by Glenn Cheney
New York - Financial Accounting Standards Board chairman Robert Herz surprised a lot of people when, toward the end of a recent speech to the Financial Executives Institute, he let it be known that henceforth his board and his board alone would set all generally accepted accounting principles.
The consolidation of GAAP-setting power removes the American Institute of CPAs’ Accounting Standards Executive Committee and FASB’s own Emerging Issues Task Force from the complex GAAP hierarchy, which had become so confusing that accountants sometimes found it all but impossible to make clearly appropriate accounting decisions.
"This change should streamline the overall standard-setting mechanisms in this country by producing greater consistency of the various pronouncements that get issued," Herz said.
Herz found a very receptive audience at the FEI’s Current Financial Reporting Issues Conference. As top corporate financial officers, the FEI’s members have long complained of the difficulty in tracking pronouncements of various priorities from various sources.
"Many are concerned not only with the volume and complexity of U.S. standards, but also with rules coming from many different bodies," Herz told the conference attendees. "Indeed, it is true that over the past 25 or so years we’ve had something of a four-legged stool in this country in terms of accounting standard setting."
The "four-legged stool" image makes American GAAP look simpler and more easily balanced than it really is. The four legs of the stool - FASB, AcSEC, the EITF and the Securities and Exchange Commission - actually form a complex hierarchy of statements, interpretations, technical bulletins, staff announcements, statements of positions, implementation guides, accounting principles bulletins, industry audit and accounting guides, consensuses, staff accounting bulletins, financial reporting releases and staff speeches, all of which have a certain priority in the preparation and auditing of financial reports and, when necessary, a certain standing in criminal and civil suits over accounting practices.
Neither FASB nor the AICPA issued a statement on the decision, but a day after Herz’s speech, the institute issued a release confirming that, "in cooperation with FASB and to help achieve the mutual goal of creating principles-based U.S. accounting standards," AcSEC would "stop issuing general purpose accounting statements of position," as discussed at a recent meeting of the institute’s Governing Council.
Dan Noll, AICPA director of accounting standards, said that AcSEC’s withdrawal from the standard-setting hierarchy opens the road to a principles-based approach to the setting of accounting standards.
"We’ve agreed to stop issuing GAAP-setting SOPs in the interest of principles-based standards and taking a shot at that world," Noll said. "That is the overriding reason. Bob Herz gave other reasons in his speech to the FEI, but those reasons have been around for ages."
Another reason that Herz gave the FEI was that "structural changes are necessary in order to better control the proliferation and consistency of standards and rules and ... to ensure that as U.S. standards are developed they do not unnecessarily create new areas of divergence between U.S. GAAP and international standards."
Two weeks before the speech FASB had issued a request for comments on a proposal to shift to principles-based standards that would be less prescriptive than current standards and thus more compatible with international standards. The panoply of GAAP standards is symptomatic of a prescriptive system striving to apply specific solutions to all conceivable financial transactions.
The EITF will continue to grapple with nascent accounting problems, but FASB will work more directly in the setting of its agenda and the course of its deliberations. The board will ratify the task force’s consensuses, whereas in the past it merely issued "no objection" statements. Herz said that the board would broaden the composition of the task force to include at least one representative of the community that uses financial reports.
FASB has yet to receive and assess public comments on its proposal to adopt a principles-based approach to setting standards. Noll said that, at this stage, the board is only trying to establish a structure that would allow such an approach. No one at FASB was available for comment, and an SEC spokesperson said that the commission was declining to comment.
FASB and AcSEC are now hammering out a transition strategy. One issue that is yet to be decided is how current AcSEC projects will be carried forward - whether entirely by AcSEC, immediately by FASB, or developed to a certain stage by AcSEC and then transferred to FASB.
"One option that nobody is going to go for is that an issue that AcSEC is currently dealing with will just get dropped, with everybody stopping and the project not continued," Noll said. "That is not going to happen. The question is whether FASB or AcSEC will complete them. And it will be done in a reasonable amount of time. We’re not going to just put something on the shelf and leave it there. The question is who should do what in the most efficient timeframe."
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