My last two blog postings discussed what happened in “Accounting Land” in the United States in 2012. But that’s history. What about the future? Let’s dust off the crystal ball and I’ll share with you my thoughts on developments that may occur in 2013, in a series of three blog articles.
In this first article, I cover changes at the Financial Accounting Standards Board (FASB) exclusive of its joint projects with the International Accounting Standards Board (IASB). The joint FASB-IASB projects, including those concerning leases, revenue recognition, and financial instruments, will be covered in the next blog article. The third article will cover non-FASB developments.
Board-Level Appointments at the FASB
As noted in my recent blog article, “Accountants in Demand in the United States,” the FASB needs to replace its chairman. The existing chairman, Leslie F. Seidman, must leave the board on June 30, 2013, since she will have completed 10 years as a FASB member—the maximum permitted under the FASB governance rules. Look for a “dark horse” candidate to replace Ms. Seidman. A person who held the role of chief accountant at the Securities and Exchange Commission (SEC) may be a good choice, as may other candidates who understand the laborious and tedious nature of the operation of the FASB. Like all FASB members, this person should be able to understand and relate to the divergent perspectives of a wide range of constituents affected by FASB standards. However, maybe most importantly, the chairman must be capable of “steering” a project to a consensus or reasonable conclusion on a relatively timely basis, and have the ability to articulate, in “painful detail,” the conclusions reached by the FASB on an accounting issue.
Separately, another FASB member, Marc A. Siegel, will have completed his first term on June 30, 2013. Look for him to be reappointed, if he wants the role. Typically, board members are reappointed for another term, but some choose to decide to “do something else.”
Since two current members that sit on the FASB, Lawrence W. Smith and Russell G. Golden, were FASB staff members when appointed, I do not foresee a third FASB member being selected from the FASB staff to replace Mr. Siegel if he is not reappointed. Selecting members from outside the ranks helps ensure fresh views and perspectives when addressing an accounting issue. That said, Messrs. Smith and Golden are very reasonable choices for the chairmanship role. However, because Ms. Seidman was promoted to the chairmanship from a sitting FASB member slot, the Financial Accounting Foundation (FAF), parent of the FASB and appointer of FASB members, may decide to go a different route this time.
Focus on Private Companies
Over the years, some users came to believe that the rules of the FASB were designed for public companies and that private companies were being short-changed. They believe that rules being issued are too complex and require disclosures that are not meaningful to users of private company financial statements. This concern led to a proposal for a separate accounting board (on par with the FASB) to develop rules for such companies, which I termed “Baby GAAP.” This proposal was rejected by the FASB’s oversight board, the FAF, in a report dated May 30, 2012. However, in response to the proposal, the FAF developed a Private Company Council to work with the FASB to determine whether and when to modify U.S. generally accepted accounting principles (GAAP) for private companies.
This council first met in December 2012, and identified four specific topics that are cause for pain in private companies:
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Accounting for “variable interest entities”;
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Accounting for “plain vanilla” interest rate swaps;
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Accounting for uncertain income tax positions; and
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Recognizing and measuring various intangible assets (other than goodwill) acquired in a business combination.
There is a reasonable chance that one or two of these topics will be considered by the FASB in 2013, but, as a result of other FASB priorities, the remaining topics will have to wait.
That said, private companies that need to have their financial statements included in a future SEC filing due to a business combination or the like may be in for a surprise. Specifically, the SEC is unlikely to allow any required financial statements prepared without public-company rigor to be included in a registrant’s filing. So, such a company would have to recharacterize potentially several years of its financial statements to ensure they match the standards used by a public company. In short, be careful what you ask for!
On a related matter, the American Institute of Certified Public Accountants (AICPA) has proposed a new financial reporting model for small and medium-sized entities. I cover that subject in my third and final article regarding expected 2013 developments.
Current Project—Liquidation Method and Going Concern Assessment
The FASB, apart from its joint projects with the IASB, is developing guidance for certain other accounting topics. This includes guidance for when the liquidation method of accounting should be used by a company and, separately, the requirement for management to make a “going concern” assessment when preparing its general purpose financial statements—something that an auditor is currently required to consider when issuing an audit report on a company. The FASB has targeted a final standard addressing when a company should use the liquidation basis of accounting by March 31, 2013—a reasonable timeframe since the topic is not overly controversial.
The going concern project dates back to 2007 and resulted in an exposure draft that was issued on October 8, 2008. Due to constituent feedback and other issues identified, the FASB decided not to issue a final standard. It hopes to have a “new and improved exposure draft” issued by June 30, 2013, but based on the history of this project a final standard isn’t likely prior to 2015.
The requirement to assess going concern currently resides in the auditing literature rather than in the accounting literature. The FASB is considering whether to include this concept in the accounting literature together with a possible disclosure requirement that management make an affirmative statement in the footnotes as to the company being a going concern. Such a disclosure requirement would likely be met with some resistance from company management.
A FASB Project on Accounting for Pensions Is Unlikely
The accounting for pensions is in need of repair or at least some tweaking. The current pension accounting rules under U.S. GAAP were developed in 1985. Even though, over the years, more and more employers have switched from defined benefit plans to defined contribution plans with less complex accounting that requires less estimating, the fact remains that the process for estimating that goes with defined benefit plans is mind-boggling. Also, the way in which a company determines and applies a discount rate to its pension obligation and the method for estimating plan asset returns deserve another look. Further, the various “smoothing” techniques that exist in pension accounting today are arguably dated.
Will the FASB add such a project to its agenda? Probably not—it’s too controversial.
About the Author
Ron Pippin is an experienced CPA based in Wheaton, IL. His 40 plus year career includes being an audit partner in Arthur Andersen, a member of Andersen’s Professional Standards Group (“national office”) in Chicago, the Director of Financial Reporting for a Fortune 50 company and most recently, the editorial director of CCH’s Accounting Research Manager. Currently, Ron does independent writing and analysis together with accounting consultation on a variety of topics.