In his remarks, Golden outlined five key goals for FASB — improving operations, reducing complexity, improving communication, enhancing collaboration with the Financial Accounting Foundation (FAF) and Governmental Accounting Standards Board (GASB), and working with FAF and the U.S. Securities and Exchange Commission to realize a vision for the future.
How well has the FASB executed on the goals that Golden laid out last year? An edited transcript of Financial Executive magazine’s interview with FASB Chairman Russell G. Golden follows.
FINANCIAL EXECUTIVE: Could you share with us how far you believe FASB has come over the past year toward reaching the goals you discussed in your speech?
GOLDEN: On the first goal — working hard to improve the efficiency and effectiveness of our operations — is one we’ve made progress on this year.I am most proud of improvements to our pre-agenda research process, which allows us to take a more systematic approach to deciding what areas we should address. This helps us clearly understand the problem that’s been identified while allowing us to consider some cost-effective solutions before getting too far along in a project.
We’re also holding quarterly agenda meetings with the board. During these meetings, the staff tells us the status of their pre-agenda work. We then direct the staff to do additional work we think needs to be done, or if we should add the project at all.
I think that by making this a quarterly process, all the board members can have an expectation of when the research will be done. Furthermore, it gives constituents a better understanding of the timing of a project.
We’ve programmed these meetings at certain times so that if we decide to add a project, and that it’s relevant to leverage the Emerging Issues Task Force (EITF), we are able to leverage the knowledge and experience of the Task Force members.
Reducing Complexity
FE: Tell us about FASB’s progress to date on the goal of reducing complexity and costs.
GOLDEN: Board members Jim Kroeker and Darryl Buck have done an excellent job of leading this initiative, which seeks ways of reducing complexity and the cost of accounting standards for both private and public companies, while maintaining or improving the relevance of reported information to users. We have done a few things around this goal. First,we developed a complexity policy. As part of this policy, board members will review standards before they are issued to determine if something is going to be more or less complex than it needs to be. I think it’s going to take a look-back before we finalize anything to see that it’s as easy as possible.
Also, we are starting to do a look-back of existing accounting standards to determine if there are areas in Generally Accepted Accounting Principles (GAAP) where we could make changes that would reduce the costs of application, without changing the relevance to investors.For example, we put out for public comment two proposed Accounting Standards Updates: one on inventory, and another on extraordinary items. The significance of these two initiatives is that they were areas where there was a lot of debate around whether or not an item is extraordinary, and there was a lot of debate about how to do an inventory impairment. We felt we could take some of the cost out of the system, without changing the information or its relevance to investors.
The board was able to act in one meeting to put that out for exposure. In doing that, we clearly understood the problem, and we clearly understood the cost-effective solution. That’s what made the board meeting more effective.We do have a number of additional items the staff is researching, and we are cognizant that multiple issues have been brought up. We also are cognizant that we can’t work on everything at one time — and our stakeholders can’t give us important input at one time — so we’re going to stagger some of these improvements so that we’ll work on them over time, hopefully over the next three years or so.
‘Foundational’ Projects
GOLDEN: I also believe it’s important that the board has been working on pre-agenda research related to the conceptual framework and financial statement presentation projects. I mention these projects together because I think some of the complexity we have in GAAP today is because certain aspects of the conceptual framework — and some of the areas around financial statement presentation — were incomplete, and/or inconsistent.
The fact that there is a debate specifically about whether items should be in net income, or other comprehensive income (OCI), and what the appropriate measurement philosophy on certain transactions should be, has led [FASB] boards in the past to create detailed accounting, but that has made the standards more complex today.
So, I think it’s important that we create the foundation, which I view as the conceptual framework, and financial statement presentation. This will allow us to reduce complexity as we move forward on future standards, while we also look back to reduce complexity on existing standards.I often talk about three foundational projects. One is the conceptual framework. Measurement is among the areas we need to improve in the framework. Currently, there are multiple ways to measure transactions in accounting. I think it is in the best interests of the board, and the future of standard-setting, if we can get parameters around what the appropriate measurement attribute should be for various transactions.
The disclosure framework project is another foundational project, because I think we need to have a consistent philosophy on disclosures. In other words, what are the types of questions board members should think about when requiring disclosures in the future?
On financial statement presentation, we are asking ourselves what types of improvements can be made to the performance statement so it’s more consistent with how investors analyze companies. Investors give different multiples to a company’s cash flow or earnings stream based on whether they think something is operating and recurring, vs. non-operating and non-recurring.
I believe a lot of complexity exists because there hasn’t been a consistent conceptual framework, a consistent disclosure framework, or a consistent presentation framework, so I view those as foundational projects. If we get those right today, we’ll make better standard-setting decisions in the future.
At the same time, I recognize that we need to do a look-back and try to reduce complexity and take some cost out of the system, and that’s what complexity simplification is about. One is a look forward, and one is a look backwards.
Improving Communication
FE: Let’s move to the third of FASB’s goals for the future — improving communications. What are some initiatives the FASB board has taken in this area?
