The third panel of the 15th Annual Financial Reporting Conference covered recent financial reporting developments in the private sector. Topics included the new revenue recognition standard and the proposed disclosure framework, as well as FASB’s financial reporting simplification initiative and the Emerging Issues Task Force’s (EITF) agenda.
Susan Cosper opened the panel by discussing FASB’s efforts to ease the transition to its new revenue recognition standard. “We formed a Transition Resource Group [TRG] to solicit, analyze and discuss stakeholder issues around the standard.” Alison Spivey, herself a member of the TRG, added that “the original discussions were focused on very broad issues. The conversations now have evolved to the point where it’s less about the need for additional guidance, but more to help educate stakeholders.” Cosper noted the transparency of the TRG’s process and the broad makeup of the group. She also encouraged stakeholders to submit issues to the group via FASB’s website, especially issues involving guidance that can be applied in multiple ways.
Moving to the standard itself, Cosper gave an overview: “Today we have a risk and rewards model,” she said, “and tomorrow we’ll have a control-based model.” This model is based around a five-step process: 1) identify the contract, 2) identify the performance obligations, 3) determine the transaction price, 4) allocate the transaction price, and 5) recognize revenue. The effective date is 2018 for public companies and 2019 for nonpublic companies, with early adoption permitted for 2017. Spivey emphasized that this meant calendar-year public companies have only eight months to early adopt; regular adopters have 20 months, also not a lot of time.
Returning to the TRG, Cosper said that the group has addressed all of the 94 issues submitted to it so far. Three Accounting Standards Updates (ASU) have been issued regarding implementation and one on the effective date, and a technical corrections ASU will be exposed soon. Spivey noted that some issues brought up through the AICPA’s process will be addressed through its own guidance.
Norman Strauss asked Patrick Durbin how much leeway issuers might have to ignore statements from the TRG, whose guidance is not technically authoritative without a formal standard. Durbin advised against such a strategy, saying, “Our initial counsel would be [the TRG guidance is] the best thinking that’s happened on this subject. But like anything, we’re willing to consider alternative views.” Robert Laux added, from a preparer’s perspective, “We’d probably follow [the TRG’s guidance], just to lower the controversy. Even though it’s not in an ASU, it’d be difficult not to follow it.”
Cosper then turned to the content of the ASUs issued so far by the TRG, noting some common themes in requests from stakeholders. “One is to clarify the intent of the board’s language within the standard,” she said, “and the other is to reduce the cost and complexity around implementing the new guidance.” Clarifications have addressed identifying contracts between issuers and customers, identifying performance obligations, licensing, principal versus agent considerations, and determining transaction prices, as well as providing certain practical expedients.
Spivey added that “the conversations now have evolved to the point where it’s less about the need for additional guidance, but more to help educate stakeholders.”
Building a New Disclosure Framework
Turning to FASB’s disclosure framework project, Cosper outlined the goals of the project: “The overall objective is to improve the effectiveness of the financial statements. We’re trying to help companies promote discretion and promote the financial statements as a communication tool.” This will require refining FASB’s process in setting standards as well as issuers’ assessment of those standards, she continued. As an example, one project will replace minimum disclosure language with the statement “to the extent material.” Materiality would be determined, individually and in the aggregate, as a legal concept that “would state specifically that the omission of an immaterial item is not an accounting error,” according to Cosper.
Durbin was supportive of the framework project, saying that “FASB should be commended at least for trying to make progress, because there’s been a lot of noise in the system.” Feedback from constituents, however, will be critical to the process. Laux cited the Supreme Court’s definition of materiality, noting that a literal reading “could get rid of 90% of our footnote information,” as unrealistic as that might be.
Continuing, Cosper cited defined benefit plans, fair value measurement, income taxes, and inventory as problem areas identified by constituents. Exposure drafts have been issued or are pending for all of them, as well as materiality.
Proposed changes to fair value measurement included the removal of forward-looking and process information, the addition of disclosures for public companies, and the modification of disclosures that users found particularly useful. Feedback was, predictably, “pretty happy with the removes and the modifies for the most part, but pretty unhappy with the adds.” Changes for defined benefit plans followed the same pattern.
Investor feedback for income tax disclosures, however, called for “more disaggregation, particularly between income from domestic results and income from foreign,” leading to many proposed additions. Meanwhile, FASB’s review of inventory disclosure is still in its infancy.
Other FASB Concerns
Cosper then talked about other projects at FASB, starting with the revision of the definition of a business. FASB’s goal is to move closer to the narrower outcome found under IFRS. In addition, the proposal would “reduce the number of transactions that actually need to be evaluated under the framework,” which would help screen out some of the false positives under the current definition.
After exploring several alternatives, FASB has elected to develop a simplified goodwill impairment test by eliminating the second step of the current test. Instead, “the test would compare the fair value of the reporting unit to the carrying value of the reporting unit, and the impairment charge would be recognized based on the difference if the carrying amount exceeds the fair value.”
Finally, Cosper talked about a project to increase disclosure of government assistance received by issuers. The project will cover “anything that’s a legally enforceable agreement where the entity receives value or benefit from the government and the government has discretion over who receives it and how much.” Feedback on this project has been “mixed,” she said, with some wanting broader recognition and others noting that such contracts are often confidential.
The EITF and Simplification
Strauss turned the panel over to Durbin, who spoke about FASB’s simplification initiative and recent EITF activity. In the past year, the simplification initiative has finalized its amendments to inventory measurement, measurement period adjustments, deferred tax classification, the equity method, and stock-based compensation. Future plans include simplifying income tax reporting regarding intra-entity transfers and simplifying the classification of debt.
Laux noted that executives at Microsoft are excited about the stockbased compensation standard, as companies can now withhold the statutory maximum, lessening the cash impact.
Speaking about the EITF’s recent agenda, Durbin highlighted work on energy contracts, prepaid gift cards, employee benefit plans, derivative contract novations and existing hedge accounting relationships, contingent put and call options, classification of cash receipts and payments, and restricted cash. He characterized the guidance as “logical answers.” Cosper noted that the cash flow guidance dovetails with FASB’s future agenda, which includes a project on “financial performance reporting, which would include other comprehensive income, statement of cash flows, as well as segment reporting.” FASB plans to seek comment on this topic, as well as others, in the near future.
Strauss then opened the floor to audience questions. One questioner asked whether carried interest is within the scope of the new revenue recognition standard, as there has been some question about the SEC’s stance on it. Cosper replied that she did not know the SEC’s view, but a recent TRG meeting concluded that it was.