FASB’s Simplification Initiative: An Update

By James L. Kroeker, FASB Vice Chairman

As we move through 2015, we will continue to build on the momentum we’ve created for the FASB Simplification Initiative, which was launched just a year ago.

In the coming months, we’ll be undertaking several new simplification projects, including projects that will address the equity method of accounting and certain aspects of the accounting related to business combinations.

In addition, we’re advancing and conducting research on simplifying the accounting for income taxes, employee benefits plans, and employee stock compensation for private companies.

The objective of the Simplification Initiative is to reduce cost and complexity in financial reporting while maintaining or improving the quality of information reported to investors.
As we’ve said, the objective of the Simplification Initiative is to reduce cost and complexity in financial reporting while maintaining or improving the quality of information reported to investors. The initiative involves identifying narrow scope projects that the FASB can complete fairly quickly. Any stakeholder may submit ideas for simplification.

Completed simplification projects

The projects that we have completed include:
  • Extraordinary items—This project reduces cost by eliminating the evaluation of whether an event or transaction is an extraordinary item, which was required to be separately presented in the income statement and disclosed.
  • Presentation of debt issuance costs—This project reduces complexity by aligning the presentation of a debt discount or premium and issuance costs.
  • Measurement date of defined benefit pension plan assets—This project reduces cost for organizations with fiscal year-ends that do not fall on a month-end by aligning the measurement date of pension plan assets with the date that valuation information is provided by third parties.
Simplification projects in progress

We also have several projects in progress including:
  • Share-based payment—This project involves several simplifications to accounting for employee stock compensation for both private and public companies. This project was covered in the last FASB Outlook.
  • Income taxes—This project includes two simplifications. One eliminates the requirement to classify deferred tax assets and liabilities as current and noncurrent. The other eliminates the exception to the income taxes accounting model that prohibits the recognition of the tax effects of intra-entity asset transfers.
  • Simplifying the measurement of inventory—This project could reduce the complexity of current guidance by requiring organizations to estimate only net realizable value when evaluating inventory for impairment.
  • Balance sheet classification of debt—This project is about reducing complexity by replacing the existing fact-pattern-specific guidance with a cohesive principle to classify debt based on the contractual terms of a debt arrangement.
Additional information about those projects is available on the FASB’s Technical Agenda.

Preview of additional simplification projects

The FASB plans to pursue other simplification ideas in the coming months.
As I mentioned earlier, the FASB plans to pursue other simplification ideas in the coming months. The Board recently voted to add these two new projects to its technical agenda as part of the Simplification Initiative:
  • Equity method of accounting—The objective of this project is to simplify the equity method of accounting. The Board decided to eliminate the requirement to account for the basis difference (and the related disclosures) as if the investee were a consolidated subsidiary. Additionally, the Board decided to eliminate the requirement that companies and organizations retroactively adopt the equity method of accounting.
  • Business combinations—The objective of this project is to simplify the accounting for business combinations. The Board decided to remove the requirement to account for adjustments made to provisional amounts in a business combination retrospectively. Instead, the acquirer would make adjustments to provisional amounts in the period in which the adjustment is determined.
In addition to those projects, the staff is researching other simplifications for income taxes, employee benefit plans, and employee stock compensation for private companies. The Private Company Council (PCC) has suggested a few ideas for stock compensation, and the FASB staff working closely with the PCC to evaluate alternatives.

My observations

As I reflect on the progress of the Simplification Initiative in its first year, my observations are:

First, I believe the initiative will benefit investors as much as preparers and practitioners. In many of the projects, the changes will improve the usefulness of the information reported to investors. More straightforward guidance can make financial information easier to understand and compare across organizations. Additionally, the cost savings associated with the initiative will benefit investors because they often bear the cost of financial reporting.

Second, simplification is a complex process. The impact of each project will vary from one organization to the next. For any single organization, some projects might result in a noticeable improvement, while and other projects might be less relevant. Likewise, a given change may require more effort to implement for some organizations than for others, but in the end, the goal of the Simplification Initiative is to make a meaningful reduction in cost and complexity.

Third, I have been encouraged by the number of stakeholders who have welcomed the Simplification Initiative enthusiastically. Many in the financial reporting community recognize that unnecessary complexity is not good for anyone.

Addressing complexity from the outset removes a significant impediment: the resistance to future change.
Fourth, simplification is not limited to the narrow-scope projects undertaken through the Simplification Initiative so far. It is a factor that we should be, and are, considering in every project we undertake. I believe we need to be mindful of simplification opportunities and avoid the introduction of unnecessary complexity from the start of any project. Addressing complexity from the outset removes a significant impediment: the resistance to future change.

We need your help

For the Simplification Initiative to be a continued success, we need your help. Some degree of financial reporting change will be necessary to make a meaningful reduction to cost and complexity. We encourage you to share your views on what those changes might be. The feedback already received from stakeholders about some of the simplification ideas submitted by other stakeholders has been mixed. I believe that is because of uncertainty regarding the amount of effort that will be required to implement an accounting change and about the impact that accounting changes may have on financial statements.

We welcome new ideas from you so that we can continue to look for ways to improve financial reporting by reducing cost and complexity.
Although we have received varied opinions on some of the projects, the message from stakeholders is clear: the FASB should reduce complexity in financial reporting. The FASB cannot address that concern without change. We welcome input from all stakeholders to ensure we understand the benefits and costs of each proposal. However, I ask you to consider the long-term benefits of reducing complexity in financial reporting when providing feedback.

We want your ideas

To date, we have received dozens of potential ideas from stakeholders for the Simplification Initiative. In the not too distant future, the FASB will have evaluated all of those ideas. We welcome new ideas from you so that we can continue to look for ways to improve financial reporting by reducing cost and complexity. You may submit your ideas through the FASB Simplification Initiative website.