Every one of us plays a role in promoting integrity in our capital markets. That’s because, for all of its flaws, modern market capitalism remains the single most efficient generator of social wealth and prosperity. Nevertheless, it’s a fragile system, because it depends fundamentally on trust. If the investors do not or cannot trust the numbers they see when analyzing a business, if company management has free rein to massage numbers based on narrow self-interest, the entire system collapses quickly. Accounting and auditing professionals are the guardians of this trust and the single most important line of defense to ensure our economy can continue to grow and create jobs and wealth for all.
But with that power comes responsibility. As accountants, auditors, and academics in this field, we work for the capital markets and those who invest in them. The markets rely on FASB to set standards that provide investors with an accurate, transparent, and neutral view of an organization’s economic health. In other words, they rely on FASB to set standards that work.
Standards that work promote truth telling in financial reporting. They help investors and lenders make better-informed decisions about how to invest their money and what risks they are willing to accept. When standards work, they reflect economic reality; they don’t drive it. They let the markets, not the accountants, pick winners and losers. That in turn inspires greater confidence in the markets, which ultimately strengthens our economy.
Sounds good, right? But there’s a catch. If a standard cannot be consistently understood and applied, or if its value to investors does not justify the cost incurred to implement it, then it becomes a standard that doesn’t work. A standard that doesn’t work is one that is complex, uncertain, or too costly. It creates anxiety, frustration, and, quite frankly, baggage in our system. That’s why FASB is continuing our culture dedicated to standards that work, one fueled by robust outreach with all of our stakeholders throughout the lifecycle of a standard, a process that begins before we add a project to our agenda and one that continues even after a final standard is issued.
I’ll talk about how FASB is making standards work our top priority, helping stake-holders successfully implement our standards. Then I’ll look at how our agenda consultation process contributes to standards that work, and I’ll explain why we decided to tackle some projects and not others. Finally, I’ll talk about what we’re doing to ensure future board decisions are more consistent, no matter who sits on the board in Norwalk [Conn.].
Implementing the Revenue Recognition Standard
One of the most important ways FASB is making standards work is through implementation support. We view quality implementation as critical to the overall success of a project. The greatest standard in the world won’t improve financial reporting if it can’t be consistently understood or applied.
We decide how to support the implementation of a particular standard based on several factors. We consider the nature of the guidance, the degree of change, the breadth of affected industries, and what we’re hearing from our stakeholders. In short, the more impactful a standard, the more implementation resources we’ll assign to it.
When we issued the revenue recognition standard in 2014, it represented a major achievement in our efforts, with the IASB, to improve one of the most important areas in financial reporting. It would affect virtually all organizations on the planet. And as we learned from our extensive project outreach, it would require major changes to how some industries recognize revenue recognition.
For the standard to be successful, we knew we needed to limit the extent to which preparers and auditors disagree on how to interpret it. For that reason, FASB created a Joint Revenue Recognition Transition Resource Group [TRG]. Based on what we learned from previous groups, we decided the TRG should hold public meetings to allow all stakeholders to follow our discussions and learn from each other about the best implementation process and practices.
TRG discussions and other stakeholder input helped the board identify opportunities to clarify or simplify revenue recognition guidance. Some of the areas we improved included principal or agent determinations, performance obligations and licensing, and how an organization evaluates whether its promise to transfer a license is satisfied at a point in time or over time.
We also addressed challenges raised by stakeholders related to collectability, non-cash consideration, contract modifications, and the presentation of sales tax. In these cases, we clarified the guidance and made things simpler, faster, and easier to implement.
We also posted over 60 staff papers to the TRG website. While they’re not authoritative, I believe they’re excellent education tools that offer appropriate real-world examples of how the standard should be applied. That set the groundwork for public companies to make a relatively seamless transition to the standard, which they did—or at least I hope they did—starting in January 2018.
