This is the second of three blog articles on my thoughts on developments that may occur in 2013 in “Accounting Land” in the United States. In this article I discuss the joint projects that the U.S. Financial Accounting Standards Board (FASB) and its international counterpart, the International Accounting Standards Board (IASB), are working on. In my third blog article, I will cover the major activities at the Securities and Exchange Commission (SEC), the Public Company Oversight Board (PCAOB), the American Institute of Certified Public Accountants (AICPA), and, finally, the Governmental Accounting Standards Board (GASB).
For the past several years, the FASB and the IASB have been working on key projects together, with the goal of issuing “common standards.” The major areas they have been addressing are lease accounting, revenue recognition, and financial instruments. They have also been working on certain industry-specific topics such as insurance.
The FASB and IASB have announced their intention of issuing, by June 30 of this year, both a final standard on revenue recognition and another exposure draft on how to improve lease accounting. A new standard on accounting for financial instruments is still a ways off as the boards cannot agree on when or how impairment should be recognized.
FASB-IASB Lease Accounting Project
The FASB and IASB intend to issue a revised exposure draft on how a company should account for its leasing transactions. It is expected by June 30 and I think the boards will achieve that timing as enough time has passed since they issued their first exposure draft on August 17, 2010. See my prior blog article, “Possible New Lease Accounting Rule—An Update,” for more particulars of the likely changes in the forthcoming new exposure draft.
In short, the boards are striving to get more leased assets on the balance sheets of lessees and in their first attempt to achieve this goal, users were generally supportive of that goal but generally “hated” the related income statement effect on lessees. To address this concern, the boards will be proposing in the forthcoming exposure draft, a new concept that minimizes the income statement effect particularly benefiting lessees of real estate.
Once the revised exposure draft is published, look for both users and preparers to try to understand the conceptual basis for the proposed changes as well as how to apply them. I expect that users and companies will generally question the complexity and ultimate outcome. A final standard will likely not happen until late 2014 and, depending on the nature of constituent feedback, a third exposure draft is possible.
FASB-IASB Revenue Recognition Project
The FASB’s June 30, 2013, timeline for finishing the revenue project is optimistic. In fact, companies in the United States are probably wondering why the boards are so determined to have a final standard this year. In short, what is broken to require a whole new accounting standard on revenue?
Companies have been recognizing revenue for years and what is currently being proposed is not particularly revolutionary, nor have investors, regulators, or companies been clamoring for a new standard. Yes, revenue accounting in the United States has evolved generally by industry rather than as an overall concept, but existing accounting seems to have served users reasonably well over the years.
Look for companies to start pushing back on issuance of a final standard by June 30, with December 31, 2013, being more realistic. There just hasn’t been enough implementation guidance developed by the boards to finalize the standard by June 30 such that a company can start learning what changes will be necessary to its systems and the likely effect of the changes.
As noted, the proposed changes are not particularly revolutionary, but companies need guidance to figure out how to comply even if the changes are not great. Probably the most difficult task that a company will face is determining the retrospective or retroactive effect on its financial statements. It’s true: the boards are moving toward the requirement to have companies retroactively implement the standard. That means that a company that has recognized revenue using, say, the percentage-of-completion basis would have to recalculate its revenue, on a contract-by-contract basis, over the past several years to determine whether any changes to recognized revenue would be necessary. Yes, ideally investors want to see the trend in a company’s recognized revenue and arguably the best way to achieve that is to have companies recast their financial statements accordingly. Ouch! Can you imagine a construction company with thousands of contracts having to redo the accounting for each contract over several years? In their latest proposal, the boards provided some relief for companies from this complexity, terming it “practical expedients,” but some say the transition provisions are still too onerous.
The boards have not determined when the forthcoming revenue standard will be effective, other than stating that it will be no sooner than annual reporting periods beginning after January 1, 2015, with nonpublic companies getting at least another year on top of that. The boards have also determined that early application should not be permitted.
While the boards have not finalized the effective date, look for another year beyond the above timeframe, with nonpublic companies given two years beyond the effective date for public companies.
FASB-IASB Accounting for Financial Instruments
The FASB and IASB have another major project on their plate, namely, the accounting for financial instruments. There are three components to this project—classification and measurement, impairment, and hedging. The boards are issuing guidance separately for each, although a comprehensive new standard covering all three might be a better answer. That said, the IASB has already issued its guidance for classification and measurement, which is now included in International Financial Reporting Standard 9, Financial Instruments. There seems to be less impetus in the United States for a new standard because of the existing standards already in place.
What could derail this project, at least from the standpoint of U.S. companies, is the latest proposal from the FASB that would shift the impairment accounting model from the currently used “incurred loss model” to an “expected loss model.” As stated in the proposal, “[i]n the aftermath of the global economic crisis, the overstatement of assets caused by a delayed recognition of credit losses associated with loans (and other financial instruments) was identified as a weakness in the application of existing accounting standards.” The FASB proposed these changes in an exposure draft issued December 20, 2012, with comments due April 30, 2013.
All entities that hold financial assets that are not accounted for at fair value through net income and are exposed to potential credit risk would be affected by the proposal. That means loans, debt securities, trade receivables, lease receivables, loan commitments, reinsurance receivables, and any other receivables that represent the contractual right to receive cash would generally be affected. The FASB, in contrast to its approach in the above-described revenue project, is proposing having an entity apply the amendments by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective.
The FASB did not propose an effective date as it wants to study the comment letters that it will receive. Anticipate numerous comments from users addressing the practicality of the proposed changes. Interestingly, the IASB has not yet proposed its impairment model, which will likely be somewhat different from what the FASB has proposed. Look for the FASB, before finalizing its own standard, to also consider comments that the IASB receives on its forthcoming impairment proposal.
A final FASB standard on impairment accounting for financial instruments is unlikely to occur this year. In short, the boards could not agree on a “converged answer.” Maybe the comment period will achieve this result, but don’t bet on it!
FASB-IASB Insurance Accounting Project
The IASB does not have any existing comprehensive guidance on the appropriate accounting for insurance companies, unlike the situation in the United States. The probable reason for making this a joint FASB-IASB project, even though the United States already has guidance already in place, is to help the IASB and share “war stories” on application issues—and allow the FASB to improve its U.S. standards at the same time. While the boards are targeting an exposure draft to be issued by June 30, 2013, look for it later in 2013 with an extended comment period.
Other Joint FASB-IASB Projects—Investment Company Accounting
Investment company accounting is another joint FASB-IASB project, and it appears that the boards will be issuing final guidance by June 30 of this year. Since the boards have tentatively agreed to “scope out” real estate investment trusts from the final rule, a very contentious part of the proposal has been removed making a June timeframe likely. The final rule will clarify the scope of companies subject to this accounting and retains the requirement to value assets and liabilities at fair value.
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.