Cosper started the panel by briefly discussing the recent turnover at FASB: by the end of 2018, the board will have replaced four members in three years. “If you think about some of the comprehensive projects that we completed over the last five or six years, it becomes very challenging when you have so much turnover,” she said, “because of the number, the length, and the frequency of the meetings and the types of decisions that we have to make to ensure that the board members that come on after buy into them.” Nevertheless, she said, the board was making sure that it would complete as many projects as possible before board member Marc Siegel’s final term ended on June 30.

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Cosper then turned to FASB standards currently in implementation, such as the new leasing standard. “When we issue the standard, we don’t stop our work,” she said. “There are a lot of resources available for stakeholders to help them prepare to implement a standard.” FASB has also launched an implementation web portal (http://bit.ly/2m9NDms) to help stakeholders find these resources more easily; this move came after requests from advisory groups and transition resource groups (TRG). The portal includes links to TRG papers, minutes and discussion summaries from board meetings, webcasts and podcasts on specific standards, and FASB’s technical inquiry service.

Spivey detailed the implementation of the revenue recognition standard, which was issued in 2014 and is now effective for public companies. She provided a list of the most frequent challenges encountered by her team at Ernst & Young, such as determining which parts of a company’s contracts create revenue that needs to be accounted for. “This has turned into an exercise that took longer for some companies than you might otherwise think it would,” Spivey said. She noted encountering problems with termination provisions in contracts. Other major issues included identifying performance obligations and determining whether parties to a contract are acting as principals or agents—“these two are probably the areas where we have seen the most difficulty for companies in reaching judgments, the desire of companies to want to compare themselves with other industry peers, to understand where the conclusions are being reached so that their decisions are not too different or dissimilar from their competitors’.” She added that estimating variable consideration, which follows a new model and requires a lot of information that may not be known at the outset or at the time of recognition, was an issue that kept her up at night. Spivey also cautioned companies to remain aware of the cost component of the standard.

Cosper then clarified an issue that FASB had received several inquiries about. Because the standard, in part, defines a contract as a legally enforceable arrangement, some companies had asked whether each contract needed to be subjected to a legal review. “That certainly wasn’t the case, and that wasn’t the intent of the FASB,” Cosper said. “Looking at customary business practices or having an appropriate evaluation would be sufficient.” She also asked Spivey about what issues she had seen so far from private companies. Spivey replied that the questions she has seen have not differed from those received from public companies, and stressed the importance of starting to plan for implementation as early as possible. “Private companies need to take advantage of this time, and also keep an eye on what’s been going on with the public companies,” she said.

Pictured, left to right: Susan Cosper, Robert Laux, Alison Spivey, and Robert Uhl

Photos by E. Lee White

Spivey then moved on to disclosures under the standard, calling them “much more robust” and “an important improvement to financial reporting.” The level of both quantitative and qualitative disclosures has increased, and a significant number of questions from companies have been about how to meet the requirements. “I think companies may be caught by surprise by the volume of information they have to gather,” she said. Particularly thorny are the disclosures about future performance obligations, which are forward looking, as well as the disaggregation of revenue, for which, she noted, “There’s not a prescribed formula for how you disaggregate revenue, but the information does need to reconcile back to segment disclosures.” Laux noted that this requirement had received considerable comment, and asked Spivey whether it had caused conflict with the SEC’s Regulation S-X requirement on revenue disaggregation. “I haven’t seen that be a focus of interest,” Spivey replied. “I think what we’re seeing is just some questions around when do you have to further dis-aggregate beyond what you may already have provided in your segments.”

Strauss asked Spivey whether guidance issued by the PCAOB on the new standard had been helpful to auditors. While only a few early adopters have gone through the audit process so far, Spivey did say that the guidance had been “important not just for auditors but for public companies as well.”

Finally, Cosper briefly discussed the cost-benefit analysis process that FASB runs after standards are implemented. This process will take time, she said, because “sometimes it takes a few years for the system to settle down.” The board will also monitor the various approaches that companies take when implementing the standard.

Hedge Accounting

Uhl took over to discuss implementation of the new hedge accounting standard, issued in December 2017. Several of public and private companies are adopting the standard early, he said, attributing this to the improvements the standard brings to the process for those that elect to use hedge accounting. “FASB’s objective was to take out some of the complexity, better align with some of the risk management strategies, and more faithfully depict the economics that are going on,” he said. Unlike with the revenue and leasing standards, this required only amending the existing guidance, rather than a complete overhaul. Among the improvements are giving companies more time to perform calculations proving their hedges will be effective, allowing subsequent analyses to be performed qualitatively rather than quantitatively, enabling the consolidation of several line items, and accommodating several more hedging strategies, including hedges for certain non-financial assets and liabilities.

Uhl did have some warnings for early adopters of the standard. First, early adoption must be of the standard in total. “You’ve got to be prepared to take it all on,” he said. Secondly, companies need to have the necessary processes, systems, and controls in place. Finally, FASB may revise the standard or provide new guidance as the official implementation dates—2019 for public companies, 2020 for private companies—draw near. Already, FASB has received comments on and discussed issues such as the definition of prepayable instruments and multiple partial-term hedges.

Strauss asked whether these changes have altered the perception that hedge accounting is difficult to apply in practice. Uhl replied that companies are viewing the new guidance much more favorably, saying, “I think we’re going to see a lot more companies coming back to applying hedge accounting.” Cosper added that opening up the accessibility of hedge accounting was part of the board’s intent in modifying the standard. “We think the reporting that results from the application of the standard and the disclosures are helpful to investors because they reflect how companies are thinking about managing their risks,” she said.

