Remarks of FASB Chairman Russell G. Golden
IMA 2019 Annual Conference and Expo
Sheraton San Diego Hotel and Marina
San Diego, California
June 18, 2019
IMA 2019 Annual Conference and Expo
Sheraton San Diego Hotel and Marina
San Diego, California
June 18, 2019
First, let me say I’m honored to help you celebrate the 100th anniversary of the Institute of Management Accountants. One full century in business is quite a milestone. And it’s one that reflects the importance of what you do every day.
I’m about to hit my own milestone. This month begins my last full year as FASB chairman. It will mark the end of a decade on the Board, and a sixteen-year career with the organization.
It’s been an honor to serve on the FASB. I’ve learned a lot, due in no small part to the people I’ve met and worked with along the way. They include my colleagues on the Board, the outstanding FASB staff—and stakeholders like you, who follow our activities, share your input, and even listen to my speeches.
For that, I thank you.
At the conference, we’ve heard a lot about the role of technology in shaping the future of our profession. There are some exciting developments on the horizon. And the FASB is following those developments to see how we should adapt standard setting accordingly.
That said, technology will never replace sound professional judgment. Only you can provide that.
What technology can do is provide us with better tools to deliver information more efficiently to our primary customer—the financial statement user. The more we refine and improve those tools, the better.
Accounting standards are another tool that can deliver information more efficiently to the capital markets. When an accounting standard works, it provides insights that investors and others can use to make informed decisions.
But a standard is like software. If it’s too complex, or has too many bugs in it, it won’t work. And a standard that doesn’t work creates anxiety, frustration, and friction in the financial reporting system.
And that brings me to the topic of my speech: the FASB’s quest for simpler accounting standards.
Back in 2013, when I delivered my first speech as chairman, I pledged to do what I could to combat unnecessary complexity and cost in accounting standards.
It was a tall order. And what I’ve learned since then is that simplification isn’t, well, so simple.
But we made good progress. And, more importantly, changed the way we do some things to make it easier for you to do your job.
This morning, I’ll discuss what we did to simplify accounting standards. I’ll look at what we accomplished over the past seven years, and what’s left to be done. I’ll conclude with my usual call to action for you to help us continue that progress.
But before I do, let me pause here and remind you that official positions of the FASB are reached only after extensive due process and deliberations. In other words, what I am about to say are my views and only my views.
Complexity carries a high price tag. For investors, overly complex financial reports can mask important information needed to make sound decisions. For preparers, a complicated, unclear standard obscures its meaning. And even when an accounting treatment is clear, sometimes the process to apply it is lengthy, difficult, and expensive.
One reason accounting is complex is because we hadn’t answered accounting questions consistently in the past. Part of the blame falls on our incomplete conceptual framework. Lacking that important tool, we usually played defense, merely reacting to the issue of the moment.
And sometimes we didn’t answer accounting questions at all. We just let the accountants figure it out in practice, which led to piecemeal guidance.
Another reason accounting is complex is because of clutter in our standards. These are existing GAAP rules that give preparers headaches but don’t provide much—if anything—in the way of relevant information.
It challenged our Board to do something about complexity without compromising the quality of information provided to investors.
So what did we do?
First, we dove into our agenda. We reassessed our priorities and eliminated less important projects. And we added a mix of new projects to help us deal with complexity issues on two fronts. That mix included foundational and simplification projects.
Foundational projects—those that contribute to our conceptual framework—define long-term standard-setting goals over time. They help keep us focused on critical issues that are most important to stakeholders. They form the basis of what we do and how we do it.
I would love to tell you we completed the conceptual framework. Alas, it remains a work in progress—but we are much closer than we were in 2013. Last year, we added new chapters to the conceptual framework to help us improve the effectiveness of disclosures in notes to financial statements. They include a new chapter that helps the Board decide what disclosures to require in notes to financial statements. This gives us, as a Board, more clarity on when we should—or shouldn’t—require certain disclosures.
Currently, our agenda includes active conceptual framework projects on measurement, presentation, and elements. We added the elements project a few years ago. Elements of financial statements include assets, liabilities, revenue, expenses, and gains and losses. These are areas that have not yet been adequately addressed in the framework—and they need to be. When they’re complete, they’ll contribute to more consistent decisions from future Boards.
In addition to foundational projects, we added to our agenda a series of short-term simplification projects that target immediate areas of improvement.
Our stakeholders identified these narrow-scope projects as opportunities to simplify GAAP in a relatively short time period. We added them because we could reduce complexity for preparers without adversely affecting the quality of information provided to investors.
