FASB Codification and Simplification Efforts
The FASB Addresses Standards Overload through New Projects
From FASB newsletter The FASB Report, February 28, 2002
The term "standards overload" is one that has been used off and on over the years by the FASB’s various constituent groups to describe their concerns about not only the volume of accounting rules and the level of complexity and detail of those rules, but also the resulting profusion of footnote disclosures and the difficulty of finding all the accounting rules on a particular subject. Those concerns surfaced once again in the responses to the 2001 Annual Financial Accounting Standards Advisory Council Surveywith respondents suggesting that the Board place a high priority (in the form of resources) on finding ways to codify and simplify the accounting literature. At its January 9 meeting, the Board agreed to commit staff resources to a variety of projects that have a common goal of improving the usability and the effectiveness of the accounting literature. Those projects are described below.
Addressing the Need for Simplification
The Board agreed to evaluate the feasibility of issuing standards that emphasize basic principles and objectives rather than issuing standards that include detailed rules, exceptions and alternatives to the underlying principles. A shift to less-detailed standards would place the focus on accounting for the substance of a transaction rather than its form. Such an approach would encourage those applying an accounting standard to comply not only with the "letter of the law," but, more importantly, with the objective of that law. This approach offers the potential to better leverage the skills of preparers and practitioners. By the same token, objective- or principle-based standards will mean fewer bright lines or safe harbors, and fewer exceptions.
The success of this project and the possible future direction of U.S. accounting standards depend on buy-in to the framework by all parties involvedpreparers, practitioners and regulators. For example, if the Board is to issue standards that focus on underlying principles and objectives, the SEC should be willing to accept some divergence in application. In addition, preparers will need to adhere to the spirit of a standard and the auditing profession will need to enforce that spirit. The Board must be prepared to resist requests for detailed guidance, while its constituents will need to accept the absence of specific guidance for many transactions.
Our initial plans are to draft the framework, which will include guidelines for deciding what types of issues should be addressed in FASB standards and which should not. We also plan to draft illustrations of how several existing standards might look if that framework had been applied while the standard was being developed. Once the Board has agreed in principle with the draft framework, a discussion paper explaining the framework and including the illustrative standards will be distributed to and discussed with various constituent groups. We hope to be able to begin those discussions this summer, if not earlier. Once agreed to by all parties, the framework would be applied to current and future Board agenda projects. Application of that framework hopefully will decrease the amount of time it takes to issue a standard and result in standards that are easier to understand and, therefore, apply.
If future FASB standards are less detailed, the potential exists for similar transactions to be accounted for differently from entity to entity. If that different accounting produces diverse results that diminish comparability (and the relevance and reliability of financial reporting), there will be a need for an authoritative body to provide implementation and interpretive guidance on those standards.
Thus, concurrent with developing a framework for more general standards, we will be evaluatingin collaboration with others-how the current standard-setting structure might be modified to adapt to issuance of standards following that framework. One objective of that effort will be to make the U.S. process of issuing authoritative literature more efficient. A second objective will be to clarify the scope of each rule-making body’s activities.
Our initial plans are to work with a small group of representatives from the EITF, AICPA and SEC to develop a model for deciding when additional authoritative literature is necessary on a given topic and then determine the most effective segregation of duties among those bodies with respect to issuing pronouncements and providing supplemental guidance. Once that group has agreed in principle to that model, we will seek input from various constituent groups.
Another project aimed at simplifying FASB standards will focus on improving the quality of the cost-benefit analysis performed on proposed standards by more actively engaging our constituents in that analysis. By achieving a common understanding of the costs of applying a new standard and working together to find ways to reduce those costs without decreasing the benefits to financial reporting, the potential exists to produce standards that are easier to understand and apply.
One of the FASB’s governing precepts is that it promulgates standards only when the expected benefits exceed the perceived costs. Thus, the Board currently weighs the cost-benefit relationship of each standard prior to issuance, and a cost-benefit section is included in the basis for conclusions of each proposed and final standard. However, a discussion of the overall costs and benefits of a standard is not a formal step in the Board’s process of developing a standard and, thus, does not receive as much attention as it might otherwise. Actively engaging our constituents in a discussion of the costs and benefits of a proposed standard will not only raise the visibility of this issue, but also get our constituents thinking about these issues sooner in the process.
We are in the process of developing additional due process steps related to the cost-benefit analysis for discussion with the Board and staff. We expect the new procedures to be in place in the next few months and to be applied to all current and future Board projects.
Codification and Retrievability
In response to the concerns about the ever-increasing volume of authoritative literature and the various places one has to look to find guidance on a particular topic, the Board agreed to pursue a number of projects aimed at improving the retrievability and usability of the accounting literature. The staff is in the process of developing due process procedures to be followed in current and future FASB agenda projects to ensure that future standards do not add to the intricacies of the literature and that those standards decrease rather than increase the volume of existing literature. Very simply, the goal is for the Board to identify, and to the extent possible, resolve all potential conflicts with other accounting literature (EITF, Accounting Standards Executive Committee, or "AcSEC," and SEC) prior to issuing a standard and either incorporate or reference in the new standard any existing related authoritative literature.
We have attempted to incorporate existing Accounting Research Bulletin, Accounting Principles Board (APB) and FASB literature in recent standards (e.g., Statements 141 and 144); however, we need to broaden our efforts to encompass all authoritative literature. Formally adopting this "all-inclusive" approach to setting standards will slowly but surely reduce the number of places one has to look to find guidance on a particular topic and at the same time slowly reduce the volume of the literature. While an all-inclusive approach to setting standards will increase the resources required to complete an agenda project, it should save time in the long run. Since the Board inevitably will have to address inconsistencies that arise between a new standard and existing literature (including AcSEC and SEC literature)the earlier in the process those inconsistencies are identified and addressed, the better.
Consistent with the decision to incorporate all related authoritative literature in future standards, the Board has agreed to include references to related AICPA and SEC literature in future editions of the FASB’s Current Text. Those references will be provided in the same manner EITF issues are currently referenced in the Current Text. This will provide users of the Current Text (either the print or electronic version) with the necessary information on a certain topic to ensure a thorough review of the pertinent authoritative literature. We plan to have this project complete in time for those references to be included in the Current Text in the near future.
The next step of this project is to partner with others in developing a comprehensive searchable database that includes not only FASB and EITF literature, but also AICPA and SEC literature.
Consistent with the objective of making the accounting literature easier to retrieve, the Board has agreed to consider (on an ad hoc basis) issuing documents codifying specific accounting topics. Currently, we plan to combine all of the EITF issues related to APB Opinion No. 25, Accounting for Stock Issued to Employees, in one EITF issue and then include that Issue with the rest of the Opinion 25 literature in a codified document. That and all future codified documents will include references to AICPA and SEC literature, similar to what will be done in the next bound edition of Current Text.
Last, but not least, in response to the disclosure overload concerns, the Board has assigned an FASB staff member to assist the SEC staff on its initiative to simplify financial disclosures to make financial statements useful to and utilizable by ordinary investors. For example, the SEC staff is pursuing the idea of supplementing existing periodic disclosures with "real-time" or more current disclosures and implementing a "click-down" (hyperlinks) disclosure system. The FASB staff will act as a liaison to the SEC staff working on this initiative, provide support as appropriate and consider the implications of the SEC staff’s efforts on existing and future standards.
The Board believes that the projects described above offer the potential for improving financial reporting by facilitating retrievability and, more important, by simplifying the basic framework of financial reporting. To be successful, however, these changes will require a significant change in the mindset of our constituents as well as of the Board itself. The FASB intends to pursue these projects aggressively but also very thoughtfully.