My first column this year discussed a few hopes for 2010. One of them happened in February, when the Securities and Exchange Commission clarified its thinking about International Financial Reporting Standards. I’m happy to report that another happened in June, as the Financial Accounting Standards Board issued several exposure drafts as part of its big push to improve and converge U.S. Generally Accepted Accounting Principles and IFRS, and announced a slower timetable for completion of the 15 or so projects on its agenda.
Four exposure drafts have been issued, with another eight or so planned in the next year, according to the new schedule. Now FASB needs insightful comment letters on all of these exposure drafts to ensure that the resulting standards are practical and useful, and include sufficient guidance for consistent application. And reporting companies—that would be you—must provide a lot of that input. To that end, I offer a few tips to writing a good comment letter on a proposed accounting standard.
You Don’t Have to Comment on Everything
Exposure drafts include a list of questions on which FASB wants input. Many companies, particularly smaller ones, will only have substantive views on a few of those questions. That’s fine. Write a comment letter expressing your views on the issues that you have views on, and note that you haven’t addressed the other questions because you don’t have experience in those areas. There is no need to attempt to learn about and develop views on all of an exposure draft’s questions simply to write a comment letter. Your letter will be taken seriously whether it addresses all of the questions asked, or just a few.
Oh, and if your main area of concern or expertise is something FASB hasn’t even asked about, that’s OK too. Sometimes FASB doesn’t focus on an area that is nonetheless important, and constituents should speak up when that happens.
Don’t Just Complain
Many comment letters object to FASB proposals on the basis that they would change the company’s accounting. Those letters don’t really accomplish much. FASB already understands that its proposals will change many companies’ accounting—calling out the fact that you are one of those companies isn’t likely to alter the board’s thinking or help to improve the standards.
Instead, explain why you believe the accounting change would be a bad idea. For example, if you believe that the change to your accounting would be unintentional, say so. If you believe the current accounting better matches the economics of your transactions, explain why. If you believe that the proposal would be difficult and expensive to implement, identify which aspects of the proposal lead to that conclusion, and try to suggest an easier way for FASB to achieve the improved accounting.
In the end, if your objection to the proposal sounds like nothing more than, “We’ve been doing it this way forever, leave us alone!” it won’t mean much.
Comment on Principles, Not Only Results
Many comment letters focus on whether the writer likes or dislikes the results that will come from applying the standards. These comments are much more effective if accompanied by analysis of the articulated principles and application guidance. After all, FASB is hoping for more than just a show of hands for who likes the proposal and who doesn’t. Comment letters aren’t intended to be an up-or-down vote.
For example, a comment letter that describes a typical customer contract and expresses the view that the proposed revenue recognition guidance would inappropriately delay revenue recognition is a good start. But it would be more effective if it identified the principle that would cause the inappropriate delay. Is it that FASB has defined revenue incorrectly? Does the proposal use the wrong principle to determine when performance occurs? Is the guidance on variable customer payments too restrictive?
My number-one recommendation is to write a comment letter. It isn’t hard to do, and it’s the best chance to affect the standard-setting process.
Or perhaps the problem isn’t the principle itself, but lack of clarity on how to apply it. If so, give FASB more than an assertion that the proposal wouldn’t provide guidance for your situation. Try to explain which principles need to be enhanced or supplemented. Is the guidance on variable customer payments too vague to be applied to your contracts? Or should the indicators for when control of an output has passed to the customer be improved to better deal with the services you provide?
The more specific the comment letter is about which parts of the proposal are causing concerns, the better FASB can consider whether the concerns can be addressed in a useful manner.
Write What You Know
Reporting companies often assert that investors would not find certain information useful. In many of these instances, investors have told FASB the opposite. When this happens, not only will FASB discount the company’s assertion, but the company may be viewed as simply trying to stop a proposal at all costs, rather than as providing thoughtful input. That could result in less attention paid to other views expressed in the comment letter.
On the other hand, reporting companies are best-positioned to comment on whether or not the proposals will work operationally: how hard it would be to track the necessary information, modify systems, and so forth. And of course, companies know the economics of their businesses and should be able to provide input on whether the proposals are consistent with the economics or not. These are areas where preparer comments are likely to be more insightful that comments from others, so companies should focus on them.
It’s generally better to let investors, auditors, regulators and other crowds speak for themselves rather than to try to assert what their views and reactions will be.
Comment Even If You Like the Proposal
Those who dislike a proposal are often motivated to respond, while those who like the proposal may feel like there’s no need to speak up. But confirming that you agree with a proposal is valuable too. After all, the more companies that agree with the proposals, the more likely FASB will believe its plans capture the economics correctly and can be applied as intended. That, in turn, helps FASB keep negative comments that arise in context.
Recent changes to the accounting for bundled-product revenue provide a great example of this. While investor reaction to the proposals was mixed, reporting companies wrote favorably and explained their views well. That gave FASB comfort that the new guidance could be applied in good faith and with consistency. Those comments helped FASB get over investor concerns.
Get Help
If you have some thoughts on one or more of these proposals, but are afraid you won’t be able to write an effective letter, look to others for help. Many industry-based organizations have access to accounting experts that can help member companies with such endeavors. Auditors, too, can help companies communicate their views on proposals. (Some might view this as an independence problem, although I don’t think so.) Remember, an accounting expert need not agree with your views to be able to help you communicate them effectively.
Just Do It
Even if you don’t have the time or inclination to apply the suggestions I’ve made so far, write a comment letter anyways. My goal in this column is to improve comments letters, not to suggest that only those that meet certain criteria are worthy of being written. Any input is better than no input, and even with the increased interest in accounting standards in the past decade, FASB doesn’t get nearly as much input as it needs during public comment periods.
I know that commenting on proposed accounting standards may not seem like a good use of time and money; there are always more pressing issues to deal with. And the sheer volume of proposals (the first four comprise about 700 pages) might make writing a comment letter seem more daunting then it really is. Accounting folks at medium and small companies may also feel like they don’t have enough expertise to write an effective comment letter, especially in comparison to much larger organizations. Overall, there are plenty of logical reasons a company might choose not to write a comment letter. But FASB needs the input.
So my number one recommendation is to write a comment letter. It isn’t hard to do, and it’s the best chance to affect the standard-setting process. Don’t miss the opportunity.
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