Larry Smith: A Board Member Reflects on His FASB Tenure

Almost 15 years ago I joined the staff of the FASB as the Director of Technical Application and Implementation Activities. In this role, I was supposed to deal with narrow issues requiring “quick fixes,” while my co-director of technical issues was supposed to deal with the longer range, more comprehensive accounting issues.

At our first meeting to divide up the projects, my co-director recommended that I take on an issue with the implementation of consolidations, which eventually became FIN 46. This “quick fix” is now 15 years old and the Board is still dealing with aspects of it (now Topic 810).
Things don’t get done overnight at the FASB, and, depending on your perspective, that can be a good or bad thing.

I have taken a couple of lessons from this experience. The first, and most obvious, is that things don’t get done overnight at the FASB, and, depending on your perspective, that can be a good or bad thing.

Second, and more important, is that the FASB continues to listen to stakeholder concerns about the status of GAAP, and strives to make improvements when the benefits of those changes justify the costs of their implementation.

I recently re-read similar reflections in articles penned by retiring Board members Tom Linsmeier and Daryl Buck. Tom’s article focused on what still needs to be done in standard setting, while Daryl’s focused on the Board’s accomplishments during his tenure. In this article, I will make my best attempt to cover both areas.

What were the FASB’s major accomplishments during my tenure?


A major accomplishment was the leadership displayed by prior FASB Chairman Bob Herz and the Board members during 2002–2010. During this time, they established the FASB as THE accounting standard setter in the U.S., rather than having that authority split among various other bodies.
Through the last 15 years, I sense stakeholders believed that the FASB has exited the “Ivory Tower” in the way we create standards.

Another major accomplishment was the FASB’s increased investment in soliciting and listening to the feedback of stakeholders. For example, the FASB further expanded its outreach to financial statement users, although this remains an ongoing challenge.

Additionally, through the last 15 years, I sense stakeholders believed that the FASB has exited the “Ivory Tower” in the way we create standards. I believe that former FASB Chairman Leslie Seidman was a successful leader in getting FASB staff and the Board to listen attentively to stakeholder concerns to produce more practical standards.

Other major accomplishments during my tenure include:

  • The FASB Accounting Standards Codification® made it much easier for a person who is not a topical expert to find authoritative guidance.
  • The elimination of qualifying special purpose entities was significant in that it did away with a flawed concept that led to poor business decisions to achieve an accounting result (with very unfortunate economic consequences).
  • The decision to abandon the major changes we had proposed for accounting for financial instruments was also significant.
  • The new lease accounting standard will improve the clarity of companies’ lease commitments so that users no longer need to guesstimate what they are.

What are some of my regrets?


One of my regrets was where we drew the line for addressing the needs of smaller companies. Private companies vary widely in size and sophistication, and thus our ability to assess the relevance of the information provided by an accounting requirement is extremely difficult. I am hopeful that the Board (or the FAF Trustees) will reconsider how to address the concerns of smaller companies.
Private companies vary widely in size and sophistication, and thus our ability to assess the relevance of the information provided by an accounting requirement is extremely difficult.

Additionally, while I listed the Codification as one of the major accomplishments, it is also one of my greatest regrets in that there is significant resistance to improving it.

When the Codification was originally created, I warned people that it would read like a patchwork quilt since it essentially pulls together various disparate pieces of literature on different accounting topics. My vision when it was created was that there would always be a phase 2 to improve its organization and readability. Unfortunately, that vision remains unfulfilled.

Lastly, while I voted in favor of the Revenue Recognition standard I understand better today the dynamics and related costs of implementing this full-scale change in accounting. Some of those dynamics did not even exist when revenue recognition was added to the Board’s agenda in 2002. Had those dynamics and related costs been understood at the time, the Board may have taken a more targeted approach to addressing the issue.

What should be the future focus of the FASB?


In terms of the technical agenda, the FASB must do something to simplify what we generally refer to as “liabilities and equity.” The area is much too complex, and it is nearly impossible to navigate through the Codification to determine the appropriate accounting answer to some specific issues.
I believe it is time to determine what changes, if any, are required to ensure that the strength of our financial markets is maintained as the financial reporting environment continues to evolve.

Beyond that, I believe that the FASB needs to work with the SEC, the PCAOB, and the Auditing Standards Board to address what I’ll refer to as “the changing financial reporting environment.” Many investors are basing investment decisions not on information that is included in audited financial statements, but rather on information included in earnings releases and related investor packages.

I believe it is time to acknowledge this fact and determine what changes, if any, are required to ensure that the strength of our financial markets is maintained as the financial reporting environment continues to evolve.

In parting, I have enjoyed my time serving as staff and member at the FASB, and anticipate continued success of the organization.