There comes a time for any set of rules when a thorough in-depth review is appropriate and necessary. For the accounting profession, globalization provides both the impetus and the opportunity. The profession needs to step back now and take a good, hard look at accounting standards—specifically those issued by FASB.
We must recognize that other nations do not have, or necessarily want, the high degree of technical correctness reflected in current U.S. accounting standards. That is why we must take the time to perform a “self-assessment”—to look at the standards now in place and ask ourselves how well they are working.
FASB’s recent release of a special report, Leases: Implementation of a New Approach, is a recognition of the need to review existing standards. That recognition should be extended to include all current standards.
Would a self-assessment cause FASB to divert resources from some current issues? Probably. Is that all bad? Not necessarily.
Do complicated, highly technical accounting standards really serve the investing public well? Or would U.S. and global markets be better served by simpler, more understandable standards uniformly applied?
In 1972, when the Wheat Committee—a study group on the establishment of accounting principles— originally recommended the formation of FASB, its report looked forward to standards that would be practical. That concept has been lost somewhere along the way.
Those of us who had supported and promoted the FASB concept also looked forward to accounting standards that would be practical and make “like things look alike.” However, current standards—which incorporate such things as estimates of future inflation and stock price volatility—cause accounting results to be based on varying opinions. That reduces comparability and means like things are less likely to look alike.
Investors must choose from many different opportunities. Comparability among companies under consideration is essential and can be weakened by unnecessary subjectivity. The exercise of accounting judgment should not, and in fact cannot, be eliminated. But the introduction of subjective measures such as future inflation leads to the use of different basic assumptions by different reporting entities.
In setting accounting standards on a national or global basis, technical correctness is less important than comparability among reporting entities. It is also less important than consistency.
For example, when FASB was considering how to account for postemployment benefits, considerable discussion arose about whether future benefits should be based on general inflation rates or medical inflation rates. Neither one can be predicted reliably. I argued unsuccessfully at the time for the computation to be based on current costs. The cost of inflation would be borne in the years in which it occurred. But most important, all reporting companies would be using the same base instead of varying estimates of something that had not yet happened—future inflation.
Since the postemployment benefit liability is, at best, an estimate, the amount of that liability is not nearly as important as its trend. Is it going up or down, and how does it compare to other companies? What is important is the consistent application of the method of calculation and the comparability of one company’s calculation with that of another.
Whenever future inflation rates and similarly subjective data are used as the basis for a calculation, there is greater opportunity for manipulation. Need to show higher income? Reduce your estimate of future inflation.
The process of setting and reviewing accounting standards can be speeded up if standard setters recognize that even diligent research will not provide all the answers. Some decisions will necessarily be arbitrary. That does not render those decisions any less valid.
For example, APB Opinion no. 18 established a presumption that a company owning 20% or more of another company’s stock had the ability to “exercise significant influence.” No amount of study or research could have determined whether 15% or 25% would have been better. The point is that it does not matter. As long as the standard is applied uniformly, investors can make informed decisions about alternative investments.
RECODIFYING THE STANDARDS
In addition to addressing the substance of the standards, FASB should revise the present numbering system. Serious consideration should be given to recodifying the standards so they have topical groupings similar to the presentation in FASB’s Current Text. This system has worked well for legislative codes and could work well for accounting standards.
At a minimum, the present system of adding a new number for every amendment of an existing standard should be changed. If a standard needs to be amended, the affected portion should simply be deleted and replaced with the new version. Although FASB Statement no.100, Accounting for Income Taxes—Deferral of the Effective Date of FASB Statement no. 96, is the only one I understand in its entirety, it really made little or no sense to create a numbered standard simply to postpone the implementation of FASB no. 96.
Globalization of commerce is here to stay, and accounting standards must reflect global interests. Clinging to unnecessary but technically correct accounting standards makes it harder to develop acceptable, meaningful international standards. FASB should take this opportunity to update and even change the standards. Now is the time for the entire accounting profession and its standard setters to come together in an effort to assure simpler, more useful and understandable U.S. and worldwide standards.
SAMUEL A. DERIEUX, CPA, is a former AICPA president and chairman of the board of directors (1973-74). He received the AICPA Gold Medal Award for Distinguished Service in 1978.