The panel began with Cosper outlining recent changes at FASB and its priorities for 2017. She said that the standard on hedge accounting was due to be released over the summer. In addition, redeliberations on long-duration insurance contracts were scheduled to start in the second half of the year, as well as a focus on implementation of the new revenue recognition and credit loss standards. Durbin added that the exposure draft on revenue recognition for grants and contracts for not-for-profit entities was due out soon, and that it might have implications for for-profit companies as well.
Simplification of Standards
Cosper then addressed FASB’s simplification initiative, calling it “a mindset shift at the board as we think about simplification and we think about reducing unnecessary complexity.” The initiative’s current projects include balance sheet classification of debt, nonemployee share–based payments, and consolidations.
Strauss asked Durbin and Spivey to comment on the simplification initiative. Spivey said that Ernst & Young was in favor, “assuming that the simplifications are really simplifications.” She explained that unforeseen complexities can sometimes arise, and cited inventory as one example. Durbin added that even minor changes can be difficult to implement, especially regarding internal controls.
Spivey offered as a case study the simplification of share-based payments, saying that the most complex areas were eliminated, such as recording excess tax benefits. Moving that recording to the income statement created some volatility, she said, but companies have welcomed the simpler accounting. In addition, the move increased transparency.
Another example, Spivey said, was an exception regarding employee vesting in shares that allowed companies not to record certain types of awards as liabilities. “We were finding in practice,” she said, “that companies may not have had the right internal controls to strictly adhere to the exception.” FASB loosened the requirements on the exception, to which Laux said, “I don’t know if I’ve seen executives so happy with an accounting.”
Durbin then covered the simplification of income tax accounting, specifically the tax effects of intra-entity transfers. Here, the simplification allows all transfers except physical inventory to be recognized at the time of transfer. Laux called the move “a big deal,” especially for the technology sector. Durbin called the goodwill impairment test “a real simplification” and illustrated how companies’ calculations will change.
Strauss asked Cosper about FASB’s process in developing the new goodwill standard. Cosper said one of the goals was to reduce costs in the system while keeping the test intact. She also noted that private companies can now elect to amortize goodwill rather than follow impairment testing.
Spivey turned to two other simplification projects, which narrowed the requirement to recognize modifications to a share-based award and clarified the presentation guidance for pension and other postretirement benefit costs. Durbin called the latter a “sleeper issue,” especially for manufacturers. Cosper countered this by saying that the measure would reduce costs for investors: “It’s more transparent; it’s not aggregated.”
Finally, Spivey detailed the work of FASB’s Emerging Issues Task Force (EITF) on updating disclosures for employee benefit plans. “Plans have evolved quite a bit,” she said, and disclosures needed to be updated to reflect the growing prevalence of defined benefit plans. In particular, a plan’s interests in individual assets held by the plan trust will be disclosed more clearly, as will underlying investments. Duplicative disclosures will also be eliminated.
The panel then turned to certain terms that are important for filers to understand. Spivey began with an overview of the term “public business entity,” which, she noted, should not be neglected, as it “drives the effective date of all these major standards that we’ve been talking about.” In particular, she said, private companies that are considered “significant”—that is, their information is required to be included in an SEC filing—will need to observe the effective date for public companies. Cosper added that certain disclosure provisions apply only to public business entities.
Durbin contrasted FASB’s definition of a public business entity with the SEC’s definition of a business, which affects the accounting for the purchase of a group of assets and activities. The broadness of the definition, he said, had led to more acquisitions being classified as businesses than made sense, which FASB is now trying to clear up by refining and narrowing the definition.
Going into more detail, Durbin laid out the criteria for determining that inputs and processes have the ability to create outputs, a key part of the definition. Currently, businesses also have to consider whether required inputs can be easily replaced in the marketplace—that is, purchased—but this requirement will be done away with in the redefinition. In addition, he said, where substantially all of the value is concentrated in a single or similar assets, the acquisition will not count as a business. “That will certainly take a lot of the analysis out of the equation, particularly in real estate,” he said.
Durbin continued with a discussion of a new term in GAAP, the “in-substance nonfinancial asset.” This is an asset in which substantially all the fair value is concentrated in nonfinancial assets, and therefore, when sold, would be derecognized according to the guidance for nonfinancial assets rather than financial assets. Durbin also stressed the importance of transfer of control in accounting for such transactions.
Cosper and Spivey then gave an update on the EITF’s activities. The latest topic is service concession arrangements where an entity operates an asset on behalf of the grantor, such as a toll road, and whether they count as leases. The current standard for service concession arrangements says that they do not, but does not provide guidance for how to account for them. “In practice,” Spivey said, “I think it’s natural for entities to gravitate towards a revenue recognition type of model”; however, even that hits a snag when attempting to identify the customer in the arrangement. The EITF ultimately decided that the grantor is the customer, and Spivey expects that companies will act accordingly when the new revenue standard goes into effect.
Cosper then discussed the EITF’s work on cash flow issues. Of the nine issues the EITF has been working on, Cosper characterized eight as reaching a bright-line conclusion in response to a specific question. The other reached more of a principles-based conclusion on classification and presentation of restricted cash.
Effectiveness of Disclosures
Durbin discussed FASB’s efforts surrounding the effectiveness of disclosures, of which he said, “There has been quite a lot of discussion.” One prong of the effort has been to consider the way the board thinks about disclosure requirements. The other has been guidance to entities about their decision process. To FASB’s surprise, the topic of materiality seemed to touch a nerve; in response, FASB held several roundtables that provided “good feedback.”
Picking up on that thread, Cosper said that the next step for the disclosure project is to consult with its Investor Advisory Committee. Laux added that one challenge will be providing information in notes that allows users to estimate future cash flows and value. He also said that FASB should be working more closely with the SEC on its disclosure package.
Durbin brought up rumors that the project might end up increasing disclosures rather than reducing them, which many users might find disappointing. “The goal of the project has never been to reduce disclosures,” Cosper responded, saying that the focus was always on improving effectiveness. “In some circumstances, you may have an increase, [or] you may have a decrease,” she added.
Cosper also discussed FASB’s broader future agenda, saying that the board solicited feedback on which areas need improvement: “The conclusion from just the letters would suggest that liabilities and equity and performance reporting ranked pretty high.”
As a final question, Strauss asked the panel whether the wind-down of the major projects on leasing, revenue recognition, and financial instruments would free up FASB staff for other projects. Cosper said that “quite a lot of staff” are currently working on implementation of those standards, which Spivey was quick to praise: “We utilize their services very often and we appreciate that they are there.” Laux said that revenue recognition was “the biggest change in financial reporting that I’ve ever seen in my career,” and the largest challenge would be in implementation. “We’re talking about a different way of thinking,” he said, “but it’s been awfully difficult even getting that message through because [the standards are] just huge. It’s going to be a number of years of people struggling with these changes.”