FASB’s new man talks advanced accounting topics

The accounting standards setting group in the United States is known as the Financial Accounting Standards Board (FASB) and consists of seven board members who are appointed to five year terms. The most recent appointment was Thomas J. Linsmeier, and CFO.com has a pretty good interview with him on some of the issues currently facing the Board.

The issues he discusses are: the conceptual framework underlying the principles of accounting, fair value accounting, and the complex topics of pension and lease accounting.

When you talk about historical cost and fair value, those two numbers are identical at an exchange transaction date. Then the issue becomes whether or not you want to re-measure the transaction price at a fair value in the future in the [accounting] model, or take the old transaction price and allocate it over time to the income statement. The real open question when you make that trade-off is, how might investors best be served?

I previously blogged about fair value accounting, when I talked about an article that was unrealistic in its stated desire for the net assets of the balance sheet to represent the stock market value of the company. It’s important to note that fair value is cost on the date of the transaction, and it’s only later on through use that the asset’s value is different from its cost less depreciation.

Our accounting model — and the standards in it — have been developed component by component. A weakness in the model is that we have not seriously considered the implications the separate accounting decisions have on aggregating financial reporting across line items. So a mixed-attribute model obviously causes challenges in that aggregation.

This is a weakness of all accounting models, whether its Canadian GAAP, US GAAP or International Financial Reporting Standards (IFRS). I don’t really see any alternative, giving the evolving nature of business transactions.

We could conceivably take everything we’ve done to this point and construct a simpler, unified set of principles, but it would inevitably end up convoluted again as we would add more components to account for financial constructs the likes of which we can’t imagine at this point.

I don’t think it’s hopeless or not worth trying to achieve, but I’m skeptical it will stand the test of time.

Anyway, check out the interview if you’re interested in the accounting profession in the US. Interesting that no mention is made of convergence with international standards, however.