Financial Accounting Standards Board

Transcription

1 Finncil Accounting Stndrds Bord 401 Merritt 7. P.O. Box 51 16, Norwlk, Connectcut I Ext. 312 Fx: DENNIS R. BERESFORO Chirmn Mr. Wlter P. Schuetze Chief Accountnt Securities nd Exchnge Commission 450 5th Street, N.W. Wshington, D.C Der Wlter: You sked tht we respond to mtters rised in the September 28, 1993 letter from John S. Reed to Congressmen John D. Dingell nd Edwrd J. Mrkey. This letter focuses on four res germne to Mr. Reed's concerns--oversight of the Bord's ctivities, how the Bord sets its gend, the extent to which the Bord ttempts to develop consensus, nd the structure of the Bord's stff. We would be plesed to provide dditionl informtion should you need it. The concerns mentioned in Mr. Reed's letter re not new to discussions of how the Bord opertes. Still, the issues re importnt. nd they deserve fresh look from time to time. We lst reviewed those issues with the Commission shortly fter the ppointment of Richrd Breeden s SEC Chirmn. I lso recll similr effort shortly fter the ppointment of Dvid Ruder. TRUSTEE OVERSIGHT OF THE FASB'S ACTIVITIES As you of course know, the FASB is subject to oversight by the SEC, nd through it, committees of the U.S. Congress. The SEC reports regulrly to the Congress on its oversight role. From time to time, Congressionl committees hve conducted herings into the Bord nd its opertions. Oversight by our Trustees is independent of, nd unrelted to, tht public-sector oversight. Though independent s to technicl mtters, the Bord opertes in policy frmework estblished nd monitored by the Finncil Accounting Foundtion. The Foundtion's Bord of Trustees is composed predominntly of senior executives from business nd ccounting firms. The Trustees hve two stnding committees tht re pertinent to your inquiry-- Structure Review Committee nd n Oversight Committee. Indeed, the structure nd opertion of the FASB hve been under lmost continuous review by the Trustees since its founding. The issues

2 Pge 2 rised in Mr. Reeds letter hve been rised previous,j nd ddressed in reviews of the FASB process. Mjor reports produced or commissioned by the Trustees include:,e 0 0 April 1977, The Structure of Estblishing Finncil Accounting Stndrds, Report of the Structure Committee of the Finncil Accounting Foundtion April 1980, A study of the ttitudes towrd nd n ssessment of the Finncil Accounting Stndrds Bord, Prepred for the Finncil Accounting Foundtion by Louis Hrris Assocites, Inc. August 1982, Operting Efficiency of the FASB, Report of the Structure Committee to the Finncil Accounting Foundtion 1985, A study of the ttitudes towrd nd n ssessment of the Finncil Accounting Stndrds Bord, Prepred for the Finncil Accounting Foundtion by Louis Hrris Assocites, Inc. July 1985, December 1985, nd December 1986, Reports of the Specil Review Committee to the Bord of Trustees of the Finncil Accounting Foundtion Jnury 1989, The Structure for Estblishing Finncil Accounting Stndrds, Report of the Committee to Review Structure for Finncil Accounting Stndrds Mrch 1989, Report of the Specil Advisory Group to the Bord of Trustees of the Finncil Accounting Foundtion October 1991, Report of the Oversight Committee of the Finncil Accounting Foundtion These efforts led to mny improvements in the Bords operting procedures. Most recently, in 199 1, the Trustees chnged the number of votes needed to issue n FASB pronouncement from 4 to 5. At bout the sme time, the Trustees estblished their own Oversight Committee, which monitors FASB ctivities. The Trustees' Oversight Committee bers specil mention. This committee follows the Bord's stndrd-setting ctivities on continuous bsis. Consistent with the overll responsibility of the Trustees, the Oversight Committee is chrged with evluting whether the Bord's ctions re consistent with the precepts of the Bord's Mission Sttement..In ddition to ongoing monitoring of ll current 'gend topics, the Oversight Committee hs conducted in-depth post-issunce reviews of two pronouncements, FASB Sttement No. 94, Consolidtion of All Mjority-Owned Subsidiries, nd FASB Sttement No. 109, Accounting for Income Txes. THE FASB'S AGENDA-SETTING PROCESS Agend setting is one of the most importnt spects of the Bord's ctivities. The issues on our gend dictte the course of our efforts. The Bord's gend includes two types of projects.

