FASB chair Leslie Seidman lays out a schedule for handling the remaining projects on the convergence agenda

In an exclusive interview with Accounting Today, Leslie Seidman, chair of the Financial Accounting Standards Board, detailed the current status and likely future timeline for the four main remaining parts of the standard-setting board's convergence agenda with the International Accounting Standards Board.

Three of the four items -- on revenue recognition, accounting for financial instruments, and leasing -- were part of the original convergence agenda, while the fourth, on insurance, was added later. As the complexity of the issues involved and the potential effects on stakeholders have become clearer, the projects have been delayed several times, but Seidman laid out a detailed timeline that would see them finished largely by the end of 2013.

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REVENUE RECOGNITION

Seidman considers revenue recognition particularly important, noting, "It's important to have global comparability for the top line of every company in the world." To that end, the boards have been working together to deal with the issues raised in response to the second exposure draft on revenue recognition.

They face a couple of "thorny" issues, specifically accounting for licenses, and whether there should be a threshold for revenue recognition when there's uncertainty relating to the amount of consideration the entity is entitled to. There are also "diverse views" on the appropriate level and nature of the disclosure package, as well as the transition: The boards have exposed a "fulsome" disclosure package, and a full retrospective approach to implementation. Some issuers feel the latter in particular is too burdensome, but investors want it, so the standard-setters are holding workshops to find common ground.

Going forward, Seidman said that FASB would hold joint meetings in November and December with IASB, with the aim of finishing their discussions late this year, and targeting an issuance date in March or April of 2013. She noted that they haven't voted on an effective date, but plan to provide ample time. "I would be very surprised if we moved with an effective date before 2015," she said.

A smooth transition is important so that investors won't be confused by the new information being released. She added that the board is planning extra educational efforts: "We don't want to end up with a bunch of detailed rules to support what is widely viewed as a principles-based standard, but we want to have enough information available to stakeholders as they implement the standard that we have a high level of comparability at the end of the day."

LEASING

Convergence on leasing has been in progress for some time, Seidman said, despite wide support from investors for its key objective of reporting lease obligations on the balance sheets of lessees. (Currently most leases are reported off-balance-sheet.)

"If I were to try to identify one cause for the difficulty of making progress on this project," she explained, "it would be that in the early days of the project, we focused primarily on the lessee, rather than on both the lessee and the lessor, and I think that strategy could have delayed the timely recognition of some of the thorny issues that we're currently dealing with."

Nonetheless, the boards are ready to release a second converged exposure draft in the next few months, which they hope will address concerns about the complexity of the standard that emerged from the first exposure draft. "We are substantially converged on the leasing proposal from top to bottom," Seidman said.

The second ED would require that all leases go on the balance sheet of the lessees, unless they are under one year of duration. It also would recognize leases in one of two categories: as purchase or financing transactions, which would use the asset financing model, with the lease asset amortized, or "more like a service or rental," where a significant amount of the value or utility of the asset would not be transferred, and the pattern of income statement recognition would be straight-line.

For the first category, lessors would recognize a receivable and derecognize a proportionate amount of the lease asset and then account for a residual; for the second, they would leave the asset on the balance sheet and account for the lease as a rental stream over time.

"Most stakeholders do not believe that all leases are the same," Seidman noted.

She expected the second converged ED to be released in the first quarter of 2013.

ACCOUNTING FOR FINANCIAL INSTRUMENTS

Seidman explained that the boards have been managing this in separate workstreams over the past few years.

Regarding classification and measurement, Seidman said, "If you had asked me two years ago what I thought the prospects of a converged standard [for accounting for financial instruments] would be, I would have told you I thought they were very low. But through persistence and the willingness of both boards to take a fresh look at their conclusions, we now are in a position of going out with a converged proposal. The FASB made some pretty significant changes to its original conclusions, and the IASB opened IFRS 9 to make a few limited changes. So I'm pleased to say that we will be going out with EDs in the next couple of months that are largely converged."

The model would classify financial assets based on their cash flow characteristics and the business purpose for which they are held. "Plain vanilla" instruments held for cash flow would be eligible for cost accounting. "Assets that fail the 'plain vanilla' or principal-and-interest test, would be required to be carried at fair value net income, full stop. So if they have 'exotic cash flow characteristics,' they would have to be carried at fair value through net income," Seidman said.

The model would apply to all debt instruments, including securities and loans, which is different from current GAAP; other key changes include narrowing which liabilities are eligible for the fair value option, and, for those items that are eligible for the fair value option, changing the way companies present the change attributable to their own credit quality; that would now be isolated and reported in other comprehensive income, instead of net income.

