Remarks of FASB Chairman Russell G. Golden
AICPA Conference on Current SEC and PCAOB Developments
Tuesday, December 10, 2019
AICPA Conference on Current SEC and PCAOB Developments
Tuesday, December 10, 2019
This is the 12th time I’ve spoken at this conference. It is also the last time I will address you as chairman of the FASB. As some of you may know, my term ends on June 30, 2020.
Normally, an outgoing chair might use this opportunity to list the Board’s accomplishments during his or her tenure—or to celebrate successful initiatives.
But I will spare you a discussion about “Standards That Work,” simplification of accounting standards, enhanced international partnerships, or improvements to private company financial reporting.
Nor will I bore you with how revenue recognition, leases, CECL, hedging, fair value measurements—and yes, even share-based payments—have improved our capital markets.
Instead, I want to discuss something a little different. Today, I want to talk about why the FASB gets to do what we do.
I know that some of our projects have made you happy—like hedging—and some have made you grumpy. I’ve been around long enough to know that we’ll never get 100% consensus on anything.
But that’s a good thing. Dissent drives us to make better decisions. It forces us to consider all potential consequences. It challenges us to find more cost-effective ways to provide investors useful information.
I was reminded of this by the movie Ford v Ferrari. If you haven’t seen it, it’s the true story of Ford Motor Company’s quest to develop a car that can beat Ferrari at the 24 Hours of LeMans race. Henry Ford II gives race car legend Carroll Shelby a blank check to do just that. Shelby taps Ken Miles, a brilliant driver, to help him achieve it.
But it isn’t easy. The process involves countless trials—and many errors—on a makeshift course. These unorthodox methods don’t sit well with some Ford executives, who want to dictate their actions. Nevertheless, Shelby and Miles succeed in their mission—and earn the respect of the Ford executives along the way.
I realize that “speed” and “standard setting” are rarely—if ever—used in the same sentence. And that comparing a legendary race car to an accounting standard is a stretch, even for me.
But like great race cars, great standards really aren’t developed in the board room. They’re developed in the field, on the test course, with continuous input from the person in the driver’s seat. In other words, you.
And it requires a process that considers a broad range of views, out of which we forge the best product possible: a cost-effective standard that produces information investors need and use.
This morning, I’ll look at how we earn our ability to set standards through an open, inclusive, and thorough process. Using examples, I’ll illustrate how that process unfolds in current agenda projects I expect to complete before my term ends—and some I don’t expect to complete.
But before I do, let me pause here and remind you 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.
The FASB earns our ability to set standards through four things we consistently do:
- We listen and we respond
- We perform quality research
- We engage in quality communication
- And finally, we welcome accountability—from all capital market stakeholders.
First, we listen and we respond. This is perhaps most important, and the foundation of all quality standard setting.
Every accounting standard we ever developed exists because stakeholders alerted us to an issue we should address.
Every amendment to every standard exists because stakeholders thought we could do something better.
And every Q and A or other implementation resource exists because stakeholders told us we did not make something clear enough.
If that feedback loop breaks, a standard won’t achieve its objective. It will not work in the real world, despite our best intentions.
That’s why we listen and respond at all levels of the standard development process. But it’s not quick or easy. It requires an open mind. It almost always requires extra work. And sometimes, it even requires us to do things differently.
For example: our commitment to listen and respond helped us help our stakeholders apply new standards.
Today, I’m proud to say the FASB devotes about 40% of our resources to implementation support.
When I became chairman in 2013, a tidal wave of change was on the horizon. Within a year, we would issue a major new standard on revenue recognition—followed shortly thereafter by leases, credit losses, and hedging.
We had to bridge that implementation gap. And you let us know it—in your comment letters, in outreach meetings, and at conferences like this one.
We listened. We changed to make implementation part of everyone’s job. And we responded—by taking a more hands-on approach to helping stakeholders apply new standards.
Additionally, our experiences with rev rec, leases, credit losses, and hedging have given us better insights on how to consider implementation throughout the entire standard-setting process—not just at the end.
Quality research is an increasingly important part of our standard-setting process.
In addition to our technical agenda, we have a research agenda of potential standard-setting projects. Stakeholder requests help us decide what to add to that 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 research project to our technical agenda.
