Financial Accounting Standards Board chair Richard Jones has been poring over the feedback the board received from a recent consultation on its future standard-setting agenda to decide on new projects to take on, possibly on cryptocurrency and other intangible assets, while working on earlier standards in areas such as credit losses and income taxes.
“Our agenda consultation process was a very extensive process for us,” Jones told Accounting Today. “We did a significant amount of outreach in preparing that document. We talked to almost 500 stakeholders as part of the preparation of that document, and then we put it out for public comment to provide everyone a chance to provide input on what we should be working on next.”
When Jones became FASB chair in July 2020, he came with 30 years of experience and ideas on what the board should be working on, but he also wanted to hear from FASB’s constituents.
“I thought it was very important to make sure that we had done that extensive outreach with stakeholders to understand what they thought we should be working on,” he said. “This is part of moving forward on that commitment and that promise. The response rate has been tremendous. We’ve been thrilled with it, and we’ve been bringing the results of those responses and that input back to our board for consideration at public meetings ever since that comment period closed at the end of last year. You’ll see most of that input come back in front of our board through probably the end of the second quarter of this year.”
The input received from the consultation was wide-ranging, but the board has also been noticing some common themes. That included input on some projects already on the agenda, such as FASB’s disaggregation project on income statement expenses.
“It was effectively the feedback we heard from investors about understanding the make-up of the expenditures that were flowing through the company’s financial statements and getting a little more detail in those areas so that they could better understand how different expenses behave,” said Jones. “We used that to reshape and refocus our project previously called Project on Financial Performance Reporting to focus on that. And that was one of the top things that we heard from investors in our outreach.”
Income tax disclosures
FASB has also had a longstanding project on income tax disclosures for which FASB had issued several exposure drafts and received a great deal of input. “We’ve once again used the input from that invitation to comment to reshape that project at a recent board meeting,” said Jones.
The board meeting attracted some outside attention, with an advocacy group known as the Financial Accountability and Corporate Transparency (FACT) Coalition questioning FASB’s recent decision, contending it would narrow the scope of its income tax disclosure review to exclude the possibility of adopting country-by-country reporting for public multinational companies, part of the Organization for Economic Cooperation and Development’s base erosion and profit shifting action plan for curbing corporate tax avoidance, also known as OECD BEPS.
“It’s like FASB has pressed the mute button on investors with trillions of dollars in assets who have repeatedly said they need more information to assess risks stemming from aggressive tax planning and international operations as they make decisions about where to allocate capital,” said FACT Coalition executive director Ian Gary in a statement last week. “It’s nearly impossible to reconcile FASB’s recent decision to ignore clear investor calls for public reporting with FASB’s stated mission to provide useful information to investors and other users of financial reports.”
However, Jones believes the proposed disclosures could still be useful to many investors. “Our focus is on financial accounting and reporting, and one of the things that we’ve heard from investors is they’re looking to see if there's a way that we can improve the information that’s required, for them to understand the legislative tax risk, as well as the tax position of a company,” said Jones. “Sometimes you hear things like country-by-country tax reporting, and very often that could be something very different than financial accounting. That could be what’s filed with the IRS, for example, or the OECD, keeping in mind that financial accounting standards are designed for financial reporting, not necessarily for tax purposes.”
One proposed disclosure that could be helpful to investors is an effective tax rate reconciliation to help investors understand a company’s tax position, and how its effective tax rate varies from the statutory rate in its home market.
“There tend to be two key items that are in that effective tax rate,” said Jones. “One is dealing with state and local taxes and the other is dealing with international taxes, and in both of those categories, they tend to be presented as a single number. What we committed to in our meeting a week or so ago was that we would take a look at that effective tax rate and see if there were improvements we could make. Is there a way that we can disaggregate that foreign tax information that’s already presented to provide better transparency about what is driving the rate differential from the home country rate and the federal rate? It’s possible that could bring additional transparency about the countries that a company operates in and where their taxable income is.”
For many companies, the state and local tax differential is also a significant factor behind the differences between the federal rate and their overall effective rate, he noted. “When a company is making a decision about where to locate one state versus another or how their operations affect the apportionment of their income from one state or another can be very important to understand, it’s also looking at that to see if there’s more transparency,” said Jones.
