FASB Chairman Leslie Seidman, in an exclusive JofA interview, explained how the board plans to finish priority convergence projects on financial instruments, revenue recognition and leases. She also shared how the board intends to reprioritize remaining projects, better serve the needs of private companies, and how its role could change if the SEC mandates the use of IFRS by U.S. public companies.
Edited excerpts of the interview follow. Additional questions and answers are available here.
JofA: The big three priority projects—financial instruments, revenue recognition and leases—have been scheduled to be completed by the end of the second quarter. Is it still realistic at this point for all three of these projects to be finished by the end of the second quarter?
Seidman: We are working through the issues on revenue recognition very thoughtfully and expeditiously. So far, we appear to be on track to have concluded our substantive discussions of the issues raised in the exposure draft in that time frame. What we’re going to need to do, though, along the way is keep a vigilant eye on the extent of change that we end up with relative to what we exposed, also relative to current U.S. GAAP so that we know whether we need to conduct additional outreach to be comfortable that the standard we end up with is well understood and operational and viewed as an improvement by investors. I’m not at a point right now where I know the extent of outreach that we’re going to think is necessary. That could extend the time frame.
On leasing, I think that we are in a similar situation. We’ve made some initial decisions to make simplifications to the model relative to what we have exposed. However, at our [March 2] meeting, the staff came to us with a couple of changes that they proposed and asked for time to do outreach, to check with constituents right now about whether these changes that they’re proposing are viewed as responsive to the concerns that were raised, operational, and, again, are they perceived as improvement?
Our plan is to continue to work through these issues with June as our goal for completion. But the June date is just a target date to signal our commitment to try and work through these issues as efficiently as we can. But, if we need more time to conduct this thorough process that I’m describing, we will take the time we need. It is much more important to me that we end up with a standard that is perceived around the world as an improvement, and that is operational and comprehensive.
Editor's note: On April 14, FASB and the IASB said the priority projects on revenue recognition, leases and financial instruments, scheduled to be completed in June, would require a few more months of work. No specific deadline was set for the projects. Read "FASB, IASB Announce Delay on Priority Projects" for more information.
JofA: And financial instruments?
Seidman: Financial instruments is on a track different from [revenue recognition and leases] in the sense that the IASB and [FASB] started at different points. If I can just digress back to [revenue recognition] and leasing—those we started together. So, we’re very much on the same timetables, trying to work toward the final standards.
Financial instruments—that was not the case. The IASB issued IFRS 9 [Financial Instruments] last year. We decided to approach it in a more comprehensive manner, issuing one exposure draft to address all of the different aspects of the proposal.
Having said that, we are still trying to come together with a converged standard on financial instruments. We’re approaching it in phases, though, because of the fact that we started in different places.
Our current emphasis is on impairment of financial assets. You mentioned before that we had issued an exposure draft, and let me just correct the terminology there. It does not represent a full-blown exposure draft in the sense that it does not contain all of the guidance that we would expect to include on a standard addressing impairment of financial assets. Rather, it is intended to solicit feedback on a new approach relative to what the FASB exposed and to what the IASB originally exposed with respect to impairment of financial assets.
What we’re asking companies and other participants in the process around the world to do is weigh in on whether they think this modified approach represents a good starting point for a new standard on impairment. It reflects some of the thinking of the FASB in the sense that we’re keenly interested in making sure that the balance sheet at any point in time represents an allowance that would cover the expected losses that you can foresee at the reporting date.
The IASB is keenly interested in making sure that the income statement reflects the interest that has been charged as compensation for the arrangement and the expected losses in income in a pattern that was anticipated at the inception of the loan. Then, to the extent that there are changes in those expectations, they would be reflected in income currently. So, it’s a marriage of the two points of view, if you will.
We’re asking people, do you think that’s an improvement? Do you think that it’s operational? If we got the green light that people think that it does form an appropriate basis for the new standard, then we’ll fully develop it into a standard. So, the impairment issue is something that we’re working on intensely with the IASB to try and come to a converged, improved standard as soon as we possibly can.
