Accounting Standards

IASB and FASB can’t get on same page

The international and US accounting standards bodies are both adjusting their mark-to-market rules in favour of politicians and bankers. FASB did it last month. IASB is working on it as quickly as they can. And yet, the two cannot agree on just how far they should bend over backward for the special interests.

After pressure from European Union finance ministers, the International Accounting Standards Board (IASB) has agreed to revise its fair value rule faster so it starts taking effect by year end.


“We desire to get to a common good answer with the IASB and we will make best efforts to do so, but some of the directions we are currently headed in are not to the liking of our board,” FASB chairman Bob Herz [said].

I think this boils down to the IASB wanting to delay reform of the impairment rules around financial instruments, and FASB believes any reform should include impairment changes right away. The IASB’s plans are to alter the rules around measurement and classification first before tackling the biggest issue with the standard.

I don’t think the rules need changing but if you’re going to do it anyway, you should include impairment. That being said, maybe the sluggish bureaucracy will allow cooler heads to prevail, at least for IFRS, while there’s still time.

Accounting Standards

Return to blogging

Greetings RSS subscribers who never got around to deleting me from their feed readers! It has been exactly one year since I announced my hiatus from blogging. I’m back!

A year ago I had broken free of the shackles of public accounting and taken on a new challenge in internal audit at a global building materials company. My adventures over the past year will provide the material for many blog posts in the future.

As well, the world was a much different place a year ago. Credit had already begun drying up, but things hadn’t quite gone completely sideways yet. Risky, greed-driven lending, opaque, incomprehensible derivatives, and the absence of my unique take on accounting have led to housing, credit and banking crises, plunging the entire world into recession.

The FASB is expertly highlighting its growing irrelevance by agreeing to change mark-to-market to mark-to-sorta-market-but-not-really-because-banks-don’t-like-having-to-write-down-their-worthless-derivatives-to-fair-value. Because letting powerful bankers and the supine politicians beholden to them determine accounting standards is a great idea.

In short, I’m returning to blogging during an interesting time.

Accounting Standards

Pension brouhaha south of the border

FASB is coming out with some tough new standards relating to defined benefit pensions that is expected to result in significant new liabilities (or increases to existing ones) for companies that had been accounting for their pensions under the more lax requirements of the old standard.

Defined benefit pension plans are definitely the more complicated type, compared to defined contribution. I’ve only worked on one pension audit thus far, and it was – luckily for me – a defined contribution. Auditing a defined contribution plan is easier to do because future estimates aren’t necessary. Defined benefit plans require an actuary to perform the highly specialized work.

Anyway, back to the change in the standard. Under the old standard:

Employers reported an asset or liability that almost always differed from the plan’s funded status because previous accounting standards allowed employers to delay recognition of certain changes in plan assets and obligations that affected the costs of providing such benefits.

Pension accounting is one of those things you learn in a 2nd or 3rd year course at university and then pray you don’t have to see frequently in practice, unless you’re a masochist. It’s just so very complicated! I feel lucky that so far the only pension audit I’ve been on has been defined contribution.

Specifically, the new standard requires an employer to:

(a) Recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status

(b) Measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions)

(c) Recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income of a business entity and in changes in net assets of a not-for-profit organization.

Sounds like they’ve improved things from both the investor viewpoint as well as the employee’s. This new standard brings up the issue of comprehensive income, which is a below-the-line adjustment to net income on the income statement. I believe the Canadian standards body has guidance out relating to it but it may or may not be in effect for year ends just yet.


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 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.


FASB and AICPA seek small, private company input

The Financial Accounting Standards Board and the American Institute of CPAs have announced a joint project whose aim is to seek “constituent feedback on proposed enhancements to the FASB’s standard-setting procedures that would determine whether the Board should consider differences in accounting standards for private companies.”

This is the classic conundrum commonly known to those in the biz as “big GAAP little GAAP.” (Link via Jack Ciesielski’s AAO Weblog.)

What this refers to is GAAP for “big”, public companies and “little”, private companies. It’s about striking a balance between the cost of complying with accounting standards for small companies with its relative benefit to financial statement users.

In Canada, the profession has responded to the issue with something called “differential reporting”, which is a set of options that non-publicly accountable entities can choose to make their financial reporting cheaper, without sacrificing quality.

The most common options that I see in my work have to do with accounting for subsidiaries and other significantly-influenced investments, and income taxes. Ordinarily controlled entities are required to be consolidated in the financial statements with the parent company, but under differential reporting you can use easier methods such as the equity or cost method. They don’t provide the same level of disclosure or quality of information, but in smaller companies this isn’t the end of the world.

For income taxes, the taxes payable method is an option that can be used instead of the future income taxes method, allowing a company to forgo measuring their future income taxes, which are taxes that are likely to be assessed in future periods and arise from timing differences between financial accounting and tax laws.

In order to use differential reporting options, all the shareholders must agree to use it. As you can imagine, it is easiest and used most often in companies with owner-managers or only a handful of shareholders. It is useful because these types of shareholders are privy to information in the companies that ordinary shareholders in public companies simply aren’t, by virtue of their increased involvement in the daily operations.