Capital Markets

The Path to Global Standards?

The new FASB chairman spells out an ambitious agenda that could produce a clear road to the adoption of international financial reporting standards...
David KatzJanuary 28, 2011

In perhaps her first public appearance since becoming chairman of the Financial Accounting Standards Board, last week Leslie Seidman laid out her “three highest priorities” through June 30. Remember that date. Not long after that, the Securities and Exchange Commission could reveal whether it intends to require all U.S. public companies to incorporate international financial reporting standards into the current U.S. financial reporting system.

Speaking on a FASB Webcast, Seidman, who became the top U.S. accounting standard-setter on December 23, said the board’s main tasks for the first two quarters of 2011 are to achieve, along with the International Accounting Standards Board, melded standards in three areas: financial instruments, revenue recognition, and leasing.

Seidman said the target date for achieving convergence on those three matters would be June 30. “To me, the June 2011 target date signals our strong commitment to work as hard as we can to develop final standards on these projects as efficiently as we possibly can,” she said.

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But since the projects “represent key issues for many companies and nonprofit organizations, I want to underscore that we want these standards to provide useful information and to be understandable and implementable at a reasonable cost,” she added. “Let me assure you, if it takes a little longer to reach that comfort level, we will take that time.”

On Thursday, speaking at a Standard & Poor’s conference on hot topics in accounting, IASB member Patricia McConnell expressed relief that FASB wasn’t regarding the June deadline as absolutely fixed. “Yes, we do have a target date of June 30. But if we’re not done, we’re not done,” she said, adding that none of the standards would be effective before 2013.


James Kroeker, the SEC’s chief accountant, said via a phone hookup to the S&P conference that the commission could decide “sometime in 2011” if and how it will require U.S.-registered companies to incorporate IFRS into U.S. financial reporting. “Particularly important to that” timing are “the projects that FASB and the IASB are working on,” he added.

Driven by the recent global financial meltdown, the standard-setters have put the convergence of their rules on financial instruments at the top of the list, and hope to produce a final standard by the second quarter of 2011. “I think the recent financial crisis highlighted the key problems we have with the current accounting for financial instruments,” Seidman said during the Webcast.

On Monday, the day before Seidman spoke, FASB reversed course on perhaps the most controversial provision, financial-instrument reporting standards. The board unanimously decided that the value of collectible loan portfolios could be measured on the basis of their amortized cost. Previously, in a position that for years has been vociferously opposed by banks, the board favored measuring the worth of loans held by banks at fair value.

For nonfinancial-services companies that don’t tend to lend much money or issue securities, the regulation of financial instruments is a lesser concern. Still, it’s a “sleeper issue” for many corporations outside the banking, broking, and insurance businesses, Neri Bukspan, S&P’s chief quality officer and chief accountant, tells CFO. Depending on the outcome of the standard setting, the accounting for such items as derivatives, financing arrangements, loans granted to customers, and vendor financing could all be affected, he says.

Of greater significance to most senior finance executives are the revenue-recognition and leasing projects. Of the former, Seidman said the goals are twofold: to create a standard that
“recognize[s] revenue the same around the world, but also to improve standards that are widely viewed as deficient.”

One priority of the revenue-recognition project is to arrive at a standard for recognizing revenue on a contract a vendor has with a customer, according to Seidman, who noted that FASB has received almost 1,000 comment letters on its current revenue-recognition proposal and held six roundtables on the subject around the world to solicit input from constituents. “There was general acceptance of the goal of having a single standard that applies to revenue recognition for all companies around the world,” she said.

On the other hand, many constituents expressed concern about how the standard-setters “articulated the underlying principle for when revenue would be recognized,” according to the FASB chairman. They worried that revenue could not be recognized as a contract is satisfied over time — as, for instance, occurs in the construction industry.

Last week FASB had “a productive meeting” with the IASB “to try to develop revised language to address those concerns,” said Seidman. “We have a strong commitment to end up with a clear and durable standard on revenue, because to many this is the most important line item in the financial statements.”

Developing a converged leasing standard represents different challenges, according to Seidman. Although the current standards are similar, they each omit “significant assets and liabilities from the balance sheet,” she said. Lessees have also expressed strong concerns about the “right-to-use” asset concept in FASB’s current proposal. The accounting mechanism, which places leased assets and liabilities on the balance sheets of lessees as if they owned the assets, would essentially eliminate operating leases.

In response to its leasing proposal, FASB has received more than 750 comment letters and held seven roundtables in a variety of nations. Many objected to the complexity of the standard, especially regarding such things as lease renewals, according to Seidman. Still, most respondents agreed “that lease obligations and the related rights do belong on the balance sheet of lessees,” she said.