There are many other aspects to the financial instruments project though, as you know. The hedging aspects of it are also on a different track. The IASB has exposed a proposal on hedging that is much more comprehensive than what we had exposed.
So, what we are doing at this point is asking U.S. constituents to let us know whether they think [the IASB proposal] forms the basis for an improved, converged standard on hedging. We will take that under advisement at about the same time that we had planned to talk about the comments we received on our hedging proposal. I can’t signal yet how that’s going to go, but that is the plan at this point for hedging.
We will also be participating in the IASB’s discussions of the comments they get on their hedging proposal. So, we’ll be at the table to hear that firsthand.
On the more key issues having to do with the measurement of financial instruments, the IASB has issued IFRS 9. We issued an exposure draft that was different from IFRS 9 in many respects.
We received a great deal of commentary on our proposal, which had proposed that all financial instruments would be carried at fair value. But then it went through a decision tree to distinguish between cases where the gains and losses would go through income, and cases where the gains and losses would go through other comprehensive income. There are a couple of other exceptions that I won’t go into.
The feedback we got on that proposal from our constituents, including investors, accounting practitioners and other interested parties, was overwhelmingly opposed to the idea that all financial instruments should be carried at fair value. Many of our constituents believe that, at least in some cases, financial assets and financial liabilities should be carried at cost.
So this is a case where our due process procedures indicated to us that many of our constituents, including investors, did not agree with a fundamental aspect of the proposal. We’ve already had a couple of meetings so far on that. The board unanimously agreed to change the proposal so that at least some financial assets and financial liabilities would be eligible for cost accounting. We are still working through exactly what the cases would be where those items would be carried at cost.
But another important point to make is that we also received overwhelming feedback from investors that they do think that there is a need to provide enhanced disclosures about financial instruments, especially in those cases where things are carried at cost. So, I want to make it clear that we will be attempting to provide a comprehensive set of information for investors that includes a mixed attribute approach on the balance sheet, but also a robust disclosure package. The disclosure would give insight to those other risks that are present in those financial instruments, including fair value disclosure, credit risk disclosure, which we actually significantly enhanced in the recent year, and interest rate risk, information such as asset liability mismatch. So, the idea is to end up with a complete standard that provides information that’s relevant to everyone.
JofA: How would you describe your vision for your term as chairman?
Seidman: We have had a change in the leadership of the organization, but we have had no change in terms of the commitment to the mission and priorities of the FASB at this important point in time. Like my predecessor, [former FASB Chairman] Bob Herz, I am absolutely committed to trying to move forward the projects on our joint agenda with the IASB, especially those that we have most recently identified as our priority projects, and deliver to the capital markets improved, simplified and converged standards on what we perceive as the most important deficiencies in financial reporting around the world at this point in time.
We do have one other important priority. I view it as a priority to make sure that we are responding to the needs of [users of private company financial statements, as well as not-for-profit financial statements] equally to the users of the public company financial statements.
JofA: What happens after two and a half years? Could you be reappointed for another term?
Seidman: No, regardless of the capacity in which you serve on the board, you’re not allowed to serve more than 10 years. I have already served seven and a half years as a board member. So after the two and a half years as chairman, I am not eligible for reappointment.
JofA: What’s been the greatest challenge so far as chairman, and what do you expect your greatest challenge to be over the course of the next year?
Seidman: It became clear last fall, or a little before that, that it was just not going to be possible for us to conduct robust, thorough deliberations on all of those [convergence] projects at the same time. So, it was going to be necessary for us to focus in on which projects were the most important, and would represent a realistic grouping of projects for us to move forward and develop high-quality standards in an expeditious manner.
So, I think one of the biggest challenges to date has been identifying, together with the IASB and then for our board alone, which are the projects we’re going to focus on and try and complete in the relative near term to try and advance and improve financial reporting for U.S. investors and also for global investors.
