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Herz discusses FASB’s priorities, the road to
convergence and changes ahead for CPAs.
obert Herz has led FASB through a period of
tremendous change in the accounting profession. The
former PricewaterhouseCoopers chief technical partner
took the helm at FASB on July 1, 2002, just weeks
before the Sarbanes-Oxley Act was signed into law.
Within four months of his arrival, FASB and the
International Accounting Standards Board (IASB) would
ink the Norwalk Agreement, committing to develop a
single set of accounting standards that could be used
internationally for domestic and cross-border
financial reporting. Early in his tenure, Herz also
set a goal of simplifying and improving U.S. GAAP.
In July 2007, Herz was reappointed to a second
five-year term as FASB’s chairman. He spoke recently
with the JofA about simplifying accounting
standards, the need for a national blueprint for
convergence and the future of FASB. What follows are
excerpts from that conversation.
JofA: You testified before Congress
in October about the need to have a national
blueprint for convergence. Tell us about your vision
for that blueprint.
Herz: What I said on Capitol Hill
is what’s reflected in the joint comment letter from
FASB and our FAF trustees. It stems from the belief
that we should get to the ultimate goal, at least for
public companies, of common, high-quality financial
reporting across the global capital markets. We’re
driven by that end goal for public companies and maybe
for certain other publicly accountable entities—banks,
insurance companies and other similar entities.
And in thinking about that issue, the SEC asked an
open-ended question about how, once they drop the
requirement for foreign issuers to reconcile to U.S.
GAAP, which they have now done, should IFRS also be
permitted for U.S. registrants?
Our answer was
well, that may be one question, but it is not the
entire question. To us, the right question is, “How do
we get to the goal of the single set of high-quality
international standards that we and the IASB have been
working toward?” In that regard, we think that a “Pax
Americana” in financial reporting where everybody
around the world does U.S. GAAP is not on the table.
Ten years ago, people talked about that. But the
world’s moved on.
So it’s likely to be IFRS.
But, in our view, it needs to be what we call
“improved IFRS” because there are some very critical
issues relating to the IASB and IFRS that we feel need
to be addressed. If we’re going to ride the IASB and
the IFRS horse, we want to make sure that it’s as good
as it can be. We want to make sure that the IASB is
strong, is independent, is well resourced, and is
properly funded in a broad-based and secure way.
There are currently gaps in IFRS in certain areas.
And just like U.S. GAAP, IFRS needs improvement in a
number of major areas, which are the subject of our
joint projects with the IASB. And there are issues
relating to the emergence of national variants and “as
adopted” versions of IFRS.
Assuming that those
important international issues can be satisfactorily
resolved, we say in the U.S., rather than just giving
public companies an open-ended choice between U.S.
GAAP and IFRS, we need to have an end game in mind. To
get to that end game, we need to have what we call a
blueprint, or a national plan.
We need to get
the right parties together and create this blueprint
on how to get it done in this country. Once you
understand all the issues and steps, you can then set
target dates for transitioning our reporting system.
It might be all in one wave, it might be more than one
wave—staggered to allow for learning and to deal with
system capacity issues. It might allow for some early
adoption in certain circumstances.
important part of the blueprint is what do we do about
private companies and not-for-profits, because right
now under U.S. GAAP, we have a vertically integrated
system. I think people agree with that. If U.S. public
companies were to go to IFRS, what would we do about
the private companies and not-for-profits?
JofA: What do you think we should
do about private companies?
Herz: Well, a couple things. One
is that part of the blueprint ought to be the IASB and
FASB completing most, if not all, of our joint
projects in major areas. If we do that, U.S. GAAP and
IFRS will be much closer, so there would be fewer
differences and the transition would be less costly
and complex. But to the extent that there are
remaining differences, we are going to have to deal
with that and whether private companies would also go
IASB is in the process of developing
a small- and medium-enterprises set of standards. And
we’ve asked the Private Company Financial Reporting
Committee to monitor that and provide input into that.
I don’t know the exact answer. What I know is
that in order to make an effective and orderly
transition, there needs to be a process.
JofA: What do you think is a
realistic time frame for convergence if we’re
looking at an improve-and-adopt plan based on IFRS?
Herz: I’d say, if everything went
absolutely right, it’s a minimum of five years. But
things never go absolutely right. Most countries have
allowed for four or five years. And in the U.S., we
have probably more issues and more complicated issues
than almost anybody else.
