From the Chairman's Desk
By Russell G. Golden, FASB Chairman
In the next few weeks, we expect to issue a largely converged standard on revenue recognition, which will take effect for public companies for years beginning after December 15, 2016. This new standard will significantly strengthen U.S. generally accepted accounting principles and deliver important benefits to both investors and the companies in which they invest.
With this new standard, we will eliminate scores of pieces of accounting literature in which revenue was recognized in dozens of often inconsistent waysWith this new standard, we will eliminate scores of pieces of accounting literature in which revenue was recognized in dozens of often inconsistent ways, depending on the industry, and substitute a single standard—so that the same principle generally will apply to all revenue transactions with customers, including transactions not covered in previous literature. That principle is: A company should recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
While revenue recognition guidance will be converged, the FASB and the IASB appear likely to differ to varying degrees on guidance for financial instruments (including impairment and classification and measurement), and insurance.
On the impairment front, the FASB continues to develop its proposed "current expected credit loss" model, which would require companies to reflect at the date the loan is granted and to put on the balance sheet any losses they expect to incur over the lifetime of the financial asset, even if the asset is fully performing.
While the IASB model initially would forecast one year’s worth of loss, it would require lifetime losses once there are signs of significant deteriorating credit quality. Investors seem to strongly prefer the FASB’s lifetime loss approach. The FASB plans to issue a final standard by the end of 2014.
Stakeholder feedback also prompted the FASB to take a different approach from the IASB in its approach to classification and measurement of financial instruments. FASB recently decided to abandon the "cash flow characteristics test"—which would determine in part whether a financial asset should be measured at amortized cost—because stakeholders believe the new model would not reduce complexity—and might actually result in increased cost—without resulting in any improvement.
the FASB’s actions on financial instruments are consistent with its mission to preserve the strength of U.S. GAAP even as it seeks to make improvementsFrom my perspective, the FASB’s actions on financial instruments are consistent with its mission to preserve the strength of U.S. GAAP even as it seeks to make improvements.
For example, the IASB’s proposed standard on recognition of loan losses (part of the financial instruments project) may represent an improvement for financial institutions that currently report under International Financial Reporting Standards (IFRS). However, it could be a step backwards for banks reporting U.S. GAAP, most likely resulting in a significant decline in their loan loss reserves.
While the IASB and the FASB have reached consistent conclusions on important areas of lease accounting, differences remain—most notably in our preferred approaches to expense recognition. At our joint meeting in March, the FASB voted to keep the current model for expense recognition.
The IASB, on the other hand, reverted to the original approach in the joint Exposure Draft that front-loads expenses by the lessee for all lease contracts. Specifically, all leases would, in effect, be treated primarily as financing transactions. Under that approach, a lessee would account for all leases by recognizing the amortization of the right-of-use asset separately from interest on the lease liability.
We favored retaining the current expense approach because it would more appropriately reflect the economics of lease transactions and, based on what we heard from U.S. stakeholders, it is more operational.
The FASB also has voted against continuing with a comprehensive project on insurance contracts. The Board decided it instead will consider targeted changes to existing U.S. GAAP guidance in this area, and will not postpone its deliberations until the IASB issues its final insurance standard.
These decisions were made because stakeholders—particularly investors—said they believed that U.S. GAAP generally serves them well for many types of insurance contracts. They felt that the FASB should focus on improving existing GAAP, and that the proposal contained in the Board’s 2013 Insurance Contracts ED would not result in improvements.
Converging has been difficult because the Boards began at different starting points. U.S. GAAP already has comprehensive guidance for insurance contracts; IFRS does not. So while the FASB has been focused on developing guidance that improves current U.S. GAAP, the IASB has been working to develop an entirely new standard.
The FASB continues to support the goal of more closely converging accounting standardsThe FASB continues to support the goal of more closely converging accounting standards. For convergence to succeed, both Boards must remain committed to reaching that goal.
The FASB’s principal mission is to first improve financial accounting standards and financial reporting for those who invest in companies using U.S. GAAP. When standards proposed for convergence do not represent an improvement to U.S. GAAP, we have no choice but to do what we believe is in the best interests of investors who use it.