About the Speakers
Wesley Bricker serves as the chief accountant for the SEC’s Office of the Chief Accountant (OCA). (Editor’s note: Bricker left the SEC in June 2019 after this speech was given.) The accounting group advises the SEC on accounting and auditing matters, and works closely with private sector accounting bodies such as FASB. Bricker was previously the OCA’s deputy chief accountant. Before joining the SEC, he was a partner at PricewaterhouseCoopers, where he was responsible for clients in the banking, capital markets, financial technology, and investment management sectors.
Russell Golden has served as chair of FASB since 2013, after previously being a board member for three years. Prior to that appointment, he served for two years as FASB’s technical director, overseeing FASB staff work on accounting standards and technical application and implementation activities. He also chaired the FASB’s Emerging Issues Task Force (EITF). He has been with the board since 2004.
Bricker and Golden presented the opening remarks at Baruch College’s 18th Annual Financial Reporting Conference, held on May 2, 2019. The following is an edited transcript of their remarks. The views expressed are their own and not necessarily those of the SEC, FASB, the commissioners, the board members, or the staff. Official positions of FASB are only reached after extensive due process and deliberations.
Next month will usher in my last full year as the FASB chairman. It will mark the end of a decade on the board and a 16-year career with the organization. It’s been an honor to serve on FASB, and I’ve learned a lot, due in no small part to the people I’ve met and worked with along the way. I became chairman in 2013, which also marked the 40th anniversary of FASB. We celebrated that milestone at a “FASB at 40” event in New York City. Those in attendance included five former chairmen of FASB: Don Kirk, Denny Beresford, Ed Jenkins, Bob Herz, and Leslie Seidman—pretty illustrious company—and I got to stand up in front of them and deliver the speech to close the event in my first major address as chairman.
In that first speech, I talked about the challenges FASB faced in 2013, specifically how to successfully improve financial reporting in the U.S. capital markets and promote and enhance the quality, comparability, and consistency of international financial reporting. I believe, and still do, that more comparable global accounting standards help reduce complexity and costs in financial reporting, costs that are borne by U.S. multinational corporations.
But by 2013, we had come to realize that the ideal of single-set, high-quality global accounting standards was just that: an ideal. Different starting points, different cultures, and different legal systems made bilateral convergence impossible to achieve. I’ll discuss how I wanted to address that challenge, what we accomplished, and what I believe is left to be done.
Creating Better Standards
When I became chairman in 2013, we had put in more than a decade of work with the International Accounting Standards Board [IASB]. Starting in 2002, FASB and the IASB agreed to focus their resources on areas of GAAP and international financial reporting standards that were most in need of improvement, and we succeeded in a number of key areas. Business combinations, noncontrolling interests, fair value measurements, borrowing costs, segment reporting, stock-based compensation, and nonmonetary exchanges were just some of the areas where we improved and aligned standards.
Our partnership produced many successes, and it challenged us both to set better and higher-quality standards. But we still had to complete our work on revenue recognition, leases, credit losses, and insurance, and we had to carve out a new role in international standards setting, one that would also serve the best interest of the U.S. capital market participants.
Our most notable achievement in both areas occurred in May 2014, when we issued our joint statement on revenue recognition. During the course of that project, FASB and the IASB issued multiple exposure drafts, conducted hundreds of meetings across the globe. We worked tirelessly to ensure the standard would be as useful and as operable as possible. After the standard was issued, we even created a joint Transition Resource Group [TRG] to monitor and address implementation issues in this important area of financial reporting.
I should add here that what we learned from that TRG process helped us improve how we support implementation for all projects, including FASB’s credit losses TRG, which was formed a few years later. In the end, I believe that revenue recognition standard achieved its objective. It simplified GAAP. It replaced numerous disparate pieces of industry-specific guidance with a more consistent framework that ensured greater comparability in financial reporting across different industries; it improved IFRS by replacing two main revenue recognition standards that had limited implementation guidance and were difficult to understand and apply across the globe; and it improved both sets of standards by requiring enhanced disclosures that gave investors and other users a better understanding of the economics behind the numbers. Transition has gone smoothly, and costs have been lower than we had originally expected, but we continue to monitor the implementation and stand ready to address any issues that may arise.
