The FASB

Comprehensive Income Compromise

T he Financial Accounting Standards Board has concluded its deliberations on its exposure draft Reporting Comprehensive Income . The final statement retains most of the provisions of the ED, with a few exceptions. (See “FASB Seeks to Revise Comprehensive Income Reporting,” JofA, Sept.96, page 19). “There were two changes that affected entities are likely to see as major,” FASB Project Manager Cheri Reither told the Journal .

“We eliminated the requirement for reporting comprehensive income per share.” This was seen as an area of contention when the ED was first issued. “Also, we modified the ED’s requirement that comprehensive income be reported in a statement of financial performance.” Companies may report comprehensive income in a statement of changes in equity or in an income statement-type format. They may think the final statement is therefore less stringent than the ED, but Reither stressed this is not the case. “We still require a total. Companies have to add net income to other comprehensive income.”

Reither said that if companies choose the equity format, they will have to display a statement of changes in equity as a primary financial statement, even though the Securities and Exchange Commission allows companies to place that statement in the financial statement notes.

Also, the effective date was pushed ahead one year to fiscal years beginning after December 15, 1997. Reclassification adjustments will not be required, but will be encouraged, for earlier period financial statements presented for comparison with the first period in which the final statement is adopted. Further details of changes are discussed in the FASB Action Alert of March 19, which is also posted on the FASB Web site, http://www.fasb.org .

To order the statement, expected later this month, call the FASB at 203-847-0700, ext. 555.

Proposal to Expense Start-Up Costs

M any CPAs have searched for broad authoritative guidance on the financial accounting of start-up costs. Except for those in a few specialized industries, noted below, most have been unable to find such guidance because there is none. The American Institute of CPAs accounting standards executive committee (AcSEC), looking to fill the gap, issued an exposure draft of a Statement of Position, Reporting on the Costs of Start-Up Activities .

The ED defines start-up activities broadly as “one-time activities related to opening a new facility, introducing a new product or service, conducting business with a new class of customer or beneficiary, initiating a new process in an existing facility, or commencing some new operation.” AcSEC noted that entities currently use different terms, such as preopening and preoperating , to describe start-up activities and costs. The ED uses start-up to describe all those costs and activities.

Main provisions
The ED requires that start-up costs be expensed as incurred. Although specific guidance already exists for construction contractors, federal government contractors, airlines and casinos, it all would be superseded by the proposed SOP.

AcSEC had considered whether start-up costs should be capitalized, given that entities undertake start-up activities expecting them to result in future benefits. However, the committee concluded the future economic benefits of start-up activities have indeterminate lives and, if those costs were capitalized, amortization periods would be arbitrary. Also, it had not heard a good answer to the question, “If these costs are capitalized, what exactly is the asset?”

The ED, which applies to all nongovernmental entities, would affect the accounting for start-up activities of entities in the development stage as well as those that are established operating entities, as defined by Financial Accounting Standards Board Statement no. 7, Accounting and Reporting by Development Stage Enterprises .

AcSEC believed the ED would reduce the current diversity in financial reporting. Currently, some entities capitalize costs while others expense as incurred. For years, AcSEC has heard complaints about inconsistencies in the financial reporting of start-up costs and about the lack of authoritative accounting guidance. In fact, the Securities and Exchange Commission staff has expressed concern periodically about the accounting for these costs.

The ED represents the next phase of AcSEC’s series of projects related to reporting on the costs of certain activities undertaken to create future economic benefits (for example, start-up, training, customer acquisition and other similar activities). The first phase resulted in the issuance of SOP 93-7, Reporting on Advertising Costs .

Tax issue
Organization costs are excluded from the ED’s scope. However, AcSEC’s definition of organization costs is narrower than that contained in the tax code. The SOP could thus lead to temporary tax differences related to costs technically outside the document’s scope. Most FASB members would have preferred the ED to include organization costs in the scope and that those costs also would be expensed as incurred. However, they cleared the document anyway.

AcSEC invites opinions on these and other issues identified in the document. One free copy of the ED (product no. 800113JA) may be ordered from the AICPA order department at 800-862-4272. It is also on the AICPA Web site (http://www. aicpa.org) in the accounting standards area. Comments are due by July 22.

—Charles L. McDonald, chairman of the start-up costs task force, and Daniel J. Noll, technical manager, AICPA accounting standards

Ball, FASB Staffer, Retires

J T Ball, who has been with the FASB as long as there’s been a FASB, announced his retirement effective June 30. Currently assistant director of research and technical activities, he started at the Financial Accounting Standards Board in 1973 as senior technical adviser to the chairman and the board. Before that he had spent four years with the FASB’s predecessor, the Accounting Principles Board, as an American Institute of CPAs staff member preparing interpretations of APB opinions. His original job at the AICPA was assistant director of examinations, a post he held for two years, preparing and supervising the grading of the Uniform CPA Examination.

At the FASB he’s worn many hats over the years, supervising staff members handling implementation and practice problems. He is the liaison with the AICPA accounting standards executive committee-“I’ve missed only one meeting of AcSEC since its inception,” he said-and with the Securities and Exchange Commission.

In an interview with the Journal he discussed some of the early years and milestones of the FASB. “At the beginning,” he said, “the FASB had inherited a lot of projects from the APB. The big problem was which were the most urgent, the most important. Meanwhile, we kept hearing questions-still around today: Can the FASB succeed? Will it stay in business?” There were growing pains-“just the usual agony of any new organization.”

Red-letter dates
“In my opinion, one of the biggest events in the FASB’s history was the formation of the emerging issues task force in 1984,” he said. “For the first time there was an organized mechanism to deal with the crisis problems of the day.” Another highlight was the creation of the successful fellows program in 1974. Although an article in the FASB’s Status Report praised Ball for organizing the program, in which more than 70 fellows have participated, he is modest about it. “It actually originated with Ray Groves, who was managing partner of what is now Ernst & Young. You could say I was just the messenger who presented the idea to the chairman, Marshall Armstrong.”

FASB Chairman Dennis Beresford, who is also retiring on June 30, said Ball is “truly one of the pioneers of the FASB and the standard-setting process…His technical knowledge, professionalism, institutional memory and dedication will be greatly missed.”

Deposit Accounting Gets Its First Treatment

In the proposed Statement of Position, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk , the American Institute of CPAs accounting standards executive committee addresses an accounting issue that has been brought up but never fully dealt with in various Financial Accounting Standards Board statements. (These include Statements no. 5, Accounting for Contingencies , no. 60, Accounting and Reporting by Insurance Enterprises , and no. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts .) The exposure draft uses deposit accounting to refer to the accounting method for such contracts but does not address when to apply it. Also not covered are long-duration life and health insurance contracts, which are already covered by FASB Statements no. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments , and no. 113.

“A key provision is that this SOP would apply to all entities, not just insurance companies,” R. Larry Johnson, an AcSEC member who chairs the deposit accounting task force, told the Journal . “This may be controversial, because some of the affected entities may believe AcSEC is not simply interpreting generally accepted accounting principles in this area but is creating new GAAP, which is the province of the FASB.”

Johnson also said that under certain circumstances, assets and liabilities would be measured at their discounted value using a risk-free rate that essentially doesn’t change. “Also, we’ve proposed that in a contract in which the liability or asset is measured at its discounted cash value, the debitor credit would end up going through the claim-loss account.” Two FASB members voted against releasing the ED largely for that reason. (Only five of the seven FASB members need to approve an ED for it to proceed, however.)

The exposure draft will be available by the end of this month and will have a 90-day exposure period. Copies will be available by calling 800-862-4272 or by downloading it from http://www.aicpa.org .