3 Pge 3 Mjor projects, like ccounting for income txes or pensions, involve issues of concern to brod cross section of the Bord's constituents. Nrrower projects, like the ccounting for reinsurnce trnsctions, ddress problems of limited scope nd often involve single industry. The number of projects on our gend nd the blnce between mjor nd nrrow projects hve remined firly constnt throughout the history of the Bord. The Source of Projects on the FASB Agend Nerly ll potentil projects re brought to us by others. For exmple, in 1984 the Bord formlly voted to undertke the stock compenstion project fter receiving lengthy Issues Pper from the Americn Institute of Certified Public Accountnts (AICPA) urging us to reconsider Accounting Principles Bord Opinion No. 25, Accounting for Stock Issued to Employees. We lso received letters from most of the mjor ccounting firms urging us to del with this issue. Mny others lso supported our considertion of the topic. The Bord receives more requests thn we cn hndle with our limited resources, so we turn down most requests. Adding project to our gend, even nrrow project tht dels with specific industry, is significnt commitment. Before the Bord votes on whether to dd project, our stff hs usully spent mny months developing mterils nd consulting with constituents to help us decide if there is enough reson to tke on the new chllenge. All newproject decisions re mde t open Bord meetings following public nnouncement. The Role of Constituents in Agend Setting We recognize the importnce tht constituents plce on our gend, nd we ctively seek theviews. We conducted review of potentil projects in 1988 (the lst time we dded mjor projects to the gend). Our stff prepred detiled summry of potentil projects nd solicited comments from constituent groups including (but not limited to) the AICPA, the Finncil Executives Institute, the Institute of Mngement Accountnts, nd the stff of the SEC. Tht process led to two projects now on our gend--impirment of long-lived ssets nd presentvlue-bsed mesurements. During the pst yer, we used "prospectuses" to solicit views on whether we should dd projects on ccounting for mortgge servicing rights nd ernings per shre. The ide for using prospectus grew out of discussions between Bord members nd the mjor CPA firms nd the Business Roundtble's Accounting Principles Tsk Force. We continuously chllenge the progress nd reltive priority of projects on our gend, nd the Finncil Accounting Stndrds Advisory Council (FASAC) is key source of informtion nd counsel. FASAC ws orgnized t the formtion of the Bord nd is chrged with the responsibility for consulting with the Bord on both technicl nd policy issues. Members of

4 Pge 4 FASAC (who re ppointed by our Trustees) re expected to communicte their individul perceptions of potentil economic effects of proposed or finl pronouncements nd re encourged to consult with one nother nd others in order to communicte to the Bord more effectively. FASAC presently hs 32 members who re brodly representtive of business, investors, creditors, cdemi, nd government. Fourteen of the members re corporte finncil executives. FASAC conducts n nnul review of potentil projects nd projects currently on the gend. The current review ws completed in October nd discussed t the October 28, 1993 FASAC meeting. FASAC members were sked bout the reltive priorities of the 11 projects now on the Bord's gend nd 23 potentil projects. Those rnkings nd the members' extensive comments were compiled nd shred with the Bord nd its stff. Just s the Bord nd its Trustees regulrly review nd reengineer FASB opertions, FASAC periodiclly reviews its role nd how it might perform tht role more effectively. FASAC recently convened committee to mke such review. Constituents' Views on the FASB Agend Most of our projects enjoy significnt support when we begin the effort. After ll, nerly ll of our projects grow out of request for ction. No mtter how creful we re in dding projects, however, two things commonly hppen lter in project's life. First, mny people forget wht cused us to dd project to the gend. Our projects my tke severl yers from the time the project first ppers on the gend to the issunce of n Exposure Drft. Second, support for workmg on project often ebbs s people relize we might rech n nswer tht does not squre with their view. The 1990 SEC informl review of the FASB's gend-setting procedures is good exmple of the first phenomenon. (Then-Commissioner Lochner ws in chrge of tht effort.) Then-SEC Chief Accountnt Coulson sked us to prepre explntions of why severl projects were on our gend. We submitted lengthy summries of our projects on income txes, pensions nd other postemployment benefits, consolidtions, nd finncil instruments. We lso prepred this kind of nlysis for the Oversight Committee of our Trustees in connection with the review of two projects mentioned erlier. After studying our explntions, neither the SEC stff nor the Oversight Committee voiced ny significnt objection to our gend-setting procedures. The second phenomenon--tht ttitudes chnge bout the need for project--is more difficult to ddress. Our dilemm is best illustrted by two exmples. In 1988, the Bord ws considering dding one or two projects to our gend nd hd developed long list of possibilities. At meeting of the AICPAs Accounting Stndrds Executive Committee, one of the members expressed the difficulty in deciding which project he fvored.

