The updated work plan recently unveiled by the Financial Accounting Standards Board and the International Accounting Standards Board reflects stakeholder concerns about the time required to review a number of exposure drafts in order to meet the June 2011 target date of completing major convergence projects.
In June, the standard-setters released a modified work plan to outline how they will proceed on the ongoing strategy of melding U.S. GAAP and International Financial Reporting Standards, retaining the June 2011 date for completing the major projects addressed in a joint Memorandum of Understanding.
"All of our key stakeholders have been watching very closely the discussions that [FASB and the IASB] have been holding for many months, and anticipating the outcome of our deliberations, in particular the documents we were planning to publish," said Patrick Finnegan, an IASB board member based in London. "They've been communicating to us a concern that in order to be responsive and provide what they would consider high-quality input, they expressed a strong preference to have the exposure drafts staggered."
BRAKING THE VOLUME OF EDS
As a result, both boards have promised to not publish more than four exposure drafts a quarter.
In May, FASB issued an exposure draft addressing financial instruments, while in June, FASB and the IASB rolled out proposed revenue recognition and fair value measurement draft standards (for more on both, see page 13). At press time, an exposure draft on leases was expected to be released sometime in July.
"Trying to space things out to provide better timing is a responsible action," maintained Dan Noll, director of accounting standards at the American Institute of CPAs. "Nevertheless, even with the spacing, they are still undertaking a great challenge with the magnitude and the volume of these topics to get most of them done by the end of 2011."
Recently, both Financial Executives International and Big Four firm PricewaterhouseCoopers had urged the standard-setters to slow down.
PwC issued a statement expressing its concern that even though more time has been given for deliberation of the exposure drafts, it's still not enough time to produce high-quality standards. Meanwhile, FEI's Committee on Corporate Reporting wrote to both boards expressing its concern on the "unprecedented volume of exposure drafts."
However, FASB board member Tom Linsmeier said during a July FASB webcast that he doesn't view June 2011 as a deadline, but more as a "target completion date."
"The timeline will be driven by what we hear in the comments of the exposure drafts, and one of the biggest challenges between the two boards is whether June 2011 is a completion date or whether it is an absolute deadline," Linsmeier said. "The timeline may or may not be realistic depending on what we get in the comments."
After the boards released their work plan in June, the Securities and Exchange Commission issued a statement re-affirming its belief that a single set of high-quality globally accepted accounting standards would be beneficial to U.S. investors.
Currently, SEC staff are creating a work plan that will help the commission evaluate the impact companies using IFRS would have on the U.S. securities market, and plan to issue a progress report in October. This plan will consider IFRS as it exists now and after the completion of the various convergence projects both boards are undertaking.
GETTING PRIORITIES IN ORDER
The FASB/IASB projects were prioritized by sharpening the focus on the areas most in need of global improvement: financial instruments, revenue recognition, fair value measurement and leases.
The new work plan does not include effective dates and transition methods, although that is expected to be addressed in the third quarter of this year.
"High on the list there are things related to the economic crisis," Finnegan said of how the two boards came up with its priorities. "The feedback that we get from the consultation process will have a significant bearing on further progress we make."
In a July webcast, Linsmeier and fellow FASB board member Marc Siegel revealed how the work plan initially called for the release of some 10 exposure drafts in June.
"The prioritized projects were not an easy process; the individual board members on each board have their own inclination of which particular project is most important in their own jurisdiction," Siegel said, adding that a standard addressing insurance is a high priority for the IASB. "These projects are the ones we believe are most important to improve globally in the quickest time frame."
While FASB issued its exposure draft in May, the IASB has issued drafts for two parts of a three-phase project, otherwise known as IFRS 9, for review and comment.
Phase One addressed classification and measurement within financial assets and liabilities. Phase Two includes releasing an impairment exposure draft, and Phase Three will focus on publishing a hedging exposure draft due out later this year.
A statement on comprehensive income was jointly released in May 2010, and FASB is currently seeking comments on the document until the end of September. The boards' strategy is to expose each other's proposals, redeliberate and issue common standards in 2011.
With regard to revenue recognition, the current standard under U.S. GAAP includes numerous requirements and was developed on a "piecemeal" basis for specific industries, according to Siegel.
Under IFRS, the current standard offers limited and vague guidance, leaving many instances open to judgment. The proposed improvement for the standard proposes revenue recognition based on satisfaction of performance obligations, reflecting the underlying economics of revenue transactions across various industries.
While U.S. GAAP only has one fair value definition (Statement 157), IFRS has several. The boards want to change this and create one global definition of fair value and approach to measurement and disclosure.
"Proposed changes to current U.S. GAAP are relatively insignificant," Siegel said.
Under the current lease standard, there are two primary accounting methods for lessees: capital leases and operating leases, with special treatment for leveraged leases.
According to FASB, most leases fall under the operating category, which understates assets and liabilities and distorts financial metrics. The two boards propose improvements for both lessees and lessors - and the new standard will affect companies with leased assets and those industries that hold big equipment leases, such as retailers, banks, airlines and hospitals.
SHIFTING STRATEGIES
Aside from priority projects, the updated work plan also addresses projects that need modified strategies - such as consolidation of converged requirements for structured investment vehicles and those relating to investment companies; and derecognition projects that include financial instruments with characteristics of equity (in which the boards developed a joint proposal based on existing IFRS) and statement presentation.
A staff draft on financial statement presentation has already been released by FASB and is open to additional input.
The IASB and FASB agree that the cost and benefits involved - especially how it relates to financial institutions - need to be analyzed. Finnegan said that it would probably be put off because of the high cost involved to companies' reporting processes and systems, and that the standard requires other changes in accounting to be adopted before its revision.
"It either belongs in the first bucket or at the end," Siegel said. "We are going to engage in proactive outreach. The goal is to complete that outreach and issue an exposure draft at the beginning of 2011."
Both boards, despite their differences, agree that they are in a unique position to create change, which keeps them going through the tedious process.
"All of these individuals who have been involved in the discussions have a certain passion for wanting to deliver a high-quality product to the financial markets," Finnegan said. "There's a very unique window to make a difference. This is an extraordinary time in terms of standard-setting and the challenge in front of us. I've been impressed with the level of energy among everybody involved."