The reason it’s been a challenge is that everything is considered important by somebody. So, I’ve been trying to make it clear that, while we’ve deferred work on some of these projects that are important to many people, it’s not as though we have stopped work on them. We do plan to resume them in the future after we have made some progress and completed some of those other higher-priority projects.
In terms of the challenges going forward, I think after we have completed work on these highest-priority projects, I would like to take a fresh look at the environment and see, are there other issues that have emerged that would rank right up there as priorities with some of these other projects that we had made some progress on? So, for example, we have been hearing lately that some investors would like us to focus on pension accounting accounting because of changes in the economy and the way that current accounting standards in the U.S. are representing that information. It is not an active project of ours right now.
So, I think it will represent a challenge to try and gather information about what are the current accounting topics that people would like us to focus on, do a reprioritization of what we think represent the most pressing issues right now, not only in the U.S., but also globally, and come up with a revised work plan going forward.
JofA: Would it be in the third or fourth quarter that you would look at reassessing priorities?
Seidman: Right. What we’re going to be looking for is completion of the [priority convergence projects with the IASB] and then any of the FASB-only projects before I’d be willing to add something new to the agenda. But, with respect to the timing, later this year I would expect us to start anticipating having some capacity to take on new projects. Before we do that, I would like to take a step back and gather this information, as I said, and then determine what our priority is going to be going forward.
PRIVATE COMPANY REPORTING
JofA: What are your concerns with the recommendation of the blue-ribbon panel on private company reporting to create a separate board to set private company standards?
Seidman: My objective in addressing the concerns of private companies is to make sure that we are providing information that is relevant and useful to the users of private company financial statements. To the extent possible, I think that private companies and public companies should have standards that are based on the same principles.
So, for us to determine when differences are warranted between public companies and private companies, I think we have to have a common understanding of the framework that we’re going to use to do that. We have not done that yet, which is why I think there’s a great deal of frustration right now with respect to the way the FASB is addressing the unique needs of private companies and the users of their financial statements.
I think it is premature to conclude that any structural change is necessary to appropriately and responsively address the needs of private companies. I think you have to start with a common understanding of when differences are warranted and why. My concern about moving to a separate board right now without that framework is that there is too much potential for differences in GAAP, between public companies and private companies, without that underlying understanding of why there should be differences. My preference would be for us to work on a framework that the community at large agrees on, that articulates the reasons why there should be differences between public companies and private companies. I have an open mind about what those reasons are. It could be cost/benefit. It could be that private company users have more access to the management of the company and therefore do not need as much detailed information. It could be that private companies, for example, don’t have traded stock, so anything having to do with that is a challenge for them, etc., but not to prejudge the outcome of that.
Let’s have a common framework. Then, I am absolutely supportive of an enhancement to our internal processes to bring more focus to the private company issues as we work through them, including setting up a standing task force to work through the issues with us, similar to the EITF (Emerging Issues Task Force).
I am going to be very interested in the feedback that the [Financial Accounting] Foundation receives on the proposal. But those represent my views at this point in time because I think that having different boards set standards for entities that are conducting the same business activities adds complexity to the system, potentially, at a time when we’re really trying to make strides to simplify and converge the accounting standards around the world.
JofA: You mentioned a common framework for delineating where there should be differences. Could it possibly become part of the conceptual framework?
Seidman: Our staff has been conducting extensive outreach with private companies and the users of their financial statements to develop a white paper. Just an exploration piece of what we hear people saying are the reasons that they think there should be differences between private company GAAP and public company GAAP.
So, we have a draft that we plan to start discussing with, first, our Private Company Financial Reporting Committee. We’re planning to establish a resource group of private companies and the users of their financial statements, specifically, to help us vet this paper, see whether they think we’ve captured accurately what we heard in these meetings, including round tables that we’ve held in different parts of the country, but also some advisory groups that we have specifically dedicated to small business and private companies. But we would absolutely plan to expose that for public comment as well.
