Good morning. I m pleased to be with all of you today here in Washington, a city that often gets a bad rap.

Transcription

1 Remarks of Russell G. Golden Chairman, Financial Accounting Standards Board AICPA Conference on Current SEC and PCAOB Developments Washington, DC December 10, 2013 Introduction Good morning. I m pleased to be with all of you today here in Washington, a city that often gets a bad rap. Most recently, the criticism of Washington has focused on the issues of gridlock. But in the brief time that I ve served as chairman of the Financial Accounting Standards Board, my observation has been that there are many organizations in Washington both inside and outside of government that are working together and working well including those that are the subject of this conference. As you know, the FASB meets quarterly with the Public Company Accounting Oversight Board to discuss each other s work and make sure that we are in sync on addressing issues in those areas where standard setting and auditing oversight bump up against each other. And the FASB always has had a close working relationship with the Securities and Exchange Commission. The SEC, of course, is the agency that provides us the authority to set accounting standards for companies that issue publicly-traded securities in the United States. The SEC also is our ally in promoting financial reporting that puts the best interests of investors first, without imposing undue burdens on those who prepare financial statements. I noted with interest the thoughtful comments made yesterday by SEC Chief Accountant Paul Beswick, who spoke about improving the FASB s agenda-setting process and reducing complexity in accounting standards. I want you to know that I did not run back to my hotel room after Paul s speech to rewrite the remarks I m making this morning. But, as you ll shortly see, those two topics are central to the priorities that we have established for the FASB and are the centerpiece of the discussion I d like to have with you today. In the past few months, I ve had the opportunity to share my thoughts with many of you about the future of the FASB and the issues that we ll be addressing in the months and years ahead. 1 P a g e

2 FASB Agenda-Setting Today, before we get into the Q&A which I always find to be the most interesting part of these conferences I d like to spend a few minutes talking about another important part of our overall work plan. That is, how will we move forward in setting the FASB s agenda in this new environment? As we complete the final convergence projects with the International Accounting Standards Board revenue recognition, leasing, and financial instruments we need to carefully review the mix of projects that the FASB will undertake. As part of this process, we need to create the right balance between major, long-term projects and projects that address specific issues that our stakeholders are concerned about. I also think it critically important that we conduct sufficient pre-agenda research to accurately assess what problem we re trying to solve or issue that we are trying to address. We must ensure that whatever solutions we consider accurately address those problems or issues. In my view and I m speaking for myself here, not for the Board the FASB in the coming months should evaluate an agenda that includes projects that fall into three broad categories. The first category I ll refer to as foundational projects. The second involves projects that will improve the way we look at recognition, measurement, and presentation. And in the third category are projects that will reduce complexity and promote simplification of our standards. There s a fourth item that I d like to add to that list. For each significant project that we undertake, we will spend a considerable amount of time and energy addressing implementation and education issues. We ll begin that process with revenue recognition later this year. More on that later. Let me talk for just a minute about each of these categories which by the way, have no hard and fast boundaries and often will overlap. Foundational Projects First, the foundational projects. By foundational, I m referring to projects that will have an overarching, longstanding impact on how those who use U.S. GAAP practice accounting. These projects represent the foundation of our practice of accounting. They should be carefully selected and the subject of considerable pre-agenda outreach. 2 P a g e

