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How well does the FASB consider the consequences of its work?

How well does the FASB consider the consequences of its work?

The chairman of the FASB responds to criticism that the Board pays too little attention to the economic and social consequences of accounting standards, that it has promulgated too many hard-to-implement standards in too short a period of time, and that it adds too many unnecessary projects to its agenda. Ever since the Financial Accounting Standards Board (FASB) was established more than 15 years ago, the Board has been under intense pressure from the corporate community to pay greater attention to the potential impact of its standards on preparers of financial information. In the early years, this concern generally was limited to implementation costs of standards as compared to the perceived benefits to users. The emphasis of these concerns seemed to be on the impact of the standards on particular companies or industries. However, there always was an implication that a presumed adverse effect on a particular industry could have a negative effect on the entire economy.

In recent years, these types of charges have escalated. The term "cost-benefit" has been overshadowed by the much broader term "economic consequences." Lately, a still broader term, "social consequences," has been used. For example, in a recent survey of Business Roundtable members, "81 percent of the respondents believe that public policy issues should be considered when [accounting] standards are developed." However, I doubt that those respondents would be quite as comfortable with that position if they examined its implications.

Throughout its history, the Board has been keenly aware of the cost-benefit equation. The problem is that reliable information on costs and benefits is extremely rare, and nobody yet knows how to obtain it consistently. The best that the Board can do is to make informed judgments based on what it can learn about the extent that companies may be affected by any proposed standard.

Any discussion of the costs and benefits of accounting standards is tricky and unsatisfying. This is because the measurable costs are borne by the preparers of financial information, while the unmeasureable benefits, by and large, accrue to the economic system as a whole in the form of reliable, relevant, and comparable information on which economic decisions can be based with confidence. For example, as financial statement preparers, banks, among others, sometimes incur significant costs to comply with accounting standards. But they also receive significant benefits from having relevant and reliable financial information available to them as lenders.

What is the "public interest"?

Perhaps our critics have done us a service by elevating the discussion of accounting standards into the realm of "social consequences" and "public policy." On its face, this may seem to be a much more difficult issue for standard setters to respond to that evaluating economic consequences or "merely" comparing implementation costs to perceived benefits. But I don't think it is. To raise the issue of social consequences is to pose the question of what is the public interest.

Upon careful analysis, one must conclude that the public interest is nothing less than an optimal balancing of all the particular interests in any given issue, a kind of algebraic sum of all the interests that are able to make themselves heard in the public arena. Those interests include political parties, labor unions, business and professional associations, and many more.

I submit that none of these groups can truly know what the public interest really is or what the social consequences of any action--or inaction, for that matter--may be. They can only present their widely divergent claims to the voters, to the regulators, or to the legislators for a political resolution. In other words, public policy decisions are political decisions, made in response to the shifting winds of public opinion.

I hope none of us would choose to have financial accounting standards set by political means or be subjected to intense political pressure. And yet, financial accounting standards will be set by somebody. While the public interest cannot be defined by any single individual or group, public expectations generally become quite clear through the political process. The Securities Acts of 1933 and 1934, and subsequent hearings and investigations by Congress, have made it clear that the public expects fair and effective standards for financial reporting. And the SEC has concluded that decisions on accounting standards are technical decisions that require the expertise of qualified persons in the private sector.

When a technical decision is made by these private-sector experts, in contrast to those in a government agency, there is perhaps a greater willingness to review the effects of that decision--and to consider modifying or changing it if such a course appears to be necessary or desirable. The record of the FASB illustrates this point. It includes, most notably, the rescission of Statement 33 on inflation disclosures. It also includes the replacement of Statement 8 by Statement 52 on foreign currency translation, plus several Technical Bulletins and other documents that modify earlier decisions. The only impediment to reconsideration or clarification is a limit on the Board's time and resources in relation to current projects. There is no political impediment.