GOLDEN: We’ve started issuing a quarterly document called the FASB Outlook, which is designed to give a higher-level understanding of the important projects we are working on. There seems to be a broad understanding of what we are doing at the Chief Accounting Officer level, but I thought we could improve the way we communicate with higher-level individuals within the companies, and that’s what the FASB Outlook is designed to do.I also think we can make our website more user-friendly, and we’ve been rolling out some improvements in that area.
We recently have started, and I’m very proud of this, Transition Resource Groups (TRGs) for some of our more significant projects.
The first TRG was formed for our Revenue Recognition project. That TRG is designed to communicate with and listen to stakeholders about pressures they are having as they transition to the new standard. It lets us communicate to them the board’s expectation when we wrote the standard, and it lets them communicate to us about any confusion or disagreements they are experiencing. We stand ready to make any changes, to improve the education, or to ensure a smooth transition.
We already have implemented the Revenue Recognition TRG; I expect the boards will implement TRGs on the other projects we are due to issue, including Impairment and Leases, and Classification & Measurement.
Expanded Collaboration
FE: Where would you say FASB is today on the goal of increasing collaboration with the Financial Accounting Foundation and the Governmental Accounting Standards Board?
GOLDEN: [GASB Chairman] Dave Vaudt and I have a strong working relationship, and we’ve already begun to streamline some of our public documents so they have the same look and feel.We recognize we serve some of the same stakeholders, but that we also serve different stakeholders. We are trying to be as aligned as we can.
We are beginning to share intellectual capital on key projects. For example, they now have a project on leases, and are privy to all of the research we’ve been doing on leases. We share staffing, and their project manager talks to our project manager, so both boards can be well-informed and make effective decisions.FE: How would you sum up movement on the fifth goal you set for FASB last year — to work with the FAF and the SEC to realize a vision for the future and promote the convergence of global accounting standards?
GOLDEN: I have spoken a number of times about our vision for international convergence. Jim Kroeker also spoke on this issue at the USC Financial Reporting Conference earlier this year. For the future, we intend to focus on making improvements to GAAP; understanding how those improvements would be considered internationally, specifically by those countries that use GAAP; and working with other standard-setters around the world.
We want to share ideas and learn from each other, so we can make the best possible improvements in the U.S., while also putting standards in the best possible position to be accepted and converged around rest of the world.Similarly, I am getting more involved in advising the IASB as a member of their Accounting Standards Advisory Forum (ASAF). I provide a U.S. perspective to the IASB on something I think they should do that’s in the best interests of IFRS stakeholders, as well as U.S. stakeholders.
FE: Where do we stand with regard to global standards and what some view as a new convergence model?
GOLDEN: We have started to develop stronger relationships with standard-setters in Asia and in Europe, and have had a strong relationship with our neighbors to the North. We have gone to Canada, and they’ve been here. I made a trip to Asia last year and am scheduled to make another one this fall. We’ve made quite a few trips to Europe, to build relationships and engage in a multilateral dialogue about areas that need to be improved in GAAP as used around the world.FE: The fifth goal as stated last year speaks of “users of U.S. GAAP.” How that does influence FASB’s vision of global accounting standards?
GOLDEN: When I was talking about users of U.S. GAAP, I was observing that a substantial number of countries outside of the United States use GAAP. I feel we need to engage in a dialogue so we can understand the perspectives of those GAAP users.FE: Is there anything else you’d like to add?
GOLDEN: The other thing we haven’t discussed is our initiative to improve the codification. I’ve asked [FASB board member] Larry Smith to take on the accessibility issue, and he’s come up with a plan and a working group on how to improve the usefulness of the codification. I am hopeful that next year we’ll be able to make some improvements to make it easier to use.Performance Reporting Project Returns
FE: One of the major new projects this year — in fact, perhaps the most significant is the Financial Performance Reporting Project (FPRP). This is the project formerly known as Financial Statement Presentation project. The FPRP project began to heat up during the summer when the FASB advanced the project from the ‘research’ phase to an active agenda (standard-setting) project.
Can you describe the FPRP at the 50,000 foot level, and how it relates to the five goals for FASB you discussed? GOLDEN: The focus we have on the Performance Reporting Project (PRP) is not as broad as the prior Financial Statement Presentation project. At this point it does not include, nor do I expect it to include, a direct reference to thinking about the direct statement of cash flow.
The staff had brought to us three alternatives — one focusing on the Performance Statement, including focusing on the statement and ‘cohesiveness,’ which is making changes to the balance sheet and statement of cash flow.
Right now, we have asked the staff to focus on the Performance Statement, and that’s a way to potentially present items between — and we haven’t landed on this yet, but are focusing on — operating vs. non-operating, recurring vs. nonrecurring, or some form of that.
We recognize there are a lot of measures that investors use when they are trying to get back to determining operating cash flow, because they want to put a different model on that number than they do on net income. They like to put multiples on operating cash flows, and maybe a single multiple on a non-operating event, or maybe ignore a non-operating event all together. We felt we should first focus on how to enhance the Performance Statement.
Then there’s all sorts of follow-on questions — if you want to determine operating vs. non-operating, there’s the definition, and when you are discounting items, where do you put accretion of the discount. The ultimate objective is to try to make the Performance Statement more useful to investors.