She noted that FASB would be issuing application guidance to clearly articulate how they intend it to be applied, and to help explain how it's different from FAS 115.

On impairment, in response to "pervasive concerns" expressed by stakeholders, FASB revised its approach, so that now, every period, the entity will evaluate the assets it holds for credit-worthiness, and then record an estimate of expected losses. The major changes are that, "There is no trigger before you start recognizing expected losses, and that you consider all available reasonable and supportable information. You don't limit the information set to what has already occurred."

FASB planned to share a draft of its standard with the IASB and "fatal flaw" reviewers in early October, and had a joint meeting on impairment planned for November. The board plans to expose before the end of 2012, as well as getting feedback on the IASB's tentative conclusions.

"If we don't seem to be ready to reach different decisions at the meeting in November," Seidman said, "it's my hope that by explaining the alternatives to stakeholders during the comment period, and then considering all of that feedback, we're in a better position to potentially reach converged conclusions." She also noted that the IASB has begun to hear some of the same concerns that FASB had been hearing from stakeholders earlier in the process.

Finally, on hedging, Seidman noted that the IASB is moving forward with a more "comprehensive" approach, but that FASB believes that hedging is related to the classification and measurement phase of the standards, so they plan to approach hedging after they have finished with classification and measurement.

INSURANCE

On insurance, Seidman said that the boards have agreed in principle that insurance obligations should be reported at a current estimate of the present value of the cash flows that are required to fulfill the contract. "Basically, it's a current measure as opposed to a locked-in measure," she said.

"But there are a number of detailed differences in our decisions, which after a few trips to the board table to try and work them out, we have not been able to resolve," she said. "The good news is we're both going out for exposure, and based on the feedback from around the world, there's still an opportunity to revisit these issues."

FASB plans to put out an exposure draft in this area in the first quarter of 2013. 

GOING FORWARD

In conclusion, Seidman noted, "It's true that we're not agreeing on everything - but we're agreeing on a lot of things."

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FASB Chair Looks to New IASB Relationship

Financial Accounting Standards Board chair Leslie Seidman is planning for a multilateral way of working with the International Accounting Standards Board in the future, even as her term approaches an end next year.

In an interview in late October with Accounting Today, Seidman talked about the status of FASB's decade-long convergence efforts with the IASB and how the two standard-setters will be working together with other accounting organizations even after the memorandum of understanding they signed in 2002 in Norwalk, Conn., known as the Norwalk Agreement, expires. Overall, she characterized the 10-year convergence effort as a success.

"Even though we do expect our relationship with the IASB to change from the bilateral sort of partnership arrangement that we've had in recent years, that does not mean that convergence is over or that divergence is going to start to occur," she said. "In the early days of our relationship, we had what I would call a 'best efforts' approach and we accomplished a lot. It seems to me that going forward we can continue to achieve a lot even if the nature and structure of our relationship changes. We plan to continue to work cooperatively with the IASB and other standard-setters around the world to continue to improve our standards here in the U.S., as well as global accounting standards, and make them more comparable."

When asked why the convergence effort is perceived to be endangered amid report of disagreements between the two boards on issues such as the impairment of financial instruments, Seidman responded, "That's why we thought it was important to take a broader look at where this started and where it's gone. It seems to me that there is more than one approach to achieving comparability in accounting standards. What we're suggesting is that there are ways to work together cooperatively to identify opportunities for improvement and opportunities for reaching converged solutions on standards short of, one, the bilateral relationship that we have had in recent years, in other words, an intense side-by-side convergence program; or two, on the other side, an adoption program where the only way you can get to comparability is by adopting a set of standards. We think there's a lot of room in between there."

Seidman also commented on the impact of the Securities and Exchange Commission's staff reports on IFRS and the lack of a decision by the SEC on whether to incorporate IFRS into the U.S. financial reporting system.

"Even if the SEC's decision is deferred for some time, we still absolutely see the opportunity and reality of working together cooperatively, sharing information, and converging on standards, putting aside any of those specific ways of proceeding," she said.

Seidman noted that there are various ways to achieve global standards beyond the convergence process that FASB and the IASB have followed since 2002. "If you're of the view that there's only one way to gain global comparability, you might not understand that there are other ways to achieve comparability," she explained, referring to the IFRS Foundation report that was sent in response to the SEC staff's final report on IFRS.