Two years later, in 2016, FASB and the IASB issued our standards on leases. During that project, FASB and the IASB both agreed that leases belong on the balance sheet. We agreed on the definition of leases and reached consistent conclusions in other important areas, but the boards chose different approaches towards expense recognition. FASB retained our current expense approach for two reasons. First, we believe it would more appropriately reflect the economics of lease transactions, and secondly, because U.S. stakeholders told us it would be easier to operate and implement. The IASB, on the other hand, reverted to the approach in our original joint exposure draft that frontloads expense by the lessee for all these contracts, one that essentially treats all leases primarily as financing transactions.
Despite our differences, the outcome of the standards is substantially the same. Both have resulted in a more faithful representation of leasing activities. Both require organizations that lease assets to recognize them on the balance sheet, and both require more disclosures to give investors better information about these transactions.
U.S. public companies began to apply the standard this year, and while we didn’t create a TRG for leases, we did make narrow scope improvements to address issues raised by stakeholders, and we will continue to monitor the progress of implementation in the coming months and years.
Next, I’ll turn my attention to our work on a standard you may have heard about recently in the news: current expected credit losses, better known as CECL. As with leases, FASB and the IASB agreed on objectives but disagreed on approaches. We agreed that we needed a more forward-looking model, but we disagreed on how to get there, largely because of what we learned from U.S. stakeholders.
Prior to finalizing our respective standards, FASB worked with the IASB to develop the so-called three-bucket model for recognizing expected losses. Auditors, investors, and regulators made it clear that the three-bucket approach would be complex and difficult to apply in the U.S. regulatory system. We met with hundreds of financial statement users, prepares, regulators, and financial institutions, and almost all agreed that the current incurred loss model was a problem. Based on our analysis, the IASB approach would be too costly for the U.S. financial reporting system to implement.
On the bright side, our work on the three-bucket model challenged us to develop a better model for U.S. transactions. As a result, we introduced a simpler, and we believe more informative, model for reporting current expected credit losses. We continue to believe that the CECL model best serves the interest of U.S. investors and that it better reflects in a timelier fashion the credit risks of loans on an institution’s balance sheet.
Our credit losses TRG has helped us understand and address implementation issues before the standard goes into effect next year, and we will continue to monitor and respond to implementation questions prior to the effective date and following the effective date. We’ll continue to work with the SEC, banking regulators, and others to ensure financial institutions of all sizes can make a successful transition.
On insurance: By 2013, it had become clear that FASB and the IASB disagreed on several fundamental issues in this area. The biggest obstacle was our different starting points. When we embarked on this joint project, the IASB did not have a measurement standard for insurance. FASB, on the other hand, had extensive GAAP guidance in this area.
We had come to realize that the ideal of single-set, high-quality global accounting standards was just that: an ideal.
Initially, FASB and the IASB set out to overhaul accounting for all insurance contracts. But when we issued our proposed overhaul, U.S. stakeholders, especially investors, told us there was no significant need for fundamental changes to GAAP guidance for short-duration insurance contracts, so we decided to change course and instead focus on making targeted changes to existing GAAP. In 2015, we issued improved disclosure requirements for short-duration insurance contracts, and last year FASB issued a new standard for insurance companies that issue long-duration contracts such as life insurance.
Learning from Each Other
I’m proud of what we’ve accomplished in these joint projects, and I’m also proud of our success in forging a new model for how we support the goal of more comparable, high-quality accounting standards worldwide. We are doing it in three ways: first, through the development of high-quality GAAP; second, through active participation in and the development of IFRS through membership on the IASB’s Accounting Standard Advisory Forum; and third, by enhancing relationships and communications with other national standards setters.
I’ll start with the development of GAAP. FASB’s primary objective is to develop and improve GAAP for those who use it, both within and outside the United States, but we’ve made it our practice to consider opportunities to align with the IFRS when possible. It’s now embedded in our research process, and we keep the lines of communication open with the IASB. We are in constant contact with IASB members and staff about research on our projects, as well as research on their projects, and we share our research activities to see if we can continue progress toward improved and aligned solutions.
For example, during FASB’s agenda consultation project a few years ago, we issued an invitation to comment seeking stakeholder input on potential new technical projects. As part of that process, we asked stakeholders to weigh in on the IASB’s solutions on pensions and intangible assets, and whether they thought those solutions would improve U.S. GAAP.
