Accounting rulemakers are looking for new ideas on how best to book assets and liabilities when nagging uncertainties or probabilities make their accounting less than straightforward.
The Financial Accounting Standards Board has issued an “invitation to comment” that poses a host of questions on how companies should book assets and liabilities when some measure of uncertainty or probability exists. By its own admission, FASB has treated uncertainty differently in various standards and concept statements, and it’s been assigned various treatments by the International Accounting Standards Board as well.
Beresford
Dennis Beresford, an accounting professor at the University of Georgia and a former FASB chairman, said FASB is on course with a general philosophy that probabilities should be expressed in percentage terms and booked accordingly.
For example, if a company were caught up in a lawsuit and had to book the prospective liability, it would be required to estimate the dollar value of the possible loss as well as the likelihood. If the company thought the worst-case scenarios was a $1 million judgment, but saw only a 1-percent likelihood of losing the case, it would book a liability of $10,000 ($1 million times 1 percent).
Beresford said current accounting rules don’t fully support that position, “but they believe in that position, so they are trying to change the concept statements.”
It’s controversial in accounting circles, Beresford said. “It’s problematic to determine what those numbers should be,” he said. “It’s an almost impossible thing to measure, and even if you could measure it, the numbers are not very relevant.”
FASB says feedback will be helpful in analyzing some of the issues that have a bearing throughout financial reporting on the role of probability and uncertainty in defining, recognizing and measuring assets and liabilities. Specifically, FASB is looking at its Concepts Statements No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, and No. 6, Elements of Financial Statements, and the IASB Framework for the Preparation and Presentation of Financial Statements.
The Board also is gearing up for the next phase of its joint conceptual framework project with the IASB, where the two rulemaking bodies will focus on the definitions of elements in the financial statement such as assets, liabilities, revenues, expenses and others. The next phase also will explore concepts for recognizing and derecognizing those elements and attributes for measuring recognized items.
Forum On Independence Calls For Convergence, Principles
About 150 people representing regulatory, rulemaking and accounting fields gathered in Brussels last week to brainstorm ways to strengthen and streamline auditor independence rules, charting a course for a revised global code of ethics.
The International Federation of Accountants convened the forum, where the common theme to emerge included a call for more implementation guidance, especially examples of appropriate and inappropriate safeguards to independence threats, and more clarity about how the code applies to tax services. IFAC’s Ethics Committee will consider forum input as it revises its Code of Ethics.
Ward
“Ethics is the driver of the actions of all professional accountants,” said Graham Ward, president of IFAC, at the forum. “As we have seen firsthand over the past several years, the accountancy profession’s credibility in the global marketplace is measured more by our ethical performance, than by our technical competence.
Participants also advocated a movement toward a more principles-based approach to ethics rules, according to Committee Chair Richard George, similar to the movement advocated in some circles toward principles-based financial reporting. “One of our greatest challenges, however, is the need to balance the principles-based approach with the rules-based approach historically favored by some regulators,” George said in a statement following the forum.
No comments yet