FASB, at 40-Year Milestone, Charts Global Position Amid Lingering Uncertainty

NORWALK, Conn.—The Financial Accounting Standards Board, which reaches its 40-year milestone in July, will keep cooperating with international standard-setters to improve U.S. generally accepted accounting principles (GAAP) and enhance global comparability, FASB Chairman Leslie Seidman told BNA Jan. 2.

This will be FASB’s global standard-setting approach even if the Securities and Exchange Commission does not make a holistic decision about whether to incorporate international financial reporting standards for use by U.S. public companies for some time, Seidman indicated in a question-and-answer interview.

“I don’t see a greater risk of divergence stemming from a different working relationship with the [International Accounting Standards Board] and other standard-setters over the foreseeable future,” she said.

Ensuring that FASB retains global standard-setting influence has been highlighted by U.S. investors to be of paramount importance, particularly in light of the switch in its convergence approach with IASB. Without the SEC deciding on a defined path forward toward incorporating IFRS into public company U.S. GAAP, investors have said it is important that FASB remain engaged in influencing the international standard-setting dialogue so that emerging standards provide comparable, high-quality financial reporting guidance.

Other Standard-Setters.

While a significant percentage of FASB’s agenda for the past several years has been dedicated to addressing issues of importance under both U.S. GAAP and IFRS, the board also has participated for years in the international forum of accounting standard-setters, and will continue to do so, Seidman said.

“We’ve met at least twice a year with the Accounting Standards Board of Japan, the Ministry of Finance of China, the section that works on the establishment of accounting standards, as well as the European Financial Reporting Advisory Group that advises the European Commission on the endorsement of IFRS as well as other standard-setters,” she said.

Seidman said while it is time for a relationship with IASB to change in terms of the side-by-side convergence approach, “we plan to maintain all of those other relationships in addition to participating in the [Accounting Standards Advisory Forum], assuming that our concerns are addressed.”

“I don’t see this as an either/or situation—rather, I view it as the evolution of our agenda and our working methods,” she explained.

The Accounting Standards Advisory Forum (ASAF), as proposed by the IFRS Foundation in November, would consist of national accounting standard-setters and regional bodies, which have a “written” commitment to IFRS (219 DTR G-4, 11/14/12). Members would provide technical feedback to IASB.

Opportunity for Reciprocal Dialogue.

FASB’s trustee organization, the Financial Accounting Foundation, in a Dec. 27, 2012, letter to the IFRS Foundation, suggested the proposal be revised so that countries that do not have written commitment to IFRS, like the United States, could also participate (01 DTR G-3, 1/2/13).

If the IFRS Foundation were to address the concerns, FASB would want to participate in the forum, Seidman said. “What we envision is an opportunity for a reciprocal dialogue, where standard-setters would provide input to the IASB, not only on the active projects that they have on their agenda, but also to share information about emerging issues and efforts being undertaken by other standard-setters,” she said.

The goal, Seidman said, would be to keep “each other informed and engaged” so that the boards are sharing information on a regular basis, with “everybody’s resources being coordinated and leveraged so that standards end up being as converged as possible even if some of the jurisdictions are maintaining some or all of their own standards.”

Sharing of Information.

Currently, FASB’s working relationship with IASB is collaborative, Seidman indicated. “When the FASB looks at an issue, we always consider any existing IFRSs as part of our research for potential new standards. For example, we are considering the IFRS standards on pensions and government grants in the pre-agenda research that we’re conducting on these topics,” she said.

FASB will also consider and provide input to IASB’s conclusions as they make progress on such issues as IASB’s new plans to work on the conceptual framework. Likewise, IASB will consider FASB’s work on the disclosure framework project, as it decides on how to proceed on a possible research effort on improving disclosure effectiveness.

“While I don’t expect the two boards to conduct joint deliberations on these new projects, I do expect us to continue to share information, provide timely feedback, and consider each other’s work to promote convergence on an ongoing basis,” Seidman said.

Four Joint Convergence Projects.

The boards also still have joint convergence redeliberations to complete—stemming from their former memorandum of understanding—on four standards: revenue recognition, leases, financial instruments, and insurance contracts.