5 Pge 5 He sid, "I cn't relly sy wht project you should work on until you tell me wht your nswer will be." Tht ws very direct nd honest sttement, but it is lso contrry to our unbised pproch to setting stndrds. We must void strting ny project with preconceived ide of the outcome. A few yers go the SEC expressed concern bout the ccounting for mrketble securities, prticulrly debt securities held by bnks, S & Ls, nd insurers. The AICPA tried to del with the problem but ws unble to follow through on proposed Sttement of Position in the fce of strong opposition from business groups. The AICPA then urged us to tke on the project nd del with it s high priority. An AICPA officil sid t tht time, "There is need for more objective stndrd such s one bsed on mrk to mrket." In n unprecedented ction, the Big Six ccounting firmsjointly signed letter tht endorsed the AICPA recommendtion to us, referring to the SEC's cll for mrket-bsed mesures of vlution. Yet three of the Big Six firms lter urged us to bck off from our Exposure Drft on this issue. Proposls to Chnge the Agend-Setting Process From time to time, constituents offer proposls for chnges to the wy the Bord decides the mkeup of its gend. Some of those suggestions involve wys to obtin more informtion from the vrious groups tht re interested in finncil reporting. We welcome those suggestions nd hve implemented some, like the prospectus, in our recent considertion of potentil projects. As he did in 1988, Mr. Reed gin proposes dding some other group to the process of setting the Bord's gend. Tht group would consider broder public policy nd economic considertions in the selection of projects. It is not cler how new group would be more representtive or thoughtful thn FASAC or the mny other constituents with whom we consult. The underlying objective ppers to be trnsfer of the Bord's control over its gend to different uthority. Whlle, the Bord would still be independent in deciding ccounting issues, it could only ddress topics selected by this new group. The Bord might be llowed to consider finncil instruments, for exmple, but not stock-bsed compenstion. To be relly effective, though, this outside group would hve to involve itself in the scope of individul projects s well. For exmple, some of the issues considered in our project on stockbsed compenstion lso rise in our project on finncil instruments. If the objective is to control the Bord's gend, the outside group would hve to dictte lso tht the Bord not consider similr issues in ny other project. Such n outside group is clerly contrry to the gol of independent nd unbised stndrd setting. A stndrd-setting process tht is precluded from investigting certin issues becuse of supposed politicl or economic consequences cnnot be sid to be independent. Allowing economic nd public policy interests to dictte the gend lmost gurntees tht the resulting pronouncements would lck the neutrlity tht we consider so importnt.

