Transcript Major Current Projects

Recent FASB Standard Setting Activities
including Convergence Decisions
Katherine SCHIPPER
Board Member,
Financial Accounting Standards Board
United States
FASB—Summary of Current Activities
Katherine Schipper
Financial Accounting Standards Board
World Congress of Accounting Educators
Hong Kong
November 2002
The views expressed in this presentation are my own and do not
represent positions of the Financial Accounting Standards Board.
Positions of the Financial Accounting Standards Board are arrived at only
after extensive due process and deliberation.
FASB Structure
• Independent private sector accounting standard
setting organization
– Established 1973
– Currently responsible for setting US GAAP
– US GAAP (or reconciliation, if a non-US firm) required of
all SEC registrants
• Board consists of 7 full time members
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All members are independent
Represent: preparer (2), user (1), audit (3), academic (1)
5 year terms, staggered across members
Supported by approximately 40 professional staff
Overview of presentation
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Principles-based standards
Revenue recognition (joint with IASB)
Performance reporting
Short-term convergence project, with IASB
Fair value measurements
Principles based standards
Response to claims that US GAAP is “rules based”
or “check box”
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Favorable comments (in the financial press) on
International Accounting Standards, which are
described as broad, principles-based, requiring the
appropriate exercise of professional judgment
Remark: The FASB uses its Conceptual Framework to set
standards, so the “rules based” approach might be
viewed as arising from deviations from the precepts of
the Conceptual Framework, or from the addition of
unnecessary detailed implementation guidance
What would “principles based standards”
imply?
Proposal paper is available at www.fasb.org
– No scope exceptions?
– No treatment alternatives?
– Extremely limited implementation guidance?
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Noncomparability?
Implications for preparers?
Implications for auditors?
Implications for enforcement?
Implications for other sources of financial reporting
guidance?
Possible approach to setting principles based
standards
• Articulate the objective [what is intended] of the standard,
within the context of the Conceptual Framework
– Requires explicit expectations about the exercise of professional
judgment in meeting the stated objective of the standard
• Eliminate (drastically reduce) exceptions and alternatives
• Provide limited implementation guidance
– Sufficient detail to apply provisions consistently [over time]
– Accept some noncomparability across entities
• Reconsider arrangements for implementation guidance
– Roles of other bodies such as EITF and AcSEC
– Convergence arrangements with the IASB
• Requires shifts in behavior from all involved parties: FASB,
other standard setting bodies, preparers, auditors, SEC
Revenue recognition
Project added to FASB’s agenda May 15, 2002
• Project is joint with IASB
• Revenue recognition issues are significant and pervasive
– Largest single item in most financial statements
• US GAAP contains no general standard on revenue recognition
• Broad conceptual guidance is hard to apply and may be inconsistent
• Detailed guidance is ad hoc and industry/transaction specific
– FASB research indicates over 100 sources of revenue recognition
guidance in the US
• Revenue recognition issues increase in number and complexity as
commercial arrangements to deliver goods/services increase in
complexity
Revenue recognition
Project goal: Develop a general standard on revenue
recognition and reconcile inconsistencies in the FASB’s
conceptual framework
– Concepts Statement 6 defines revenues in terms of
changes in assets and liabilities
– Concepts Statement 5 adds several paragraphs of
recognition criteria that are specific to components of
earnings
• Realized or realizable => readily convertible to cash or
claims to cash
• Earned => process or set of activities; “entity has
substantially accomplished what it must do to be entitled to
the benefits represented by the revenues.”
Revenue recognition
Issues to be considered
– Should revenue recognition be subject to special criteria (over
and above asset and liability recognition criteria)?
• Can result in “deferred revenues” that are not liabilities
– Is “earnings process” useful as a basis for revenue recognition?
• Earnings process seems to be the basis for SAB 101 (which is
based on SOP 97-2, Software revenue recognition) and for
several other key pieces of US GAAP reporting guidance
• Earnings processes are specific to, and derived from, business
models
• Revenue recognition approaches based on earnings process =>
reflect industry-specific and business-model-specific factors
– Volume and complexity of guidance will increase as business
models evolve
– Is the distinction between revenues and gains useful?
Revenue recognition
Examples of liability and asset recognition issues
– Customer has paid in advance, and the entity has a
performance obligation
• Does it matter whether the customer has a continuing
obligation?
• Does the nature of the entity’s performance obligation matter?