A final converged standard, Revenue from Contracts with Customers, is set for conclusion in the first quarter of 2013, followed by implementation activity. For the United States, it will mean a major shift from the current multiple pieces of industry-specific GAAP.

“We’re giving up detailed guidance so it’s inevitable that more questions will arise here. People are going to say, ‘well do you still mean this’ or ‘does that detailed guidance still apply?’ ” Seidman said.

“The answer is that we’re going to be superseding all of it, but because our standards have been around for quite a long time and, to a large degree, they’re industry specific, we are prepared for a high volume of questions to arise. The key will be for us to deal with them in a manner that is timely and transparent but does not reinstate all of that detailed guidance,” she said.

Response to Banks’ Concerns.

Related to financial instruments, FASB Dec. 20, 2012, issued a proposed accounting standards update, Financial Instruments—Credit Losses, which includes a single approach to estimating impairment (245 DTR G-1, 12/21/12).

FASB’s approach addresses concerns raised by a wide range of U.S. stakeholders about having different loss estimates, depending on whether the assets have begun to deteriorate, Seidman said.

“Concerns were expressed here about the lack of clarity regarding when enough deterioration has occurred to trigger recognition of the full loss estimate, as well as concerns about deferring timely loss recognition of losses that are indeed expected,” she said.

FASB proposed that every reporting period, the entity would review all of the assets held. Then using all available information, including historical experience, as well as reasonable and supportable forecasts about the future, it would estimate the cash flows it does not expect to collect.

The board felt this approach would eliminate any triggers or probability thresholds that are present in current GAAP that are perceived to interfere with timely recognition of impairment losses, Seidman said.

IASB also began to hear these concerns from other jurisdictions later in the year, and has decided to address those concerns by refining the proposal rather than reconsidering it. It is expected to issue a proposal in the first quarter of 2013, and therefore the comment periods for the boards will overlap.

“In my view, the key difference between the proposals is whether there should be a different approach to estimating losses in cases where there has not yet been a significant deterioration of the credit quality of the assets,” Seidman said. “That’s what we’re asking people to home in on during the comment period.”

Views on Leasing Diverse.

On lease accounting, the boards plan to issue a second exposure draft for public comment around March, and to begin redeliberations in the second half of the year. Views among investors and preparers have been diverse throughout the project, pertaining to the recognition of lease obligations on the balance sheets of lessees, and in relation to the income statement effects.

The issue for the boards is that they do not have agreement or consensus about which income statement approach is appropriate for all leases. “Said another way,” Seidman explained, “while there seems to be consensus that they should be on the balance sheet, many investors say they would like one approach, but they do not agree on which approach.”

The proposal on which the boards will move forward distinguishes between two different types of leases based on the extent to which the underlying asset has been consumed or utilized, Seidman said. “The significance of that distinction is really the income statement treatment, not the balance sheet,” she said.

Regarding the cost/benefit evaluation of the proposal, and whether it is worth moving forward with an improvement in this area, Seidman reiterated, “we do continue to hear widespread support for the idea that more leases should be recognized on the balance sheet.”

The board has attempted to minimize the cost of the proposal by simplifying several aspects of the original exposure draft, including the treatment of contingent rents, and has retained an exemption for short-term leases, she said.

Seidman highlighted the scope of the standard as another important change from the first exposure draft and said constituents should “make sure they take a careful look at what constitutes a lease in this proposal to know whether they’re even in the scope of the standard.”

As part of next steps, the boards will conduct field work during the comment period to gather more information about both the cost of implementing the proposal and its benefits, to refresh that analysis based on the entire proposal with all the changes that were made, she said.

‘Pens Down’ on Insurance Deliberations.

Related to insurance contracts, Seidman said that ultimately any changes FASB decides to make will be based on the feedback that the boards received on the proposals. “At this point we’re saying pens down—let’s go out with our proposals even though there are some differences and ask for comments on them from stakeholders around the world,” she said.

A key difference among the boards is that in the United States, GAAP had long-standing standards on insurance and therefore FASB has a higher hurdle than IASB to justify the cost of making changes.

“We need to make sure that we’re actually improving the standards, not just changing them for the sake of convergence because our standards have been in place for a number of years, and while there are understood to be opportunities for improvement, we want to make sure that the cost of that is justified,” Seidman said.