We continue to learn from each other. Later this year, FASB and the IASB will have another joint meeting in London to discuss common projects, including performance reporting, disclosure reporting, and liabilities and equity. Over the past five years, we’ve also helped improve IFRS through our membership on the Accounting Standards Advisory Forum [ASAF]. The ASAF was created in 2014, and its purpose is to advise the IASB as it develops IFRS.
At ASAF meetings, we share insights and U.S. perspectives on the IASB’s projects. FASB’s participation on the ASAF is an important opportunity to represent U.S. interests in the IASB’s standards-setting process. It’s proved to be yet another valuable opportunity to work together with other standards setters on issues of common interest, and it helps all of us continue the process of improving GAAP, IFRS, and other national standards.
In addition to ASAF, we meet individually with standards setters from other countries, including Canada, Japan, Italy, Australia, China, and South Korea to exchange ideas on improving our respective standards. This process also helps promote the broader flow of information and ideas that mutually informs our thinking and contributes to an environment that will foster greater alignment of standards across the globe.
In 2020, FASB will host a meeting of the International Forum of Accounting Standard Setters in Washington, D.C. It is a group of national accounting standards setters from around the world, plus other organizations closely involved in financial reporting issues. These relationships are critical to developing better and more comparable standards across the globe, and I’m honored to play a role in helping to strengthen them.
What’s left for FASB to do on the international front? Plenty, but above all, we have to keep making progress. I think FASB should continue to engage with stakeholders in the United States and abroad to make GAAP the very best it can be for those who use it and apply it.
I think FASB should continue to work with the IASB, our strongest ally in improving financial reporting. We should continue to share our research and potential solutions to standards setting problems. And I think we should follow the IASB’s lead and remain focused on improving the financial statements and leave sustainability reporting and other performance metrics—however important they may be—to other experts.
I think FASB should continue to build its relationship with national standards setters and to share research and potential solutions on issues of common interest. But most of all, I think FASB should continue to actively engage our stakeholders in the standards setting process.
I ended my first speech as the FASB Chairman with the hope that when my term ended, GAAP and IFRS would be closer in key areas than they were in 2003, and I believe with your support we’ve achieved that. Because no matter who’s on the board, FASB needs you to continue to share your input. You make standards work now and for the future, and that’s one thing that will never change.
We’ve made it our practice to consider opportunities to align with the IFRS when possible.
Questions from the Moderator
Moderator Norman Strauss:
A lot of registrants are having more and more trouble with interim reporting. It seems to get longer and harder to get the stuff out. Is there some thinking about simplifying that?
Great question. Quarterly reporting or interim reporting has been included in our rulemaking agenda in the form of a proposal dealing with a variety of questions about frequency of reporting. How often would be the optimal frequency? Also, how does it integrate with other communications, earnings releases, and compliance filings? And so, I would say yes, it has our attention from a rulemaking perspective.
But there’s also a practical side to interim reporting, which is the ongoing preparation judgments that come into play, and thinking about materiality and the information that’s otherwise included in the annual report in relation to FASB standards.
With finishing the major topics—revenue recognition, leases, and financial instruments—does that free up some room to think of any new significant projects that aren’t on the table right now?
Sure. Right now, the FASB staff are spending about 40% of their time monitoring the progress of implementation on the major standards: revenue, leases, credit losses, hedging, and insurance. The other 60% is devoted to thought leadership on the conceptual framework. We do not have a chapter on measurement, and that is one of the reasons why we have different management philosophies throughout GAAP, which I think increases cost and complexity.
We’re also focused on how to improve segment reporting, as well as financial performance reporting, and we’ve done a lot to go out to companies and ask them what their segments would look like, and what their income statement would look like, under new models that we’re thinking of.
The last thing we’ve focused attention on is to try to simplify the distinction between liabilities and equity. Today, there are five models to account for convertible debt. My personal view is, that is four too many; some of you are really good experts at distinguishing between liabilities and equity, and the rest of you are probably like me and are very scared to have to answer those questions.
We’re going to try to make it more logical and more streamlined so that we can reduce the restatements associated with distinguishing liabilities and equity, and provide cost savings to companies, as well as a better way for investors to understand the distinction.