We’ve also supplemented our own research with academic research. Led by Dr. Christine Botosan, FASB member and former University of Utah professor, we created an academic web portal that makes it easier for professors to submit research papers. Many didn’t even know we were interested in academic research.
We certainly are.
Our best source of information is interaction with stakeholders—through meetings, roundtables, and events like this. That’s where quality communication comes in.
As you know better than anyone, our projects get into the weeds—and if you can’t understand what we are asking for, you can’t help us make our product better. Therefore, to get quality input, we need skilled communicators who can break down complex technical concepts and ask the right questions.
Fortunately, the FASB staff is made up of people who do that, and well.
That said, we know we can’t meet everyone face-to-face. That’s why we also offer a host of communication resources designed to speak to a wide range of stakeholders. They include our quarterly FASB Outlook newsletters, CPE webcasts, FASB In Focus and other project overview documents, Q and As, and many educational videos.
Now, anyone who’s ever heard me speak before knows I have a tendency to quote the legendary New York Yankees catcher, Yogi Berra. And today, I won’t disappoint.
With less than seven months left in my term, I’m reminded of Yogi’s most famous quote: “It ain’t over ’til it’s over.” I’d like to spend just a few minutes talking about what I hope to accomplish with my fellow Board members in the months ahead.
Our liabilities and equity project is one I hope we’ll complete by the end of my term. During our agenda consultation process, stakeholders described guidance in this area as overly complex, internally inconsistent, and the source of frequent financial restatements.
So we added a project to reduce complexity and provide investors more useful information. To do this, we targeted improvements to guidance on both convertible instruments and the derivatives scope exception for contracts in a company’s own equity.
Last July, we issued a proposed standard that would reduce the number of accounting models for convertible debt instruments and convertible preferred stock. It would also revise the derivatives scope exception guidance and improve and amend the related disclosure and earnings-per-share guidance.
Tomorrow morning, the FASB staff will present a summary of comments we received on our proposal. The outcome of tomorrow’s meeting will help us determine our next steps.
The Board is also focused on LIBOR Reform. With global capital markets expected to move away from the London Interbank Offered Rate, or LIBOR, the FASB, the SEC, and other regulators are preparing U.S. stakeholders for a successful transition.
Last month, the FASB voted to approve temporary, optional guidance to ease the potential accounting burden. We expect to issue the final standard in early 2020.
Among other things, we’ve made it easier to report interest rate changes for contracts that meet certain criteria. For eligible contracts, a change in reference interest rate can be accounted for as a continuation of that contract—eliminating the need to create a new contract. This provision applies to loans, debt, leases, and other arrangements.
Companies will also be permitted to preserve their hedge accounting when reference rate reform takes effect.
The guidance will apply only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued due to the upcoming reform. The guidance will expire on January 1, 2023.
The Board has also made progress on our project to improve accounting for goodwill and identifiable intangible assets. Based on our previous work with private companies and not-for-profit organizations, we decided to revisit this area of financial reporting for all companies and organizations. We sought to understand the usefulness of the information versus the costs to provide it, especially for public companies.
Since issuing our Invitation to Comment last July, we’ve received about 100 comment letters. And last month, 30 of those letter writers traveled all the way to Norwalk, Connecticut, to share their views on the topic at our public roundtables.
Now, these numbers may not seem earth-shattering to you. But this level of interest at such an early stage of the process is striking. In this case, the staff ramped up communication among affected stakeholders. They employed targeted email campaigns, social media announcements, speaking engagements, and other communication vehicles to put this issue front and center.
Based on the diverse views we heard at the roundtables, I expect an interesting public Board discussion about intangible assets and goodwill early next year.
Our projects on performance reporting and segment disclosures are likely to continue beyond the end of my term.
Published academic research and investor input helped us decide to add a project on financial performance reporting. They helped us identify why disaggregating performance information and defining operating income could improve financial reporting.
Our project is focused 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.
The staff has conducted extensive research on various approaches. Based on our work with preparers, we’ve homed in on an approach that would disaggregate—or separate—income statement expense information based on how management internally views consolidated expenses. We continue to work with preparers to understand the operability of the internal view approach.
