From the Chairman's Desk:
By Russell G. Golden, FASB Chairman
Reducing Unnecessary Complexity in Financial Reporting
Reducing unnecessary complexity in financial reporting benefits all our stakeholders. While some have said that our initiative to reduce unnecessary complexity degrades financial reporting and simple “GAAP” allows companies to omit important information, I have found quite the contrary to be true. Everyone who participates in the system of financial reporting benefits when unnecessary complexity is reduced.
Reducing unnecessary complexity:
- Enables investors and other financial statement users to more easily identify and understand financial information about an organization, while making comparisons across organizations more effective and efficient
- Lowers preparers’ ongoing implementation costs, and makes transactions in the financial statements more consistent and straightforward by allowing for similar economic transactions to have similar accounting
- Reduces the attestation effort and cost for auditors, which in turn, reduces costs passed on to preparers.
Everyone who participates in the system of financial reporting benefits when unnecessary complexity is reduced.Knowing this, the Board continually strives for the “sweet spot,” between creating accounting standards that provide useful information to investors and other users, while also ensuring that they don’t impose unnecessary complexity and costs on preparers. How we try to find that “sweet spot” is the focus of this column.
Our Process to Reduce Unnecessary Complexity
With potential benefits at stake, you won’t be surprised to learn that many suggestions to reduce unnecessary cost and complexity come directly from our stakeholders. We receive ideas from individual preparers, auditors, investors, and others; members of the FASB’s advisory groups; and industry organizations.
Typically, the first thing we do is to talk to a stakeholder who sends us an idea. We want to make sure we understand the concern and suggestion. Our next step is to perform research and outreach with other stakeholders. How widespread is the problem? What are the full range of potential solutions? How important is this issue relative to other improvements the FASB could make to GAAP? What new costs and benefits would arise from making a change? Is there a compelling argument to move forward?
All changes to GAAP that are designed to reduce unnecessary complexity—even narrow changes—go through our comprehensive and independent standard-setting process that encourages broad participation, objectively considers all stakeholder views, and is subject to oversight by the Financial Accounting Foundation’s Board of Trustees.
Even projects designed to simplify GAAP can involve one-time costs for transition to the new guidance. During the standard-setting process we always conduct a thorough cost-benefit analysis. The purpose of that analysis is to:
- Ensure that the expected improvement in the quality of the information provided to users—the benefit—justifies the cost of preparing and providing that information, and
- Reduce unnecessary complexity when we can.
Simplification as a Mindset
Simplification as a “mindset” helps us to identify opportunities to reduce unnecessary cost and complexity from the start of a project.
We have found that addressing unnecessary complexity from the beginning removes a potential impediment to an improvement: the resistance to future change.
For example, in our current hedging project, we are proposing to make improvements to align hedge accounting more closely with an organization’s risk management activities and to better reflect the economics of those risk management activities. While there might be one-time costs to implement that improvement, many stakeholders have told us that the ongoing benefits, such as better financial information for users and reduced application costs, would outweigh the costs of implementation.
What we have learned is that reducing unnecessary complexity (and costs), is a concept that we can apply to all our projects.
Additionally, we are proposing to expand the scope of employee share-based payments guidance to include share-based payments to nonemployees to improve the consistency of accounting for economically similar transactions and to reduce cost and complexity. We would accomplish this by eliminating the need to establish and maintain very different processes to account for awards to nonemployees that are economically similar to awards to employees.
Not every effort to simplify GAAP is as ambitious as hedging and share-based payments to nonemployees. We launched a Simplification Initiative a couple of years ago to make more narrowly-targeted improvements and simplifications to financial reporting through a series of short-term projects. What we have learned from that initiative is that reducing unnecessary complexity (and costs), is a concept that we can apply to all our projects.
Reducing Cost and Complexity Isn’t Always Simple
Although reducing unnecessary cost and complexity benefits all stakeholders, sometimes simplification is not easy. It can be a complex process that requires ongoing dialogue and strong cooperation among the FASB, investors, preparers, auditors, and other stakeholders. This is because:
- The U.S. economy is a large, diverse, and ever-changing environment. New industries, new financial products and structures, and new approaches to transactions sometimes push standard setters to address business transactions that are inherently complex.
- Even simplification means change, and change can be hard for stakeholder organizations. The effects of change vary widely among organizations. Some stakeholders may be enthusiastic about a simplification opportunity, while others may not benefit as much and, therefore, may be less supportive.
We welcome your feedback about our efforts to reduce unnecessary cost and complexity in financial reportingIn the end, we return to that “sweet spot” I described earlier. The FASB’s goal in improving GAAP is to provide high-quality financial information to investors and other users, while doing our utmost to meaningfully reduce unnecessary cost and complexity.
We Welcome Your Feedback and Ideas
We are proud of the considerable progress we have made in improving GAAP and reducing unnecessary costs and complexity in financial reporting, and we plan to continue our efforts. I invite you to read more about the FASB’s current simplification projects, and other simplification projects that we successfully completed.
We also welcome your feedback about our efforts to reduce unnecessary cost and complexity in financial reporting. A great way to start the conversation is by submitting new ideas for simplification in other areas of accounting. Please email your suggestions to email@example.com.