Other FASB Projects

Next, Uhl discussed several smaller projects where standards had just been or were about to be issued. The first was an Emerging Issues Task Force (EITF) project on software-as-a-service arrangements, where a model for recognizing costs was decided on and released for comment in March. Laux asked for clarification on the disclosure requirements of this standard, which require delineation of the amount capitalized and the amount expensed, and, drawing on his experience at Microsoft, advised FASB to spend more time talking with and listening to companies about how difficult it is to produce the information required for disclosures. “There’s a strong argument that you don’t collect that information because it doesn’t help run your business,” he said. Cosper replied that FASB is looking into the issue and determining whether the information is something that investors truly want.

Cosper also talked about an EITF project to reconcile accounting for television versus film production costs. With the advent of streaming services producing and releasing entire seasons of television shows all at once, the line between the two mediums, and thus the methods of accounting for them, has grown fuzzier. “It’s not without its inherent consequences,” she said. “I think to the extent you do decide that more costs should be capitalized, then you get into other questions about amortization and impairment.”

Spivey then detailed a project on accounting for collaborative arrangements that will clarify how shared costs and cash flows should be presented, in light of the new revenue recognition standard. Asked by Cosper about whether such collaborations are increasing, Spivey said that, going by the definition in the standards, “I’m not sure that there’s any more today than there have been in the past, but I think there’s a greater focus on making sure which things you get to take credit for.”

Finally, Cosper turned the discussion toward FASB’s efforts in light of the Tax Cuts and Jobs Act (TCJA) of 2017, which she said were accomplished in “record time.” Q&As were distributed on December 22, 2017—the day the act was signed—an exposure draft on January 18, and a final Accounting Standards Update (2018-02) in the middle of February. Issues addressed included whether the SEC’s Staff Accounting Bulletin 118 could be used by private companies and nonprofits, and the calculation of deferred taxes. For the future, Cosper said, FASB plans to monitor the effects of the TCJA’s implementation on financial statements and the disclosures that companies make about those effects. “We have made a number of proposed amendments to the disclosures of income taxes; some of those disclosures are probably no longer needed, but there may be others that could be helpful, as a result of the changes from tax reform,” she said. “We’ll look at them together so that we can be as effective and efficient as possible.” The same, she said, is true of elements of FASB’s income tax simplification initiative.

Most Wanted Standards

The panel next discussed upcoming standards, and particularly those most requested by users and issuers. First, Uhl outlined the features of an effort to simplify accounting for down round features of certain company issues, such as warrants or convertible preferred stock, especially from private entities. Down round features complicate these transactions and the accounting for them, and FASB has responded by effectively removing down round features from the assessments that companies must make when classifying such equities until they are actually triggered. “This is another one that companies probably want to consider for early adoption,” he said.

Next, Cosper talked about FASB’s various proposals regarding consolidations. Of primary interest was an exception whereby private companies can elect not to apply variable interest entity guidance to the extent that they are under common control. There are, however, certain requirements for the election—public business entities are not eligible, for example—as well as “a number of disclosures to provide the reader all the associated risks with the structure.”

Integrated Reporting

Laux then discussed the IIRC’s efforts surrounding integrated reporting. “We need to do a much better job of communicating what we’re about,” he said. “First and foremost, especially in the United States, it’s about internal business decision making and accountants getting the information to help businesses make decisions.” Ideally, improved internal reporting would eventually lead to external reporting that matches how the company runs internally and provides a better picture for investors and other stakeholders.

Laux laid out the six capitals of integrated reporting—financial, manufactured, intellectual, human, social, and natural—all of which contribute to a company’s value under an integrated reporting framework. The first two capitals, he said, correspond to disclosures and reporting already done under FASB and SEC requirements. He also estimated that, during his time at Microsoft, approximately 80% of resources were spent on providing this information, along with 5% for intellectual and human capital, and 15% for social and natural capital (i.e., environmental, sustainability, and governance information, as detailed by Alan Beller in his keynote speech).

Ideally, Laux said, all six capitals should be considered equally, based on effort and decision making within a company. “I think that’s the real problem,” he said before attempting to outline a strategy for getting businesses—and the accounting profession—to think about all six capitals. At the top of companies, CEOs need to abandon the business model promulgated by sell-side analysts. This, he believes, will allow executives to shift their momentum. “I believe, and I could be wrong, that there’s a real movement, especially from chief executive officers at large U.S. companies, to change the conversation—to focus capital on the long term.” Integrated reporting, Laux said, “fits perfectly where CEOs and companies want to manage on a long-term basis and get out of this quarterly treadmill that has been so destructive to our long-term value creation.” Finally, he said, the focus of organizations like the IIRC is not on providing even more key performance indicators for companies to disclose, but to enable and proactively encourage this shift in corporate priorities and strategies. He expressed concern that if accountants do not provide the relevant, long-term information that CEOs need, they may find someone else to replace them. “Let’s bring our profession into the 21st century,” he said.

Business Segments

Finally, Cosper spoke briefly about FASB’s efforts regarding accounting for segment reporting, which preparers have said is difficult and receives a lot of second-guessing from regulators. Both aggregation criteria and the information actually being disclosed are being looked at by FASB, and the board is considering two different approaches for a new standard. In the first, aggregation criteria might be removed altogether, while the second may institute a size threshold above which segments would have to be disclosed separately. Field tests will take place over the summer. “We’d certainly love participation and feedback,” Cosper said.

Norman Strauss is distinguished lecturer of accountancy at Baruch College.
Susan Cosper is technical director at FASB.
Alison Spivey is a partner at Ernst & Young.
Robert Laux is region lead for North America at the International Integrated Reporting Council (IIRC).
Robert Uhl is a partner at Deloitte & Touche LLP.