3 One of the principal projects that I think meets the criteria is the FASB s conceptual framework. The conceptual framework is one of the cornerstones of our standard-setting process. In fact, the lack of a broad-based, conceptual basis for setting accounting standards was one of the reasons cited for creating the FASB back in the early 1970s. The conceptual framework is a set of interconnected objectives that identify the goals and purposes of financial reporting and the underlying concepts that help achieve those objectives. Those concepts provide guidance in selecting the transactions, events and circumstances to be accounted for, how they should be recognized and measured and how they should be summarized and reported. I believe a robust conceptual framework has and will continue to help us better resolve accounting debates in a consistent manner; defend accounting standard-setting as neutral; achieve principles-based standards; and reduce complexity. Since the late 1970s, the FASB has issued eight Concepts Statements. The first seven statements, developed solely by the FASB, cover a variety of topics, including the objectives of financial reporting, the elements of financial statements, etc. Concepts Statement 8, entitled Conceptual Framework for Financial Reporting, was developed as part of the convergence process with the IASB. The idea was that the FASB and the IASB would complete additional phases of their joint conceptual framework project and add new chapters to Concepts Statement 8 that would supersede earlier concepts statements. That has not occurred, largely because of the need to direct our focus to completing the other convergence projects. But the IASB has taken up the project again, and I think it is important that we look at it as well. That would help us continue the process of converging U.S. GAAP with IFRS and also would address important needs for our stakeholders and the Board. Our intention would be to resume where we left off, and update and improve the conceptual framework. The areas on which I believe we should put specific focus are measurement and presentation. So that s one foundational project I believe we should consider. A second foundational project is the disclosure framework project, which is intended to focus on disclosure effectiveness. By that, I mean our goal is to both improve disclosure content make it more useful to investors and at the same time, where we can, reduce the amount of disclosure content. I should mention that we have not done this work in isolation. We have spent considerable time consulting on this project with the IASB and the European Financial 3 P a g e

4 Regulatory Advisory Group or EFRAG which is working on its own disclosure project. The framework is designed to lead to disclosures that clearly communicate the information that is most important to the users of financial statements. It also is intended to promote consistent decisions by the FASB about disclosure requirements and guide reporting organizations when making disclosure decisions. The disclosure framework project has two components. The first involves the Board s decision-making process and is intended to help the Board decide on disclosure requirements in the standard-setting process. The second component involves the reporting organization s decision process and is intended to help them make decisions about which disclosures are relevant for their particular circumstances. Both components emphasize the relevance, not the volume, of notes to financial statements. One of the goals of this project is to allow individual organizations to exercise more discretion and flexibility in applying existing and future relevant disclosure requirements. Field testing is currently being conducted by FASB staff to identify the best approach to provide organizations with that flexibility. In addition to conducting outreach with the investor community, the FASB and its staff are in the process of soliciting input from other stakeholder groups. Incorporating this input is essential to developing a framework which ultimately meets the needs of investors and other users. Promoting Transparency: Recognition, Measurement, and Presentation The second category of project that I think we should pursue relates to improvements in recognition, measurement, and presentation. Projects focused on these issues should lead to greater transparency in financial reporting. I think of these projects as the blocking and tackling of accounting. On one hand, someone unfamiliar with our profession might take a look at the breadth of literature in U.S. GAAP on recognition, measurement, and presentation and conclude that we have completed this part of our mission. I, on the other hand, believe that we must continually take stock of existing standards, emerging trends and an ever-changing business environment and consider whether and where U.S. GAAP can and should be improved. An area we should take a look in, my in view, is accounting for pensions, where we ve already conducted some pre-agenda research. 4 P a g e

5 While we have a robust standard in GAAP, the passage of time, the creation of new plans, the development of new environmental factors, and compromises in Statement 87 itself all indicate to me that it may be useful to see what evolutionary changes might be useful to consider. The IASB has done recent work in this area. In June 2011, the IASB issued IAS 19 Employee Benefits. Those amendments are intended to make it easier for users of financial statements to understand how defined benefit plans affect a company or organization s financial position, financial performance, and cash flows. We certainly plan to consider what the IASB is doing as we begin to think through our next steps. We also plan to consider changes in types of employee pension plans, including cash balance pension plans. We also have done some pre-agenda research related to accounting for government grants, in response to the SEC s observation that International Financial Reporting Standards address the issue, but U.S. GAAP does not. This is just one example of the type of project that we will be considering. As always, it is important to evaluate the cost of implementing changes against the benefits that are likely to flow to financial statement users. Reducing Complexity Finally, let me talk about the third category projects that will help us reduce complexity and increase the simplification of financial reporting. I suspect that most of us think about the concept of complexity as something that s actually pretty simple to understand too many words, too many decision points just plain too much work. But I want to suggest to you that in reality, the concept of complexity actually is well a little more complex. Here s what I mean: One way to think about complexity in accounting is that the literature surrounding a standard is so dense and complicated that its meaning is unclear and therefore it becomes very difficult for a preparer to decide exactly how to apply the accounting model. Another way to think about complexity is that even though the accounting treatment is clear, the work involved to properly do it is so lengthy, convoluted and expensive 5 P a g e

