For the Investor—How and Why the Investor View Is Obtained
While the FASB has frequent communications with preparers and auditors, it may be less obvious how the Board goes about obtaining the views of investors and other financial statement users.
investors are critical to the standard setting process—as they are the consumers of the financial information that is based upon U.S. GAAPWhether valuing a company’s equity or determining whether a loan will be repaid, investors are critical to the standard setting process—as they are the consumers of the financial information that is based upon U.S. GAAP.
Despite the importance of investor views, there are many obstacles in reaching investors and figuring out how to secure decision-useful information in a cost-beneficial way:
- Analyzing companies and making capital allocation decisions is all-encompassing, leaving little time to consider seemingly banal details about accounting,
- Accounting proposals are often dense and technical, making it hard for non-experts to understand the implications of a new reporting rule, and
- Some analysts may resist providing opinions that may be at odds with the accounting policy personnel at their own institution, and because of the competitive nature of investing—some investors may be reticent to give feedback in front of other investors.
Similarly, other groups who participate in our standard setting process (such as the Emerging Issues Task Force and the Private Company Council) have investor representatives. An Investor Advisory Committee meets with the full FASB in public several times a year to give advice, and also writes comment letters.
the goal is to understand why a particular investor thinks the way he/she thinks and how they use information in their analysisFurthermore, two Senior Investor Liaisons (Chandy Smith and Jeff Brickman) serve full time in the quest to work with project teams to obtain investor opinions on accounting issues. As with outreach with any other FASB stakeholder, the object is to do more than quantify how many investors prefer one alternative versus another; the goal is to understand why a particular investor thinks the way he/she thinks and how they use information in their analysis.
To accomplish this, the Investor Liasions help the organization understand the different kinds of investors and how their perspective might impact how they use financial information. With this understanding, the Investor Liasions set up calls with individual or small groups of investors. Presentations are created to translate the accounting proposals into language and graphics more accessible to investors. Often FASB Board Members will participate in the outreach sessions in order to hear investors’ views first-hand as well as to ask pertinent questions.
An example of how this works can be found in the soon-to-be-published Revenue Recognition standard. Feedback from the last Exposure Draft regarding disclosures was mixed. Almost all preparers indicated that the proposed disclosures would be voluminous, hard to operationalize, and costly.
On the other hand, many investors commented that the proposal contained very useful, relevant information about one of the most important line items in an income statement. In order to reconcile these perspectives, the staff set up a series of workshop meetings with both investors and preparers together.
In this way, the project teams were able to query the preparers about the specific facets of the disclosures that were most costly. The investors were similarly asked which pieces of data were the most useful, and more importantly, why.
This allowed the staff to create alternatives which attempted to prioritize investor objectives in a cost-beneficial manner.
The FASB seeks to hear from ALL types of investors, including present or potential lenders, present or potential donors, and employees and others who provide resources in other waysIn order to improve U.S. GAAP, we need to hear directly from investors about the kind of information they need. That being said, we realize different investors may have different needs. The FASB seeks to hear from ALL types of investors, including present or potential lenders, present or potential donors, and employees and others who provide resources in other ways.
Your input will help the FASB set standards that lead to stronger capital markets and help investors make informed decisions.
For more on the many aspects of investor outreach, please visit our Investors Web Page and watch our video series discussing the Board’s Outreach with members of the investment community.