Setting FASB's record on GAAP straightThe recent series of columns by Paul Miller and Paul Bahnson about the Financial Accounting Standards Board's views on generally accepted accounting principles and, in particular, its recommended elimination of Rule 203, contain several incorrect assertions.
Dedicated to advancing GAAP
Perhaps chief among the misconceptions in these columns is the suggestion that the board views GAAP as infallible. In reality, FASB continually works to improve and advance GAAP. To suggest anything otherwise is preposterous.
Even a cursory look at the board's current agenda - which contains over 30 projects, including fair value measurements, revenue recognition/liability extinguishment, financial performance reporting, converging and improving the conceptual framework, distinguishing liabilities and assets from equity, improving accounting for business combinations, and many others - would provide clear evidence of this point.
Rule 203
Rule 203 was put into place decades ago as a method for auditors to communicate those rare and specific instances where they believed that the application of GAAP could result in misleading financial reports.
Since the rule's creation, a variety of more effective, efficient and investor-friendly methods have become available to managers who wish to supplement, contradict or discuss the information in financial reports prepared in compliance with GAAP. These methods have made Rule 203 superfluous. They include press releases, detailed discussions in the management discussion and analysis that is required of Securities and Exchange Commission registrants, and conference calls and Webcasts open to all who wish to listen.
For all practical purposes, the use of a Rule 203 exception has been extremely rare. To suggest that the removal of an exception that is generally not used will have any major practical consequences is not based in reality.
Rigorous, open due process
In executing its mission to develop standards that benefit the public interest by improving financial reporting, FASB invests considerable effort to obtain and consider input from its constituents on standard-setting issues. The board and its staff take this due process incredibly seriously.
Accordingly, the board actively seeks and obtains divergent viewpoints on many controversial and complicated standard-setting issues, and works hard to balance those viewpoints in reaching its technical decisions. By carefully weighing the often conflicting views of constituents through a thorough, competent, objective and open process, FASB increases the quality and credibility of financial reporting.
A key element of due process is the exposure, for public comment, of proposed authoritative guidance. A constituent who disagrees with, or has concerns about, an entire exposure draft, a section, a paragraph or even a sentence has every opportunity to make their views known to FASB, and those views will be carefully considered.
Accordingly, in developing the very exposure draft, which would (among other things) eliminate the Rule 203 exception, the board carefully considered the various viewpoints of its constituents and determined that allowing for an override of the GAAP hierarchy was not the best course.
FASB appreciates and strongly encourages proactive and constructive input from our constituents. We look forward to continuing to objectively establish and improve standards of financial accounting and reporting that ensure that credible, comparable, conceptually sound and usable information is available to the capital markets.
Gerard Carney
Financial Accounting Foundation
Norwalk, Conn.
