Transcript Conceptual Impediments to Convergence James Leisenring, FASB Senior Advisor The views expressed in this presentation are my own and do not necessarily represent.

Conceptual Impediments
to Convergence
James Leisenring, FASB Senior Advisor
The views expressed in this presentation are my own and do not necessarily represent official positions of the Financial Accounting
Standards Board. Official positions of the FASB Board are arrived at only after extensive due process and deliberations
Convergence: The End of an Era
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Original vision
 A single set of high-quality global standards
 Used on the global capital markets
Last effort at convergence has been on Revenue
Recognition
Brief history of the convergence effort of the
FASB and IASB
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Convergence
 Memorandum of Understanding (SEC “Roadmap” 2005)
 Focus on major projects on agenda
 Don’t try to address every reconciling item
 Don’t try to converge inadequate standards
 Process identified an agenda to address problems with both US
GAAP and IFRS
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MOU Projects—Convergence Agenda
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Established in 2006 (Refocused in 2008 and again in 2010)
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Intangible Assets (never added to the agenda)
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Business Combinations (completed 2007, revised SFAS 141 (2001)
and IFRS-3 (2004))
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Fair Value Measurements (completed 2011, revised SFAS 157 (2006))
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Revenue Recognition (completed 2014)
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Leases (In process)
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Financial Instruments (In process—FASB only)
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Consolidations
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Derecognition
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Liability and Equity Distinction
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Postretirement Benefits
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Financial Statement Presentation
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Convergence Agenda
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Record of accomplishment is not stellar
 Projects identified had long been vexatious
 Progress has been limited because of lack of agreement
on basic conceptual issues
 Inconsistent application of asset and liability definitions
 No agreements on accounting for forward contracts or
options written or held
 No agreement on measurement issues
 No agreement on what we mean by control
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Conceptual Impediments to Completion
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In-Process Projects: Leases
 Agreement a right of use is an asset and acquisition of
that right can create a liability
 Renewal options:
 Can the asset held by the lessee create a liability?
 Can the option written by the lessor create an asset?
 Why are various service rights or obligations
disaggregated from leasing contracts?
 If a default on a contract can occur, why isn’t there a
performance obligation of the lessor and liability of the
lessee?
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Conceptual Impediments to Completion
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In-Process Projects: Financial Instruments
 Why can’t we agree on an impairment measure for
loans?
 Day one loss?
 Why can’t we agree on measurement attribute(s) for
financial instruments?
 Is presentation the cause of our measurement
disagreements?
 How can anyone believe the present measurement and
presentation systems create comparable information?
 Complexity?
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Conceptual Impediments to Completion
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 Consolidations
 What do we mean by control?
 What do we do with options and forward
contracts?
 Do we really mean control or do we mean
assurance of perpetuation of control?
 Would we apply “stickiness” notions to control of
an entity?
 Conceptual Framework Exposure Draft on the
Reporting Entity never completed in part
because of common control concerns
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Conceptual Impediments to Completion
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 Derecognition
 Why not derecognize when the right or
obligation fails the definition of an asset or
liability?
 Why do we confuse risk and rewards with assets
and liabilities?
 Why are we afraid we might get it back?
 What should we do with options and forward
contracts?
 What is the basis for “stickiness”? History
matters?
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Conceptual Impediments to Completion
 Liability and Equity Distinction
 Basic liability definition issue: Is a liability the result of
an obligation to deliver an asset of the obligor or not?
 Why do we distinguish between an obligation to
deliver a fixed from a variable number of shares?
 Why are gain and losses on derivative contracts in
equity instruments of the entity (however defined) not
recorded in comprehensive income?
 Why do we create different accounting for an option
held or forward contract to acquire the entity’s
outstanding stock?
 What should be done with issued shares that are
puttable?
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Conceptual Impediments to Completion
 Postretirement Benefits
 Does an unvested obligation meet the definition
of a liability?
 Does the projected benefit obligation meet the
definition of a liability?
 Why can’t we resolve issues related to the
discount rates?
 What do we mean by a constructive obligation?
 Does a funded postretirement plan represent an
SPE that, absent a scope exception, would be
consolidated?
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Conceptual Impediments to Completion
 Financial Statement Presentation
 Why won’t we just require a single statement of
comprehensive income?
 If we think a subtotal for net income, (earnings,
profit or loss) is important, why don’t we define
the term and require it?
 What is the conceptual basis for items in OCI?
 What is the conceptual basis for recycling?
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Conceptual Framework Issues
Assets
“Assets are probable future economic benefits obtained or
controlled by a particular entity as a result of past transactions or
events.”
(Con 6, paragraph 25)
Problems:
 Probable(1)
 Future economic benefits
 Controlled
 Past transactions or events
(1)See
footnote 18 (Con 6)
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Conceptual Framework Issues
Liability
“Liabilities are probable future sacrifices of economic
benefits arising from present obligations of a particular entity
to transfer assets or provide services to other entities in the
future as a result of past transactions or events.”
(Con 6, paragraph 35)
Problems:
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Probable(1)
Future economic benefits
Obligations (uncertainties)
Past transactions or events
(1)See
footnote 21 (Con 6)
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Conceptual Framework Issues
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Asset/Liability Definitions
 Where should (must) the focus be with respect to an asset:
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Present right
 A right either exists or does not exist
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Not on probable future benefit (cash inflow)
 The outcome of having a right (which could be zero)
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Contingent asset?
Where should (must) the focus be with respect to a liability:
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Present obligation
 An obligation either exists or does not exist
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Not on probable future sacrifice (cash outflow)
 The outcome of having an obligation (which could be zero)
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Contingent liability?
