Providing implementation guidance about the application of accounting standards has always been a challenging issue for the FASB. Is there enough guidance? Is there too much? If the guidance is issued subsequent to the issuance of a new standard, does that imply that the standard was incomplete, or even broken when it was issued? And, if yes, what does that mean about the process used to develop those standards?
In the mid-2000s, when it appeared the U.S. was headed towards the application of international financial reporting standards (IFRS), much of U.S. GAAP’s implementation guidance was criticized as providing too many rules, which many observers thought was inferior to the so-called “principles-based” IFRS. My participation in that struggle began in 2002 when I joined the FASB as the Director of Technical Application and Implementation Activities and Chairman of the Emerging Issues Task Force (EITF). The U.S. standard setters struggled then, and continue to struggle now, with what implementation guidance should be provided, and how best to provide that guidance. The demand for implementation guidance seems to have grown with the FASB’s issuance of major standards in recent years; yet the mechanism by which such guidance is being issued is not without some fundamental issues, which are discussed further below.
A Little History
Implementation guidance took many forms prior to me joining the FASB as a technical director, and the nature of guidance and their forms evolved considerably during my tenure at the FASB (2002-2017). Back in 2002 one could find accounting guidance in FASB Statements of Financial Accounting Standards and Interpretations, FASB Statement 133 Implementation Issues, FASB Staff Positions, and AICPA Accounting Research Bulletins and Accounting Principles Board Opinions, all of which was considered “Level A GAAP.”
There was also guidance in what was considered “Level B GAAP” such as FASB Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and Accounting Guides and Statements of Position. But, it didn’t end there. “Level C GAAP” included AICPA Accounting Standards Executive Committee (AcSEC) Practice Bulletins cleared by the FASB, consensus positions of the EITF, and Topics discussed in Appendix D of the EITF Abstracts. Finally, “Level D GAAP” included Implementation Guides (Q&As) published by the FASB staff, AICPA Accounting Interpretations, and AICPA Industry Audit and Accounting Guides and Statements of Position not cleared by the FASB.
The existence of all of this literature, which was not organized topically, made the process of performing accounting research exceedingly difficult. Basically, if a person was researching a particular accounting topic they would theoretically have to consider all of the different forms of guidance that existed within the GAAP hierarchy to be certain their final conclusion was correct.
The Board that existed under Chairman Robert Herz understood that the complexity of researching and applying accounting standards had become so unwieldly that some basic structural changes in how standards were set and how they were organized had to be considered.
The structural changes in how standards were set occurred fairly quickly under Chairman Herz. The FASB understood that, while other bodies were involved in the creation of accounting standards at that time, the FASB was viewed by many constituents as the only accounting standard setter. Consequently, the FASB decided that it should reduce the role of other bodies in the standard setting process. The Board, with the SEC staff’s concurrence: (1) requested the AICPA and AcSEC to cease issuing authoritative accounting guidance, and (2) changed the EITF process such that future consensus positions of the EITF needed to be exposed for comment and approved by the FASB, just like any other FASB standard.
The other major change endorsed by the Board at that time was the topical reorganization of existing accounting guidance, which eventually became the FASB Accounting Standards Codification, or, for short, the Codification. Today, the Codification is the only authoritative source of accounting guidance in the U.S. (other than guidance issued directly by the Securities and Exchange Commission and its staff). It is topically organized with guidance addressing: general principles, presentation, assets, liabilities, equity, revenue, expenses, broad transactions, and industry guidance. One basic rule that was followed in its creation was that wording that existed in the original source literature should not be changed, or changed as little as possible.
We feared that rewriting guidance to make it read better ran the risk of being interpreted as a change in GAAP, and we had no intention of changing GAAP through the creation of the Codification. Seeing that, when speaking to constituents as the Codification was being developed, I frequently warned people that it would read like a patch-work quilt since it was merely the joining together of guidance for specific topics that existed in different forms of the authoritative literature. Quite frankly, it still reads like a patch-work quilt. Even new standards that replaced entire topics (such as revenue recognition and lease accounting) don’t flow like the old standards because of the sectional organization that was created to accommodate the joining of different sources of literature when the Codification was originally created.
In 2009, the FASB did away with the multiple levels of GAAP that existed prior to the Codification, and replaced all previously issued forms of standards and guidance with the Codification as the authoritative source of generally accepted accounting standards in the U.S. Once the Codification became GAAP, any changes or interpretations of it were issued as Accounting Standards Updates (ASUs), which are amendments to the Codification.
Over the years following the adoption of the Codification, ASUs took various forms; there were ASUs that merely corrected simple errors in the Codification, there were ASUs that provided interpretive, or minor implementation guidance in how GAAP should be applied in specific circumstances, and there were ASUs that provided guidance for transactions that previously were either not specifically addressed in GAAP or that changed what was previously required.
In my mind, the fact that all guidance issued by the FASB was being incorporated in the topically organized Codification is probably the most important beneficial aspect of its creation. Someone conducting accounting research no longer had to worry about whether she/he missed a GAAP requirement because some authoritative piece of literature had not been considered; rather all GAAP related to a specific topic was found in the Codification for that topic.
