Society Responds to Three Accounting Proposals

By Steven Rubin

One of the major activities of the New York State Society of CPAs is to respond to proposals from standards-setting, legislative and regulatory bodies on matters that affect accounting practice.

The Society, through its Financial Accounting Standards Committee, chaired by Robert A. Dyson, issued three comment letters recently. Two of the letters respond to Financial Accounting Standards Board (FASB) proposals, while the third is in response to a proposed statement of position (SOP) of the Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants (AICPA).

These comment letters are available in their entirety on the Society’s website at www.nysscpa.org/commentletter/main.htm. Additional information about the proposals may be found on the FASB and AICPA websites at www.fasb.org/ and www.aicpa.org/index.htm, respectively.

Hot Stuff: Asbestos and FASB Statement 143

Proposal Summary. The proposed FASB staff position, the “Applicability of FASB Statement No. 143 to Asbestos Removal,” states the staff’s perspective on the following issue: existing legislation requires the owner of a building to remove and dispose of asbestos in a certain manner when a building is either renovated or demolished. Regardless of whether the owner has any plans to demolish or renovate the building, does the existence of that legislation create an asset retirement obligation (ARO) that should be recognized as a liability in accordance with FASB Statement No. 143, “Accounting for Asset Retirement Obligations”?

The staff position is “yes, it does,” and it provides proposed guidance for recognizing and measuring the amount.

Response Summary. The committee’s comment letter, while generally supporting FASB’s desire to provide timely guidance on accounting matters, recommends that FASB withdraw the proposal in its present form and give the matter greater consideration either by reissuing it as a proposed FASB Interpretation—with a longer comment period—or by adding it to the agenda of the Emerging Issues Task Force (EITF). The reason is that the proposal represents a major change to, rather than a mere clarification of, existing practice for a relatively large number of companies.

Aside from the proposal’s form, the committee also questioned whether a liability regarding non-routine removal of regulated asbestos-containing material (RACM) can be readily estimated in many cases, because most companies have had little, if any, experience in estimating removal costs of asbestos originally sprayed on the various beams and ironwork. The committee believes that such companies generally encapsulate, rather than remove, such asbestos anyway.

Further, committee members were unaware of any instance in which the estimated cost of removing asbestos-containing material sprayed on beams and ironwork is reflected in the purchase or sales prices of property. The committee’s experience is consistent with the most recent edition of The Appraisal Institute’s publication The Appraisal of Real Estate (12th ed., 2001), which states on page 232 that “One market’s reaction to the effect asbestos has on the value of income producing properties may differ from the reaction of other markets. There is little evidence, however, that investors are willing to sell properties at sharp discounts because of the problem.” Thus, in estimating the complete liability for asbestos removal, many companies would be compelled to engage in costly, speculative studies that would provide no benefit other than making an accounting estimate in applying this proposal.

Finally, the committee expressed concern that the FASB staff refers to remote contingent events, such as fires, boiler explosions, water damage and natural disasters, to justify the recognition of a liability. The criteria in recognizing a contingent liability, as presented in FASB Statement No. 5, “Accounting for Contingencies,” does not require the recognition of a liability due to the mere existence of a possibility of an event.

Up to SPEed: Assets, Liabilities and FASB Statement 140

Proposal Summary. The FASB exposure draft, Qualifying Special-Purpose Entities and Isolation of Transferred Assets, would amend and clarify FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” in several ways.

One key provision would prohibit an entity from being a qualifying special-purpose entity (SPE) if it enters into an agreement that obligates a transferor, its affiliates or its agents to deliver additional cash or other assets to fulfill the SPE’s obligations to beneficial interest holders (except certain servicing advances and forward contracts to transfer additional financial assets).

A second provision would prohibit a qualifying SPE that can reissue beneficial interests from holding liquidity commitments, financial guarantees or other commitments that entitle it to receive assets in addition to the original transfer if necessary to fulfill obligations to beneficial interest holders unless certain conditions are met.

Response Summary. While applauding FASB’s efforts to better reflect economic realities, the committee feels this exposure draft appears mostly designed to close loopholes highlighted by Interpretation 46. Such an exercise seems at odds with the “principles-based” approach to accounting standards-setting that the FASB previously has proposed.

Given the relatively large number of recent revisions to FASB Statement 140 and Interpretation No. 46 that have already been issued, the committee wrote that this narrow exposure draft should be withdrawn and that FASB should instead proceed with a new comprehensive statement, rather than continue issuing a series of “repairs.”

Further, the committee favors FASB’s adoption of a basic concept of control, noting that such a concept would require extensive judgment by financial statement preparers, auditors and regulators. However, the committee believes that such judgment is preferable to detailed and frequently changing rules that may allow substance to be hidden.

Allowance for Credit Losses: Clarifying Inconsistencies

Proposal Summary. AcSEC’s exposure draft of a proposed SOP, Allowance for Credit Losses, addresses how non-government creditors should recognize and measure the allowance for credit losses related to all loans, as the term is defined in FASB Statement No. 114, “Accounting by Creditors for Impairment of a Loan,” with certain exceptions. The proposed SOP was undertaken in order to narrow inconsistencies that have developed in practice.

Response Summary. The committee supports AcSEC’s intention of clarifying practices surrounding the allowance for credit losses and addressing inconsistencies that have developed.

In general, the committee believes the proposed SOP presents an appropriate conclusion that a loss under FASB Statement No. 5, “Accounting for Contingencies,” is not a single event and that the proposed SOP provides useful illustrations. However, the committee also believes the final SOP should require disclosures sufficiently comprehensive to ensure that financial statement readers understand the rationale behind the “unallocated portion of the Statement 5 reserve.”

The committee does not believe, though, that an unconditional promise to give to a not-for-profit organization constitutes a loan to be covered by the proposed SOP.

Steven Rubin, CPA, is the NYSSCPA vice president for professional issues, as well as immediate past chair and a current member of the Financial Accounting Standards Committee.