NYSSCPA member Marc A. Siegel was appointed to the Financial Accounting Standards Board (FASB) in 2008 and reappointed for a second term in 2013. A forensic accounting expert with a wide-ranging background in industry, he has helped to bring an investor perspective to the board. Siegel recently spoke with The Trusted Professional about what we can expect from the FASB in 2014.
What are the FASB’s main priorities this year?
The board is looking forward to a productive year. We expect to finalize guidance on revenue recognition with the International Accounting Standards Board (IASB) during the first half of the year. We also hope to complete our work to improve accounting standards for financial instruments in the areas of classification and measurement, and credit impairment. And we will be working closely with the IASB on our joint project on accounting for leases. A large-scale project reconsidering accounting for insurance contracts is also on tap.
Beyond these four big projects, we plan to review the mix of projects we undertake going forward. One of our advisory groups, the Financial Accounting Standards Advisory Council (FASAC), recently conducted a survey about FASB priorities, which is available on our website, fasb.org. It shows which projects on our agenda are important to stakeholders. [Ed. Note: According to the FASAC, the top projects that survey respondents felt the board should prioritize over the next three to five years include the Disclosure Framework, Accounting for Financial Instruments: Hedging, Conceptual Framework, Financial Instruments with Characteristics of Equity Pensions and Financial Statement Presentation.]
Our preliminary thinking is that our future projects should fit into one of several categories. The first category would be projects that cut across all elements of accounting—this could include projects such as the Disclosure Framework, elements of our conceptual framework and a reconsideration of how performance is presented in the financial statements. Another category would be projects aimed at simplifying accounting and taking complexity out of GAAP wherever we can. And, of course, we will always be working on projects that involve improving transparency in particular line items or transactions, and we will continue to be responsive when questions of interpretation come up.
The Private Company Council (PCC) has been active for more than a year. How well has it been fulfilling its mission?
The dedication, commitment and passion of the PCC members—who, by the way, are volunteers—have been impressive. They met five times in 2013 and have made significant progress. Their input was critical in the recently finalized decision-making framework that will help guide the board for years to come on how to think about recognition, measurement, presentation, effective date, transition and disclosure issues in the private company context. The PCC has moved forward on a number of issues for private companies, recommending an option to amortize goodwill after an acquistion and an option to apply a more simplified approach to hedge accounting for certain interest rate swaps when the intent is to mirror fixed-rate debt. They are also considering other topics such as identifying and recognizing separately intangible assets in a business combination, and consolidation accounting in related-party lease situations. And it also held a town hall late in 2013 to make sure that any emerging issues in the private company landscape are identified. So, they’ve made great progress so far.
Is there any work, internally, that remains to be done to the structure of the PCC?
Not so much to the structure, but one thing we have discussed doing differently is to change the timing of the consideration of public businesses in the issues that the PCC identifies. In the first couple of issues the PCC discussed, the board deferred the question about whether the identified problem is solely a private company issue, or if it also is applicable to public companies. Going forward, we want to think about that up front. One example where we did this is [with] development-stage entities. The PCC identified significant costs in applying GAAP requirements for development-stage entities. We worked with some of these companies and their investors, and learned that the requirements produced high costs and low benefits for public development-stage entities as well. As a result, the board took on a short-term project and issued a proposed Accounting Standards Update to take costs out of the system for both public and nonpublic development-stage entities.
To what degree will private companies be factored into ongoing technical projects, such as leases or revenue recognition?
For the past several years, even before the PCC was formed, we’ve had dedicated staff on each of the big projects whose role is to bring the private company perspective to the board. So, in revenue recognition and leases, for example, we had already obtained feedback from our private company financial reporting committee, our small business advisory committee and from outreach conducted by the dedicated staff on the project teams. Now that the PCC is in place, we look to them as an advisory group on current agenda topics, in addition to the work that the project teams do.
What lessons did you learn in your first term and how will you apply them to your second?
Patience is one of the biggest things I learned during my first term. The due process that we follow takes quite some time, but may be the best way to ensure that the board has the information needed in order to assess the costs and benefits of proposed changes to accounting standards. It’s also become more and more clear how interconnected all the parts of the financial reporting system are. Any changes that we propose have to be implemented by preparers, evaluated by auditors and understood by users. This also has to take place in an environment where there is second-guessing about judgments made along the way. So, in some cases, we have found creative ways to put all parties together in a room to discuss the relative tradeoffs. In one example, the Center for Audit Quality sponsored and co-hosted with us two forums to discuss the Disclosure Framework. Preparers, auditors, regulators, attorneys and investors were all represented. In the case of disclosures for revenue recognition, we held focus meetings with preparers and investors in order to understand which disclosures might be the most useful, compared to the ones that were the most costly to produce. These types of outreach are quite constructive, and I hope we continue doing them during my second term.
The Financial Accounting Foundation (FAF) had expressed a desire for the FASB to be more closely involved with the IASB, even after the convergence projects are completed. What will be the nature of these two bodies’ interactions once the convergence projects are concluded?