The quality of neutrality

Neutrality is the quality that distinguishes technical decision-making from political decision-making. Neutrality is defined in FASB Concepts Statement 2 as the absence of bias that is intended to attain a predetermined result. Professor Paul B. W. Miller, who has held fellowships at both the FASB and the SEC, has written a paper titled: "Neutrality--The Forgotten Concept in Accounting Standards Setting." It is an excellent paper, but I take exception to his title. The FASB has not forgotten neutrality, even though some of its constituents may appear to have. Neutrality is written into our mission statement as a primary consideration. And the neutrality concept dominates every Board meeting discussion, every informal conversation, and every memorandum that is written at the FASB.

As I have indicated, not even those who have a mandate to consider public policy matters have a firm grasp on the macroeconomic or the social consequences of their actions. The FASB has no mandate to consider public policy matters. It has said repeatedly that it is not qualified to adjudicate such matters and therefore does not seek such a mandate. Decisions on such matters properly reside in the United States Congress and with public agencies.

The only mandate the FASB has, or wants, is to formulate unbiased standards that advance the art of financial reporting for the benefit of investors, creditors, and all other users of financial information. This means standards that result in information on which economic decisions can be based with a reasonable degree of confidence.

A fear of information

Unfortunately, there is sometimes a fear that reliable, relevant financial information may bring about damaging consequences. But damaging to whom? Our democracy is based on free dissemination of reliable information. Yes, at times that kind of information has had temporarily damaging consequences for certain parties. But on balance, considering all interests, and the future as well as the present, society has concluded in favor of freedom of information. Why should we fear it in financial reporting?

A good case in point arises from the FASB's project on postemployment benefits other than pensions. For many years, corporate America has quite generously granted its employees health care benefits after retirement. In light of several factors, including rapidly escalating health care costs and a trend toward early retirement, the FASB has decided to consider how such costs and obligations should be accounted for.

The result, of course, has been great concern about what the FASB is doing and how it might affect the balance sheet and income statement. Corporate management has awakened to a serious economic problem and has begun to take steps to deal with the size of the obligation to be reported in the future.

Proliferation of new standards

A second major concern is that the FASB has overloaded the system by promulgating too many standards. On this one, I am sympathetic to the corporate community, although not in quite the same terms that are articulated by some parties. The problem is not in the number of standards issued in the last few years, but that our standards on loan fees, cash flows, consolidation, and income taxes have created a major implementation burden within a relatively short period of time.

This burden on preparers of financial statements came about because of the historical coincidence that certain major projects, started years apart, happened to come to fruition within a relatively short period. It is extremely unlikely that such an historical coincidence will occur again. Nevertheless, I can assure you that in the future the Board will be even more alert and sensitive to the potential for implementation problems, particularly implementation costs. At the same time, we must weigh those considerations against the needs of users for better and more timely information.

Adding projects to the agenda

The final concern is about how and why projects are added to the FASB's technical agenda. The reality is that we do not seek projects. The business world thrusts them on us. Another reality is that we do not have the resources to take on all the accounting problems that are brought to our attention. We are compelled to reject many more agenda proposals than we are able to accept.

In 1988, for example, we identified 26 significant contenders as agenda projects. Dozens of others we judged to be of lesser significance. In addition, the AICPA's Accounting Standards Executive Committee has another three dozen or so topics on its agenda. Many of these will eventually come to the FASB in some form.

There is not now, and never has been, a project on the Board's agenda that some substantial portion of our constituency did not believe required action. Our Advisory Council always provides significant input on agenda decisions, but so have many other organizations and individuals. Note, however, that there have been many instances in which, as a project developed and its implications became clear, some original proponents of the project changed their view and urged the Board to slow down or to cease and desist altogether.