JofA: Has the board discussed what
FASB’s role and mission would be in a converged
Herz: We’ve discussed
possibilities, but that will have to be for further
discussion, not just by us. Clearly the SEC would have
to be a key party. We think that U.S. constituents
would have to be very much engaged in that. But there
are different possibilities.
is we do like the Accounting Standards Board in the
U.K. and certain other national standard-setters—they
are still there even though their countries have
adopted, for public companies, IFRS.
still there because while some countries have adopted
IFRS for public companies, they still have a local
GAAP for private companies, not-for-profits, and in
some cases, governmental entities. They are also still
there because they provide national input and
resources to the global process and help with the
implementation of the global process in their country.
So that’s one possibility.
possibility—and this is just something that seems to
me would be a natural concomitant of the IASB being
the recognized global standards-setter—is they are
going to need a presence and resources on the ground
in the major capital markets around the world.
One of the things I think people like and respect
about us is they’re able to readily engage us. So
there may be a concern that with the IASB being in
London, if they’re only in London and have no people
locally, that it’s harder to do that. And so you can
envisage the IASB of the future having a branch here
with staff and some board members who reside here,
maybe one in Japan, maybe one in China. So that’s
another possibility, both are possibilities.
JofA: Which path do you favor?
Herz: I think first we need to
decide where this country’s going in that whole
regard. The SEC could say, “We think broad choice is
just fine. No end game. Just let the market decide
between GAAP and IFRS.”
I’m not in favor of
that personally. I think a two-GAAP system for U.S.
public companies would just add immense cost and
complexity to our already-complicated system, but the
SEC could say that. In which case, our agenda, what we
do, how long we’re around in our current form, could
be many years.
JofA: Convergence brings to the
forefront concerns about the cost of reworking tax
accounting systems and the consequences for the U.S.
tax code. The AICPA has taken the position that LIFO
should continue to be an option for tax purposes
even if U.S.-based companies issue their primary
financial statements in IFRS, which does not allow
LIFO. What are your thoughts?
Herz: That is one issue among many
issues in moving to IFRS—that we have the tax
conformity requirement—and that would need to be dealt
with because there are a number of major U.S.
companies that are on LIFO and the consequences of
coming off LIFO, depending on how it was done, could
cost them hundreds of millions or billions of dollars.
So that’s an issue that would have to be addressed.
I’m not enough of a tax expert to say whether
the LIFO method of accounting for taxes is a good way
of adjusting for inflation. Other countries have other
tax methods of providing some relief from inflation.
JofA: What results do you hope to
see from the SEC Advisory Committee on Improvements
to Financial Reporting (CIFiR) led by Robert Pozen?
Herz: The overall objectives are
to come up with some workable recommendations that are
practical to implement and that could have a real
impact on improving our reporting system and making it
less complex. This is a very important effort.
I also think they need to weigh in on convergence.
I think it’s almost impossible to think about what to
do with the U.S. reporting system and divorce it from
all that’s going on in convergence and the potential
use in this country of IFRS. I believe they will be
thinking about that soon.
JofA: One recommendation that has
come out of the SEC advisory committee in the early
stages is discussion of a decrease in the use of
industry-specific guidance. What do you think of
Herz: That, I think in part, came
out of speeches I made last spring. I believe that we
have too much industry-specific guidance in the U.S.
Some of it’s outdated, and some of it’s fitted to
industries that have begun to converge. I agree with
their preliminary view that accounting ought to be
more around activities, not industries.
can have the same activity done by an insurance
company, a bank, an investment company, a securities
broker/dealer and you may have four different methods
of accounting. And that’s got to add to complexity. A
lot of it emanated from different revenue recognition
methods for specific industries. And that’s why our
revenue recognition project with the IASB is very
important. It could help a great deal.
JofA: What role does the Private
Company Financial Reporting Committee play in the
Herz: The committee was created to
see whether or not, based upon either clear
cost/benefit considerations or clear differences in
the user preferences in that market, there ought to be
some differences in standards for public and private
We’re looking for them to have good
discussions, a robust process. Providing they do that,
it’s our responsibility and commitment to take their
JofA: Do you believe there’s a need
for an industry-specific framework, such as the one
being developed by the Enhanced Business Reporting
Consortium, to serve as the basis for taxonomy
development for information not captured in the
primary financial statements and notes?
Herz: Well, go back to my former
incarnation. Seven or eight years ago, while at
PricewaterhouseCoopers, I wrote with three other
people “The Value Reporting Revolution.” It’s all
about EBR and reporting of key nonfinancial
information. EBR took the value reporting work that
had been done by PwC and further developed it.
I strongly believe that financial reporting is very
important because it is the end result of your
performance, but to understand a company’s performance
and also understand where the company is going you
need more than financial reporting. You need EBR. You
need the key nonfinancial performance indicators. You
need to put those in the context of the company’s
strategy. Those will give you a much richer idea of
what’s going on in the company and also those are
often leading indicators to its future financial
JofA: What changes are coming with
regard to employers’ accounting for the effects of
defined-benefit pension plans?