– Customer does not pay until the entity has fully
performed
• Does it matter if some of the revenue is contingent?
• Does it matter if the entity must estimate the amount of cash to
be collected?
• How should the components of overall performance be
accounted for?
Revenue recognition
Should revenue recognition differ for specific kinds of
performance obligations?
– Provide access (e.g., connect a customer to a public utility
network)
– Provide services
– Stand ready (e.g., guarantees; warranties)
– Stand aside (e.g., noncompete arrangements)
– Repurchase an asset (e.g., specific trade-in rights)
Should revenue recognition differ, depending on the sacrifice
the entity must make?
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Refund cash
Provide goods
Provide services
Provide use of an asset (e.g., a lease)
Revenue recognition
What should be the accounting for linked transactions and
components?
– Contracts for the provision of both goods and services
– Installation of asset and subsequent service that requires the
asset
– Sales linked to incentives (e.g., discounts on future purchases)
How should revenues be displayed?
– Are revenues conceptually distinct from gains?
– Under what conditions should revenues be shown gross?
– Under what conditions should revenues be shown net (of some
cost)?
Performance reporting
• IASB and the UK’s ASB have undertaken a joint project
– FASB is monitoring
– Discussed at joint FASB-IASB meeting September 18
• Project scope and activities (FASB)
– Display, classification and aggregation of all four basic financial
statements
– Will not concern segment reporting, MD&A
– FASB has consulted extensively with users of financial statements
• Tentative decisions and ongoing discussions
– Single statement of comprehensive income
– Classification by function (e.g., sales) not by nature (e.g.,
depreciation) except for income taxes and discontinued operations
Performance reporting
• Ongoing discussions (joint meeting with IASB) about display
in a statement of comprehensive income
– Goal is to enhance predictive value and feedback value
– Separate financing from operating elements?
– Separate initial measurements from remeasurements?
• Initial measurements => close to income flows
• Remeasurements => valuation adjustments
– Distinctions can be very difficult in some cases
• FASB goals
– Co-ordinate activities and approach with the IASB-ASB project
– Attempt to resolve issues in ways that increase convergence
– Exposure Draft expected sometime in 2003
International convergence
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Convergence, as a concept, has few or no detractors
Convergence, as a process, is yet to be fully specified
Added sense of urgency => 2005 requirement that
listed firms in European Union jurisdictions must use
international standards (IFRS)
New standards
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Joint with IASB
Monitor IASB’s projects
Goal => develop the same standard and (eventually) converge
agendas
Hundreds of existing differences
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New standards on financial instruments could add more
International convergence
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“Short term” convergence project to address existing
differences
– Goal => choose between existing IASB and FASB
standards
Examples: Asset exchanges, transition, voluntary accounting
changes, interim reporting, research and development
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Achieve “substantial convergence” by 2005?
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Most frequently occurring differences?
Largest items in magnitude?
How will this project affect U.S. GAAP?
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Convergence => changes to U.S. reporting requirements
in the absence of complaints and identified problems
Immediate costs to preparers and users
Benefits to be realized in the future
Fair value measurement issues
• US GAAP is increasingly requiring fair value measures
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Asset retirement obligations (except for historical discount rate)
Acquired assets and liabilities in a business combination
Impaired assets (inventory, fixed assets, goodwill)
(Disclosed) fair values of financial instruments
Guarantees (whether or not a cash premium is received)
Derivatives
• Intent is to increase the relevance of financial reports
– Fair value => relevant measure for incomplete transactions
– Fair value => the only measure for certain derivatives
• Key question: what is the reliability of the reported
numbers?
Fair value measurement issues
• Assessing the reliability of fair value measures
• Reliability => users of financial reports can depend on
the reported numbers to represent the economic
conditions (transactions, events) they purport to
represent
– Verifiability => consensus among various measurers of
the same construct (low dispersion of independent
measurements)
– Representational faithfulness => correspondence
between the measure and the phenomenon being
measured
Fair value measurement issues
• An empirical question: What is the actual reliability of
reported fair value measures?
– Fair values of impaired goodwill or fixed assets
– Fair values of financial instruments
• How does the reliability of fair value measures compare
with the reliability of other estimates in financial reports?
• What causes unreliable measures?
– Intrinsic error in the measurement tools (models)
– Management-induced error
• Research design issues
– Lack of benchmarks for reliability assessments
– Lack of access to underlying data used to generate
measures