Remarks of FASB Chairman Russell G. Golden
AICPA Conference on Current SEC and PCAOB Developments
December 12, 2018
AICPA Conference on Current SEC and PCAOB Developments
December 12, 2018
Let me start by saying the FASB chairman’s address usually takes place the second full day of the conference. However, due to FASB scheduling conflicts, I had to request a new time slot. The AICPA event planning committee was kind enough to move my speech to this, the final day of the conference.
So before I get started, I’d like to thank the committee for its flexibility. And I’d like to thank you for sticking around for my speech, instead of flying home early and/or sleeping in after last night’s celebrations.
As some of you know, before I became chairman, I was the FASB’s technical director. In that role, I was able to convince prior FASB chairmen that the technical director should always do the FASB update presentation—which traditionally follows this one. That’s partly because I wanted to attend the conference—but mostly because I suspected the chairmen weren’t fully up to speed on technical project details.
Now that I am chairman of the FASB, I can confirm my suspicion was correct.
Therefore, you should be relieved to know that current FASB Technical Director Sue Cosper will deliver the much-anticipated FASB update. She will focus on what you really need to know as you implement new standards, and how we’re here to help you make a successful transition.
With most of our big standards out the door, I’m often asked by professionals like you what the FASB is up to these days. Some more politely than others, I might add.
Today, the FASB is focused on what lies ahead. We’re laying the groundwork now for successful financial reporting in the future.
I think of our work in three phases: short-term improvements, midterm improvements, and long-term improvements.
In the short term, we’re enhancing our educational resources for stakeholders so that they can successfully transition to new standards, from next year and beyond.
In the midterm, we’re immersed in proactive, extended outreach on key projects that will lead to more successful standards to be issued in the next three to five years.
And in the long term, we’re preparing for the potential impact of technology on financial reporting to ensure standards can stand the test of time.
Before I begin, I should note that official positions of the FASB are reached only after extensive due process and deliberations. In other words, what I am about to say are my views and only my views.
I’ll start with how we’re enhancing education to support implementation of new standards taking effect in the immediate future.
Education can make the difference between a standard that works and one that doesn’t.
For a standard to work, people must be able to consistently understand it and consistently apply it. When they can’t, the standard does not achieve its objective.
Simply stated, the easier it is for accountants to understand our standards, the easier it is for their organizations to report financial information. And that helps investors and other financial statement users make more informed decisions about where to put their money.
In recent years, we’ve been more proactive in developing educational resources to help preparers and practitioners implement our standards. They include plain-language documents, educational videos, CPE webcasts, transition resource groups, and the FASB implementation web portal.
These resources have been well received.
I’d also note that public companies and accounting firms are doing a good job providing their employees and clients with robust, supplemental training on our standards.
But there continue to be gaps (no pun intended) in accounting education—mostly among small accounting firms and small public and private companies. These groups often turn to third- party CPE providers to fill in the blanks of their learning.
We realized that to reach these stakeholders, we needed to do a better job of engaging with the organizations that provide their continuing education.
That’s why we created the FASB CPE provider forums. This series of web-based forums is tailored to stand-alone providers and individuals who offer CPE within their organizations or directly to clients.
These “train the trainer” forums are designed to help CPE providers prepare for and teach accounting courses and develop manuals and other publications that become widely used. They also give them a unique opportunity to discuss accounting standards with Board members and FASB staff to help them more efficiently pass that knowledge on to their clients.
One recent forum covered half a dozen major new or impending standards. It gave us an opportunity to make clear “what we meant” when we issued certain standards, therefore reducing uncertainty around how to apply them. It also provided a venue for them to ask and receive answers to their questions.
The program has been very successful, with 120 participants tuning in to the forum last March. The next forums are slated for March and September 2019. Details will be announced in the coming months.
Last September, we also conducted our first webcast on FASB standard-setting activities targeted to university and college accounting educators. This was followed by another first—a joint webcast with the Governmental Accounting Standards Board (GASB) tailored for academics interested in not-for-profit and governmental accounting. Together, the webcasts attracted more than 1,000 viewers.
While academic webcasts focus on bigger picture activities of the FASB and the GASB, they provide educators with valuable updates on current standard-setting activities—which, in turn, helps them cultivate better-informed future accountants.
Our focus on the future goes beyond monitoring and addressing near-term implementation issues. We’re also focused on improving standards to be issued during the next three to five years. This work begins even before we issue a single proposal—and, as I’ll discuss, even before projects are added to our technical agenda.
To develop the right accounting solutions, the FASB must first identify the right accounting issues—issues that can, in fact, be addressed through standard setting in a cost-effective manner. Then we decide whether to add a project to our technical agenda or to our research agenda.
Our approach to financial performance reporting issues is a good example of how we make these determinations.
When we added the financial performance reporting project to the FASB’s technical agenda last year, we initially discussed improving the structure of the performance statement by developing an operating performance measure.
After some debate—and, frankly, uncertainty—as to whether we could develop an effective measure, we decided more study was needed. We removed that aspect of the technical agenda project and made it a standalone project on our research agenda.
That allowed us to focus our technical project on the disaggregation of performance information—either through presentation in the statement of income or disclosure in the notes. This is an area we thought we could address more successfully with the information and resources at hand.
As a starting point, we decided to base the project on disaggregating functional lines into natural components. We then directed the staff to perform outreach to answer the following questions:
- How do companies roll up their components into consolidated line items?,
- On what level do accounting systems track the components?, and
- Do companies review, for internal reporting purposes, the components of costs of goods sold and selling, general, and administrative expenses?
