to Convergence James Leisenring FASB Senior Advisor The views expressed in this presentation are my own and do not necessarily represent official positions of the Financial Accounting Standards Board Official positions of the FASB Board are arrived at only after extensive due process and delib ID: 334264
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Conceptual Impediments to Convergence
James Leisenring, FASB Senior Advisor
The views expressed in this presentation are my own and do not necessarily represent official positions of the Financial Accounting Standards Board. Official positions of the FASB Board are arrived at only after extensive due process and deliberationsSlide2
Convergence: The End of an Era
Original vision
A single set of
high-quality
global standardsUsed on the global capital marketsLast effort at convergence has been on Revenue RecognitionBrief history of the convergence effort of the FASB and IASB
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Convergence
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Memorandum of Understanding (SEC “Roadmap” 2005)
Focus on major projects on agendaDon’t try to address every reconciling itemDon’t try to converge inadequate standardsProcess identified an agenda to address problems with both US GAAP and IFRS3Slide4
MOU Projects—Convergence Agenda
Established in 2006 (
R
efocused in 2008 and again in 2010)
Intangible Assets (never added to the agenda)Business Combinations (completed 2007, revised SFAS 141 (2001) and IFRS-3 (2004))Fair Value Measurements (completed 2011, revised SFAS 157 (2006))Revenue Recognition
(completed 2014)Leases
(In process)
Financial Instruments (
In process—FASB only)
Consolidations
Derecognition
Liability and Equity Distinction
Postretirement Benefits
Financial Statement Presentation
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Convergence Agenda
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Record of accomplishment is not stellarProjects identified had long been vexatiousProgress has been limited because of lack of agreement on basic conceptual issuesInconsistent application of asset and liability definitionsNo agreements on accounting for forward contracts or options written or heldNo agreement on measurement issuesNo agreement on what we mean by control5Slide6
In-Process Projects: Leases
Agreement a right of use is an asset and acquisition of that right can create a liability
Renewal options:
Can the asset held by the lessee create a liability?
Can the option written by the lessor create an asset?Why are various service rights or obligations disaggregated from leasing contracts?If a default on a contract can occur, why isn’t there a performance obligation of the lessor and liability of the lessee?
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Conceptual Impediments to Completion
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In-Process Projects: Financial Instruments
Why can’t we agree on an impairment measure for loans?
Day one loss?
Why can’t we agree on measurement attribute(s) for financial instruments?
Is presentation the cause of our measurement disagreements?How can anyone believe the present measurement and presentation systems create comparable information?Complexity?
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Consolidations
What do we mean by control?
What do we do with options and forward contracts?
Do we really mean control or do we mean assurance of perpetuation of control?
Would we apply “stickiness” notions to control of an entity?Conceptual Framework Exposure Draft on the Reporting Entity never completed in part because of common control concerns
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Derecognition
Why not derecognize when the right or obligation fails the definition of an asset or liability?
Why do we confuse risk and rewards with assets and liabilities
?
Why are we afraid we might get it back?What should we do with options and forward contracts?What is the basis for “stickiness”? History matters
?
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Conceptual Impediments to
Completion
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Liability and Equity Distinction
Basic liability definition issue: Is a liability the result of an obligation to deliver an asset of the obligor or not?
Why do we distinguish between an obligation to deliver a fixed from a variable number of shares?
Why
are gain and losses on derivative contracts in equity instruments of the entity (however defined) not recorded in comprehensive income?
Why do we create different accounting for an option held or forward contract to acquire the entity’s outstanding stock?
What should be done with issued shares that are puttable?
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Completion
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Postretirement Benefits
Does an unvested obligation meet the definition of a liability?
Does the projected benefit obligation meet the definition of a liability?
Why can’t we resolve issues related to the discount rates
?What do we mean by a constructive obligation?Does a funded postretirement plan represent an SPE that, absent a scope exception, would be consolidated?
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Financial Statement Presentation
Why won’t we just require
a
single statement of comprehensive income?
If we think a subtotal for net income, (earnings, profit or loss) is important, why don’t we define the term and require it?What is the conceptual basis for items in OCI?What is the conceptual basis for recycling?12
Conceptual Impediments to Completion
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Conceptual Framework Issues
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“Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.”
(Con 6, paragraph 25)
Problems:Probable(1)Future economic benefitsControlledPast transactions or events(1)See footnote 18 (Con 6)
Assets
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Liability
“Liabilities are probable future sacrifices of economic
benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.”
(Con 6, paragraph 35)
Problems:Probable(1)Future economic benefits
Obligations (uncertainties)Past transactions or events
(1)
See footnote 21 (Con 6)
Conceptual
Framework Issues
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Conceptual Framework Issues
Asset/Liability Definitions
Where should
(must) the
focus be with respect to an asset:Present rightA right either exists or does not existNot on probable future benefit (cash inflow)The outcome of having a right (which could be zero)
Contingent asset?
Where should (must) the
focus be with respect to a liability:
Present obligation
An obligation either exists or does not exist
Not on probable future sacrifice (cash outflow)
The outcome of having an obligation (which could be zero)
Contingent liability?