6 Pge 6 The Bord hs lwys opposed ttempts to impose socil or politicl conditions on ccounting stndrds. The Bord understnds tht its ctions hve rel-world economic consequences. If finncil reporting hd no consequences, if it did not ffect behvior, it would hve no reson to exist. Any ttempt to develop stndrds tht further prticulr socil or politicl gols, no mtter how noble, would destroy the neutrlity nd credibility of finncil reporting. Imposing those gols on the gend, rther thn the individul stndrds, could be just s destructive. It would crete flse impression of independence nd neutrlity, while limiting the Bords bility to ddress certin issues. BUILDING CONSENSUS Constituents often criticize the Bord for promulgting stndrds contrry to wht they perceive to be the "consensus view." Some of those criticisms seem to equte the speker's individul view with the ''consensus," but it is fir to sy tht FASB pronouncements lmost lwys generte vociferous opposition from t lest someone. We do not find tht opposition surprising becuse we del with contentious nd difficult issues. Tht is why we follow n extensive due process tht involves constituent input t every step long the wy from the gend decision to issues identifiction to proposl to finl pronouncement. We recognize the need for blnce between cceptbility nd ledershlp in improving finncil reporting. Any orgniztion tht sets rules or stndrds must be cogniznt of the need for consensus, or, filing tht, cceptbility. Our gend criteri include considertion of whether "n improved ccounting solution is likely to be cceptble generlly." The Bord's Mission Sttement observes, "The Bord considers it desirble tht chnge be evolutionry to the extent tht cn be ccommodted by the need for relevnce, relibility, comprbility, nd consistency." Severl of the Trustees cited the need for enhncing the cceptbility of FASB pronouncements in reching the decision to chnge the Bord's voting requirements mentioned erlier in this letter. The Bord hs, on occsion, revisited its pronouncements when there is demonstrted need to do so. For exmple: 0 FASB Sttement No. 52, Foreign Currency Trnsltion, replced FASB Sttement No. 8, Accounting for the Trnsltion of Foreign Currency Trnsctions nd Foreign Currency Finn ci 1 St tem en ts. 0 FASB Sttement No. 82, Finncil Reporting nd Chnging Prices, rescinded the required disclosures of informtion bout the effects of infltion tht were imposed by FASB Sttement No. 33 of the sme title. 0 FASB Sttement No. 109, Accountingfor Income Txes, replced FASB Sttement No. 96 of the sme title.

7 Pge 7 In ddition to those mjor reconsidertions, the Bord frequently mends or in pronouncements to ddress chnging needs nd circumstnces. erprets On the other hnd, we mintin tht the estblishment of ccounting stndrds must be more thn n exercise in vote counting. The Bords mission, its reson for being, is to "estblish nd improve stndrds of finncil ccounting nd reporting for the guidnce nd eduction of the public, including issuers, uditors, nd users of finncil informtion" (emphsis dded). It is unlikely tht ll, or even most, of the Bord's constituents will necessrily gree with prticulr proposl. Mny of our constituents hve vested interests in the existing ccounting tretment of prticulr trnsctions. The Bord's Mission Sttement chrges it to weigh crefully the views of its constituents. However, the Mission Sttement lso sttes, "The ultimte determinnt of concepts nd stndrds, however; must be the Bord's judgment, bsed on reserch, public input, nd creful delibertion, bout the usefulness of the resulting informtion." Finncil sttement issuers provide the vst mjority of comments on proposed FASB pronouncements. Issuers ber most of the complince costs nd hve concerns bout effects on their compnies' finncil sttements. Issuers predictbly re most likely to dislike stndrd nd to mke their views known. It should come s no surprise, then, tht the mjority of comment letters on most mjor proposls re criticl. We believe tht consensus seeking should focus on the long-term cceptbility of the body of stndrds, not the immedite populrity of prticulr stndrd. An ccounting pronouncement cnnot be fully judged until it is widely pplied. Acceptbility should be judged by the usefulness of stndrds to economic decision mkers. The Evolution of Consensus We hve observed tht comments bout the need for consensus'vq over the life of project. Most projects suffer from "lck of consensus'' t some time in their development. As mentioned erlier, most (but not ll) projects enjoy support when they re dded to the gend. Tht support often ebbs s the Bord reches tenttive conclusions nd issues n Exposure Drft of Proposed Sttement. However, support my grow s constituents study the Bords rtionle nd prticipte in due process. Over time, pronouncements tht were strongly opposed by mny constituents cn come to be well supported. FASB Sttement No. 106, Employers' Accounting for Postretirement Benefits Other Thn Pensions, provides recent exmple. 0 The Bord first rised the question of other postretirement benefits, principlly postretirement helth cre benefits, in Discussion Memorndum, Employers' Accounting for Pensions nd Other Postemployment Benefits. No more thn hndful of respondents to tht