But, that began to change with the FASB’s issuance of a number of major changes in GAAP beginning with ASU No. 2014-9 on Revenue From Contracts with Customers.
The Current State
ASU No. 2014-9 created new requirements for all revenue transactions with customers. The FASB knew there would be questions on how the new standard should be implemented, so it established a Transition Resource Group (TRG) to discuss issues identified by various constituencies shortly after the issuance of the ASU. From those discussions, the FASB then considered several factors around each identified issue, including complexity, and whether it had narrow or broad applicability, among others, to determine whether an amendment to the Codification was required or whether the wording in the Codification supported by the discussion (and related minutes of TRG meetings) provided sufficient guidance to enable people to understand how the Topic should be applied.
From July 2014 through November 2016 there were eight meetings of the Revenue TRG, during which over 100 different questions or issues were discussed that are documented in 60 different memos on the FASB’s website. It is fair to say that prior to any discussion at the respective TRG meetings, constituents had various views as to how Topic 606 should be applied. The FASB’s decision as to whether an amendment to the Topic was required was based on whether the Board concluded that the “discussion at the meeting indicated that stakeholders can understand and apply the applicable guidance in the new revenue standard in a manner that it believes is consistent with the standard” in which case amending the Codification was not considered necessary. So, while there was initial confusion in how Topic 606 should be applied for the over 100 questions and issues raised, those issues for which an amendment was deemed unnecessary are discussed in the memos mentioned above, which clarified how the standard should be applied.
The FASB did not establish a transition resource group for the new lease accounting standard, yet it discussed at various meetings different implementation issues. Again, some of these discussions led to amendments to Topic 842, while issues that did not result in an amendment were documented in memos that can be found on the FASB’s website.
Additionally, the FASB established a transition resource group for the new standard for credit losses, although the process is a little different than the process used for revenue. While there are staff memos documenting discussions about different issues addressed at TRG meetings, additionally, for credit losses, the FASB staff have posted some staff Q&As documenting the staff position for certain issues.
Finally, some staff Q&As were issued in connection with issues related to the Tax Cuts and Jobs Act that was adopted in December 2017.
The primary question in my mind is whether all of the guidance that exists outside of the Codification is considered authoritative. Would the SEC require a company that failed to apply guidance existing outside of the Codification to restate its financial statements? And how are constituents that use the Codification but do not closely follow FASB activities expected to know that guidance that may need to be followed exists elsewhere? (I understand that the FASB is considering putting links in the Codification to guidance included elsewhere but, as of now, that does not exist.)
Another concern is that if the guidance issued in the form of a FASB staff Q&A is considered authoritative, it is issued without the FASB following its normal due process procedures, which includes exposing the draft guidance for public comment and considering comments received prior to the release of final guidance. I know that much feedback in various forms was solicited by the FASB and its staff prior to releasing all of the guidance mentioned earlier; however, exposing proposed guidance for public comment ensures that all constituents have an opportunity to consider the proposed guidance and provide valuable feedback to the FASB prior to the release of final guidance. Also, I believe that following FASB’s normal due process will help ensure that guidance is in fact supplemental guidance that is needed to understand how to apply GAAP, rather than just adding different words that effectively say what is already included in the Codification. For example, in my opinion, much of what is included in some recently issued Q&As on CECL just repeat what is already included in the Codification.
I understand from speaking with some of my former colleagues at the FASB that constituents do not mind there being guidance outside of the Codification; in fact, I understand there is considerable pressure on the FASB to issue more guidance in the form of Q&As. This doesn’t surprise me since I experienced much of that pressure back when I was both a director and a FASB member. Yet, this could create a slippery slope to the creation of something similar to what we had prior to the creation of the Codification. Will we need to create multiple layers of GAAP like we had before? Or will all of that guidance be considered “nonauthoritative”? How will the SEC treat such guidance? Will registrants be forced to apply it? And what about private companies? Will they get a bye in having to apply it?
Personally, I would rather see any guidance that is considered helpful or resolves an issue be included in the Codification. The fundamental reasons for my view are (1) all authoritative guidance will be available in the Codification, (2) confusion as to what is, and what is not, GAAP will be avoided, and (3) it will require following the FASB’s due process procedures. Implementation guidance helps both preparers and auditors in understanding what was intended when a standard is issued by the FASB. It is important that constituents understand: (1) that the guidance has been developed consistent with the FASB’s due process procedures, (2) where to find the implementation guidance, and (3) that the guidance is authoritative.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Larry Smith is a Senior Managing Director in FTI Consulting’s Forensic & Litigation Consulting segment serving as a member of FTI Consulting’s National Office, consulting with engagement teams and clients on complex accounting issues and as a testifying expert in litigation matters involving the application of GAAP. On June 30, 2017, Larry completed his second five-year term as a member of the Financial Accounting Standards Board.
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