Discussions of contingent assets/contingent liabilities are really discussions about arrangements with uncertain outcomes
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Conceptual Framework Issues
Asset Liability Definitions
Observations
Some virtually certain in or out bound cash flows are not assets or liabilities
“Risks and rewards” are not liabilities and assets; they are the results of having assets and liabilitiesRisks and rewards affect the measurement of both assets and liabilities, not their existenceWe don’t know what to do with forward (executory) contracts that appear to meet definitions of assets and liabilities
We are inconsistent in accounting for options written or held
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Conceptual Framework Issues
Questions about Assets and Liabilities
Does a forward contract to acquire an asset convey control of that asset?
Does an option to acquire an asset convey control of that asset?
Does the owner of an asset subject to a forward contract to sell or a call option still control that asset?Why do we think an option or a forward contract suggests control of an asset is retained but not obtained? (derecognition, revenue recognition)
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Conceptual Framework Issues
Questions about Assets and Liabilities
Can writing an option (by definition, a liability) result in an asset?
Can having an option (by definition, an asset) result in a liability?
Can an option or a forward contract create an asset for both parties to the contract?Can one have a liability without any present obligation if non-payment is sufficiently consequential?Can one have a liability based on a contract to refrain from a given activity or did one just sell an unrecognized right?
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Conceptual Framework Issues
Measurement
One phase of the Conceptual Framework project is intended to address measurement attributes and measurement issues
Measurement of assets is of course controversial
Measurement of liabilities seems to pose even more issues especially nonfinancial liabilitiesWe seldom really measure anything, we make calculationsBest estimatePresent value of expected cash flows
Isn’t remeasurement really the controversial issue?
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Conceptual Framework Issues
Issues such as we have discussed demand resolution
Risk of retaining inconsistent answers and standards
Lack of conceptual agreement has been an impediment to resolving issues
MOU projects identified because accounting was considered to be deficientWork on resolving Conceptual Framework issues was discontinued to focus on MOU projectsBoth Boards now again beginning to look at their respective Conceptual Frameworks
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Conceptual Framework Project(1)
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Objectives and qualitative characteristics (done 2010)
Elements, recognition and derecognition MeasurementReporting entity (Exposure Draft March 2010)Presentation and disclosure (Disclosure Framework Exposure Draft in 2014) (redeliberations have begun)
Framework purpose and statusApplicability to the not-for-profit sector (IASB)Entire framework
(1)
Once a joint project, however, the IASB decided to proceed not as a joint project but with the FASB and others as advisors.Slide22
Conceptual Framework Project
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Project Objective
Never the intention to start with a clean sheet of paper and develop a new conceptual frameworkTry to address deficienciesTry to clarify and improve understanding
Make amendments that experience in application have suggested are necessaryFASB has agreed to complete Disclosure Framework and begin work on presentation and measurement
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Conceptual Framework Project
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Issues in Process
Disclosure framework—objectiveImprove the effectiveness of disclosures in notes to financial statements by clearly communicating the information most important to users of those statementsFramework to assist Board in establishing consistent relevant disclosure objectives in each project (admission of an ad-hoc basis)Framework to assist preparers in meeting disclosure objectives
How much disclosure compensates for sub-optimal accounting
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Conceptual Framework Project
Issues in Process
Measurement
We typically don’t really “measure” anything
We assign (calculate) a number to depict an asset, liability, or changes in an asset or liabilitySFAC 5 states items are measured by different “measurement attributes.” “Attribute refers to the traits or the aspects of an element to be quantified or measured” (SFAS 5, footnote 42)Entry price or exit price does depict the amount necessary to acquire or proceeds expected to be received at disposition of an item but do not seem to be “traits or aspects” of the itemOther “attributes” can only be understood by describing the calculation process to determine the number
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Conceptual Framework Project
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Issues in Process
MeasurementMost debates about measurement are actually debates about remeasurement and are asymmetricalRemeasurement debates are typically about whether to recognize gains before realizedThere is less debate, at least with respect to assets, that some
remeasurement is appropriate to portray an impairment
No
agreement on the objective of the
remeasurement
Many often assert measurement of liabilities involves issues that are unique
Own credit riskSlide26
Conceptual Framework Project
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Issues in Process
MeasurementTo properly focus the debates about measurement that have been so pervasive, we need to agree:That measurement in concept should be resolved in terms of what best meets the objective of financial reporting and enhances the decision usefulness of representationally faithful, relevant informationWhat we are trying to accomplish (the objective) when depicting items in terms of a number and perhaps stop suggesting the depiction even represents a measureSlide27
Conceptual Framework Project
Issues in Process
—Presentation
Presentation of the statement of comprehensive income
What subtotals should be required, if any, in a statement of comprehensive income?How should each subtotal help meet the objective of financial reporting?What is the objective of items classified as other comprehensive income?Should how an item is measured affect the presentation of comprehensive income?27
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Conceptual Framework Project
Even with progress on measurement and presentation, for the MOU projects to be addressed in a satisfactory manner certain basic conceptual issues need to be resolved
Clarification of asset and liability definitions to emphasize rights and obligations
Resolve liability/equity distinction by a changed notion of what must be the obligation to meet liability definition
Resolve derecognition to be consistent with recognitionAgree on a consistent notion of what is meant by control
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