There are three primary reasons to make changes to accounting standards, according to Financial Accounting Standards Board Chairman Richard Jones, and stakeholder engagement and feedback are critical to getting those changes right.
“I sometimes refer to accounting standards being ‘sticky,’” he said in a virtual presentation during the American Institute of CPAs’ Conference on Current SEC and PCAOB Developments on Tuesday. “By that, I mean that to change an accounting standard, you need to make a strong case for change.”
“If we issued or expanded a standard every time someone requested a specific piece of information, there’d be an unwieldy volume of information to weed through that would be presented in an inconsistent manner,” he said. “Would it be good standard-setting? I don’t think so. In fact, I think it would just obscure critical information that investors truly need. While I probably need an updated example, I would equate it to someone asking you for a phone number and you handing them a phone book.”
With that in mind, Jones noted the three main reasons for the board to consider changing accounting standards:
1. Providing investors with better, more useful information. “We must balance the investor’s desire for more granular information with the cost to provide that information,” he said. “I intend to put added emphasis on cost/benefit analysis throughout our standard-setting activities. It will challenge us to carefully evaluate the case for change. And it will challenge us to clearly identify, understand, and communicate the types of investors who will benefit from that change and how they will use that information.”
2. Removing unnecessary cost and complexity from the system. “Unnecessary complexity, and the cost that accompanies it, affects investors and preparers. It conveys a level of precision that can be misleading and can reduce the quality of compliance with a standard,” he said, citing FASB’s project on reference rate reform as an example of the board proactively addressing potentially unhelpful complexity.
“Some have questioned whether the FASB’s simplification projects only benefit preparers and whether they are done at the expense of providing information to investors. That is not the case,” he argued. “For example, during our project on convertible debt instruments, many investors told us they didn’t want a complex model. In fact, they told us they found the information provided by the less complex model more useful.”
3. Maintaining and improving the Codification. “Codification maintenance and improvement projects rarely make headlines. They’re narrow, often technical or industry-focused, and sometimes even seem like ‘wordsmithing,’” he said — but that doesn’t mean they’re not important, as they help maintain the relevance of the standards and reduce variations in application.
“After all, at the end of the day, there is actually an accountant who has to apply our standards, and we need to make sure that can be done in an efficient and effective manner,” he said. “As a result, our Codification maintenance and improvement projects will remain a significant and important part of our technical agenda.”
Reaching out for feedback
Jones also emphasized the central importance of stakeholder input to the standard-setting process.
“Former Mets manager Casey Stengel once said, ‘Sometimes it’s easier to understand things than to figure them out,’” he noted. “As standard setters, we ‘figure them out’ only when we actively listen to all our stakeholders — even those who hold opposing views. Then, and only then, do we come to the best decisions.”
Jones, who took the helm at FASB in July, began his tenure with a “listening tour” that included both the staff of the board and its many outside constituents. “While I had intended to do this outreach in person, the pandemic had other plans,” he said. “On the bright side, remote work has allowed me to engage with more stakeholders. Instead of spending hours on a plane, I can spend that time talking with people — even if it is through a computer screen.”
“Since July, I’ve spoken with a wide array of investors, preparers, auditors and academics. I’ve met with industry groups, regulators, government leaders, and others with an interest in our work,” he continued. “I’ve heard a wide range of perspectives. Suffice it to say, not all stakeholders agree on all issues. But one thing everyone seems to agree on is that we just went through, or are going through, a period of significant accounting change. Some companies, investors, organizations, and other users are still grappling with recently issued standards. Others haven’t even begun to implement them, and some investors are still incorporating them into their decision-making process. Throw a worldwide pandemic into the mix, and it becomes hard to keep up with day-to-day responsibilities, let alone sweeping new initiatives.”
Jones plans to continue engaging with stakeholders on a regular basis. Among other things, the board will be asking for stakeholder input on what issues it should be considering in the future.
“The FASB undertook a successful agenda consultation project in 2016. I believe it’s time to do it again,” he said. “Starting this month, we’ll begin to conduct outreach with our advisory and other stakeholder groups to understand priority areas they think we should address. We’ll hold meetings and request written comments to evaluate these needs.”
That feedback will be analyzed next spring and shared with the Financial Accounting Standards Advisory Council for them to weigh in on. The board will then issue a public invitation to comment or discussion paper by the middle of 2021.
