This blog article discusses the formal post-implementation review (PIR) process for U.S. accounting standards used by companies, not-for-profit entities, and state and local governments.
Significantly, formal reviews recommending improvements have now been completed for Financial Accounting Standards Board (FASB) standards on accounting for uncertain tax positions and on segment reporting. Reviews of additional FASB standards on business combinations and on income taxes are underway.
Role of the FAF
The reviews of implemented standards are conducted by the Financial Accounting Foundation (FAF), which is the oversight body of both the FASB and the Governmental Accounting Standards Board (GASB). It is the FASB that establishes generally accepted accounting principles in the United States (U.S. GAAP), which must be used by most U.S. companies, whether public or private, as well as not-for-profit entities. The GASB sets accounting rules for state and local governmental agencies in the United States.
The FAF, as an independent, private sector organization, is responsible not only for the oversight of the activities of the FASB and the GASB, but also the boards’ administration and finances. The FAF’s primary duties include protecting the independence and integrity of the standards-setting process and appointing members of the FASB and GASB. For example, as discussed in a prior blog article, “Accountants in Demand in the United States,” the FAF must appoint a new FASB chairman as the existing chairman, Leslie F. Seidman, is due to leave the board because of term limits, on June 30, 2013.
Objectives of Post-Implementation Reviews
Since 2011, the FAF has been periodically conducting a PIR of significant standards issued by the FASB and GASB, with three main objectives:
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To determine whether a standard is accomplishing its stated purpose
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To evaluate the standard’s implementation and continuing compliance costs versus benefits
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To provide feedback to improve the standard-setting process (as opposed to recommending standard-setting actions).
For example, when determining whether a standard is accomplishing its stated purpose, the PIR assesses whether:
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The standard resolved the issues underlying its need.
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Decision-useful information is being reported to, and being used by, investors, creditors, and other users of financial statements.
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The standard is operational—that is, stakeholders are able to apply the standard as intended, the standard is understandable, and preparers are able to report the information reliably.
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Any significant unexpected changes to financial reporting and operating practices resulted from applying the standard.
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Any significant economic consequences resulted from applying the standard.
When evaluating the selected standard’s implementation and continuing compliance costs and related benefits, the review process assesses whether:
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Implementation and continuing application costs are consistent with the costs that the FASB or GASB considered and stakeholders expected.
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Benefits are consistent with what the FASB or GASB intended and stakeholders expected.
Mechanics of Post-Implementation Reviews
Staff for a PIR is assembled from among individuals who are already experienced FASB and GASB staff members, to promote a collaborative review aimed at improving the standard-setting process. The PIR team leader reports directly to the FAF president and CEO and to an oversight committee of the FAF board of trustees. The PIR team leader directly supervises the day-to-day activities of other review staff that were released to the FAF to devote full-time efforts to the PIR function.
As the PIR of a standard begins, the FAF solicits interested stakeholders such as users, preparers, auditors, academics, and regulators affected by the new standard to provide input into the effectiveness of the accounting standard being reviewed.
Once a PIR report is issued by the FAF, it is made public and posted on the FAF website. Thereafter, the chairman of the FASB or GASB, as appropriate, addresses the observations and comments in the PIR report. The chairman’s response is also made public and posted on the FAF website.
Completed Reviews to Date
To date, the FAF has completed reviews of four issued standards as follows:
FASB Standards—
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FASB (FIN) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (now codified by the FASB into Topic 740, Income Taxes)
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FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information (now codified by the FASB into Topic 280, Segment Reporting).
GASB Standards—
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GASB Statement No. 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements
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GASB Statement No. 40, Deposit and Investment Risk Disclosures.
Results from PIR Reports on FASB Standards
Uncertain Tax Positions
The PIR report on FIN 48 was released in January 2012. FIN 48 was issued to increase relevance and comparability in reporting information about income tax uncertainties. The PIR report concluded that FIN 48 generally achieved that purpose, although some stakeholders believe the standard could be improved.
In responding the these findings, the FASB chairman stated, “[b]ecause the findings in the Report indicate that overall, FIN 48 has improved the consistency, comparability and relevance of information about uncertain tax positions, and that those benefits outweigh the related costs, the FASB does not plan to undertake a separate project to review FIN 48 at this time. However, the FASB will consider the findings that are technical in nature in future efforts to simplify our standards, converge them with International Financial Reporting Standards, or both.”
Segment Reporting
The December 2012 PIR report on Statement 131 concluded that this standard, which was issued in 1997, generally improved the way a public company reported information about its segments; however, improvements could be made. On March 6, 2013, the FASB chairman responded to the PIR report with the following statement:
The FASB welcomes the overall conclusion in the PIR report that Statement 131 is working effectively and is providing more information about an organization’s business activities than the prior segment reporting standard and enhancing the relevance of segment disclosures …. The report’s findings indicate that some stakeholders believe certain operational aspects could be improved with additional guidance.
Therefore, the FASB will consult with stakeholders to understand the significance of the issues raised and their priority in relation to other potential agenda items. We will also meet with representatives of the U.S. Securities and Exchange Commission and the International Accounting Standards Board (IASB) in response to the report’s findings and will report back to the FAF Trustees and the FAF’s Oversight Committee as progress is made ….
Results from PIR Reports on GASB Standards
In February 2013, the PIR team that reviewed the two GASB standards noted above issued its report . In the press release announcing the report, the PIR team noted that it had accomplished the three main objectives set out for the PIR process and generally was complimentary in its findings. Specifically, this release states that the two GASB standards “have achieved their purpose and provide decision-useful information to creditors and other financial statement users.” A formal response from the GASB chairman has yet to be published.
Scheduled Additional PIR Reports
The FAF has assembled a PIR team to address the effectiveness of FASB Statement 141(R), Business Combinations (now codified by the FASB primarily into Topic 805, Business Combinations). This effort to review the main business combinations standard is underway and the related report is likely to be released later in 2013.
In February 2013, the FAF announced that it would also perform a review of FASB Statement No. 109, Income Taxes (now codified by the FASB primarily into Topic 740, Income Taxes). The timing of a final report is uncertain.
Summary Observations
Some might argue that the PIR process takes entirely too long to provide input into any necessary “tweaks” to the accounting rules. That said, time is needed to “let the dust settle” so that meaningful evaluations can be made.
Others might argue that having staff people from the FASB or GASB perform a PIR is self-serving and a conflict of interest. However, to train a group of totally independent CPAs or other qualified individuals in the process of standard setting and objectively evaluating constituent feedback is probably not practical either.
Financial statement preparers and users that feel a different approach might be better should submit any suggestions directly to the office of the FAF president and CEO, currently held by Teresa S. Polley.
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 as well as accounting consultation on a variety of topics.