The leaves are turning. Soon they’ll be dropping to the ground and the snow will begin to fall. In the world where accountants work, there are some developments that should be kept in mind as we change seasons and approach year-end, as discussed in the paragraphs to follow.
Accounting Standards
The U.S. accounting standard setter, the Financial Accounting Standards Board (FASB), has installed a new chairman. The former chairman, Leslie F. Seidman, had to leave the FASB on June 30, 2013, due to term limits. The new chairman, Russell G. Golden, is a former audit partner with Deloitte & Touche LLP, a large international accounting firm, and worked in that firm’s “national office.” After leaving public accounting, Mr. Golden joined the FASB and worked on its staff for about six years before being appointed to the board in 2010. He was elevated to the position of chairman as Ms. Seidman left. The obvious question is what does a change in chairmanship mean to standard-setting?
The chairman is only one vote on the seven-member board, so he or she can only do so much. One might say the key role is to establish an appropriate “tone at the top.” It is way too early to learn what this tone might be but some believe that international convergence on accounting standards might be a higher priority under Mr. Golden vs. Ms. Seidman. Stay tuned.
Probably a larger issue and a huge unknown is the future of the controversial leases project the FASB is trying to finalize together with the International Accounting Standards Board (IASB), the FASB’s international counterpart. In my prior article, “A Further FASB/IASB Proposal to ‘Fix’ Lease Accounting,” I noted that the current exposure draft on leasing was approved by the FASB on a vote of 4 to 3. Both Ms. Seidman and Russ Golden were among the 4 assenting votes, so the “unknown” in the equation is the new board member on the FASB—James L. Kroeker. Like Russ Golden, Mr. Kroeker was an audit partner with Deloitte & Touche LLP and worked in that firm’s national office as well. Separately, he worked at the Securities and Exchange Commission (SEC) for several years and had the role of chief accountant for about three years that ended in 2012. In short, Mr. Kroeker brings a wealth of experience and perspective to the FASB.
The comment period on the latest leasing exposure draft has just concluded (September 13, 2013). Over 500 letters of comment were received by the FASB, which is considerably less than the nearly 800 letters received on the first exposure draft issued by the FASB. While the latest proposal addresses many of the “complaints” (notably, accelerating lease expense for lessees of real estate) that users had with the original proposal, it arguably lacks a solid conceptual basis in several respects, remains very complex, and will require companies to spend considerable implementation effort.
In fact, as the exposure period ended, the Big 4 accounting firms weighed in with less than overwhelming support for the accounting being proposed. For example, Ernst & Young made this statement in its comment letter: “[w]e are unable to support the Proposal because it is unclear to us whether the ED would significantly improve the decision-useful information available to financial statement users.” KPMG expressed a similar view in its comment letter. And while the Big 4 firms don’t dictate how the accounting rules should be developed, the FASB cannot completely disregard such sophisticated voices.
So where does Jim Kroeker stand on the leasing project and will any of the other board members change their vote? The comment letters from the Big 4 firms and other key players might result in a different voting pattern by the FASB and could lead to another “bite at the apple,” also known as a third exposure draft. Leasing is such a broad accounting topic affecting so many companies, it is imperative for the FASB to “get it right.” Since this is a joint project with the IASB, the FASB hopes that whatever changes it agrees to are acceptable to the IASB—otherwise, convergence will take a major step backward.
This lease project “looks and feels” like another controversial FASB project—share-based payment. The FASB “solved” this topic by issuing a disclosure-only standard in 1995 but replaced it with a recognition standard in 2004. Some nay-sayers in corporate America thought life as we knew it in the United States would come to an end by requiring share-based compensation to be recorded in the income statement. Yet somehow, nearly 10 years later, life continues.
Separately, the FASB and IASB are in the process of finalizing a new revenue standard that would replace all existing revenue accounting rules. Voting, unlike with the leases project, is not an issue. Originally, the boards were planning to issue the new standard by September 30, 2013, but the latest projection is now “sometime in the fourth quarter.” See my prior blog article, “New Standard for Revenue Accounting Finally Coming!” for complete details.
SEC Developments
The SEC has recently installed Ms. Mary Jo White as its new chairman. Like all SEC commissioners, the chairman is appointed by the U.S. president with the advice and consent of the U.S. Senate. Unlike some appointees, Ms. White was supported by most members of both political parties. She brings substantial savvy and experience to the table. One of her first tasks will be to reduce the backlog of work at the SEC. For example, the U.S. Congress directed the SEC to develop and implement numerous regulations resulting from the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Much of that work is behind schedule. One of the regulations the SEC was directed to develop relates to corporate governance and disclosure, including certain executive compensation disclosures. That effort is pending.
However, one key controversial rulemaking the SEC did adopt as required by the Dodd-Frank Act relates to disclosure by companies that have used “conflict minerals,” as defined. That final rule was challenged in the courts but was dismissed in July 2013; however, an appeal to the U.S. Court of Appeals has been made. For many companies, the required disclosure (which requires independent auditor involvement) is due May 31, 2014. Companies should be well along in assessing whether the disclosure applies, and should keep abreast of the pending appeal. For a complete discussion of this topic, see my prior blog article, “Companies Must Begin to Identify ‘Conflict Minerals.’”
Separately, the SEC is still considering whether to allow U.S. registrants to use international accounting rules (International Financial Reporting Standards or “IFRS”) issued by the IASB rather than those issued by the FASB. This consideration will probably not be a high priority until after the FASB and IASB finalize their joint projects on revenue recognition and leasing. The SEC staff issued a report on this matter as discussed in my prior blog article, “SEC Staff ‘Punts’ on IFRS Decision.”
PCAOB Developments
The Public Company Accounting Oversight Board (PCAOB) has recently issued a far reaching proposal on the auditors’ reporting model. This proposal is open for comment until December 11, 2013. The substance of this proposal is discussed in two prior blog articles, “Significant New Auditing Standards—Part 2, Tenure/Other Information,” and “Significant New Auditing Standards—Part 1, Critical Audit Matters.” Separately, the PCAOB is still considering whether to require the audit partner to be disclosed to investors and whether to require mandatory rotation of auditors—something that most auditors hate, and an issue that has the attention of many in the U.S. Congress. Specifically, in July 2013, the U.S. House of Representatives passed a bill that would prohibit the PCAOB from requiring public companies to use specific auditors or requiring the use of different auditors on a rotating basis. This legislation, which has support from both political parties, has now moved to the U.S. Senate.
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.