So, step one is to ask: Have we heard the concerns accurately? Step two will be to assess whether people agree widely that these are the right things to focus on in establishing a differential framework. Step three would be to determine what form it should take. Should it be some sort of a conceptual framework? Should it be just some guiding principles that we would use in approaching this? I don’t know at this point in time, but that’s something we can think about down the road.
FASB’S ROLE IN “CONDORSEMENT”
JofA: Last fall at the AICPA National Conference on Current SEC and PCAOB Developments, Paul Beswick, one of the SEC’s deputy chief accountants, introduced the concept of “condorsement” in the context of the discussion on whether the U.S. will adopt IFRS. In your view, what does “condorsement” mean?
Seidman: I am very appreciative of the fact that the SEC is taking such a thoughtful path to evaluating whether and how to incorporate IFRS into U.S. GAAP. I think it is a very, very important decision that they’re making, and I really am grateful for the robust process that they’re using to make this decision.
My understanding of the idea that Paul Beswick mentioned at the SEC conference, which he dubbed “condorsement,” involves a few key points. First is that the FASB and the IASB would continue to work on the MOU (Memorandum of Understanding) projects, and try and reach converged standards on those topics, which I am obviously very supportive of.
He also suggested that the FASB would undertake no new projects. That the FASB would evaluate the remaining differences between U.S. GAAP and IFRS, and evaluate whether those IFRS standards are suitable for the U.S. with a pretty high threshold to what “suitable” means. In other words, you tend to approach it assuming that they would be suitable for the U.S. and have to have some very good reasons why they would not be.
Now, that evaluation could be done over a period of time or in a relatively short period of time. I can understand how, because IFRS is already accepted in the United States, that you could view that particular aspect of this proposal as not being mission critical.
I think that last piece is very important, that we would go through the remaining differences between U.S. GAAP and IFRS and have a critical evaluation of the significance of those items from both a quantitative standpoint and a qualitative standpoint. By qualitative, what I mean is that we would have discussions with investors about whether they care about these differences or not, because I think that can really help inform the path that we take about adopting or incorporating IFRS into U.S. GAAP.
One of the things that the FASB has learned in recent years in our discussions with investors is that there are some issues that they care deeply about and other issues that they care less about. So I think it’s very important to have that data before we make a decision about whether to adopt an IFRS standard, whether to try and converge the IFRS—with the IFRS standard, or whether to let the difference stand. It could well be that it’s just not important other than from an operational or an efficiency standpoint.
Then part of [Beswick’s] approach was that new international standards would be set by the IASB, but that the FASB would manage the process for the U.S. to be an active participant in the development of those standards—again, ultimately, be the entity that would recommend whether it is appropriate for the U.S. to incorporate this standard or not. Now, my hope would be in a role like that that the FASB would be an active participant along the way, so that any “endorsement” process would be perfunctory at that point in time.
In other words, I would not be supportive of an approach where we weigh in at the end, and potentially be disruptive. Also, I think that would potentially lead to cases where we would not end up with the goal of consistent standards around the world. So I think the advantages of the approach that he has laid out is that it’s a very deliberative approach to identifying and evaluating the specific differences.
I think it can minimize any unintended consequences of a shift from IFRS into U.S. GAAP. I think it avoids a big bang for us. It potentially can minimize the transition costs of our country making such a significant change.
It allows the U.S. issues to be dealt with in a very deliberative fashion, including, what are we going to do with the LIFO difference, for example? What are we going to do with rate regulation, which is very important in the United States? I think a phased methodical approach, such as what Paul suggested, has those advantages.
On the risk side of the equation, I think that it has the potential to increase the risk of national GAAP, the point that I just made that if the role of the U.S. standard setter is sort of an afterthought, I think you have that potential. But I think there are ways to mitigate that risk, for example, by having the FASB be an active participant in the process, and by setting very clear and rigorous criteria for when a difference would ever be warranted.
