The next few months should pump a little excitement into the profession as the Financial Accounting Standards Board moves to issue as many as 20 new documents - most of them exposure drafts - with some proposing significant changes to financial reporting.
Two proposals on accounting for business combinations are generating controversy before they've even been issued. One deals with purchase method procedures, the other with the treatment of non-controlling interests. A little later in the year, the profession can expect a proposal on combinations of not-for-profit organizations.
Meanwhile, the board is re-deliberating an earlier proposal on fair value measurement. The exposure draft issued last year raised many questions about the shortcomings of using fair value, and substantial criticism about its long-term repercussions. By the third quarter of 2005, the board hopes to issue a final statement that defines fair value and clarifies its measurement.
FASB also hopes to see a staff-issued document that will set the stage for talks on the conceptual framework that the board uses to support new standards.
Other impending documents include a review of board decisions made regarding liabilities and equity related to financial instruments, and two documents intended to bring U.S. accounting standards closer to those issued by the London-based International Accounting Standards Board.
The business combinations project is already drawing criticism from the corporate sector, with the Institute of Management Accountants and Financial Executives International issuing a joint letter expressing deep concern about several aspects of the expected proposal. The letter warned that FASB's tentative decisions, especially those relating to fair value measurement and the reporting of contingencies, will have serious ramifications beyond the scope of the proposed standard.
FASB project manager Stefanie Tamulis said that the board had already considered most of the issues raised in the FEI/IMA letter, and has made most of the tentative decisions needed to formulate a proposed standard, which will be released as an exposure draft at the end of June, with an expected exposure period of 120 days.
"Once we have received all comment letters, the board will break them down by issue and begin re-deliberations based on the comments," Tamulis said. "I imagine FEI and the IMA will provide comment letters that are very close to the letter they sent a few weeks ago. At that point we will take into account their comments and those of other constituents."
The project on the purchase method is the second phase of FASB's umbrella business combinations project. Among its objectives are the elimination of inconsistencies in asset and liability measurement, guidance on the treatment of liabilities associated with contingent consideration arrangements, and guidance on whether a transaction other than a purchase of net assets should be accounted for by the purchase method. The eventual standard is expected to replace Statement No. 141, possibly by the middle of 2006.
FASB also is working on a business combinations standard that will deal with non-controlling interests. The objective is to clarify the classification of non-controlling interests in consolidated statements and the accounting for transactions between reporting entities and holders of minority interests. An exposure draft will be issued concurrently with the proposal on purchase method procedures, with the intent of eventually issuing concurrent final statements.
Both business combination projects are a cooperative effort with the International Accounting Standards Board. FASB and the IASB hope to issue nearly identical standards.
Merging frameworks
The two boards have also launched parallel projects to update, refine, extend, improve and, if possible, over the course of several years, merge their frameworks into one.
Following joint discussions in London in April, FASB plans to issue a document with background information on why the boards need a framework, where existing frameworks fall short, which aspects of the existing frameworks need updating or completion, and the overall plan for improvements.
The two boards' frameworks differ over:
* Their concepts in the purpose of financial reporting;
* The extent to which standards should apply;
* To whom financial reports should be useful (shareholders only or all stakeholders);
* How neutral financial reports should be (as opposed to intentionally conservative); and,
* Relevance versus reliability (that is, whether to report relevant financial information even if it is less than ideally accurate), as well as other qualitative fundamental issues.
Citing a gap in both boards' frameworks, FASB senior project manager Halsey Bullen noted that neither mentions the word "transparency."
"You didn't see that word 20 years ago, when these frameworks were written," Bullen said. "Maybe it means the same thing as faithful representation, and maybe it means completeness. Everybody uses the word, but nobody knows what it means."
FASB and the IASB are also working together on the financial instruments project on liabilities and equities. The objective is to develop a comprehensive standard on accounting for and reporting on financial instruments with characteristics of both equity and liabilities, or of assets, or both.
The two boards are pursuing a "modified joint approach" to their work on financial instruments, with FASB's first exposure document to be issued as a preliminary views document. The IASB will issue an identical document concurrently.
Prior to the preliminary views document, FASB staff will issue a "milestone draft." This background document, to be issued by summer, will summarize the tentative decisions that FASB has made in early discussions this year. The board will then discuss the measurement and presentation of single- and multiple-component instruments, including whether their classification as liabilities or equity should be changed subsequent to initial recognition.
The board also has in the works several "short-term international convergence" projects aimed at aligning U.S. standards with those issued by the IASB. By the middle of 2005, the board expects to issue a final statement that will replace APB Opinion No. 20, "Accounting Changes." Also by mid-year, the board expects to issue an exposure draft on a statement that will converge the standards on earnings per share.
FASB also expects to issue a host of smaller exposure drafts and pronouncements. It should issue a proposed interpretation that will clarify Statement 109, "Accounting for Income Taxes."
The board is also working to improve the quality of the hierarchy of generally approved accounting principles. The first step will be to move the hierarchy from the American Institute of CPAs' auditing literature to FASB's accounting literature, and to define the meaning of "authoritative literature." An exposure draft was issued in early May.
The staff at FASB is expected to issue six final staff positions and seven exposure drafts of staff positions.