"I thought one of the most important elements of that report included the discussion of the accounting standards forum. The idea was to form a network of global accounting standards-setters to meet periodically and discuss topics of common interest. If you consider that the IASB currently has an advisory group made up of preparers and an advisory group made up of investors, I think it makes a lot of sense to set up an advisory group of accounting standards-setters from around the world, some of which will have adopted IFRS and some of which will not have. But at the end of the day, if you want global comparability, it's got to include the U.S., and it's got to include some of the other major capital markets in the world, regardless of their current status relating to adoption or incorporation or other acceptance of IFRS. It shows that there are various ways to work together to end up with comparable standards."

Seidman noted that national standard-setters, such as FASB in the U.S., the Accounting Standards Board of Japan and the European Financial Reporting Advisory Group, are "the boots on the ground" in their jurisdictions.

"We have expertise with regard to the U.S. environment, what U.S. preparers need, what U.S. investors want, etc., and we know how to gain input here that can inform the development of the accounting standards," she said. "It seems to me to make total sense to leverage the expertise of the national standard-setters and feed that information into a global process as we're developing global accounting standards. We're very eager to participate in that initiative with other standard-setters and we think that at the end of the day it should lead to more timely identification of issues so that they can be worked through to end up with comparable standards. And I think it also will contribute to the acceptance of the standards in various jurisdictions around the world."

Seidman noted that some countries have adopted IFRS and some countries have only committed to IFRS, but not yet adopted it. Others have needed to make adjustments and carve-outs, as in Europe for some aspects of the financial instruments standards, in China for government-controlled entities, and in Canada for rate-regulated utilities. "You see that in certain jurisdictions the standard-setter or whoever is responsible for endorsement has to make some tweaks to deal with jurisdictional issues," she said. "We accept that. We think that's inevitable. What we're concerned about is calling that the same thing. It's really a truth-in-labeling issue."

Seidman noted that the SEC's report on the so-called "condorsement" approach said the U.S. is likely to keep the term "U.S. GAAP" for practical reasons such as legislation that explicitly refers to U.S. GAAP, while incorporating as much of IFRS as possible.

"It's a truth-in-labeling issue because we're going to have, at least as a transitional matter, certain items where we have standards right now that are not addressed in IFRS," said Seidman. "Let's not pretend that it's the same everywhere. Let's just be very transparent about the extent of commonality and the extent of difference. It could very well be a transitional manner, whereas others seem keen on calling it IFRS even where there are differences."

Seidman was asked about warnings that the U.S. is going to lose "most favored nation" status in having influence over IFRS after the regular joint meetings between the IASB and FASB come to an end. European Commission internal markets commissioner Michel Barnier recently sent a message to the IASB criticizing the process, reportedly saying that 2011 and 2012 had been years of wasted opportunity, and 2013 would be a year of truth for convergence.

"In terms of the frustration with the timing on the projects, let me just reiterate that the decision to pare down the agenda was widely supported, including by the Monitoring Board of the IASB as well as stakeholders here in the U.S.," said Seidman. "Then the decision to re-expose revenue recognition and leasing [standards] were widely supported decisions. Clearly they had the effect of extending the timeframes. On financial instruments, clearly impairment is taking longer than we would have hoped, but it's extremely important that at the end of the day, we have a standard that restores confidence in financial reporting. When we have evidence that companies are confused by what we mean and raise serious concerns about ambiguity in provisions, we don't have a realistic expectation that comparable reporting is going to result. So when we're faced with that kind of feedback, we feel it's our responsibility to address it before we move forward with a final standard. That takes time. We think the time is well spent if at the end of the day we end up with an improved standard."

Seidman insisted that the time had not been wasted. "We do believe that what we have achieved so far has been important and substantive and has had the effect of significantly improving comparability on some of the most material differences that had previously existed," she said. "We do think that having a network of standard-setters from around the world working together will give us the opportunity to continue with that progress. I think that we can all work together on this. Sometimes the IASB will take the lead. In fact, in many cases, the IASB will take the lead, and we will work cooperatively within that system to, for example, provide input at various stages in the process, expose the documents in the U.S., with the goal of participating and trying to reach a consistent conclusion. But in other cases, I can see FASB taking the lead or Japan taking the lead, or another standard-setter taking the lead on an issue based, for example, on their expertise, availability of resources, etc., and feeding that research and work product into the process, so that we could end up with the opportunity to have global standards that are devised in various ways. In other words, I don't think there's only one way to achieve globally comparable standards."

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