FASB: A new era of liberation and perhaps even reformation

The article FASB: Subjugation, liberation, reformation, consternation and incorporation by Paul Miller and Paul Bahnson is a look at not only the history of the Financial Accounting Standards Board, but also where the authors think it should go.

They feel that FASB subjugated itself by penning an agreement in 2002 to make existing standards fully compatible with the International Financial Reporting Standards (IFRS).  Over the last 10 years, both boards have felt the strain of trying to meet the original agreement.

According to Miller and Bahnson, the FASB has now been liberated because it's become obvious that the SEC can not set the IASB as the standard-setting body under the Sarbanes-Oxley Act.  This also frees them to do what they need to do without worry because their funding is assured and they are backed by the SEC, “the baddest big brother of them all”.

Now, in their opinion, is the time for reformation.  It is time for FASB to bring GAAP into the 21^st century by updating financial reporting standards and making them more relevant.

They believe the following should be FASB’s to-do list:

·         Reporting Frequency – Dates back to the 1930’s for the stock exchange and the 1960’s for all other companies.  In today’s fast-paced world, why are we still running on 1930’s time?

·         Inventory – Managerial decision-making for LIFO or FIFO dates back to 1946.  Time to fix the weak stance on the matter.

·         Depreciation – Systematic Depreciation dates back to the 1830’s.  No more dodging the question ‘How do we assess market value?’

·         Leases – Accounting for leases hasn’t change since the 1970’s, and it’s time to create a new standard that doesn’t allow for bogus leases to create false financial information.

·         Stockholder Equity – Should be limited to common stock only.  Prefered stock, employee stock options and other derivatives should be listed as liabilities.

·         Pensions – Pension obligations are debt.  Pension funds are investments.  They should be listed separately on the balance sheet.

·         Cash Flows – We’ve been using the indirect method of reporting operational cash flows since 1987.  Isn’t it time to start using what users wanted in the first place?

·         Income Taxes – Is GAAP income tax reporting even useful?  Perhaps it’s time to try the flowthrough method.

·         Investments – Repeat after me: Fair Value.

As for consternation, Miller and Bahnson believe that making these necessary changes will create consternation for managers and auditors alike, but that shouldn’t stop FASB. 

To be truthful, I chose this article because of the name.  However, it will be interesting to see where FASB goes now that they have stepped away from the IASB and have decided they will not be incorporating IFRS.

Changes in the Way We Recognize Revenue

This week's article is about changes to how accountants will recognize revenue for contracts come 2015.  Matthew G. Lamoreaux's article in the January 2012 issue of the Journal of Accountancy, discusses what these changes mean for accountants.

The Federal Accounting Standards Board (FASB) as well as the International Accounting Standards Board (IASB) have decided to create a single standard for recognizing revenue.  Lamoreaux says under a the new standard a company will recognize revenue from contracts as soon as it transfers goods and services.  This is not much of a change from how accountants already handle revenue under GAAP.

According to Lamoreaux the boards also included guidance on how to know a good or service is tranferred over time.  They also simplified proposals on warranties, how to determine transaction price, and modified the test to apply to long term service as well as provided some expemptions from some disclosures for private companies.

The accounting model they have proposed would be:

1.  Indentify the contract with a customer.

2.  Identify the seperate performance obligations in the contract.

3.  Determine the transation price.

4.  Allocate the transaction price to the separate performance obligations in the contract.

5.  Recognize revenue when the business satisfies a performance obligation.

This model is scheduled to go into effect on January 1, 2015 except for private companies, who have an extra year to implement as well as being exempt from some mandatory disclosures.

I personally can't tell the difference between this new standard from what I have already practiced in the professional sphere.  I did however find it interesting that despite the FASB's refusal to adopt or even converge with IFRS, it felt the necessity to write a new standard with the IASB on the recognition of revenue.

They are also handling implimentaion differently as well.  FASB is not allowing early implimentation which means that people will have to collect data for two years and then retroactively apply the new standard to it.  Whereas the IASB is allowing companies to implent the new standard as soon as they are ready.

I can understand why the IFRS vs GAAP debate has gone on for so long, FASB continues to send mixed signals whether it wants to be part of the international community or not.

Standards for Private Companies

I managed, almost, to get away from IFRS.  I instead chose to look at the push to change the U.S.'s standards (GAAP) to recognize the differences between public and private companies.  In the middle of the article I realized it had included how the international community was dealing with issue and so found myself reading about IFRS once again.

In the article One Size Does Not Fit All, Judith Kamnikar and Ashley Burrowes assess why the Financial Accounting Standards Board (FASB) should create a seperate set of standards for private companies.  It boils down to the end users of private companies being quite different from public companies, thus their needs are different.  Why should a private company have to figure its Earnings Per Share if they don't publicly sell their stock?

