From the Chairman's Desk
By Russell G. Golden, FASB Chairman
Albert Einstein said that. And while it may not unfortunately apply to all of GAAP, it does put a stake in the ground for the FASB as it seeks to reduce complexity in Generally Accepted Accounting Principles.
When accounting is complex, no one wins.Investors tell us that overly complex financial reports often obscure important information they need to make sound capital allocation decisions. Preparers tell us that a complicated, unclear standard obscures its meaning. And even when an accounting treatment is clear, applying it is lengthy, difficult, and expensive. When accounting is complex, no one wins.
We at the FASB have been listening to your concerns. We’ve heard your suggestions about areas of GAAP that could be simplified without compromising the quality of information provided to investors.
We at the FASB have been listening to your concerns. We’ve heard your suggestions about areas of GAAP that could be simplified without compromising the quality of information provided to investors. We are acting on them by:
- Launching a new “simplification initiative” featuring a number of targeted, narrow-scope projects
- Addressing complexity in key joint projects with the IASB
- Reducing complexity and simplifying accounting and financial reporting for private companies, while identifying areas where those improvements also could translate to financial reporting by public companies as well.
The FASB launched our initiative to simplify accounting standards through a series of narrow-scope agenda projects identified as opportunities to simplify GAAP in a relatively short time period.In early June, the FASB launched our initiative to simplify accounting standards through a series of narrow-scope agenda projects identified as opportunities to simplify GAAP in a relatively short time period.
We considered more than 70 suggestions from stakeholders. Based on this feedback, we began by adding to our agenda and subsequently issuing proposals on the following simplification topics:
- Inventory (Topic 330): Simplifying the Measurement of Inventory seeks to address stakeholder concerns about the complexity of current guidance on measuring inventory by requiring organizations to estimate only net realizable value when measuring inventory.
- Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating Extraordinary Items seeks to simplify income statement presentation by eliminating the notion of reporting extraordinary items separately in the performance statement.
While these two projects represent the beginning of our simplification initiative, they are a small part of our ongoing effort to reduce complexity in our accounting and financial reporting standards. We anticipate adding many more projects down the road.
Key joint projects with the IASB
In the leases project, the FASB recently voted to keep the current model for expense recognition. The FASB favored retaining the current expense approach because it would more appropriately reflect the economics of lease transactions and, based on what was heard from our stakeholders, it is more operational and simpler to apply.
We will look at more ways to improve and simplify existing GAAP.Stakeholder concerns about complexity also prompted the FASB to depart from the IASB’s approach to classification and measurement of financial instruments. Specifically, the FASB decided to abandon the "cash flow characteristics test"—which would help determine whether a financial asset should be measured at amortized cost—because stakeholders told us the new model would not reduce complexity, and might actually result in increased cost without resulting in any improvement. Instead, we will look at more ways to improve and simplify existing GAAP.
Private companies—and public companies
Through our work with the Private Company Council (PCC), we already have made significant progress by issuing three alternatives for:
- The accounting for goodwill
- Applying variable interest entity guidance for leasing arrangements, and
- Accounting for interest rate swaps, using a simplified hedge accounting approach.
The PCC has become a springboard for efforts to reduce complexity in GAAP for all organizations.In working with the PCC, we have found that areas of accounting that are complex for private companies also usually are complex for other types of organizations. As a result, the PCC has become a springboard for efforts to reduce complexity in GAAP for all organizations.
For example, as a result of feedback from stakeholders and the PCC, we added a goodwill project to the FASB’s agenda to see how we also can reduce the cost and complexity for public companies and not-for-profits.
Additionally, we acted on the PCC’s recommendation and added a narrow-scope project to address the concerns of both private company stakeholders and public company stakeholders on financial reporting complexity for companies in the development stage (for which we issued an accounting standard in June).
The PCC’s suggestions have resulted in improvement in the functionality of our standards for all companies—large and small, public and private, and not-for-profit.
As always, we want to hear from you. If you have suggestions and potential solutions to simplify existing GAAP for public companies, private companies, not-for-profit organizations, and employee benefit plans, please email them to firstname.lastname@example.org.