Herz: Well, we did phase one where
we, in our terms, fixed the balance sheet. The big
question is where to go now. The IASB is also working
on that and they’re going to come out with a
discussion document next year with some of their
thoughts on the next steps, and we’re following that.
But the big issues are what to do in the income
statement. Statement no. 158 left the whole recycling,
the whole Rube Goldberg model in place for the income
statement. Do we get rid of it completely? Do we
change it so it’s less Rube Goldberg, so that it’s
A lot of that is interwoven with our
project on financial statement presentation, where
we’re proposing dividing the financial statements
between business, investing and financing activities.
So you could, for example, contemplate an income
statement in the future that has the annual service
cost in the business or operating section, the
interest cost on the accretion of the pension
obligation in the financing section, and the movement
in the value of the plan assets in investing
There are also issues around
cash-balance plans, which increasingly are becoming
the predominant form of defined-benefit plan. Some
people believe there are some real issues there with
how the accounting is done currently. There are also
issues around multi-employer plans. Some believe
participating sponsor companies are in for
dramatically increasing costs that are not currently
transparent to investors.
JofA: Talk about changes you see
coming with regard to accounting for leases.
Herz: Well, we have a major joint
project with the IASB on that. The approach we’re
looking at is what’s called a rights-and-obligations
approach. It is a different way of thinking, saying
that instead of trying to get either/or type
classifications, all-or-nothing type accounting around
bright lines in order to determine who is the
substantive owner of the equipment—the lessor or the
lessee—let’s just account for the actual rights and
obligations created by the leasing arrangement.
Suppose you had leased a large piece of equipment
and the lease says you will lease the equipment for 10
years, and you’ll make 120 monthly payments to use the
equipment for the 10 years.
approach what you have is an asset, that is, a right
to use the equipment for 10 years, and you have an
obligation to make 120 payments, and let’s put those
both on the balance sheet rather than trying to make
an all-or-nothing determination as to who
substantively owns the underlying equipment.
Now the devil’s going to be in the details because
my example of that lease is a highly simplified one.
It has no renewal options, no contingent rents, no
other fancy bells and whistles that are often in
leasing arrangements, so we’re going through those as
well to understand how those might affect the model.
Our plan is to expose a first-stage document, we
and the IASB, outlining this approach and how it would
work. We’ll also probably hold roundtables, and then,
based on the input, we’ll work together toward an
JofA: In closing, is there anything
else you’d like to highlight for our readers?
Herz: We try hard to balance the
pace of change with maintaining an open, thorough and
deliberate process in order to engage all points of
view. We reach out to many different groups for
viewpoints, hosting roundtables and visiting companies
and constituents. When we give people the chance to
comment, we learn, and we deliberate using that input.
While it’s a very involved process, and can be
frustrating at times, it’s also very rich.
We’ve also made significant efforts to simplify
U.S. GAAP by rationalizing the accounting
standard-setting structure, by codifying the
literature in an integrated and more useable form, and
by trying to make our documents more understandable.
Web-Exclusive: More From Robert
JofA: How do you respond
to CPAs in business and industry who are
concerned about convergence-related costs
associated with education and training as
well as system changes?
Herz: Those costs are
real. But most of those would be one-time
costs for shifting the system. I personally
believe it will be worth those costs and the
pain. I think it could be a huge gain. Now
the question is how to get there in an
orderly and effective manner from the U.S.
perspective. That’s why we need a plan.
And another question is, do we want to be
the only major country not in the global
JofA: Where do you see
the PCFRC making its greatest contribution
to the standard-setting process?
Herz: I think we would
hope that as we develop new standards, we
get real-time input from them. An ounce of
prevention is worth a pound of cure. We’d
like to get it right the first time from
But if there are
areas in existing standards where they feel
strongly and they are hearing from their
constituency—not just the auditors and
accountants and owners of the businesses,
and preparers, but, very importantly, also
the users—then we would like to know about
JofA: How will XBRL
taxonomies be maintained, and will updates
to the taxonomies be integrated into
FASB’s standard creation and revision
Herz: There’s not yet a
finalized maintenance plan, but a plan has
been in development between us and XBRL US
as to how the taxonomies will be maintained.
At least at this stage, it will call for
us—to the extent that we make changes in
GAAP—to actually create the amendments to
the taxonomy in a just-in-time mode, so that
when we put out a new standard, it will also
contain the changes in the taxonomy. And we
plan to link the taxonomies to the GAAP