Measurement: The Big Picture
T he Financial Accounting Standards Board is issuing an exposure draft of a new concepts statement that addresses present-value-based measurement. If approved, it will be only the seventh such statement in the FASBs history and the first since 1985. The draft provides general guidance on measurements that are based on estimated future cash flows.
"CPAs often deal with situations in which estimated cash flows are the only available measurement tool. This happens in environmental and insurance liabilities and in impaired assets, for example," FASB Senior Project Manager Wayne Upton told the Journal . "Now a cash flow received or paid 10 years in the future is economically different from the same amount tomorrow. This concepts statement says that difference should be reflected in the financial statements. The ED provides some ground rules on how to do this." The draft does not cover recognition issues and assumes the CPA already has determined there is something to measure. "Basically, if you want to measure it, and cash flows are what youve got to work with, the ED says how to go about solving the problem," said Upton.
A controversial aspect of the document, according to Upton, deals with risk. He said CPAs often discuss interest rates commensurate with risk. "Risk of what? What is commensurate?" He pointed out that credit cards have a higher interest rate than Treasury bills, for example, because one is a riskier proposition than the other. "But weve never attacked the problem of making explicit statements about quantifying risk." The proposed statement suggests being more analytical, and Upton said some will be uncomfortable with such explicit measurements, preferring the current practice of assuming risk is implicit in the interest rate.
Rules for the rule makers
Concepts statements provide a general framework and agenda for future FASB projects. In fact, Concepts Statement no. 1, Objectives of Financial Reporting by Business Enterprises , says, "The Board itself is likely to be the major user". They also provide a basis for the American Institute of CPAs accounting standards executive committee when it comments on proposed FASB pronouncements. Concept statements do not establish generally accepted accounting principles and do not invoke rule 203 of the AICPA Code of Professional Conduct, which requires conformity with FASB pronouncements.
The comment period for Using Cash Flow Information in Accounting Measurements runs unusually long, until October 31, to encourage many comments from the accounting and business community. After the exposure period ends, the FASB will hold a public hearing. To order a copy of the ED, call the FASB at 203-847-0700, ext. 555.
Postretirement ED Reforms Disclosure Rules
T he accounting wont change, but disclosure rules will if a new Financial Accounting Standards Board exposure draft goes through. The ED offers a host of revisions on postretirement benefit disclosures for both public and private companies. According to FASB Project Manager John Hepp, the new rules would make sure users had the information they wanted but would not burden preparers to provide information no one uses.
The statement would supersede only the disclosure requirements in three statements: no. 87, Employers Accounting for Pensions , no. 88, Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits , and no. 106, Employers Accounting for Postretirement Benefits Other Than Pensions . "Were making the disclosure easier to understand and filling in gaps to provide data that equity and credit analysts say they want to see." Added to the ED are requirements for more information on cash flows, such as contributions and benefits paid. The ED eliminates requirements for some alternative measures of obligations, such as vested-benefit and accumulated-benefit obligations.
"The big controversy is on sensitivity analysisthe board debated that at length," said Hepp. Currently, the sensitivity analysis is the effects of a 1% increase in the long-term health care trend rate. The ED will propose disclosure of the effects of an increase and a decrease. The FASB is specifically asking for comments on this issue.
Relief for small companies
A major proposed change, according to Hepp, is an alternative, greatly reduced set of disclosures for certain nonpublic entities. "Users of public company statements usually want more information than do users of private company statements," said Hepp. "So we proposed reporting requirements that would take that difference into account." The FASB staff worked closely with the technical issues committee (TIC) of the private companies practice section of the American Institute of CPAs division for CPA firms in deciding what disclosures were necessary. "Smaller companies no longer will have to break out any more of their contributions to multiemployer planshow much to pensions, how much to benefits and so on," said Hepp. That change was recommended by TIC chairman James A. Koepke.
TIC member Jeffery C. Bryan was pleased with the way the FASB and TIC worked together on this ED. He cited another recent FASB pronouncement, Statement no. 126, Exemption from Certain Required Disclosures about Financial Instruments for Certain Nonpublic Entities , as part of a trend in addressing the special needs of private companies. (See "FASB Makes Small Businesses Larger," JofA, Feb.97) "The FASB is addressing the issue that different users have different needs," he told the Journal . "Even though this proposed statement would not change recognition, it would relieve some of the disclosure burden while still giving decision makers the information they need."
Employers Disclosures about Pensions and Other Postretirement
Benefits is available by calling the FASB at 203-847-0700,
ext. 555. Comments are due by September 30.