The Financial Accounting Standards Board has finalized its position and its rationale for barring companies from using the accrue-in-advance method of accounting for future major maintenance costs.
In its staff position, AUG AIR-1: Accounting for Planned Major Maintenance Activities, FASB says companies are prohibited from using the accrue-in-advance method—where companies project when a particular asset will require major maintenance and book a liability gradually leading up to the event—because it isn’t consistent with the concept of a liability.
Several critics who commented on the proposed rule disputed FASB’s contention that future major maintenance is not a present liability. Some pointed out that in certain sectors maintenance is mandated by safety guidelines, such as in the airline industry, which is where the method is most strongly rooted.
FASB’s elaboration leans hard on the concept of timing: that future maintenance, even if mandated by some regulation, is not a present obligation.
The accrue-in-advance method “causes the recognition of a liability in a period prior to the occurrence of the transaction or event obligating the entity,” FASB wrote in its staff position. “The fact that an entity may incur future maintenance costs to improve the operating efficiency of an asset, comply with regulatory operating guidelines, or extend the useful life of the asset does not embody a present duty or responsibility of the entity prior to the obligating transaction or event. The entity can decide whether to use the asset in such a way to avoid the need for future maintenance activities.”
Ciesielski
Jack Ciesielski, owner of research and advisory firm R.G. Associates, says the explanation makes sense and should settle the issue. “I think the FASB rationale is pretty much on target: You don’t have to use the asset in such a way as to wear it out.”
The staff position amends the American Institute of Certified Public Accountants’ Industry Audit Guide, Audits of Airlines, which has been adopted in sectors beyond the airline industry because it is the highest-ranking piece of literature in the collection of U.S. Generally Accepted Accounting Principles that addresses how to account for planned maintenance.
The AICPA guide still allows companies to select from among three other methods, including charging maintenance expenses as incurred (which is the approach the AICPA advocated), or following the built-in overhaul or deferral methods, which still allow some measure of incurring maintenance costs early.
The AICPA says the majority of its Accounting Standards Executive Committee would have preferred to see FASB take an even more aggressive position and eliminate all methods that allow any advance recognition of major maintenance expenses.
Accounting Group Advocates Lifelong Ethics Education
An international accounting education group is proposing new guidance on how to teach accountants to make ethical decisions not just during the college years, but throughout their accounting careers.
RELATED RESOURCES
Development And Maintenance Of Professional Values, Ethics, And Attitudes In Accounting Education (Sept. 6, 2006)
The International Accounting Education Standards Board, an arm of the International Federation of Accountants, has authored a draft practice statement based on a two-year research project launched in 2004.
The draft statement says accounting groups should establish a flexible, competency-based ethics education framework that ties in to the four stages of learning: knowledge, sensitivity, judgment, and behavior. It also advocates that continuing education in values, ethics, and attitudes should be required throughout an accountant’s career.
Henry Saville, the IAESB chairman, says ethical leadership in the work environment is an important element in ensuring ethical behavior throughout the organization, but education is essential to help accountants know how to navigate the situation when they discover unethical behavior.
Saville
“It may well be that the most powerful tool of all is for individuals to observe the approach to ethical decision making and problems by those in senior positions in their own workplace,” Saville says. “What we are aiming to achieve is a situation where all professional accountants are sufficiently well equipped with the basic knowledge in this area, to ensure that they will know when an ethical problem exists and they will be sufficiently skilled as a result of the educational process to be able participate in the resolution of the problem.”
Such an approach is meant to fend off another Enron or WorldCom scenario, where unethical behavior sprung from senior leadership and set the tone for the organization, leaving those in lower ranks simply to accept it as the norm rather than challenge it.
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