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The FASB's mandate: where Statement 96 falters.

The FASB's mandate: where Statement 96 falters

Is the FASB missing its mandate to devise practical financial reporting standards? One businessman believes so and says the preparation of Statement 96, Accounting for Income Taxes, is a prime example.

Five years have passed since the FASB started its project on accounting for income taxes. The prolonged process leading to the development and implementation of Statement 96 has raised sufficient concern to invite a review of the methods. Statement 96, a 126-page document, was issued a year ago and is being followed with implementation guidelines, which are just beginning to arrive. More undoubtedly will be issued later. This bulk is required because of a narrow and detailed approach to implementation as opposed to reliance on a professional partnership between the financial executive and the independent accountant. In short, the process is taking too long, and the standards are too burdened with complex rules.

Fitting with reality

The decision to review accounting for income taxes and the adoption of the liability method for deferred tax accounting met with considerable favorable response. Some dissent, however, was expressed. The most difficult job of the FASB is to reconcile all opinions and advice. In any event, it is necessary to ensure that accounting standards are practical and the public interest is served.

The approach used with FASB Statement 96 does not offer a practical resolution. Incorporating detailed implementation rules as part of communicating accounting standards has resulted in some answers that do not fit well with reality.

Top-down responsibility of corporate management is emphasized in the findings of the National Commission on Fraudulent Financial Reporting (the Treadway Commission). If this same top-down responsibility had been emphasized in Statement 96 implementation, the problems encountered would have been substantially alleviated. Moreover, had this approach been followed for accounting within specific industries, such as thrift and energy, we would now have better and more workable standards. The same can be said for the issues encountered in accounting for foreign taxes, leases, and leveraged buy-outs. Finally, implementation of the standard would have been simpler if management had been given the responsibility to account for the expected results of tax planning rather than being required to follow a set of artificial and rigid rules.

A study group headed by Francis M. Wheat, former Securities and Exchange Commissioner, led to the establishment of the FASB in 1973. Its mandate was to ensure that financial reporting standards would be practical and that the public interest would be served. Today, the FASB appears to have forgotten or fumbled its mandate for practical accounting standards. Charges being levied against it complain of an impractical, narrow, and detailed--or "cookbook"--approach to implementation. Critics also charge it is not keeping up with innovative business practices.

What comes next?

New standards are being considered for financial instruments and postemployment benefits. If the detailed implementation process continues, it is possible that the financial executive and the outside accountant will be operating under rules and regulations similar to those of the Internal Revenue Service. It is not practical to expect this dictatorial approach to keep pace with today's rapidly changing business environment.

It is not the FASB who should alone shoulder the responsibility of the implementation dilemma. Public accountants, including members of the American Institute of Certified Public Accountants (AICPA), have been willing to rely upon the FASB for detailed rules to avoid facing controversy with an audit client or other AICPA members. Corporate executives, including members of Financial Executives Institute and the National Association of Accountants, do not hesitate to seek a second opinion--or even a first opinion--directly from the FASB. As a result, implementation of financial accounting standards has become cumbersome and ineffective. The FASB is spending valuable time on details, which could be better spent on keeping up with changing business practices.

It is up to members of the FASB and the AICPA and of business organizations like FEI and NAA to correct the implementation process. Each group should accept its own responsibility in implementing accounting standards. The focus should be on three things: the FASB's role in setting practical accounting standards and assuring that the public interest is served; the corporate executive's responsibility for accurate and informative financial reporting; and the independent accountant's role in monitoring implementation practices.
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Article Details
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Author:Wrathall, T. Wallace
Publication:Financial Executive
Date:Jan 1, 1989
Previous Article:The FASB, guidance, and Statement 96.
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