Tom Linsmeier Looks to the Future
as He Leaves the Board

While there have been many significant accomplishments during my 10 years as a member of the FASB, I want to focus this column on the most important issues that I believe remain to be addressed as I leave the Board. They are: improvements to the conceptual framework, reporting financial performance, intangible assets, and the future of international convergence.

During my time on the FASB, a very significant portion of our time has been focused on 11 major projects considered for inclusion in the original 2006 Memorandum of Understanding (MoU) with the International Accounting Standards Board (IASB). Only four of these projects were completed as originally planned (business combinations, fair value measurement, revenue recognition, and leases).

The other seven projects either only partially addressed the issues identified (financial instruments, consolidations, derecognition, and postretirement benefits) or did not address them at all (financial statement presentation, liabilities and equity, and intangibles).
The primary reason that we didn’t address the issues identified in the MoU is that we lacked the necessary conceptual foundations for making key decisions.

I believe that the primary reason that we didn’t address the issues identified in the MoU is that we lacked the necessary conceptual foundations for making key decisions. Most importantly, the conceptual framework is missing guidance on measurement, presentation, entity, and derecognition. Happily, during my first five years at the FASB, both Boards recognized the importance of the framework and undertook initial efforts to work jointly on improving and completing it.

Unfortunately, however, in standard setting the urgent often overtakes the important! The joint conceptual framework effort was abandoned in 2011 when both Boards chose to focus exclusively (and sometimes unsuccessfully) on certain of the MoU projects. As the FASB moves forward and is asked again to address these topics, I believe it is critical that the conceptual framework is completed first to help guide the Board in making consistent decisions that have a defensible basis that our stakeholders understand.

As our joint work with the IASB has drawn to a close, both Boards are consulting with our stakeholders to identify major projects that should receive the highest priority on our future agendas. Given our previous failures to complete these projects jointly as part of our MoU activities, it is not surprising that amongst the projects preliminarily identified as priorities by stakeholders of both Boards are reporting financial performance, intangible assets, liabilities and equity, and postretirement benefits.
The reporting of financial performance and intangible assets have the greatest potential to address deficiencies in financial reporting information for users of financial statements and, therefore, should be given the highest priority going forward.

I believe the reporting of financial performance and intangible assets have the greatest potential to address deficiencies in financial reporting information for users of financial statements and, therefore, should be given the highest priority going forward.

The recent growing proliferation of non-GAAP measures indicates to me that our current financial performance reporting model is not meeting preparers’ and users’ needs. According to Jack Ciesielski’s two-part Analyst’s Accounting Observer report entitled “The Non-GAAP Earnings Epidemic” non-GAAP earnings reports were issued by 67% of S&P 500 companies in 2014 and resulted in a net increase of 22.2% in non-GAAP income when compared to GAAP income. Seventy-six percent of the adjustments increased reported results.

Most GAAP earnings statements are quite abbreviated, presenting an average of 16 line items, including approximately 5 subtotals. This abbreviated reporting makes it challenging for users to understand whether non-GAAP reports consistently adjust GAAP earnings for income components that have the same characteristics (e.g., nonrecurring or nonoperating amounts), or whether the non-GAAP reports selectively reverse out only bad stuff.

The financial performance reporting project is focused on presenting more disaggregated income information. It can serve the needs of financial statement users both in calculating their own adjusted performance metrics, and in better understanding and evaluating the non-GAAP reports provided by the organization.

Organizations with business models that focus on intangible assets are a growing and increasing part of our economy. Yet the current accounting model fails to provide much information on most internally developed intangible assets, resulting in an often-increasing market to book ratio for these organizations and leaving users with little financial reporting information to make their valuation assessments.

While there are some challenging issues with recognizing and measuring internally developed intangible assets, I believe that it is time to better address users’ needs by considering, at a minimum, requiring disclosure of the cost and fair value of these assets.
Users’ needs will best be served if both Boards make efforts, where possible, to keep converged standards converged and to work to limit differences in outcomes on major projects that are on both of our agendas.

Finally, much effort has been made in my time on the Board to improve and converge GAAP and IFRS. While it is clear to me that the U.S. will not be moving to IFRS in the foreseeable future, I believe that users’ needs will best be served if both Boards make efforts, where possible, to keep converged standards converged and to work to limit differences in outcomes on major projects that are on both of our agendas. It is important that efforts are undertaken now to develop new working relationships between the Boards to make this happen.

I have enjoyed immensely my time as an FASB member and look forward to the future successes of the organization.