FASB addressing liabilities and equity complexity, goodwill

An effort to reduce complexity and a potentially challenging debate are imminent for FASB as board Chairman Russell Golden nears the end of his term.

Golden, whose term concludes on June 30 of next year, described the priorities for the final months of his tenure Tuesday at the AICPA Conference on Current SEC and PCAOB Developments in Washington, D.C.

FASB’s project to improve its liabilities and equity guidance is well underway, and Golden said he hopes to complete it by the end of his term. Golden said the complexity related to having five accounting models for convertible debt instruments under the current rules creates challenges for preparers.

He said that in similar economic circumstances, with just minor variations in facts, different accounting conclusions can be reached under the current rules, making it difficult for financial statement preparers to know what to do.

“You can see this,” Golden told reporters after his speech at the conference. “Private companies, small public companies have larger areas of restatements in this area because it’s harder for them to figure out what to do. I’d like to have an accounting result that’s consistent based on the economics.”

The board has proposed:

• Reducing the number of accounting models for convertible debt instruments and convertible preferred stock.
• Revising the derivatives scope exception guidance.
• Amending the related disclosure and earnings-per-share guidance.

FASB is due to discuss the issue today and into the first quarter of next year, and board member Sue Cosper said the board hopes to issue a final standard by the time Golden’s term ends.

Debate coming on goodwill

Golden would like to continue making progress on FASB’s examination of accounting for certain intangible assets acquired in a business combination and the subsequent accounting for goodwill.

The board issued an Invitation to Comment on the issue in July.

“Companies and auditors have observed that the annual impairment test is very costly,” Golden said. “And you can see this in the information they’ve given us. You can see it in the early adopters for critical audit matters. A lot of auditors have made goodwill impairment a critical audit matter, which is a signal that there is greater audit emphasis and greater audit costs associated with that.”

Amortization of goodwill would be much less expensive than impairment, but Golden said the board also needs to consider which method (impairment or amortization) gives investors the information they need.

There also are convergence matters to consider, as U.S. private companies and not-for-profits are permitted to amortize goodwill, but public companies reporting under rules issued by FASB and companies using IFRS are not.

The International Accounting Standards Board (IASB) also has been investigating possible changes to its rules for business combinations and impairment of assets and plans to publish a discussion paper in February. But the IASB voted 8–6 in June to retain impairment and not to permit amortization.

Golden predicted a similarly divided vote by FASB after the issue is discussed.

“Some would say it’s important that we converge the U.S. system and amortize all, and others would say we should keep the international convergence,” Golden said. “Those are all the things we will debate. I doubt that the end result will be a 7–0 vote. On something as important as this, it rarely is.”

Other important standard-setting issues for FASB include:

• LIBOR reform: As global capital markets move away from the London Interbank Offered Rate (LIBOR), FASB expects to issue a standard providing temporary, optional guidance early next year. The guidance will apply only to contracts or hedge accounting relationships that use LIBOR or another reference rate that’s expected to be discontinued.
• Performance reporting: FASB is in the early stages of a project focused on the disaggregation of performance information, either through presentation in the statement of income or disclosure in the notes to the financial statements.
• Segment reporting: The board will receive a summary of findings Wednesday on the FASB staff’s second study on potential improvements to segment disclosure requirements. The study focused on improving the aggregation criteria and the process for determining reportable segments.

— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.