The Board considers the following factors when deciding whether to add topics to the technical agenda: * Pervasiveness of the problem. * The extent to which one or more solutions that will improve financial reporting are likely to be developed. * The extent to which a technically sound solution can be developed. * The practical consequences of either action or inaction by the Board. Evaluating these factors beforehand helps to bring a consistency to the decisions the Board makes about its technical agenda. When several topics suggested to us pass this agenda screening, we must carefully assess the relative priorities of each potential project. For example, I recently received a letter from the CEO of a major corporation urging the FASB to reconsider the accounting for business combinations. While such a project might be worthwhile, Board members believe that many other topics are of greater current importance. Also, I suspect that many in the corporate community would not support such a project. They might fear that a "fresh look" at accounting for business combinations could mean ruling out pooling of interests accounting and reducing the maximum amortization period for goodwill.

Our Rules of Procedure specify that only the Board itself will make agenda decisions, but the process has been sensitive to constituent interests from the beginning. In its first year, the Board called for public comment on perceived needs for amendment or replacement of existing standards. Five years later, the Board called for public comment on perceived needs for amendment or replacement of its own standards that had been in effect for at least two years. That gave rise to reconsideration of Statement 8 on foreign currency translation. Since then, the Board's formal and informal dialogue with constituents on agenda questions has become more intense.

In the Board's recent consideration of possible additions to our agenda, we consulted our Advisory Council, FEI's Committee on Corporate Reporting, NAA's Management Accounting Practices Committee, the AICPA's Accounting Standards Executive Committee, and several other appropriate groups. This represented a broader outreach for comments on potential projects than has ever occurred before.

Meanwhile, some have said that we should be even more diligent in determining our agenda, suggesting that a group other than the FASB should determine the Board's agenda and that a new type of document called a "prospectus" should be issued for public comment on each item the Board considers for addition to the agenda. We believe the standard-setting process would be crippled by allowing outside forces representing particular interests to decide what goes on our agenda. But we are prepared to experiment with the "prospectus" idea in the future, even though we have not yet determined what the document's exact objective and scope should be.

An agent of change

So, to summarize our position regarding these criticisms of the FASB, we offer the following. * We reject the notion that the FASB, or any other body, can determine accurately the social consequences of accounting standards. * We continue our dedication to ascertaining, as fully as the state of the art permits, the costs and benefits of accounting standards. * We accept the view that broader public input may be desirable on agenda decisions, but that the actual decisions must continue to be made by the Board itself. * We continue our dedication to establishing standards that will serve the needs of users of financial information in consonance with the mandate of the 1934 Securities Act. As long as it functions in a manner calculated to satisfy the public demand for financial reporting that is reliable, relevant, and comparable from company to company, the FASB always will be regarded with uneasiness, particularly by those who are the preparers of financial information. That is because the Board is, necessarily, an agent of change, responding to rapid developments in the business world, but operating in an environment that essentially and understandably resists change. Also, however constructive it may be, change always is costly and inconvenient.

In pursuing the Board's mission, we cannot be responsive to each individual company's perception of economic reality, but must look instead to the overall interests of all our constituents, including users and government regulators. Nor can we indulge our own individual perceptions of reality. Reality is thrust upon us by balancing all particular interests in any given issue. Said another way, we approach the task of setting standards determined to perform it in as neutral a fashion as is humanly possible.

Obviously, not every viewpoint on a particular project can be incorporated in the final standard, but that should not be taken as evidence that the Board "doesn't listen." We do listen, and we value every point of view.

Indeed, industry has always been our most prolific source of comment letters and public hearing testimony. So I urge financial executives to continue to provide input to the Board and to focus on hard information about how proposed standards will affect their companies and industries--in relation to the undeniable need of users for reliable, relevant, and comparable financial reporting.

Nearly all of the criticisms of the FASB and the related suggestions for improvement have been accompanied by strong support for retaining an independent FASB to set standards in the private sector. I promise that we will continue to work hard to demonstrate that that confidence is well deserved.

PHOTO : Waiting for the Boat, William Aiken Walker, c. 1884

PHOTO : Hallway (Interior), Joseph Stella, 1919
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Title Annotation:Financial Accounting Standards Board
Author:Beresford, Dennis R.
Publication:Financial Executive
Date:Mar 1, 1989
Previous Article:What is the role of the FAF?
Next Article:The rule-making process: a time for change?

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