June 24, 2021
The Financial Accounting Standards Advisory Council (FASAC) held its quarterly meeting on Thursday, June 24, 2021. The FASB chair provided highlights on FASB activities that were not otherwise on the agenda for the Council meeting, and SEC and PCAOB staff members commented on current issues and activities. Council members discussed the following topics:
Financial Accounting Implications—Critical Audit Matters (CAMs): FASAC members discussed potential financial accounting implications to the related standards for the accounting areas that were most frequently referenced as CAMs. The discussion focused on gathering input from Council members about potential standard-setting implications related to the underlying accounting (similar to how the Board and Council have used information in other data sets), rather than areas outside of the FASB’s mission and scope (such as the CAM requirements, costs or benefits of those requirements, or other general perspectives on CAMs).
Overall, Council members indicated that the accounting areas identified as frequent CAMs were generally aligned with their expectations and did not highlight suggested changes to the underlying accounting or disclosures that should be considered by the Board.
Some investors and other financial statement users indicated that CAMs may provide additional context into accounting areas to focus on. Some users noted that there is some lack of information in financial statement disclosures in certain accounting areas, such as loss contingencies.
Council members also commented on certain academic research, which suggests that CAMs may have a greater influence on less sophisticated investors by highlighting accounting areas that they may have been unaware of, including the high level of complexity and judgment associated with those areas.
Preparers indicated that CAMs generally did not result in additional financial statement disclosures and that the areas of accounting complexity typically aligned with the complexity of the underlying transactions. Some Council members noted the overlap of the information included in CAM disclosures and critical accounting estimate disclosures in the MD&A, which are not required for private companies.
Implementation of Leases: FASAC members discussed their assessment of the benefits and ongoing costs of applying the leases standard.
Investors and other financial statement users generally stated that the leases standard resulted in additional disclosure that allowed users to enhance their analyses in comparison to the disclosures that were required under the legacy leases standard. One investor questioned whether the current information is better than the legacy practice of using a multiple of lease rent for analysis. Some Council members indicated that the divergence between IFRS Standards and GAAP results in more costs and reduced comparability. Some investors noted the leases standard had a material impact on some industries but for many other industries, the impact was immaterial.
Most preparers indicated that the implementation costs as well as the ongoing costs of application were higher than expected and communicated prior to the issuance of the leases standard. The increase in costs generally were a result of the following:
- New software and system upgrades needed to apply the leases standard
- Systems maintenance
- Software licensing fees
- Increased headcount
- More detailed review of the company’s contracts to determine whether a lease exists, and
- Additional ongoing disclosure requirements.
FASAC Meeting Recaps are provided for those interested in following the activities of the FASAC. Official positions of the FASB are reached only after extensive due process & deliberations. More details on the FASAC’s input on the FASB’s projects can be found within the meeting minutes, which will be published on the FASB website in the coming weeks.