The one piece of it that I’m not so happy about is that the FASB would not enter into any new projects. I’m not ready to sign up for that. I think that there can be cases, domestically, where we have an urgent financial reporting matter. I still think there is value in having boots on the ground for the FASB to address the issue expeditiously and hopefully cooperatively internationally so that we don’t end up with U.S. flavor per se. But I’m not ready at this point to say that there’s no role for the FASB to be having particular standard-setting activities.
I also think that on something like, for example, our disclosure framework project, which we are currently working on by ourselves, even in the context of an international standard-setting arrangement, the FASB and other national standard setters can be working on very important projects like disclosure framework that ultimately can feed into an international financial reporting system.
So, we can be undertaking very important developments and other improvements that would hopefully be embraced internationally or at least set the stage for research and thought processes that might have value and be accepted around the world.
JofA: One of the things that we hear from readers is that users, and especially preparers, are more interested not in when the standard is going to be issued but when the standard is going to be effective, and how much time they’ll have to implement it. Can you offer any insights?
Seidman: I have a few key points to make in response to that.
The first is that the feedback that was received internationally differs from the feedback that we received here in the U.S. Generally speaking, the feedback that the IASB received was that their constituents would prefer to adopt the major MOU projects at one time.
We received much more mixed feedback in the U.S. We do have some entities who would prefer to adopt the standards sequentially. Then we have others who, for systems efficiency reasons, would prefer to do it all at once. Investors also had mixed views, but requested good disclosures to help them understand the changes and the effect on trends and retrospective application.
One thing that was common in the responses that we got was strong desire for adequate lead time between the issuance of the standard and the date that it would become effective. While we did not make any specific decisions [at our March 2 joint meeting with the IASB] about that, we want to send a strong signal to people that our plan is to provide a generous amount of time between the issuance of the standard and the date that it would become effective, so that companies and the advisers that they use to help them implement standards will have enough time to understand the proposal, plan for the transition, and test the quality of their implementation before it would go live.
It is not a simple decision to make because it depends on the particular method of transition that we would require. For example, if we were ever to say that the standard is effective prospectively, then you need relatively less time to transition to the standard. Whereas, if we were to say, “recast your financial statements for a couple of years to incorporate this change,” you need a lot more time to transition to the standard.
So, it’s subject to a couple of things. Number one, what method of transition? Number two, are we going to roll these standards out sequentially or in one fell swoop? Number three, what’s the extent of change that we’re proposing? The exposure draft represented significant change in many respects for all of the projects.
To the extent that we make changes through these re-deliberations, but simplify the approach that was in the proposal, or at any rate, reflect less change relative to current U.S. GAAP, people will need less time to transition to the new standards. But having said that, it’s absolutely our intent to have an orderly, well-understood transition to these new standards, which involves a certain amount of lead time, so that people can feel comfortable they’re going to have a quality transition.
I will also say that we did not specifically discuss whether private companies and other smaller entities might have additional time beyond what I’m even indicating now. We will discuss that at a later date.
Matthew G. Lamoreaux is a JofA senior editor. To comment on this article or to suggest an idea for another article, contact him at email@example.com or 919-402-4435.
Read more of the JofA’s interview with FASB Chairman Leslie Seidman:
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PRIVATE COMPANY REPORTING
A blue-ribbon panel in January submitted a report to FASB’s parent organization—the Financial Accounting Foundation (FAF)—recommending significant changes to the future of accounting standard setting for private companies.
The panel concluded that:
There are urgent and growing systemic issues that need to be addressed in the current system of U.S. accounting standard setting;
The system should focus on making exceptions and modifications to U.S. GAAP for private companies that better respond to the needs of the private company sector rather than move toward a separate, self-contained GAAP for private companies or a wholesale reorganization of GAAP;
Under FAF’s oversight, a separate private company standards board should be established to help ensure that appropriate and sufficient exceptions
and modifications are made, both for new and existing standards; and
A differential framework (set of decision criteria) should be created to facilitate a standard setter’s ability to make appropriate, justifiable exceptions and modifications.
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