FASB would like the standard to provide more consistency in how the income tax information is provided from one company to another.
“We’ll be taking a look to see if there maybe are some defined categories and other things that we could do to make that more transparent to investors using that information,” said Jones.
FASB is also considering expanding a current requirement for companies to disclose the overall income taxes they pay that could involve country-by-country reporting.
“The issue is maybe there’s additional detail underlying that as to the jurisdictions where those taxes are paid that can also help provide investors with additional transparency about a company’s tax operations and information as part of analyzing that financial accounting report,” said Jones. “One thing that was clear in our recent board meeting was our board is focused on achievable standard setting, and we recognize that we can possibly take action in this as well as other areas and provide the most critical information to investors by focusing on that information at the start of our projects or at a reset of our projects and getting that information out over time.”
Cryptocurrency and other intangible assets
FASB has been hearing more interest in accounting standards specifically for cryptocurrency as companies invest in Bitcoin and other virtual currencies and dabble in nonfungible tokens, or NFTs, as a way to capitalize on their intangible assets. Companies that are relying on the existing guidance from the American Institute of CPAs are frustrated that the current FASB standards for intangible assets don’t allow them to account for the increase in prices at fair market value.
“For companies that don’t qualify for specialized industry accounting, most of what people refer to as digital assets or cryptocurrency fall under intangible assets,” said Jones. “There are some that don’t. Maybe some might be considered securities or some form of claim on a service or on an asset. But for the general category, many of them are falling into the category of intangible assets. It’s fair to say that when the accounting for intangible assets was created, it probably wasn’t for digital assets. The question is, is there a better accounting model for them? And is that an area that the board should be focused on?”
FASB has added such questions to its research agenda, giving the staff an opportunity to take a look at what’s occurring in practice, the population of items, and possible alternative accounting models to consider.
“Generally a lot of the concerns you hear about an intangible asset model is it tends to be at a one-way mark, meaning it marks it down in value, but it doesn’t account for the recovery in value that can occur, particularly with volatile assets,” said Jones. “One of the things that we would consider is would it possibly make more sense to do some accounting based upon a mark to fair value type model? One of the other questions there is that fair value is a really easy term to use from a standard-setter perspective, but in practice you have to determine what is fair value and what’s the most appropriate source of fair value. That would be part of our discussion too, not simply to say maybe fair value is a better model. Maybe it's not, but if it was, what would that actually mean to people in practice?”
He anticipates the researchers will be coming back to the board in the next few months with further information, and then the board members can decide whether it’s something they would like to pursue from a standard-setting perspective.
ESG standards
Intangible assets are just one of the items on the research agenda that were requested during the agenda consultation.
“Some of those more frequent areas that we heard about and that have fully shaped our research agenda are the accounting for exchange-traded digital assets and commodities, and the accounting for and disclosure of intangible assets,” said Jones. “We had an existing project on hedge accounting, but we also heard some questions about the scope of derivative accounting, so we’ve added that under our hedge accounting research project. Accounting for financial instruments with environmental, social and governance-linked features as well as regulatory credits. The accounting for government grants, which we’ll soon be issuing an invitation to comment on, as well as the agenda consultation project that was part of our research.”
ESG has been one of the most talked about areas in recent months, but Jones is hesitant to get too involved in that area. While the International Financial Reporting Standards Foundation recently set up an International Sustainability Standards Board that it will be overseeing alongside the International Accounting Standards Board, Jones isn’t sure this is an area for FASB, although he is watching the developments. The Securities and Exchange Commission issued its long-awaited
“We are focused on financial accounting and reporting, and sometimes you see other measures like the recent SEC release and possibly some of the things the ISSB will consider go beyond that,” said Jones. “They go into everything from carbon emissions and measuring them, but we’re focused on the financial accounting and reporting area. That’s our mission. We’ll certainly watch developments from the SEC as well as the IASB and other areas and understand if there’s any interaction with our financial accounting and reporting standards. But we’re focused on financial accounting reporting standards.”
