Accounting Measurement Plan Draws Blunt Feedback for US Board

How businesses should measure assets and liabilities is one of the trickiest issues in accounting. Feedback on a plan to streamline US rulemakers’ approach to setting measurement requirements reflects just how thorny that debate can get.

Academics, audit firms, and professional groups gave blunt feedback on a Financial Accounting Standards Board proposal laying out high-level concepts for how assets and liabilities should be measured, comment letters show. The proposal is confusing, some responses said, and others said it didn’t go far enough to help the board craft consistent accounting rules.

The proposal, issued in December as a draft chapter in FASB’s Conceptual Framework, calls for updating an internal guide the board uses when making tough decisions about writing accounting rules for US companies and not-for-profit organizations. FASB has been working on and off on its Conceptual Framework since the board was founded in 1973 but has never developed robust concepts on measurement.

Measurement has always been a tough theoretical debate for the board, with techniques largely divided into two camps. Some assets and liabilities get measured at fair value, a method that captures the most-up-to-date value of assets but also injects volatility into earnings. Others get measured at cost, the price paid plus some adjustments. How an item is measured affects the numbers businesses report, which ultimately impacts earnings.

The current proposal doesn’t offer ground-breaking guidance and maintains the status quo, wrote Paul Miller, emeritus accounting professor at the University of Colorado at Colorado Springs and author of a book about FASB’s history.

“Beyond any doubt, I believe the board could have done better,” Miller wrote. “If this draft represents the best it can do, I’m full of doubts about its present credibility and its future existence.”

The CFA Institute, an investor advocacy group, also criticizedthe plan, saying it won’t help FASB figure out which measurement system should be used for any particular asset or liability.

“By leaving most of the work of choosing a measurement system to the standards level, we don’t see how the Exposure Draft will help the Board drive improvements in financial reporting,” the group wrote.

Tough Decisions

The draft framework does not directly affect accounting practices for US companies and not-for-profit organizations that follow FASB’s rules. It does, however, influence how the board tackles measurement when setting accounting rules, which would impact financial reporting.

Under the proposal, measurement must be anchored in prices—both entry prices and exit prices. Prices objectively measure the financial effects of transactions and other events and circumstances. Prices are fundamental in depicting recognized items like assets or liabilities in general purpose financial reporting, the proposal states.

Reported amounts of assets should not be more than what is recoverable and the reported amount of liabilities should not be less than what can be settled, according to the proposal. Essentially, assets shouldn’t be overstated and liabilities shouldn’t be understated.

Some responses to the FASB proposal questioned whether only two types of measurement systems work for all assets and liabilities.

Deloitte & Touche LLP said entry and exit price systems are two relevant measurement systems, but they shoudln’t be the only ones. Sometimes items need to be subsequently measured based on the recovery of costs, Deloitte cited as an example. The accounting firm recommended FASB clarify its description of measurement systems by separating initial measurement from subsequent measurement.

Fair Value Terms

Several organizations said they were concerned about using the terms “entry price” and “exit price” in the proposal. The terms are currently used in FASB’s fair value measurement accounting guidance, outlined in ASC 820, to refer to different fair value approaches.

The terms have different meanings in that context, however, compared to their meanings in the proposal, accounting firm BDO USA said. It recommended FASB use different terms in the framework to avoid confusion.

Grant Thornton LLP made a similar point, noting that “fair value” is used in several places in the proposal, with potentially different meanings and implications. In some places, it seems to be used interchangeably with an exit price, the accounting firm said. In other places, the proposal discusses exchanges at fair value that do not appear to refer solely to market participant exit prices, according to Grant Thornton.

Advisory and valuation firm Kroll warned about the framework potentially conflicting with accounting rules on fair value itself. It called the proposal “incongruent with the nature, breadth, and frequency of the application of fair value,” which could impact future standard-setting.

FASB’s Conceptual Framework sets definitions of bedrock financial reporting concepts, such as assets and liabilities, and the definition of a “reporting entity.” The measurement chapter is the final piece FASB needs to finalize. The board wants to finish its work by midyear, according to an agenda.

The document, a constitution of sorts for the board, is supposed to help FASB frame, discuss, and resolve issues.

“Without exaggeration, the board’s future existence depends on finishing the framework with the best answers and is at risk if it avoids hard questions and decisions,” the University of Colorado’s Miller wrote.