The next phase of support is helping private companies prepare for implementation in 2019. And we’re learning from public companies’ experience to help them do that. Last March, members of the Financial Accounting Standards Advisory Council, or FASAC, shared their initial observations on the costs and benefits of implementing revenue recognition. While some noted that initial costs were a bit higher than expected, most agreed that the recurring costs would be lower. And in some cases, costs were minimized by the fact that information technology systems did not need to be modified. We’ll continue to monitor public company challenges and best practices so that we can better support private company implementation. We’ll also work closely with our Private Company Council to understand other issues that might impact a smooth transition to the standard.
Preparers aren’t the only ones who need standards to work. We’re also helping investors and others understand the impact of revenue recognition on financial statements. We created an investor education webinar series led by FASB member Mark Siegel that focuses on the standards’ impact on specific industries. It included videos aimed at the software, healthcare, and aerospace and defense industries. They’re available on our website.
Taken together, we believe these efforts have improved and will continue to improve consistency in how the standard is applied. That, in turn, will help reduce costs, uncertainty, and complexity. And we’ve used what we’ve learned with revenue recognition to help make sure other major standards work.
The Credit Loss and Leasing Standards
Based on the success of the Revenue Recognition TRG, FASB created a Credit Loss TRG. Convened in late 2015, the group includes financial statement preparers, community bankers, credit unions, auditors, users, and regulators. We realized in our work with the Revenue Recognition TRG that if we had convened the group before we issued the final standard, we might have been able to improve certain confusing words and phrases before we issued the guidance.
For that reason, we had the Credit Losses TRG meet before the standard was issued, letting members weigh in on the draft guidance before it was final. We believed that would reduce the need to make technical corrections later, while adding to its clarity. Since the credit loss standard was issued in 2016, the TRG has also assisted in providing us with information about interpretive questions that might arise prior to implementation.
While we’ve been focused on successful implementation, it’s not the only way we make standards work.
We’re continuing to address these questions, as well as some recent issues that have surfaced. They include accounting for recoveries of amounts previously charged off, issues raised regarding the accounting for accrued interest when applying CECL [current expected credit loss], and applying CECL when a loan or debt securities accounting classification is transferred.
Like revenue recognition, supporting implementation of credit losses doesn’t begin and end with the TRG. Our outreach also includes presentations to preparers and practitioners at conferences like this, webinars, industry meetings, and other resources.
With credit losses, we also knew it would be important to address stakeholder concerns about the standard’s effect on auditing and regulatory capital requirements. While they’re not standards-setting issues, they’re important to understand. Therefore, we’ve been meeting regularly with various regulators so that they too are prepared to monitor potential impacts. Even when a standard doesn’t rise to the need for a TRG, making sure it works remains a priority.
For example, we decided not to develop a Lease Accounting TRG, because, while the impact of the change is significant, the change itself is fairly straightforward. Our staff has, however, been monitoring the types of questions we receive. In public meetings, for example, the board has discussed the nature and extent of lease questions our staff has addressed to date.
We are also supporting implementation of the leases standard by posting several educational documents, hosting an interactive CPE webcast, and producing three videos about the project. One video focuses entirely on how a lessee might apply the new lease standard using the display approach, a frequently asked question from stakeholders.
Thanks to that stakeholder input, we found ways to improve the lease standard. For example, in November we voted to move forward with two changes expected to reduce unnecessary costs without compromising the quality of information to investors. As a result, in January we issued a final standard that will reduce costs for organizations that have land easement arrangements. Also in January, we proposed simplifying transition requirements and making it easier for lessors to separate non-lease components from lease components. We expect to issue the final guidance this spring. Together, we expect these changes will ensure organizations can adopt the leases standard in a timely manner.
Our experiences with revenue recognition, credit losses, and leases have helped us improve implementation support for all of our standards. Last year, we launched our first FASB implementation web portal [http://bit.ly/2m9NDms]. It’s a one-stop shop of information preparers may want to look at to apply major or not-so-major standards. It also shows the importance of stake-holder feedback.
The implementation portal also features links to FASB’s technical inquiry system. That system puts you in contact with members of our project teams to talk through issues and clarify positions of applicable FASB guidance. It’s there for you when you need help in addressing a particular set of facts and circumstances, no matter how big or small the standard.
