How accounting standards are like Ford v Ferrari
Financial Accounting Standards Board Chairman Russell Golden compared the standard-setting process to the new race-car movie, “Ford v Ferrari,” even though he admitted the process usually isn’t so speedy.
The movie, which stars Matt Damon and Christian Bale, tells the story of how Henry Ford II funded a racing team to create a car that could compete against Ferrari’s perennially winning team in the 24-hour Le Mans auto race in France.
“I realize that ‘speed’ and ‘standard setting’ are rarely — if ever — used in the same sentence,” said Golden, during a speech Tuesday at the AICPA Conference on Current SEC and PCAOB Developments in Washington, D.C. “And that comparing a legendary race car to an accounting standard is a stretch, even for me. But like great race cars, great standards really aren’t developed in the boardroom. They’re developed in the field, on the test course, with continuous input from the person in the driver’s seat. In other words, you. And it requires a process that considers a broad range of views, out of which we forge the best product possible: a cost-effective standard that produces information investors need and use.”
Golden discussed how FASB develops standards by listening and responding to its stakeholders, as the real-life protagonists in the movie, Carroll Shelby and Ken Miles, had to take in each other’s input as well as from the Ford executives sponsoring the team. As his term as FASB chairman nears its end next June, Golden also reviewed the status of some of FASB’s ongoing standard-setting projects, including the liabilities and equity project , which he hopes to complete by the end of his term.
“During our agenda consultation process, stakeholders described guidance in this area as overly complex, internally inconsistent, and the source of frequent financial restatements,” he said. “So we added a project to reduce complexity and provide investors more useful information. To do this, we targeted improvements to guidance on both convertible instruments and the derivatives scope exception for contracts in a company’s own equity.”
He noted that last July, FASB issued a proposed standard to reduce the number of accounting models for convertible debt instruments and convertible preferred stock. “It would also revise the derivatives scope exception guidance and improve and amend the related disclosure and earnings-per-share guidance,” he added. “Tomorrow morning, the FASB staff will present a summary of comments we received on our proposal. The outcome of tomorrow’s meeting will help us determine our next steps.”
FASB has also been focusing on reference rate reform, he noted, as the global capital markets are expected to move away from the London Interbank Offered Rate, or LIBOR, to other benchmark lending rates that are less prone to manipulation like the Secured Overnight Financing Rate, or SOFR.
“Last month, the FASB voted to approve temporary, optional guidance to ease the potential accounting burden,” said Golden. “We expect to issue the final standard in early 2020.”
FASB has also made progress on its project to improve accounting for goodwill and identifiable intangible assets. “Based on our previous work with private companies and not-for-profit organizations, we decided to revisit this area of financial reporting for all companies and organizations,” said Golden. “We sought to understand the usefulness of the information versus the costs to provide it, especially for public companies.”
Since FASB issued an invitation to comment last July, the board has received approximately 100 comment letters, and last month, FASB held a public roundtable meeting with 30 of the comment letter writers at its headquarters in Norwalk, Connecticut. FASB will hold a public board discussion early next year, taking into account the feedback it has heard.
Other projects are likely to last beyond Golden’s term, including FASB’s projects on performance reporting and segment disclosure. He has been a regular speaker at the AICPA’s annual conference, and he saluted the AICPA and the members and staff of FASB he has worked with over the years, in addition to SEC Chief Accountant Sagar Teotia, and his predecessors Jim Kroeker, Paul Beswick, Wes Bricker and the late Jim Schnurr, who died earlier this year.
He closed with a final comparison to the “Ford v Ferrari" movie. “And, last but not least, I want to thank all of you who support the open, independent standard-setting process that drives our best work — one that allows us to make objective decisions based on the best interests of the capital markets,” said Golden. “Your willingness to share your time and your views helps us improve U.S. GAAP. I encourage you to continue that involvement for the long run. Because, like the 24 Hours of Le Mans, standard setting is an endurance event, not a sprint.”