Society Weighs In On FASB Agenda, Urges Disclosure Effectiveness Study, Framework Update On Liabilities Vs. Equity

Chris Gaetano
Published Date:
Oct 19, 2016
By Hash Milhan - Flickr: suggestion box, CC BY 2.0

The NYSSCPA, in a comment letter recently released to the public, weighed in on the Financial Accounting Standards Board's agenda, pointing out a number of topics the board could take up in the future, including disclosure effectiveness and an updated framework for distinguishing equity from liabilities. The letter was written in response to an Aug. 4 FASB request for comment on potential financial accounting and reporting topics that the board should consider adding to its agenda. The FASB had a number of suggestions. 

One was to make it easier for preparers to make suggestions. Rather than take feedback on its agenda only when it issues a request for comment, the Society suggested that the board develop an open protocol for the ongoing submission of additional topics for agenda consideration, one that requires disclosure of the identity of the submitter and reasons why the matter should be considered. 

"We have found in the past that topics have been proposed for consideration, and while such topics may benefit certain groups of financial statement users, they frequently place an unnecessary cost and burden on other financial statement preparers. Similarly, accounting topics are routinely discussed by practitioners in the field, but those topics have a long path to travel before being raised at the FASB level. We respectfully suggest that the Board develop an accessible mechanism for practitioners and users to submit agenda topics for Board consideration," said the Society. 

However, the Society said that the FASB's biggest priority should be updating the framework for distinguishing liabilities from equity. The FASB invitation to comment said that stakeholders feel the current GAAP standards are difficult to apply, the information is costly to provide, and the accounting does not provide useful information because answers are inconsistent due to the "form-based" or "terms dependent" nature of the guidance. Consequently, according to the FASB, the topic is a source of errors and significant confusion due to the troubles practitioners have with interpretation and application. 

"Stakeholders continue to find the guidance to be internally inconsistent, conceptually flawed, rules-based, and subject to financial structuring to achieve a desired result," said the FASB. 

The Society was in heavy agreement. Financial instruments can be a confusing topic for users, and the flaws in the current literature do not help matters, according to the Society. It pointed out, too, that this was a topic that has a wide impact on both financial statement users and preparers.

"The current literature is a compendium of guidance developed over time and needs to be revised and updated to be relevant and responsive to today’s economic environment and financial instrument products," said the Society. 

The Society said the board needs to take a holistic approach to these changes, as targeted improvements would be impractical given that the relevant guidance is fragmented between liability standards, equity standards and derivative standards, along with the impacts to earnings per share.

The Society said that the FASB should instead examine the entire framework in order to weigh whether, for example, retaining the current model of changes in the value of a reporting entity's value translates to reporting income or expenses in the income statement. The Society also said the FASB could consider an alternative model in which the financial instrument is not recorded in equity and only recorded at fair value when redemption is probable. The Society said it would find the latter option acceptable. 

"We believe that a holistic approach would result in a refined standard that is more clearly and easily applied, that does not require significant initial or ongoing costs, but continues to maintain adherence to the spirit underlying GAAP," said the Society. 

The Society also suggested that the FASB put disclosure effectiveness on its agenda as well, though the board did not include the matter in its initial call for comments. The Society noted that the past few years has generated a lot of discussion about exactly what information is and is not relevant for financial statement users. It added that a lot of the information currently required by Generally Accepted Accounting Principles is either no longer considered relevant or has become boilerplate in nature, and so the Society suggested the board conduct a study to objectively determine what information users feel is necessary, why it is necessary, and how that information can be better presented. 

"Looking at the question from the perspective of the whole, the most significant financial reporting topic we identified as a major financial reporting issue is the relevance, importance and clarity of the current disclosure requirements. In today’s Internet and instant information environment there is a lot of general discussion around what information users of financial statements are looking for including what is considered relevant in the notes to the financial statements," said the Society. 

While there were other topics that the Society felt needed attention, such as accounting for the value of internally generated intangible assets or pensions and other post-retirement benefits, it felt that the above topics represented more pressing concerns for preparers and users. 

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