Fixing the Right Problems
While we’ve been focused on successful implementation, it’s not the only way we make standards work. It’s a process that begins even before we add a project to our agenda. To develop the right accounting solutions, FASB first must identify the right accounting issues. That can, in fact, be addressed through standards setting. That means engaging with stakeholders to understand their priorities, experiences, and concerns.
In 2016, we issued an invitation to comment. In that document, we presented a list of potential financial reporting issues and asked stakeholders to tell us what they considered priorities. We also asked stakeholders if they thought there were problems that should be addressed and potential solutions going forward.
This was the first time we had done this as part of our general consultation process, and we received a lot of valuable feedback. Last September, FASB made its final decisions on what projects to add and what projects not to add to our technical agenda.
First, we added a project under distinguishing liabilities in equity. We decided to focus on indexation and settlement, convertible debt, disclosures, and earnings-per-share. As a lot of you know, accounting in these areas is very difficult to apply and get right; in fact, this area has had the greatest number of restatements in recent years. When it’s completed, I believe the project will reduce complexity and cost without sacrificing the quality of information to investors.
Second, we added a component to FASB’s Financial Performance Reporting Project, focused on disaggregation of performance reporting by function and nature. And third, we added a narrow-scope project on segment reporting, intended to improve aggregation criteria and segment disclosure. When our work on financial performance reporting and segments is completed, I believe investors will have greater transparency into the operations of public companies.
We selected these issues for a few reasons. One, because they were identified as priorities by diverse stakeholders. Two, because the board felt that the issues could be successfully addressed through standards setting. And three, because we could complete them with existing resources.
That said, we decided not to add all the projects in the discussion paper. Those that did not make the cut were areas where financial accounting could be improved, but we just didn’t think viable standards-setting solutions existed. In other cases, the projects were not a priority.
The reality is we don’t have unlimited resources, including the resource of time needed to address every issue well. And based on your responses to the invitation to comment, you really don’t have the resources to tell us about and provide input on everything. Part of making standards work is positioning stakeholders for successful transitions to those standards, and that means making hard but necessary choices. We’re striving to improve how we manage the pace of change by managing at the beginning, not at the end. Rest assured that our three new agenda projects will require time to complete, and even then, the final standards won’t be effective until sometime thereafter.
Now I’ll turn my attention towards the future of standards that work, a process that begins with ensuring future boards make more consistent decisions, no matter who sits on the board in Norwalk. In 2018, we expect to complete work on our Disclosure Framework Project. The Disclosure Framework Project is intended to give present and future boards a consistent methodology or process for approaching decisions about disclosures across all topics.
Developing standards that work challenges us as a board to make our decisions as consistent and clear as possible.
In the coming months, FASB will issue four final documents intended to improve the effectiveness of disclosures and notes to financial statements. They include a new chapter on FASB’s Conceptual Framework on disclosures, an update on an existing chapter of the Conceptual Framework that aligns FASB’s definition of materiality with other definitions in our financial reporting system, an update to fair value measurement disclosure requirements, and an update to the defined benefit disclosure requirements.
As I’ve said in the past, FASB’s disclosure framework project is aimed at the relevance, not the volume, of notes to financial statements. In many cases, the project is likely to result in more relevant disclosures, not necessarily fewer disclosures. It’s another way we’re ensuring that standards provide investors and other users with the information they need when they need it.
In closing, let me emphasize that standards that work are always a work in progress. They require FASB to support their implementation and to reduce, to the extent possible, uncertainty around their application. Setting standards that work also requires FASB to be mindful of issues that we can and cannot successfully address in setting our technical agenda.
Developing standards that work challenges us as a board to make our decisions as consistent and clear as possible. Above all, to ensure that standards work, we must continue to engage with stakeholders through all stages of the standards-setting process. As with everything we do, we need your input to direct our resources appropriately.
We can’t answer your questions and help you if you don’t ask your questions to us. But the process isn’t static; we don’t stop listening after a comment deadline has passed or a standard has been issued. We always welcome your input, and the more input, the better. Granted, we may not always agree on the outcome, but you’ll always know that we considered your input carefully.