6 that the costs of complying far outweigh the benefits to be derived. Working with projects in category three, the FASB plans to address both of these issues. Let s take the first example where a standard is so complex that it becomes difficult for preparers to decide how to apply it. This issue can arise when GAAP calls for alternative accounting treatments for economically similar transactions or events. This kind of complexity also can result from application guidance that is overly detailed or inconsistent with the main standards. Often cited examples of standards that fall into this category are accounting for liabilities and equity, and hedge accounting. You have likely experienced a situation in which very minor changes in terms of an instrument can dramatically change the accounting. Depending upon how you structure a transaction, you can get different accounting for similar economics. In the second case, accounting rules are clear but it may be too hard to reasonably and efficiently follow them. This can be caused by a number of factors. Overly prescriptive disclosure requirements is one. We ve heard stakeholders over the years suggest that assessing goodwill impairment falls into this category. It s hard to do, it is often subjective, it engenders fear in preparers of getting it wrong, and there is heavy auditor involvement. Also, it often requires filers to retain the services of third-party experts, significantly driving up costs. In fact, the FASB recently added a project to look at improving the accounting that is impairment and/or amortization of goodwill. I believe that we ve already made some progress on simplification. Take a look at what we re doing with the IASB with the new standard for revenue recognition. In this case, we re taking scores of pieces of accounting literature in which revenue was recognized in dozens of different ways, depending on the industry, and we are developing a single standard so that the same principles will apply to everyone. More importantly, we also are improving the underlying reporting for investors. It s true that some people will have a steep learning curve. But we are replacing an enormously complex process of determining which accounting principles apply with one in which only one principle applies. The same can be said for many other projects, including our projects on discontinued operations, financial instruments, and even leasing, to name a few. 6 P a g e

7 On another front, we re in the final stages of developing an internal Board policy on complexity in accounting standards. Once adopted, this policy would guide the FASB in explicitly considering complexity in the development of financial reporting standards by: 1. Evaluating before balloting any due process document whether the standard, taken as a whole, will reduce or increase reporting complexity, and 2. Discussing its analysis of complexity at a public meeting and explaining in the basis for conclusions how and why the standard reduces or increases complexity In another effort, the Board is thinking about ways in which we can broaden the areas where we should be thinking about reducing complexity. As part of that work, we plan to initiate some targeted outreach to stakeholders to help us think about these issues. In a nutshell, we want to make it easier for you to know what to do; and we want to make it easier for you to do it. But let me be clear, any decision we make would be weighted toward what investors need. If a change would impair an investor s ability to do his or her work, then we would not consider this to be an appropriate agenda item. Finally, let me spend just a moment on transition and implementation. To carry out our mission, we plan to create a transition resource group intended to educate and better understand implementation issues before the implementation process actually begins. I expect that a group would focus on three primary areas: Education; Interpretation; and Amendments. I hope that the majority of the group s time will be devoted to the first category education. I also expect that they will meet in public with the full board and will publish minutes. We plan to include in these groups representatives from the preparer, auditor, and investor communities. We also plan to have both domestic and international participation including members of the IASB. The revenue recognition group will be the first one of these groups. It will be formed shortly after the standard is issued and its activities will cease sometime in Conclusion So, once again, let me thank you for joining us here today. I ve tried to outline for you re my thinking about how the FASB will move forward in setting the agenda for its next projects. We want to build a strong foundation that will enable us to solve problems. 7 P a g e

8 Our mission, as always, is to promote transparency, reduce complexity, and ensure continued progress toward the convergence of international accounting standards. Thank you very much for your time. # # # 8 P a g e