The FASB was created in 1971.  It took quite some time, however, for the FASB to decide to do something about the disparate reporting needs of private companies.  Finally in 2004 they created the Small Business Advisory Committee (SBAC) to begin the process of developing reporting and financial standards for small businesses.  The SBAC is still providing input private company reporting issues.

A seperate task force created by the AICPA (American Institute of Certified Public Accountants) in 2005 produced a report that concluded, "the users of private company financial statements have different needs than users of public company fiancial statements (and) that GAAP exceptions and OCBOA should not be the resolution to the private company financial reporting problems."  This report thus generated yet another committe, the Private Company Financial Reporting Committee (PCFRC) for the purpose of providing recommendations to the FASB about how prospective and existing GAAP rules would affect small businesses.  Unfortunatley, the PCFRC has not enjoyed much attention from FASB.

In response to this the AICPA again created another committee who issued another report in 2011 claiming that GAAP for private companies is "urgent and growing".

Internationally, the IASB has been a bit more receptive to the needs of small businesses and has implimented IFRS for SME's (International Financial Reporting Standards for Small and Medium-sized Entities).

Some of the changes in IFRS for SME's include:

• Some topics are omitted from small business reporting
• A more simplified accounting method
• Substantially fewer disclosures
• Omitted Earnings per share

In the end it appears that the IASB has made leaps and bounds on this issue within the international community while the FASB has sat on its thumbs.  In their defense, they have been overshadowed by the needs of public industry and it looks as if they are finally applying the attention that is required to fix this deficit of standards for private companies.

References:

Kamnikar, J., Kamnikar, E., & Burrowes, A. (2012). One Size Does Not Fil All. Journal of Accountancy, 213(1), 46-49.

SEC's Decision on IFRS: Understanding the Words

Following up on my previous thoughts on the adoption of the International Financial Reporting Standards (IFRS), I searched for an article on the Security and Exchange Commission's (SEC) decision, if any.  As it turns out, Accounting Today in their February issue, discussed exactly that.

According to Paul Miller and Paul Bahnson of Accounting Today, in their article, The Demise of the Drive to Bring International Standard-setting to the U.S., the SEC's announcement in December that the commission would not in fact make a decision on this topic by the end of the year was not just a a setback but its death knell.  Miller and Bahnson explain this opinion to be based on of their understanding of the issue as well as the actual wording used in the SEC's Chief Accountant Jim Kroeker's statement.  Some of the points they present are reminiscent of last week's article, and some are new and previously, at least for me, not considered.

They start off by explaining the differences in what was expected and what was said.  Kroeker's announcement was "I'm encouraged for the prospect of incoporation of IFRS."  Obviously incorporation is not the same same as adoption.  The largest difference is that incorporation is not using the IFRS in whole, but instead it would integrate acceptable pieces into the U.S's existing system, Generally Accepted Accounting Principles (GAAP).  Adpotion on the other hand would use IFRS exactly as it is without a single change.

Miller and Bahnson believe this soft wording with no pre-determined date of an answer is a way to introduce the idea to IFRS's die-hards that the SEC will never adopt IFRS.  Their reasoning for this is:

1. Adopting IFRS is legally impossible.  I had not considered that the SEC can't give up its legal obligation to set the accounting standards for the U.S.  Adoption of the IFRS would remove the SEC's power and give it to International Accounting Standards Board (IASB).

2.  Allowing U.S. companies to choose between GAAP and IFRS is ridiculous.  The entire point was to create a single accounting standard, not confuse the issue more.

3.  Expecting the IASB and the Financial Accounting Standards Board (FASB) to agree on key issues is optimistic at best.

This is further complicated by the IASB's recent political tilt.  The newly appointed chairman of the IASB was a career politian with Master's degrees in history and international relations, not accounting or even business.  The IFRS Foundation then followed up the politician's selection with the selection of a French lawyer with extensive political experience.  In the U.S. it is hard to fathom how political knowhow could surpass the need for accounting or business qualification for a board that wants to set international accounting standards.  But as David pointed out in last week's article, many European countries see financial reporting as a political tool instead of an investor's.

I must then, under the weight of such well thought out and persuasive arguements, change my previous assessment that IFRS is something acheivable with the correct application of want and will.  As an accountant, I want my accounting standards to be set by men who understand the struggles of accounting for the myriad of different customers I will face upon graduation.  I want the accounting standards that I follow be set in place by men knowing the difficulties companies face competing in the expansive global market.  And much like the FASB I am not ready to hand over the power to decide what these rules are to politicians.

References:

Bahnson, P. R., & Miller, P. R. (2012). The demise of the drive to bring international standard-   
     setting to the U.S. Accounting Today, 26(2), 16. retrieved from http://wichita.edu.