In an exclusive interview with Accounting Today, Leslie Seidman, chair of the Financial Accounting Standards Board, detailed the current status and likely future timeline for the four main remaining parts of the standard-setting board's convergence agenda with the International Accounting Standards Board.
Three of the four items -- on revenue recognition, accounting for financial instruments, and leasing -- were part of the original convergence agenda, while the fourth, on insurance, was added later. As the complexity of the issues involved and the potential effects on stakeholders have become clearer, the projects have been delayed several times, but Seidman laid out a detailed timeline that would see them finished largely by the end of 2013.
Seidman considers revenue recognition particularly important, noting, "It's important to have global comparability for the top line of every company in the world." To that end, the boards have been working together to deal with the issues raised in response to the second exposure draft on revenue recognition.
They face a couple of "thorny" issues, specifically accounting for licenses, and whether there should be a threshold for revenue recognition when there's uncertainty relating to the amount of consideration the entity is entitled to. There are also "diverse views" on the appropriate level and nature of the disclosure package, as well as the transition: The boards have exposed a "fulsome" disclosure package, and a full retrospective approach to implementation. Some issuers feel the latter in particular is too burdensome, but investors want it, so the standard-setters are holding workshops to find common ground.
Going forward, Seidman said that FASB would hold joint meetings in November and December with IASB, with the aim of finishing their discussions late this year, and targeting an issuance date in March or April of 2013. She noted that they haven't voted on an effective date, but plan to provide ample time. "I would be very surprised if we moved with an effective date before 2015," she said.
A smooth transition is important so that investors won't be confused by the new information being released. She added that the board is planning extra educational efforts: "We don't want to end up with a bunch of detailed rules to support what is widely viewed as a principles-based standard, but we want to have enough information available to stakeholders as they implement the standard that we have a high level of comparability at the end of the day."
Convergence on leasing has been in progress for some time, Seidman said, despite wide support from investors for its key objective of reporting lease obligations on the balance sheets of lessees. (Currently most leases are reported off-balance-sheet.)
"If I were to try to identify one cause for the difficulty of making progress on this project," she explained, "it would be that in the early days of the project, we focused primarily on the lessee, rather than on both the lessee and the lessor, and I think that strategy could have delayed the timely recognition of some of the thorny issues that we're currently dealing with."
Nonetheless, the boards are ready to release a second converged exposure draft in the next few months, which they hope will address concerns about the complexity of the standard that emerged from the first exposure draft. "We are substantially converged on the leasing proposal from top to bottom," Seidman said.
The second ED would require that all leases go on the balance sheet of the lessees, unless they are under one year of duration. It also would recognize leases in one of two categories: as purchase or financing transactions, which would use the asset financing model, with the lease asset amortized, or "more like a service or rental," where a significant amount of the value or utility of the asset would not be transferred, and the pattern of income statement recognition would be straight-line.
For the first category, lessors would recognize a receivable and derecognize a proportionate amount of the lease asset and then account for a residual; for the second, they would leave the asset on the balance sheet and account for the lease as a rental stream over time.
"Most stakeholders do not believe that all leases are the same," Seidman noted.
She expected the second converged ED to be released in the first quarter of 2013.
ACCOUNTING FOR FINANCIAL INSTRUMENTS
Seidman explained that the boards have been managing this in separate workstreams over the past few years.
Regarding classification and measurement, Seidman said, "If you had asked me two years ago what I thought the prospects of a converged standard [for accounting for financial instruments] would be, I would have told you I thought they were very low. But through persistence and the willingness of both boards to take a fresh look at their conclusions, we now are in a position of going out with a converged proposal. The FASB made some pretty significant changes to its original conclusions, and the IASB opened IFRS 9 to make a few limited changes. So I'm pleased to say that we will be going out with EDs in the next couple of months that are largely converged."
The model would classify financial assets based on their cash flow characteristics and the business purpose for which they are held. "Plain vanilla" instruments held for cash flow would be eligible for cost accounting. "Assets that fail the 'plain vanilla' or principal-and-interest test, would be required to be carried at fair value net income, full stop. So if they have 'exotic cash flow characteristics,' they would have to be carried at fair value through net income," Seidman said.
The model would apply to all debt instruments, including securities and loans, which is different from current GAAP; other key changes include narrowing which liabilities are eligible for the fair value option, and, for those items that are eligible for the fair value option, changing the way companies present the change attributable to their own credit quality; that would now be isolated and reported in other comprehensive income, instead of net income.
She noted that FASB would be issuing application guidance to clearly articulate how they intend it to be applied, and to help explain how it's different from FAS 115.
On impairment, in response to "pervasive concerns" expressed by stakeholders, FASB revised its approach, so that now, every period, the entity will evaluate the assets it holds for credit-worthiness, and then record an estimate of expected losses. The major changes are that, "There is no trigger before you start recognizing expected losses, and that you consider all available reasonable and supportable information. You don't limit the information set to what has already occurred."
FASB planned to share a draft of its standard with the IASB and "fatal flaw" reviewers in early October, and had a joint meeting on impairment planned for November. The board plans to expose before the end of 2012, as well as getting feedback on the IASB's tentative conclusions.
"If we don't seem to be ready to reach different decisions at the meeting in November," Seidman said, "it's my hope that by explaining the alternatives to stakeholders during the comment period, and then considering all of that feedback, we're in a better position to potentially reach converged conclusions." She also noted that the IASB has begun to hear some of the same concerns that FASB had been hearing from stakeholders earlier in the process.
Finally, on hedging, Seidman noted that the IASB is moving forward with a more "comprehensive" approach, but that FASB believes that hedging is related to the classification and measurement phase of the standards, so they plan to approach hedging after they have finished with classification and measurement.
On insurance, Seidman said that the boards have agreed in principle that insurance obligations should be reported at a current estimate of the present value of the cash flows that are required to fulfill the contract. "Basically, it's a current measure as opposed to a locked-in measure," she said.
"But there are a number of detailed differences in our decisions, which after a few trips to the board table to try and work them out, we have not been able to resolve," she said. "The good news is we're both going out for exposure, and based on the feedback from around the world, there's still an opportunity to revisit these issues."
FASB plans to put out an exposure draft in this area in the first quarter of 2013.
In conclusion, Seidman noted, "It's true that we're not agreeing on everything - but we're agreeing on a lot of things."
"These are the hard issues; we've already dealt with the easy issues," she said. "I want to give both boards a lot of credit for already having achieved a lot, and remind everybody that we're not done, and we're still working on this."
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