Seidman defends FAF’s private co. proposal at FAE conference

Financial Accounting Standards Board (FASB) Chair Leslie F. Seidman, during FAE’s Oct. 25 IFRS Conference at the Society’s Manhattan office, defended the decision of the Financial Accounting Foundation (FAF) to propose a new private company standards board that would be subject to FASB oversight.

The NYSSCPA and other accounting organizations told the FAF previously that they would rather the new board—the proposed Private Company Standards Improvement Council (PCSIC)—exist as an independent body that would be subject to FAF oversight only.

“Setting up [an independent] board could, over time, lead to more significant differences between public and private companies,” Seidman said at the conference. “It’s important to maintain FASB’s role as sole standards setter.”

Establishing the PCSIC under the FASB means private company-specific issues can be considered within the context of all companies, Seidman said, so “any simplifications can be considered concurrently with all companies. It’s crucial to have common objectives and coordinated teams and processes.”

For example, Seidman noted that recent changes to goodwill impairment testing were informed by input from private companies, who “gave us good advice on how to improve the process” for them. The suggestions were so good, she said, it eventually led to an overall change in the standard, resulting in a simpler process for both public and private companies.

Seidman added that the PCSIC will learn from the weaknesses that developed in the Private Company Financial Reporting Committee (PCFRC), a private company advisory body sponsored by the FASB. While Seidman praised the work the PCFRC had done since first being formed in 2006, she said the committee, despite being sponsored by the FASB, did not develop a common framework with the FASB, and as a result was limited by not integrating its people and processes.

The decision of the FAF, the organization that funds and operates the FASB and the Governmental Accounting Standards Board, was in response to a January report from a blue-ribbon panel composed of representatives from the FAF, the AICPA and the National Association of State Boards of Accountancy. The report was the culmination of several years of outreach to private companies by the three organizations in order to better understand how they can serve nonpublic entities. The report recommended that, first, private companies be allowed to utilize U.S. Generally Accepted Accounting Principles (GAAP), with modifications and exceptions carved out specifically for nonpublic entities. Second, the report suggested the creation of an independent standards-setting body that would oversee the drafting and implementation of this modified private-company GAAP.

But the FAF proposed in early October that, instead of having the PCSIC be an independent organization, it would instead be housed within the FASB, and while it would still be responsible for identifying, proposing, deliberating and formally voting upon specific exemptions or modifications to U.S. GAAP for private companies, ultimate decision-making power would remain with the FASB.

Some organizations, including the NYSSCPA and the AICPA, have expressed disappointment with the FASB’s decision to not establish an independent standards setter.

“The FAF had a rare opportunity to do something good for millions of privately held companies in this country but failed to hit the mark by leaving the standards setter as the FASB,” said NYSSCPA President Richard E. Piluso. “The FAF recommendation is not really a change but merely creates an additional bureaucracy which provides no real incentive to address the needs of privately held companies and the users of their financial statements.”

Seidman also talked about the progress of the FASB’s convergence efforts with the International Accounting Standards Board (IASB) to come up with a set of common, high-quality standards that would be applicable to both U.S. GAAP and International Financial Reporting Standards (IFRS). While she said some convergence projects can be called successful, such as business combinations, stock compensation and nonmonetary exchanges, others, such as leases, revenue recognition and financial instruments, have been more difficult to implement.

However, progress in these areas is being made, according to Seidman. On leases, the FASB and the IASB plan to meet with each other to hammer out some of the finer details of a new lease exposure draft, which, she said, is expected to be released soon.

While re-exposing the proposed standard will add to the timeline, the FASB felt the extra input would be worth it when a final standard is released, Seidman said. Meanwhile, a new proposal on recognition of revenue—“perhaps the single most important line in the financial statement”—is due within the next few weeks. On financial instruments, she said both boards must come up with a solution that benefits all.

Noting that some projects, such as business combinations, have been easier to pass than others, such as leases, Seidman voiced her opinion on what makes some projects successful and others less so. Successful projects, Seidman said, had clear, agreed-upon objectives, along with plenty of back-and-forth between FASB and IASB staff. Further, she said, on the successful projects, the two bodies cooperated and coordinated with each other on a lot of outreach. Problematic projects lacked that coordination, she said, which was not only inconvenient but “undermines the goal of a common reporting language.”

When speaking about convergence, Seidman said the goal is not to simply align with IFRS for its own sake; the goal, she explained, is to create something that is greater than either, improving both GAAP and IFRS, “rather than rely on one or the other.”

With this in mind, she expressed support for an approach suggested by the Securities and Exchange Commission (SEC) earlier this year called “condorsement,” a framework that would incorporate elements of both endorsement of IFRS and convergence. Condorsement would facilitate the transition to IFRS by incorporating the standards into GAAP over a set period of time, at the end of which a U.S. issuer compliant with GAAP would also be able to demonstrate that it is in compliance with IFRS as issued by the IASB, according to the SEC. Seidman said the fact that the language would still be labeled GAAP would be “easier on the system” in terms of regulations and bank covenants, and would also allow for active participation by the FASB in the standards-setting process, as the condorsement model would retain the FASB as a standards-setting body in the United States.

Seidman added that regardless of the approach ultimately taken—whether it’s endorsement, convergence, condorsement or something entirely different—IFRS is going to need to be applied consistently around the world if it’s going to have any support in the United States. While standards setters can address ambiguities in the standards themselves, uneven implementation will cast doubt on the whole process and lead people to question the value of international standards in and of themselves.

“If the U.S. is to adopt a global standard, it must work here,” Seidman said.

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