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.

Accounting Standards

Lease accounting to get overhaul

Apparently FASB is going to overhaul the US GAAP for leases. I’m not sure what exactly is going to be changed, or why it needs changing, but it’ll be interesting to see. Of course, Canadian standards are moving towards harmonization with International Financial Reporting Standards (IFRS), so we might not see Canada following the US revision like we usually have seen occur in the past.

I’ve been discussing the current method of accounting for leases with Greg, whose site I stumbled upon today searching Technorati for accounting-related content. He was blogging about an article in Business Week, and what follows is a quote from that article that may give us some insight into the possible changes:

One new model that FASB will explore, says Herz, would treat a lease as a “right to use” the property, which would be given a value and included among the liabilities and assets of the company that is leasing it. Companies argue that information about these leases is not secret, but is readily available in the footnotes of their annual reports. However, Bear Stearns analyst Chris Senyek has found that such disclosure is far from consistent, with some companies leaving out vital information such as the length of the lease. And the databases that many investors consult to sort through a company’s performance generally don’t include the data from footnotes.

Not sure what the “right to use” means as far as the difference between current rules about leases goes, given that we already have a good method for valuing a lease (the present value of minimum lease payments) asset and corresponding liability. Basically the FASB believes the rules need to be clarified because the criteria have been abused to show more leases as operating versus capital. But that’s just the difference between US rules-based accounting and Canadian and international principles-based accounting.

Plus, the article even notes that the information is already contained in the notes to the financial statements. My firm has a footnote on every page of the financial statements we produce that clearly states “The accompanying notes are an integral part of the financial statements.” If investors are ignoring that information, is this really an accounting problem?


Does the media understand public accounting?

The short answer is no. Here is a story from the Associated Press that claims the FASB is going to “tackle the thorny question of accounting for leased equipment and property.” Excuse me? Have we just been ignoring leases until this point? Does any journalist do research any more?

Lease accounting isn’t new, although it is constantly being revised due to the complicated financing arrangements implemented by business. There are very few differences between accounting for leases between the US and Canadian GAAP. As with every other area of accounting, we just follow business – if the arrangement is complicated, then the accounting for that arrangement is likely to be complicated.

Stock options are another area of complication, and one where ordinary journalists (and even those who are primarily business journalists – a contradiction in terms if I’ve ever seen one) often mix up the facts for the hysteria.

When you read something in the mainstream media about public accounting, please take it with a grain of salt because it is inevitably rife with misinformation, either deliberate or otherwise.