Since 2014, we’ve simplified accounting for discontinued operations and development stage companies and other organizations. We also simplified the measurement of inventory, extraordinary items, presentation of debt issuance cost, and measurement date of defined benefit plan assets.
Once we reset our agenda, we got to work on our standard-setting process. We embedded cost and complexity considerations throughout the entire life cycle of a project.
These days, if we find an accounting solution is not clear and operable, we search for another one that is.
Our Private Company Council, or PCC, has helped us with this. In fact, its work has become a launchpad for our efforts to simplify accounting for all stakeholders, not just private companies.
Goodwill impairment is an excellent example.
PCC members shared private company concerns about the cost and complexity of the goodwill impairment test. And private company financial statement users told us they often ignore goodwill and goodwill impairment losses when analyzing a private company’s financials.
Based on this input, the FASB issued an accounting alternative that allows private companies to amortize goodwill and apply a simplified goodwill impairment model.
But private companies weren’t the only ones who questioned the relative usefulness of the existing goodwill impairment model. Not-for-profits and public companies shared similar concerns.
So we asked ourselves if we could extend the private company alternative to more stakeholders.
And we did. In May, we issued a new standard that extends the PCC alternative for goodwill and for measuring certain identifiable intangible assets to not-for-profit organizations. And soon we’ll issue an Invitation to Comment on a broad project on the subsequent accounting for goodwill and the accounting for certain identifiable intangible assets for public companies.
Reducing unnecessary complexity and cost also drove the development of one of our most popular standards. In August 2017, we issued our final standard on derivatives and hedging. That standard refines and expands hedging for both financial and commodity risks. It also presents the economic results in a more transparent way, both on the face of the financial statements and in the footnotes, for investors and analysts.
This standard is as close as we’ve ever come to making everyone happy. Companies and investors alike have been extremely supportive of it. In fact, when we voted to issue it, one headline called it “Christmas in June for Derivatives Users.” And many companies decided to early adopt.
I attribute that success to our staff’s efforts to proactively solicit views from all our stakeholders—including those who use and prepare public company, private company, and not-for-profit financial reports—throughout the process. Based on responses to our 2016 Exposure Draft, the Board considered comment letters, held numerous conference calls with investors and other users of financial statements, and hosted two public roundtables, which included preparers, auditors, regulators, and other perspectives. Again, the PCC provided valuable input on private company hedge documentation issues.
The process was a model for how those views help us better understand the costs and benefits of our decisions—which, in turn, helped us avoid unnecessary complexity. It’s also a testament to the importance of stakeholder input to help us make better decisions.
Our work to simplify accounting standards doesn’t end when a final standard has been issued. We view quality implementation as critical to the overall success of a project.
Currently, the FASB devotes 40% of our resources to implementation support.
That wasn’t always the case. It wasn’t long ago that, when we issued a standard, we considered our work done. We left it up to you to figure them out—and it led to a lot of unhappy stakeholders.
To address this, we’ve made implementation part of everyone’s job. We now consider it through every stage of the standard-setting process. If, during that process, we learn that a potential solution is too complicated—or its costs don’t justify its value to investors—we keep at it until we get it right.
We decide how to support the implementation of a particular standard based on several factors. We consider the nature of the guidance, the degree of change, the breadth of affected industries, and what we’re hearing from stakeholders. In short, the more impactful a standard is, the more implementation resources it’ll require.
When we issued the revenue recognition standard in 2014, it represented a major achievement in our efforts to improve—with the International Accounting Standards Board, or IASB—one of the most important areas of financial reporting. It would affect virtually all organizations. And, as we learned from our extensive project outreach, it would also require major changes to how some industries recognize revenue in their financial statements.
For the standard to be successful, we’d need to make it as clear as possible so preparers and auditors could agree on how to interpret it.
For that reason, the FASB initiated the creation of the joint Revenue Recognition Transition Resource Group, or TRG. Based on what we learned from previous groups, we decided that the TRG should hold public meetings to allow all stakeholders to follow our discussions and learn from each other about best implementation practices.
TRG discussions and other stakeholder input helped the Board identify opportunities to clarify or simplify the revenue recognition guidance. Some of the areas we improved include principal or agent determinations, performance obligations and licensing, and how an organization evaluates whether its promise to transfer a license is satisfied at a point in time, or over time.
We also addressed challenges raised by some stakeholders related to collectability, noncash consideration, contract modifications, and the presentation of sales taxes. In these cases, we clarified the guidance and made things simpler and faster to implement.
We also posted 60 staff papers to the TRG website. While they’re not authoritative, they’re excellent educational tools that offer appropriate, real world examples of how the standard should be applied.
