The FASB Chairman's November 19 letter to the current chairman of the Permanent Subcommittee on Investigations of Congress's Committee on Homeland Security and Government Affairs was sent in response to Sen. Levin's letter to the FASB dated Oct. 14, 2014 (see our earlier report: Levin Lobs Challenge to FASB, SEC on Rev Rec).
In his response, obtained by FEI Daily, Golden emphasizes, "FASB's highest priority has always been to develop accounting standards that serve the best interests of investors and others who participate in U.S. capital markets - and other markets around the world that use or reference Generally Accepted Accounting Principles (GAAP)."
Listing a number of major projects on which the FASB and IASB succeeded in issuing converged standards, including business combinations, fair value measurement, segment reporting, and others, Golden states these "are just some of the areas where we have improved and aligned standards."
And although convergence across the board is no longer an currently option due to divergent decisions of the two standard-setting boards, Golden stated "In these cases, FASB believes that full convergence would not be in the best interests of those who invest and otherwise participate in U.S. capital markets."
Projects on which FASB currently expects to diverge from the International Accounting Standards Board's (IASB) IFRS include impairment of financial instruments and the project on Leases.
Regarding Revenue Recognition
Focusing on the concerns expressed by the Senator regarding FASB's converged revenue recognition standard, including existing U.S. Securities and Exchange Commission guidance originally contained in Staff Accounting Bulletin No. 101 (SAB 101), Golden notes, "The FASB believes that the new revenue standard is an improvement to GAAP," and that existing revenue recognition standards under both U.S. GAAP and IASB's IFRS 'were in need of improvement.'
Citing the "piecemeal approach to revenue recognition" in existing U.S. GAAP, under which "different guidance for different industries sometimes resulted in inconsistent accounting for economically similar transactions," Golden observes that "a significant portion of guidance relating to revenue recognition was developed outside of the standard-setting process through accounting firm publications, industry practices, SEC staff interpretive guidance, and other activities, " which, he points out, are "generally not subject to due process."
On the Senator's question regarding the probability threshhold for revenue recognition in the new FASB standard vs. SAB 101, Golden states, "[SAB 101.] and SAB 104 stipulate that revenue can be recognized only if collectibility is reasonably assured."
He continues, "[FASB's] new revenue recognition standard also requires a company or organization to meet a collectability threshhold to recognize revenue. That collectibility threshhold, which is very similar to the threshhold in SAB 101 and SAB 104, would not allow revenue recognition until it is probable that the company or organization will collect the consideration to which it will be entitled in exchange for the good or services that will be transferred to the customer."
In addressing what may be perceived by some as a lessening of the collectibility threshhold, Golden points out that in the FASB's principles-based standard the use of judgment will be key, and that "Prescriptive rules in accounting standards can reduce the need to apply judgment, but cannot eliminate judgment."
To assist preparers, auditors and others in applying professional judgment subject to the consistent set of principles in the new standard, more than sixty examples are contained in implementation guidance issued concurrent with the new standard, and the FASB (together with the IASB) formed a joint Transition Resource Group to identify implementation issues, Golden added in his letter.
He emphasizes that "The [TRG] meets in public to discuss potential implementation issues," and that their discussion is used both to inform the two accounting-boards, and educate constituents. Further, he adds "The FASB stands ready to be responsive to concerns raised by our stakeholders during implementation, and to work with the SEC if the Commission identifies any areas where the standard does not deal robustly with practice issues."
Unsurprisingly in a letter to Congress, the closing paragraph highlights how transparency and neutrality (traditionally defined as freedom from 'bias' or 'undue influence'), which states, "Transparent and neutral financial reporting is the bedrock of the global capital markets and is ta the core of the FASB's mission."
Full text of the FASB's response to Sen. Levin can be viewed here.