8 Pge 8 0 Discussion Memorndum ccepted the view tht n employer's promise of helth cre benefits fter retirement constituted libility of the employer. The Bord received similr responses to its 1982 Preliminry Views nd 1983 Discussion Memorndum (both of the sme title). Opposition continued s the Bord begn ctive delibertion of this issue in Powerful groups, including the Business Roundtble, complined tht there ws no "consensus" supporting the Bords position. They sought vrious mens to block FASB ction. In Februry 1989, the Bord issued n Exposure Drft, Employers' Accountingfor Postretirement Benefits Other Thn Pensions. While mny of the more thn 475 respondents continued to oppose the Bord's conclusions, mjority (including the Finncil Executives Institute) greed tht the promise of benefits constituted libility tht should be recognized in the finncil sttements. Tody, Sttement 106 enjoys substntil, lthough not universl, support. Mny employees hve expressed concern when employers, fced with the need to report their obligtions, hve cut or chnged their promises. However, we receive few comments suggesting tht the Bord reched the wrong ccounting conclusion. If the Bord hd responded to the cler lck of consensus in erlier yers, ccounting for postretirement helth cre would still be on the csh bsis. Compnies nd the users of their finncil sttements would still be lrgely ignornt of the extent of their obligtions. Informtion tht tody informs public policy would simply not exist. THE STRUCTURE OF THE FASB STAFF Occsionlly, constituents suggest restructuring the FASB professionl stff. Mr. Reed's proposl involves ressignment of stff to individul Bord members. You probbly recll tht the Bord nd stff were originlly structured long those lines. Tht pproch proved unsuccessful, nd the 1977 Report of the Trustees' Structure Committee recommended chnge to centrlized stff orgnized under Director of Reserch nd Technicl Activities. In our current structure, stff members re ssigned to individul projects nd responsibilities nd serve the Bord, rther thn ny individul member. The current structure hs proven efficient nd hs contributed to development of hghly motivted, professionl, nd independent-minded stff. Bord members re generlly plesed by this pproch, nd it ws endorsed in the 1989 report by the Structure Review Committee of our Trustees. Our current pproch hs never deprived Bord member of stff support. All member need do is sk nd he receives ll the support he requests. Nor does ths pproch work ginst Bord members who disgree with the mjority on prticulr issue. Indeed, the stff frequently ssists dissenting Bord members in the preprtion of their dissents.

9 Pge 9 The objectives of proposls for chnges in stff structure hve never been cler to us. Mr. Reed's proposl mentions incresed efficiency nd enhnced cceptbility of FASB pronouncements. We do not see how the proposl would chieve either of those gols. Assigning stff to individul Bord members would require ech member's stff to gin the sme depth of understnding tht project tem develops in the service of the entire Bord. Tht would hrdly contribute to efficiency. Nor is it cler how the structure of our stff hs nything to do with the cceptbility of our pronouncements. The Bord, not the stff, delibertes nd votes on Exposure Drfts nd finl Sttements. Perhps the best rgument in fvor of our current orgniztion comes from stndrd setters in other countries. The United IQngdom, Cnd, nd Austrli ll use centrlized stff model similr to the FASB. The United Kingdom is especilly notble, becuse they recently reorgnized their stndrd-setting process. We understnd tht their decision on stff model resulted, in lrge prt, from their study of the Bord's operting procedures. CONCLUSION I would observe tht constituents often rise process issues whenever the Bord is involved in prticulrly contentious issue like income txes, other postretirement benefits, or stock-bsed compenstion. The severl efforts by the Trustees nd Bord to study nd refine the FASB's procedures testify to the importnce we plce on mintining n open nd objective process, nd we will continue to crefully consider ll suggestions to improve our process. Plese let me know if we cn provide further informtion bout ny of the mtters discussed in this letter. Very truly yours, A