The boards will know more after the proposals are exposed for comment, which is targeted for mid-year, she said.

Domestic Agenda Candidates.

Shifting to FASB’s domestic agenda, Seidman said the board will await input from the Financial Accounting Standards Advisory Council before adding new projects to its agenda.

Projects earmarked for consideration include FASB’s back-burner project on liabilities and equity, income taxes, potential convergence items, pensions, government assistance, the FAF’s review of segment reporting on FASB Statement 131 (issued Jan. 14), and the use of non-GAAP measures, she said.

“To elaborate about pre-agenda work on pensions and government assistance, those two items have been identified as potential areas of improvement by numerous stakeholders,” Seidman said.

“But I want to clarify that our staff is just doing pre-agenda work, and that the projects have not been added to the agenda. They will be included among the other topics that are identified in the FASAC survey,” she said.

Pensions will most likely be at the top of the list since this has been highly requested by many of the board’s stakeholders, Seidman said. In terms of ongoing current projects, she highlighted:

• the board’s work on the not-for-profit reporting model project, which it will potentially expose for public comment later in 2013; and

• its various initiatives on disclosures, including the disclosure framework, for which an invitation-to-comment (ITC) was issued July 12, 2012.

Look at Redundancy in Own Reports.

The board’s project on disclosures is one of the areas that analysts have highlighted as especially important to financial reporting, but views have differed on how the issue should be addressed. FASB’s ITC identified two potential objectives of the project: (1) to provide a guide to standard-setters to bring more discipline to the process of establishing disclosure requirements, and (2) to help companies think through how to decide what disclosures are relevant.

Seidman said that based on the feedback received, there are a few areas in which the board could make meaningful improvements with a minimal cost:

• streamlining the accounting policy footnotes, which was one of the most commonly cited areas of overload in the financial statements; and
• bringing more clarity to effectively cross-reference between the various sections of a financial report.

The board would also need to coordinate with the SEC staff to address the known areas of overlap and redundancy, Seidman said. “I do want to emphasize that we have seen a number of companies take the initiative to streamline their financial reports without any help from us or the SEC,” she said.

“When people express concerns about overload, we definitely take some responsibility for that, but I’d encourage companies to take a look at existing areas of redundancy and overlap in their own reports and perhaps start the process before there are any changes to the relevant standards or regulations,” she said.

Seidman also highlighted the board’s other disclosure-related projects, namely, interest rate risk and liquidity, as other work on which they will hold an education session in the first quarter to review feedback.

“And [to] understand the efforts that are under way by others including for example, the Basel Committee, which has been working on some potential disclosures, and also to consider whether we want to reframe our objectives for the project,” she said.

Opportunity for Private Companies.

One of FASB’s most notable domestic developments is the newly established Private Company Council, which will work in tandem with the board to develop private company GAAP. The PCC, which had its inaugural meeting Dec. 6, was established by the FAF to work alongside FASB to develop private company GAAP, but FASB has final ratification authority.

The PCC and FASB will also continue discussions on the private company decisionmaking framework and determine whether it needs to be re-exposed or what the appropriate next steps will be, Seidman said. The decisionmaking framework will not be authoritative GAAP.

PCC members tentatively agreed that this year they would look at four topics: variable interest entities, “plain vanilla” interest rate swaps, income taxes (formerly FIN 48), and recognizing and measuring various intangible assets (other than goodwill) acquired in business combinations.

To that end, FASB’s staff has been preparing papers on each of these issues using the draft private company framework as a guide. Depending on the nature of the analysis, there could be an opportunity to reconsider the issues for public companies, too, Seidman said. “For example, if the issue turns out to be primarily excessive cost or complexity, then I think we would consider any simplifications for public companies as well as private companies.”

On the other hand, if the analysis reveals a unique need for the users of private company financial statements, “I think it’s less likely that we would consider the issues for public companies,” she said.

After June 30.

Regarding her own next steps following her departure from FASB June 30, Seidman said she would focus on finalizing several of the board’s initiatives and help the new chairman have a smooth transition.

“We plan to have the results of the FASAC survey ready for consideration by the board and the new chairman probably in the second quarter, so that together they can chart the course of the new agenda,” she said.