FASB Simplifying GAAP…oh, really??

The same FASB that issued the new Revenue Recognition standard in late May 1014 (Accounting Standards Update No. 2014-09) at 700 pages long, or only 150 pages if you just count the actual revenue recognition guidance and don’t include the amendments required to other guidance, or the background information and basis for conclusions?

Yes…and the same FASB that has been working on a new lease standard since 2006 when it was added to the FASB’s technical agenda as one of the joint projects with the International Accounting Standards Board (IASB), and which the FASB “hopes to complete” by the end of 2015, AND is expected to culminate in the need for most leases to be recorded on the balance sheet.

On several previous occasions, I have blogged on the FASB’s efforts to alleviate some of the complexities in financial reporting faced by non-public companies (see most recent post of April 1, 2015). As sure as our practice at ASL is limited to financial reporting for non-public companies, I am equally sure that the FASB has simplification for all companies-public and private, alike – in its sights. Obviously, this is not to mean that areas of significant complexity have withered away never to be heard of again outside the walls of Norwalk but…let’s face it, sometimes complex business transactions require complex accounting answers to provide financial statement users the information they need to make sound financing and investing decisions.

In recent public comments, FASB Chairman Russ Golden has described how FASB is trying to “cut the clutter within our accounting standards”. In fact, in a speech that recognized the FASB’s 40th anniversary, Golden outlined five key goals for the FASB, one of which was reducing complexity. In fact, the FASB has even developed a “complexity policy” where the Board will review standards before issuance to determine if something is included that is more complex than it needs to be. Also at the foundation of this simplification effort is a look-back of existing standards to see if there are any areas where changes could be made to reduce costs of application without changing the relevance to investors. This is, in essence the FASB’s “Simplification Initiative.”

Many view the efforts put forth on behalf of non-public companies as being the catalyst for the focus on GAAP for all companies. How can one consider simplifying certain areas of GAAP for one constituency without challenging whether the same principles should apply to all entities’ financial reporting?

Looking closer, the FASB has launched a “tightly-focused initiative to make narrow scope simplifications and improvements to accounting standards through a series of short-term projects.” Projects completed to date, not formally considered part of the Simplification Initiative but providing simplification nonetheless, are:

  • Discontinued Operations – a refinement of the criteria for reporting a discontinued operation (i.e., what is considered a “discontinued operation”) such that fewer business strategies are expected to be reported as discontinued operations.
  • Development Stage Entities – removes all incremental reporting requirements for development stage entities (e.g., cumulative to-date financial statements).

One project under the “Simplification Initiative” completed in January 15, 2015 eliminates the concept of “extraordinary items” in financial reporting classification – a principle that proved difficult to apply, at best.

Of perhaps greater interest, due to wider applicability, are other simplification initiatives currently in process:

  • Simplifying the measure of inventory by requiring a measure of only net realizable value when cost is not the applicable measurement attribute.
  • Presentation of debt issuance costs as a reduction of the debt liability (rather than as an amortizing asset).
  • Measurement date of defined benefit pension plan assets by aligning the measurement date of plan assets with the date valuation information is provided by third-party service providers.
  • Balance sheet classification of debt by basing classification solely on the contractual terms and compliance with debt covenants, and removing existing fact-pattern specific guidance.
  • Accounting for income taxes to require that all deferred tax assets and liabilities are presented as noncurrent.
  • Stock-based compensation by introducing practical expedients for non-public companies related to expected term, classification of awards with repurchase features, and a one-time election for liability awards to measure at intrinsic value rather than fair value.

Other projects currently under consideration but not part of the Simplification Initiative, where FASB is looking to reduce cost and complexity, are:

  • Clarifying Certain Existing Principles on Statement of Cash Flows (clarification of principles for classifying cash flows)
  • Accounting for Financial Instruments-Hedging (targeted improvements to the hedge accounting model).
  • Liabilities & Equity-Targeted Improvements (relates to financial instruments with characteristics of both liabilities and equity)

For more information on the FASB’s simplification efforts and any of these specific projects, the FASB website contains a dedicated page “Simplifying Accounting Standards.”

It’s an interesting phenomenon to me that what started as a response to a rally cry to simplify certain onerous accounting principles for private companies, rapidly morphed into a high-profile strategic agenda of the FASB for broader financial reporting applications captured under the Simplification Initiative. Aggressive goals and none too soon.