The FASB staff is also performing extended outreach on another technical agenda project—segment reporting. The project has two workstreams:
- Improvements to the aggregation criteria and reportable segment process, and
- Improvements to the segment disclosure requirements.
Last August, the staff invited public companies that prepare financial statements using the aggregation criteria in current segment reporting guidance to participate in a segment reporting study.
As part of the study, we asked these companies to tell us how they currently use the criteria and how two potential alternative approaches would affect their segment reporting:
- Reordering the current process for determining reportable segments, moving the quantitative thresholds earlier in the process, and
- Removing the aggregation criteria so that each operating segment is reportable until a practical limit is reached.
The staff will present complete results of the study at next week’s public Board meeting. That information will help us better understand the costs and benefits of the different alternatives to improve the reportable segments process. It will also help us chart our path for the project.
We’re also studying potential approaches to improving liabilities and equity. Our goal is to make the guidance less complex and more understandable without reducing the quality of information provided to investors.
When we added the liabilities and equity project in 2017, the Board decided it should focus on indexation and settlement in the context of the derivative scope exception, convertible debt, disclosures, and earnings per share. Stakeholders had identified these areas as overly complex, internally inconsistent, and the source of frequent financial statement restatements.
Currently, the staff is researching potential paths forward for accounting for convertible instruments and for determining whether instruments are indexed to an organization’s own stock (referred to as indexation) within the context of the derivative scope exception. We expect to discuss the results of that study at a public Board meeting during the first quarter of 2019.
In addition to these technical agenda projects, the FASB is also working on a rather robust research agenda.
Like all things, stakeholder input helps us decide what to add to the research agenda. When we do decide to add a research project, our goal is to answer two questions: Is this an issue that can be addressed with a standard-setting solution? And, if so, is there a solution whose benefits to the user justify the costs to the preparer?
Based on what we learn, we then decide whether to promote the project to the technical agenda. If we do, the project goes through the full due process that may (or may not) lead to the issuance of a new standard.
I’ve already mentioned our current research project on financial performance reporting measures. The staff’s work on this issue will help the FASB decide whether to require a measure of operations and whether and how to define a measure of operations for public companies, private companies, and not-for-profit organizations.
Another project—hedging phase 2—was added to the research agenda after we issued our major new hedging standard in 2017. The research project will help us determine if there are ways we can extend the benefits of that standard by further aligning risk management activities with the new hedge accounting model.
Another research project—income taxes—backwards tracing—was added after the Tax Cuts and Jobs Act was passed. Current accounting guidance generally prohibits backwards tracing, which is the process of recognizing the effects of changes in deferred tax amounts in the current year in the same line item in which the deferred tax amounts were originally recorded (for example, other comprehensive income) in prior years.
The objective of the research project is to determine if we should make changes to this prohibition—or if there are alternatives to backwards tracing.
The staff will consider the costs and benefits of backwards tracing from both a preparer perspective and a financial statement user perspective.
There are several other projects on our research agenda of varying scope and priority. Not all will make it to the technical agenda. Those that do will take an additional three to five years to finalize.
In other words, we’re not adding to your already-full implementation plate. At least not in the immediate future.
And speaking of the future—the long-term future—I’d like to talk a little bit about technology.
Last September, Accounting Today published its survey of the top 100 most influential people in accounting. As part of that survey, accounting leaders were asked what issues keep them up at night. Number one on that list was the impact of technology.
It’s on our minds, too. Without a doubt, technology is changing how financial information is collected, distributed, and consumed—and that has implications for how we set standards today.
New technologies are already affecting what information is useful, who consumes financial information, and how that information is consumed. They also could affect future financial reporting requirements, including disclosure and standards for structuring data (or electronically tagging business and financial reports).
Our primary mission is to develop accounting standards that provide useful information to financial statement users. That mission includes ensuring those standards can evolve to meet the changing needs of investors. Understanding and adapting to future technological advances will be critical to our ability to do that.
Therefore, we need to ask what these changes in the business environment mean to investors, companies, and auditors in the future—and what the potential impacts of those changes will be on accounting standards and disclosures.
To answer those questions, we’ve embarked on a study to help us understand what we should do to adapt our standards to that new reality.
We view this as an important opportunity for us to learn from all our stakeholder groups. Over the last year, we held preliminary discussions with diverse types of investors, companies, auditors, educators, and others about the potential implications of technology on financial reporting. We’ll continue to gather information about financial reporting and the systems and processes that support those activities.
This input will help us better understand the current technologies that companies and investors are using, and how they may evolve over the next five years. Our goal is to raise awareness about the potential impacts to our accounting standards and disclosures and to develop a plan that is responsive to changes that may be needed in the future.
We’re going to be looking to you to provide input in this area, so stay tuned.
I’ll close with a quote from George Burns, who said “I look to the future, because that’s where I’m going to spend the rest of my life.” The same holds true for the FASB—it’s never too early for us to make future standards work.
We make them work in the short term by developing new educational resources to ensure successful implementation of standards in 2019 and beyond.
We make them work in the midterm by conducting extensive stakeholder outreach and research on technical agenda and research projects so they result in useful information for investors and other financial statement users.
And we make them work in the long-term future by ensuring they can adapt to a new technological landscape.
But most of all, we make them work—today and tomorrow—by working with you. When you share your views, you help us make standards more effective and more operable. That’s one thing that will stay the same in the future.
I want to thank you for continuing to help us make standards work.
And now, I’m happy to take your questions.