Nevertheless, FASB may yet decide to do some standard-setting related to ESG. “What we did get through the invitation to comment process was input that there was an emergence of different instruments and different transactions where it may make sense for us to take a look at the accounting and see if the accounting makes the most sense,” said Jones. “One of those areas was what I referred to as ESG-linked financial instruments. Think about it as a debt issued that pays one interest rate if an environmental target is achieved and would pay a different interest rate if an environmental target of the company is not achieved. By the same instance, we’re seeing the emergence of different regulatory credits. Maybe they could be carbon credits. They could be other forms of credits that are either generated by companies or that companies are trading, and what’s the most appropriate accounting for those types of credits?”
Some of the input received by FASB during the agenda consultation suggested these are likely to be emerging issues that the board should look at, so the staff will be bringing their research back to the board members to decide whether there’s interest in setting standards in either of those areas.
Current events
With the inflation rate rising dramatically to 8.5% this year, many companies are closely watching their balance sheets for the impact.
“When you think about inflation and understanding the effects of inflation on a company, it segues right back into our projects on income statement disaggregation and understanding more detail about expenses,” said Jones. “Our standard on revenue recognition several years ago had additional details about the breakout of revenue information in the footnotes. I think the combination of that additional information on revenue, the projects that we have focused on disaggregation in the income statement, additional tax information, those are all part of providing additional information that can be looked at on a comparative basis that should help investors understand the effects of inflation on a company's business.”
In a related matter, many companies are also worried about the impact of supply chain constraints since the pandemic, one factor contributing to the high inflation rate. Accounting standards can also help companies deal with those impacts.
“I think the financial reporting is designed to reflect what’s happened,” said Jones. “To the extent that supply chain issues have an effect on either revenue or the ability to produce inventory or the cost of producing inventory, those are all reflected in our standards today. For public companies, I would also point out that our standards are designed to to work with, but not necessarily be duplicative of, information required elsewhere in public company filings. And the SEC certainly has a robust set of disclosure requirements related to management’s discussion and analysis, including trends in revenues, costs and so on, that I think our financial statements work very well with providing insight into those matters.”
The Russian invasion of Ukraine is also having an impact on many companies’ financial statements, as they need to deal with not only sanctions but with the loss of business and supplies, in addition to the incalculable human costs. The Public Company Accounting Oversight Board recently issued
“We do have standards on risks and uncertainties that deal with everything from supplier risk to concentrations risk,” said Jones. “There are some thresholds in there purposely to bring the most important and imminent information to light. That’s certainly something that we have today. In general, most of our standards are designed to reflect what’s happened, and to reflect them transparently based on the income statement performance, but as well as what’s on the face of the balance sheet. So I think we have things in place that help with that. There’s disclosure requirements to the extent that there are risks that are imminent and are being identified related to any of those world events.”
CECL adjustment
One area where FASB recently tweaked its standards was credit losses, often referred to as CECL in reference to the current expected credit loss model it uses. FASB adjusted the standard to take account of information about troubled debt restructuring, vintage disclosures and gross write-offs (
“When it came to troubled debt restructurings, one of the things that we were hearing was because CECL is an expected loss model, that it was already incorporating the expectation of loss that would have otherwise been caught by a troubled debt restructuring model,” said Jones. “And in fact, it was effectively imposing an additional calculation on entities that neither investors nor preparers and auditors affiliated with it were finding necessarily the most important information.”
One of the other things FASB heard during the post-implementation review of the CECL standard was how some of the best practices about disclosures and loan modifications during the last few years were particularly helpful to investors.
“We took a look at some of those best practices, and it was really the combination of that input that led us to determine that the troubled debt restructuring model for lenders was really taken into account already through our CECL model, and that the CECL model was doing a good job and that really what investors were looking for was a little more transparency about loan modifications,” said Jones. “What you see is the output of that. It effectively enabled us to simplify the accounting for loan restructurings by going to one model, but it also allowed us to provide more transparent information to investors via the additional information about loan modifications.”
Some users are adopting the accounting standards update early, while others will be adopting it shortly.
“It’s something that I would say was definitely an output of the extensive input that we got from our stakeholders and responding to it on a timely basis,” said Jones.
FASB could be weighing a number of other areas for future standards suggested by its constituents.
“I always tell people just because we haven’t either talked about it yet, or it hasn’t appeared on our research agenda, doesn’t mean we’re not talking about it,” said Jones. “We’re going to talk about all the input we’ve gotten and you’ll see most of that come back to our board over the next few months.”