That set the groundwork for public companies to make a relatively seamless transition to the standard—which they did, starting in 2018. And we used what we learned from the public company experience to support the 2019 transition for private companies.
We used what we learned with revenue recognition to help make sure another major standard works: the current expected credit losses standard, also known as “CECL.” Perhaps you’ve heard of it.
Based on the success of the Revenue Recognition TRG, the FASB created a Credit Losses Transition Resource Group. Convened in late 2015, the group includes financial statement preparers—including community banks and credit unions, auditors, users, and regulators.
Based on what we learned from the Revenue Recognition TRG experience, we made an important improvement. We realized that, had we convened that group before we issued the final standard, we might have been able to improve certain confusing words and phrases before the guidance was released.
For that reason, the Credit Losses TRG met before the standard was issued, letting members weigh in on the draft guidance before it was final. We believed it would reduce the need to make technical corrections later while adding to its clarity.
Since the credit losses standard was issued in 2016, the TRG has also assisted in providing us with information about interpretative questions that might arise prior to implementation.
Like revenue recognition, supporting implementation of credit losses doesn’t begin and end with the TRG. Our outreach also includes presentations to preparers and practitioners at conferences like this, CPE webinars, industry meetings, and other resources. They are available through the implementation web portal on the FASB website—another new tool that serves as a “one-stop shop” for all your implementation needs.
With credit losses, we also knew it would be important to address stakeholder concerns about its effects on auditing and regulatory capital requirements. While they’re not standard-setting issues, they’re important to understand. We continue to meet regularly with various regulators so that they, too, are prepared to monitor its potential impacts.
Even when a standard doesn’t rise to the need for a TRG, making sure it works remains our priority.
For example: we decided not to develop a leases TRG because, while the impact of the change is significant, the change itself is relatively straightforward. However, our staff closely monitors the types of questions we receive. In public meetings, for example, the Board has discussed the nature and extent of leases questions our staff has addressed to date.
We also supported implementation of the leases standard by posting several educational documents, hosting an interactive CPE webcast, and producing three videos about the project. One video focuses entirely on how a lessee might apply the new leases standard using the display approach—a frequently asked question from stakeholders.
And thanks to your input, we found ways to improve the leases standard. In fact, since early last year, we issued a handful of narrow standards that simplify transition requirements and make it easier for lessors to separate non-lease components from lease components.
Together, we expect these changes will ensure all organizations can adopt the leases standard in a timely manner.
Since 2013, we made progress on our journey to better standards. But there’s more to do. And we need your input to be successful.
Our active agenda project on liabilities and equity will simplify a very complex area of accounting—and provide more relevant information to financial statement users. In the coming months, we’ll seek your input on an Exposure Draft that contains our proposals to achieve that.
We’re also working on a project to simplify balance sheet classification of debt. Currently, the staff is working on a revised Exposure Draft to be issued later this year. Again, we’ll look to you to share your views on that proposal.
At a public meeting next month, the FASB will consider whether we should extend implementation timelines for private companies and not-for-profit organizations as well as for smaller public companies—and if so, how we should define a “small public company.” As part of this process, we’ll look at the effective dates of certain standards that are not yet effective to determine whether they should be amended to reflect a new philosophy. We’ll ask you for input on this as well.
Finally, with the impending reference rate change away from LIBOR, the FASB has begun to consider its impact on accounting standards. We’ve already amended the hedging standard to include SOFR as a permissible benchmark rate and intend to stay ahead of any new developments. This project will generate more proposals where—surprise!—we’ll need your input.
By the way…we plan to discuss reference rate reform tomorrow—June 19—at our weekly Board meeting. I encourage you to tune into the live or archived webcast of that meeting, as the transition away from LIBOR is one that will affect almost everyone. Check out the “Meetings” section at fasb.org for more information.
On another note, I think we should continue to seek opportunities to align standards across the globe.
When I started as chairman in 2013, we had put in more than a decade of work with the IASB. While we did not come to identical solutions to some accounting problems, we had success in many important areas.
I believe more comparable global accounting standards help reduce complexity and costs in financial reporting—costs that are often borne by U.S. multinational corporations. I think the FASB should continue to engage with the IASB and other global standard setters to make GAAP and other national standards the very best they can be for all who use and apply them.
Back in 2013, I said I hoped that when my term as chairman ended, I would leave the organization and the U.S. financial reporting system in a better place. One where there is more useful information for investors and less complexity in standards for preparers—and that those benefits would be achieved for both private and public companies.
I think we made great progress toward that goal, thanks to your involvement and input in our process.
Making accounting standards less complex required us to change how we do things. But it challenged us to develop better standards and create the best GAAP possible.
I encourage you to help us continue that progress.