December 15, 2020
The Financial Accounting Standards Advisory Council (FASAC) held its quarterly meeting on Tuesday, December 15, 2020. The following topics were discussed:
Complexity and Differences in the Perceived Precision Involved in Financial Reporting: FASAC members discussed complexity in financial reporting including different expectations between the level of precision required in applying GAAP (for preparers and practitioners) and the level of precision produced in the financial statements (for investors and other financial statement users). Overall, Council members provided varying views on complexity stating that complexity can be perceived differently depending on the stakeholder.
Council members commented that complexity often occurs when there is a lack of understanding in how to apply or interpret accounting guidance. Some preparers indicated that complexity can result when an accounting standard requires a significant amount of financial information that differs from the information used internally by management. Preparers and practitioners noted that complexity increases in accounting areas that involve a significant amount of judgment or require the collection of new data or changes in technology to comply with the accounting guidance. Investors and other financial statement users indicated that a high volume of financial information can create additional complexity because it can create difficulties in distinguishing between useful information and boilerplate disclosures. Some investors and other financial statement users also noted a higher level of interest in understanding key assumptions (and related changes) and inputs used by management in developing an estimate, rather than the estimate itself.
Council members discussed current areas of GAAP that in their view include unnecessary complexity, result in a high amount of cost and complexity for preparers and practitioners, and may not result in decision-useful information for investors. Some users highlighted the importance of the precision on the cash flows of a company in comparison to other types of accounting areas perceived to be complex by preparers, such as pensions. Council members noted the importance of communication between stakeholders around what financial information is being prepared by management and the nature and extent of the financial information needed by financial statement users.
Council members provided their views about changes in complexity in financial reporting over time. Council members commented about:
- The difference between change and complexity. Some Council members acknowledged the perceived complexity associated with a high level of change in recent major accounting standards (such as revenue recognition, leases, and credit losses). Those members observed that while cost and complexity may be higher during initial implementation, change does not necessarily equate to complexity.
- The FASB’s recent efforts. Some Council members acknowledged the Board’s recent efforts to reduce complexity, including providing practical expedients in certain areas of accounting, such as leasing.
- The level of complexity in the current environment. Some Council members commented that complexity has significantly increased over time along with economic changes, new business models, and regulations; however, that complexity is not necessarily related to financial reporting. Council members indicated that the complexity of a transaction likely drives the complexity of the accounting guidance on how to account for that transaction.
Accounting Standards and Financial Statements in the Current Environment: FASAC members commented on the following topics.
Disclosures about COVID-19-Related Assistance: A Council member discussed disclosures about pandemic related assistance and benefits received from governments and others. There was an active discussion on this topic with examples being given of companies and industries and an interest in understanding practice in this area.
Non-GAAP Information Related to COVID-19: Some Council members observed that many companies are including non-GAAP-related information within the MD&A. Some also commented about the difficulty in determining which charges or benefits are specifically related to COVID-19 and which are related to a single event or ongoing (for example, sanitation or social distancing expenses). Investors and other financial statement users noted they commonly view one-time COVID-19 non-GAAP adjustments differently than ongoing non-GAAP adjustments (for example, amortization relating to intangible assets). Other Council members encouraged the Board to consider whether companies should be required to disclose frequently occurring non-GAAP adjustments as part of their financial statement disclosures.
Current Expected Credit Loss (CECL) Disclosures: Some investors and other financial statement users indicated that disclosure around key assumptions and inputs used in determining a credit loss reserve has been improving since implementation of the credit losses guidance. The increase in detailed disclosures has been helpful for users when performing their own assessment of a company based on their individual needs.
Environmental, Social, and Corporate Governance: Some Council members also raised questions about financial information, comparability, and standards relating to sustainability, given the IFRS Foundation’s recently issued consultation paper on sustainability reporting.
Non-GAAP Information Related to COVID-19: Some Council members observed that many companies are including non-GAAP-related information within the MD&A. Some also commented about the difficulty in determining which charges or benefits are specifically related to COVID-19 and which are related to a single event or ongoing (for example, sanitation or social distancing expenses). Investors and other financial statement users noted they commonly view one-time COVID-19 non-GAAP adjustments differently than ongoing non-GAAP adjustments (for example, amortization relating to intangible assets). Other Council members encouraged the Board to consider whether companies should be required to disclose frequently occurring non-GAAP adjustments as part of their financial statement disclosures.
Current Expected Credit Loss (CECL) Disclosures: Some investors and other financial statement users indicated that disclosure around key assumptions and inputs used in determining a credit loss reserve has been improving since implementation of the credit losses guidance. The increase in detailed disclosures has been helpful for users when performing their own assessment of a company based on their individual needs.
Environmental, Social, and Corporate Governance: Some Council members also raised questions about financial information, comparability, and standards relating to sustainability, given the IFRS Foundation’s recently issued consultation paper on sustainability reporting.
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.
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.