The FASB has worked closely with the IASB for many years, with the unique ability to deliberate accounting topics at the same table. Once the convergence projects are complete, this unique standing among all other standards setters will change. We will, however, remain very involved with the IASB. The FASB is a member of the IASB’s Accounting Standards Advisory Forum, a technical advisory body made up of standards setters throughout the world. It meets regularly with the IASB to provide input into their standards-setting activities. Additionally, we have excellent relationships with other standards setters around the world and frequently meet to discuss accounting topics of mutual interest. Our objective is to continue to work to improve and converge U.S. GAAP for preparers and investors who are using it around the globe.
Getting into one of the specific convergence projects, there has been concern that the proposed lease standard, even after revision into a Type A and B model, is still too complex and relies too much on management judgment. To what degree do you feel the proposal will need to be further simplified by the time a final standard is issued?
The boards are just beginning to redeliberate the issues in our second exposure draft on accounting for lease contracts, and the feedback on complexity will be one of the main elements of those deliberations. Complexity is sometimes a difficult term to define, though. For example, some might say that the model would be much less complex if there were only one type of lease. In this way, preparers wouldn’t have to assess all their leases in order to classify them. However, the feedback was not unanimous as to which model (Type A or Type B) better reflects the economics for all leases, especially in different industries. Complexity might be perceived to be added if preparers believe that a simpler, one-lease-type model doesn’t reflect the economics and they have to explain the accounting to their users, potentially creating additional non-GAAP metrics. Stay tuned.
Again on leases, the FASB and IASB have disagreed on some key points regarding the proposed standard, such as lease types. How confident are you that these differences can be resolved, and what would the FASB’s course of action be in the case of irreconcilable differences on the matter?
So far, for the most part, the FASB and IASB have made substantially converged conclusions in the latest exposure draft. Going back to your last question about complexity, additional complexity would certainly be added if we diverge now. The boards will be receiving briefing memos written by staff from a joint project team and together will be deliberating all the issues, often at the very same table. This puts us in the best position to achieve converged answers, but there are no guarantees, as there are more than 20 individual board members between the two boards.
You plan to issue the final version of the revenue recognition standard early this year. Do you anticipate this to be the final word on the matter?
A smooth transition to the new revenue recognition standard is certainly everyone’s goal. To try to achieve that objective, one of the things we will do is establish a Joint Transition Resource Group with the IASB. The group will be made up of 10 to 15 specialists representing preparers, auditors, regulators and investors, and will solicit, analyze and discuss issues that apply to common transactions that could reasonably create diversity in practice. The discussions will help the boards determine what action, if any, will be needed to resolve the diversity. The group itself will not issue guidance, but these meetings will be held in public and minutes will be drafted and made available to our stakeholders. In the past, we have tried different techniques aimed at fostering a smooth transition, and those efforts and experiences will help this group’s effectiveness.
Where do you think practitioners will face the most difficulty in terms of implementing the new revenue recognition standard?
The implications of the revenue recognition standard and the complexity of implementation really will vary from industry to industry, and the challenges will be different depending on the sector. In many cases, the outcomes may not appear very different under the new approach as compared to the current guidance. In those situations, communicating trend information and explaining future implications to public company investors will not be very difficult, but those preparers still might have to reassess and document internal processes and controls. In other cases, new judgments will have to be made that don’t exist today. For one example, the new model differentiates between certain types of licenses of intellectual property, and preparers will have to assess which license falls into which classification. The boards discussed this area many times, and we are drafting implementation guidance and examples that will help preparers distinguish between these licenses. Another area that requires judgment today and will continue to require judgment is estimating variable consideration. Under the new model, in situations where the agreed-upon transaction price is not fixed or is subject to a contingency, a preparer will be estimating a constrained transaction price, which could be a new area of judgment.
How does the FASB consider the auditability of its standards in the standards-setting process?
Auditability is one element of cost that the FASB analyzes when comparing the benefits of a proposal. As part of our normal due process, we do outreach with audit firms large and small in order to understand the auditability of our proposals. Our advisory groups and any project-specific resource groups always include auditor representatives. Moreover, the majority of our staff members and many of our board members were auditors at one point, so the auditor perspective is provided to the board. An example of how we consider this perspective is the phrase “probability-weighted expected cash flows.” We have learned that using this phrase in a new standard carries a high cost because of what many auditors expect to analyze when they audit an estimate using that measurement. FASB members, therefore, have to take that into account when deciding whether or not to use that phrase when drafting a measurement requirement for a particular line item.
What’s a financial accounting issue that you think is getting too little attention?
A presentation issue that is really important to me is how performance is reported in the basic financial statements. The proliferation of non-GAAP measures is a phenomenon that could be an indicator that operating income, net income or comprehensive income are not seen as useful communicators of performance during the reporting period. A reconsideration of how performance is reflected in the financial statements and how it relates to the other financial statements might really help companies communicate with their stakeholders in a much more efficient way.