New FASB Chair Looks to Strike the Right Balance
On June 30, Russell Golden stepped down as chairman of the Financial Accounting Standards Board (FASB) after seven years. During that time—and particularly within the last several months—the world has changed considerably and businesses have had to adapt to its shifting dynamics. Golden and his colleagues made considerable headway in addressing numerous accounting and reporting issues, many of which emerged as far back as the 2008 financial crisis, and adapting the accounting world to today’s more interconnected, technologically savvy, and highly regulated business environment.
As Richard Jones, the new FASB chairman, steps up to the plate, he must contend with a much different business landscape than Golden inherited in 2013. Yet, like Golden, Jones will have to guide the organization through a post-crisis market that is still reeling from the impact of unprecedented economic decline. The fallout of the coronavirus pandemic will undoubtedly be at the forefront of Jones’ agenda for the foreseeable future, despite his comments that the board’s actions to date have addressed the issues at hand. New developments are inevitable, and businesses can expect to see the Board address questions related to troubled debt restructuring, adoption of the current expected credit losses standard and banking regulation, and other COVID-related accounting issues as the pandemic continues.
Jones will have to guide the organization through a post-crisis market that is still reeling from the impact of unprecedented economic decline.
Serving all stakeholders
Jones’ tenure is beginning at a time when the difference between the needs of businesses and those of investors is the focal point of the accounting conversation. Indeed, the case could be made that Jones is taking on his new role at a time when investors are more outspoken and influential on the FASB agenda than ever before. This may present a challenge for Jones, who has spent the entirety of his career at Ernst & Young LLP. While Jones has served both on the AICPA Accounting Standards Executive Committee and the FASB’s Financial Accounting Standards Advisory Council, he has not served the FASB from the inside. This is in direct contrast to his predecessor, who spent several years as the technical advisor, technical director and EITF chair to the FASB prior to assuming his current appointment. Golden was well versed in the evolving stakeholder landscape.
The dichotomy of interests between companies and investors is nothing new. Whereas investors are anchored in highlighting and strengthening the accounting and disclosure for metrics that they find meaningful—items such as an integrated cash flow and income statement and clear tax disclosures—companies are looking to reduce the burden on accounting for complex items that they believe provide limited value to stakeholders, such as goodwill impairment.
To that end, it appears as though the FASB’s current agenda will include review of simplification projects, such as those related to convertible debt and convertible preferred stock instruments, updates to goodwill and intangible assets for public companies, and disclosure simplification for share-based compensation, income taxes and inventory. These projects are all aimed at streamlining standards and disclosures to reduce complexity and cost for preparers while increasing transparency and alignment with economic substance for investors and capital markets. It is a balance that Golden strove for during his tenure that will see continued focus during the first part of Jones’ term.
Additionally, private companies can likely expect forthcoming guidance on implementations that have been delayed and potential practical expedients or specific private company updates. There will also likely be more incremental alignment between IFRS and US General Accepted Accounting Principles (GAAP), as the FASB continues to leverage informal channels, such as the Accounting Standards Advisory Forum and relationship building with international rule-making boards rather than formal convergence projects.
The Golden era
Regardless of the agenda Jones sets, he will be hard pressed to match the change and, at times, controversy of his predecessor. Throughout his tenure, Golden introduced sweeping reforms to many key accounting regulations with a focus on simplification and transparency for investors. While many of these changes reduced the reporting burden for companies and streamlined key functions and processes, not all of the one hundred plus accounting standard updates introduced since 2013 have been met with open arms. For example, two of the most comprehensive accounting changes that occurred under Golden, lease accounting and revenue recognition, have had challenging and labor-intensive rollouts for many public and private companies alike. This sets the stage for Jones’ tenure at a time when many management teams are experiencing implementation fatigue.
Lease accounting, which was first introduced in 2016, has been a particularly complicated standard to implement. Aimed at bringing greater transparency to the balance sheet, the new standard marks a stark difference to the way operating and certain other leases were previously recognized. Unfortunately, some have concluded that the transparency achieved does not counteract the labor-intensive accounting in areas like short- and long-term classification for individually immaterial high-volume leases for example. Further, adopters have had challenges with their lease accounting software due to delays in development and underestimating the massive volume of effort required. As a result of the challenges surrounding the implementation of this standard, its effective date for private companies has been pushed back numerous times to give these adopters more time to leverage lessons learned by public company adopters. Jones must be ready to mitigate the challenges of private company adopters as they continue the implementation process. This is made especially poignant with the constrained resources resulting from the pandemic. Jones may consider modifications to the standard to address the ongoing burdens continuing after adoption.
The other major accounting standard that has defined Golden’s chairmanship is revenue recognition. Intended to streamline revenue guidance and bring consistency across different industries, the new standard was introduced as a salve to the disparate ways in which private and public companies alike had previously been reporting revenue. While the new guidance was intended to bring more transparency to investors, for many, the result has been longer and more complex disclosures that have led to investor confusion in some industries. While restatement has been rare thus far, the majority of first round comment letters on revenue recognition have ultimately resulted in some level of modification to filers’ disclosures. As standards are introduced to stakeholders in the future, the new standards are unlikely to be as comprehensive – relief by comparison. However, this standard has investors acutely aware of the alignment or mis-alignment of anticipated and actual impact. Jones’ adoption process must identify pitfalls and address them comprehensively before the standards are issued. Guidance to and communication with stakeholders will be critical for Jones’ success.
While lease accounting and revenue recognition have certainly encountered pushback from stakeholders, Golden’s agenda has also included the advent of many other policies that are lauded for their simplification without adding onerous new requirements. For example, the FASB’s new standard on derivatives and hedging, introduced in 2016, removed the concept of hedge ineffectiveness and allowed for an expansion of risks eligible to be hedged. Goodwill impairment changes, which were rolled out in multiple standard updates, have simplified processes for public, private, and nonprofit adopters and led to cost savings in calculation and valuation. Stakeholders will expect continuing simplification from Jones. There is lessening appetite for changes that involve increased complexity and volume of disclosure. Jones must focus on finding areas that ease disclosure burdens before he embarks on far reaching efforts. Phased another way, build credibility with weary stakeholders first by streamlining “form”, then tackle more overarching “substance” areas.
Additionally, the FASB has emphasized the importance of adopting uniform standards that align with global accounting bodies. Its partial alignment with the International Financial Reporting Standards (IFRS) has helped foster uniform practices in key accounting functions such as business combinations, noncontrolling interests, fair value measurements, borrowing costs, segment reporting, stock compensation, nonmonetary exchanges, and revenue recognition. While full convergence is unlikely to be realized, continued steps of progress would be added benefit for companies with multiple statutory reporting responsibilities. Jones would be wise to mirror his predecessor’s approach in this area.
Many of the standards include different provisions and implementation dates for private and public companies, a hallmark of Golden’s tenure and an example of his pledge to create a more “customer-centric culture” that celebrates stakeholder differences. Likely influencing this pledge was the FASB’s creation of the Private Company Council (PCC) the year before Golden became chairman. Since private companies often contend with different business issues than their public company counterparts, the PCC was created to advise the Board and highlight the need for differentiated guidance. This has been met with praise from private companies. Advisable here for Jones to follow the path cut by his precedessor’s trailblazing.
The road ahead
No organization or its leadership operates within a vacuum, as this year has taught us. While Richard Jones will assume his new role within today’s challenging context, the accounting standards and updates that businesses can expect to see in the coming years will be largely influenced by yet unknowable forces and the way that the business world responds to them.