We also directed the staff to work with users to understand whether the internal view approach would result in better information. This will help us analyze the costs and benefits of establishing guidance in this area.
In a related project, the staff recently concluded its second study on potential improvements to segment disclosure requirements. It focused on the information that is disclosed by each reportable segment. The first study, undertaken in 2018, focused on improving the aggregation criteria and the process for determining the reportable segments.
These studies will help inform the Board about the costs and benefits of the different ideas. A summary of the findings will be presented to the Board tomorrow.
Finally, the Board will continue to monitor implementation activities for all standards.
When we issued the revenue recognition standard in 2014, we knew it would affect virtually all our stakeholders. And, as we learned through our extensive outreach process, it would require some industries to make major changes to how they report their revenue—one of the most important metrics in financial reporting.
We listened, and we responded. We created—with the International Accounting Standards Board—a revenue recognition transition resource group, or TRG.
It worked. Stakeholders submitted more than 100 implementation issues to the TRG. In response, the TRG created 60 educational papers. And the FASB issued five technical improvement documents. Together, our efforts helped ensure a smoother transition to the standard.
We went through a similar process with the credit losses TRG, which produced 18 educational memos. To date, the FASB has issued 4 technical improvement documents to ensure a successful implementation. We also fielded more than 78 technical inquiries, issued two Q and A documents, and are hosting a series of CECL educational workshops around the country.
Let me state here that our implementation support is never “over.” This is especially true of the current expected credit losses standard, or CECL. We’ll closely monitor implementation progress when CECL takes effect for large public SEC filers next month.
Finally, the FASB earns our ability to continue to set standards because we welcome accountability from all capital market stakeholders.
If you’re inspired to see Ford v Ferrari—which has a 93% freshness rating on “Rotten Tomatoes”—you’ll realize it’s not just about the car. It’s also about the process of building the car, of working together, and earning the trust of your colleagues and customers. Despite the obstacles.
It’s a lot like standard setting.
I’ve already addressed how input from preparers, auditors, and academics makes us better. But we’re also accountable to the leaders responsible for the safety and functioning of our capital markets.
Since I’ve been with the FASB, we’ve been fortunate to work with regulators, industry leaders, and others who believe in our mission. They support our Board and our process.
We regularly meet with the Office of the Chief Accountant at the SEC—and with our counterparts at the PCAOB—to ensure we’re working in tandem to promote more accurate and more transparent financial reporting. We also meet regularly with banking regulators and major stakeholder groups to share information and trade points of view on important issues.
Financial reporting improvements are designed to provide useful information to assist in the allocation of capital—an exceedingly important economic benefit. But we recognize these improvements do come at a cost.
We conduct research and analysis that allows each member of the FASB to judge, for him or herself, whether the benefit of change justifies the cost of change. This assessment requires us to clearly identify the need for a change; understand and assess the expected benefits and costs of each reasonable alternative; and evaluate and compare the cost effectiveness of reasonable alternatives.
We take that very seriously. And we stand behind the integrity of that process.
In the end, our number one client is the capital markets. Our number one product is trust. And if we deliver, all of us benefit.
I’ll stop here. But before I do, I want to offer my heartfelt thanks to all the members of the FASB and FASB staff I’ve worked with over the years. These are all dedicated professionals who get up every day to support our mission to improve information for our capital markets.
I’d like to thank the AICPA for inviting me to speak all these years, their support of our mission, and their work towards our shared goal of more transparent capital markets.
I’d like to thank the commissioners and staff of the SEC who have supported our activities and the integrity of an independent standard-setting process. Special appreciation goes to Chief Accountant Sagar Teotia, and his predecessors in that role: Jim Kroeker, Paul Beswick, Wes Bricker…and, of course, Jim Schnurr, who passed away earlier this year.
And, last but not least, I want to thank all of you who support the open, independent standard-setting process that drives our best work—one that allows us to make objective decisions based on the best interests of the capital markets. Your willingness to share your time and your views helps us improve U.S. GAAP.
I encourage you to continue that involvement for the long run. Because, like the 24 Hours of LeMans, standard setting is an endurance event, not a sprint.
Thanks for the great run, everyone!