Discussions of contingent assets/contingent liabilities are really
discussions about arrangements with uncertain outcomes
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Conceptual Framework Issues
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Asset Liability Definitions
Observations
 Some virtually certain in or out bound cash flows are not
assets or liabilities
 “Risks and rewards” are not liabilities and assets; they are
the results of having assets and liabilities
 Risks and rewards affect the measurement of both assets
and liabilities, not their existence
 We don’t know what to do with forward (executory)
contracts that appear to meet definitions of assets and
liabilities
 We are inconsistent in accounting for options written or held
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Conceptual Framework Issues
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Questions about Assets and Liabilities
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Does a forward contract to acquire an asset
convey control of that asset?
Does an option to acquire an asset convey control
of that asset?
Does the owner of an asset subject to a forward
contract to sell or a call option still control that
asset?
Why do we think an option or a forward contract
suggests control of an asset is retained but not
obtained? (derecognition, revenue recognition)
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Conceptual Framework Issues
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Questions about Assets and Liabilities
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Can writing an option (by definition, a liability) result in an
asset?
Can having an option (by definition, an asset) result in a
liability?
Can an option or a forward contract create an asset for both
parties to the contract?
Can one have a liability without any present obligation if
non-payment is sufficiently consequential?
Can one have a liability based on a contract to refrain from
a given activity or did one just sell an unrecognized right?
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Conceptual Framework Issues
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Measurement
 One phase of the Conceptual Framework project is
intended to address measurement attributes and
measurement issues
 Measurement of assets is of course controversial
 Measurement of liabilities seems to pose even more
issues especially nonfinancial liabilities
 We seldom really measure anything, we make
calculations
 Best estimate
 Present value of expected cash flows
 Isn’t remeasurement really the controversial issue?
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Conceptual Framework Issues
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 Issues such as we have discussed demand resolution
 Risk of retaining inconsistent answers and standards
 Lack of conceptual agreement has been an impediment to
resolving issues
 MOU projects identified because accounting was
considered to be deficient
 Work on resolving Conceptual Framework issues was
discontinued to focus on MOU projects
 Both Boards now again beginning to look at their
respective Conceptual Frameworks
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Conceptual Framework Project(1)
A.
Objectives and qualitative characteristics (done 2010)
B.
Elements, recognition and derecognition
C.
Measurement
D.
Reporting entity (Exposure Draft March 2010)
E.
Presentation and disclosure (Disclosure Framework Exposure Draft in
2014) (redeliberations have begun)
F.
Framework purpose and status
G.
Applicability to the not-for-profit sector (IASB)
H.
Entire framework
(1) Once
a joint project, however, the IASB decided to proceed not as a
joint project but with the FASB and others as advisors.
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Conceptual Framework Project
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Project Objective
 Never the intention to start with a clean sheet of
paper and develop a new conceptual framework
 Try to address deficiencies
 Try to clarify and improve understanding
 Make amendments that experience in
application have suggested are necessary
 FASB has agreed to complete Disclosure
Framework and begin work on presentation and
measurement
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Conceptual Framework Project
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Issues in Process
 Disclosure framework—objective
 Improve the effectiveness of disclosures in notes to financial
statements by clearly communicating the information most
important to users of those statements
 Framework to assist Board in establishing consistent
relevant disclosure objectives in each project (admission
of an ad-hoc basis)
 Framework to assist preparers in meeting disclosure
objectives
 How much disclosure compensates for sub-optimal
accounting
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Conceptual Framework Project
Issues in Process
Measurement
 We typically don’t really “measure” anything
 We assign (calculate) a number to depict an asset, liability, or changes in
an asset or liability
 SFAC 5 states items are measured by different “measurement attributes.”
“Attribute refers to the traits or the aspects of an element to be quantified
or measured” (SFAS 5, footnote 42)
 Entry price or exit price does depict the amount necessary to acquire or
proceeds expected to be received at disposition of an item but do not
seem to be “traits or aspects” of the item
 Other “attributes” can only be understood by describing the calculation
process to determine the number
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Conceptual Framework Project
Issues in Process
Measurement
 Most debates about measurement are actually debates
about remeasurement and are asymmetrical
 Remeasurement debates are typically about whether to
recognize gains before realized
 There is less debate, at least with respect to assets, that some
remeasurement is appropriate to portray an impairment
− No agreement on the objective of the remeasurement
 Many often assert measurement of liabilities involves issues
that are unique
− Own credit risk
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Conceptual Framework Project
Issues in Process
Measurement
 To properly focus the debates about measurement
that have been so pervasive, we need to agree:
 That measurement in concept should be resolved in terms of
what best meets the objective of financial reporting and
enhances the decision usefulness of representationally faithful,
relevant information
 What we are trying to accomplish (the objective) when
depicting items in terms of a number and perhaps stop
suggesting the depiction even represents a measure
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Conceptual Framework Project
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Issues in Process—Presentation
 Presentation of the statement of comprehensive
income
 What subtotals should be required, if any, in a statement
of comprehensive income?
 How should each subtotal help meet the objective of
financial reporting?
 What is the objective of items classified as other
comprehensive income?
 Should how an item is measured affect the presentation
of comprehensive income?
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Conceptual Framework Project
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 Even with progress on measurement and presentation,
for the MOU projects to be addressed in a satisfactory
manner certain basic conceptual issues need to be
resolved
 Clarification of asset and liability definitions to emphasize
rights and obligations
 Resolve liability/equity distinction by a changed notion of
what must be the obligation to meet liability definition
 Resolve derecognition to be consistent with recognition
 Agree on a consistent notion of what is meant by control
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