The Financial Accounting Standards Board has issued a proposed statement to rank authority in generally accepted accounting principles, but in the process is contradicting its stated intention to give professionals more room for judgment.
FASB is exposing for comment a draft of its hierarchy of GAAP to rank the order of authority of accounting principles as issued by multiple standard-setters; it tells professionals in what order they should apply GAAP.
Miller
“I see this action by FASB as a clarification of its authority over its own area of influence,” said Paul B.W. Miller, professor of accounting at University of Colorado at Colorado Springs and a former FASB staffer. FASB’s overarching agenda is to establish its authority over accounting principles and rule-making as part of the fallout from Sarbanes-Oxley and the creation of the Public Company Accounting Oversight Board.
The Board said its hierarchy is generally an adoption of one established by the American Institute of Certified Public Accountants in 1988 in its Audit Standards No. 69, the Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. In a statement, the board said it expects its recently proposed hierarchy to result in little change in current practice.
Bahnson
FASB’s hierarchy differs from AICPA’s in one important way, however, said Paul Bahnson, chair of the accounting department at Boise State University. AICPA’s hierarchy allows professionals to depart from GAAP when they can show good cause for doing so but FASB’s hierarchy eliminates that allowance, he said.
“There’s a lot of GAAP that really isn’t much good,” Bahnson said. “Now there will be no path to more informed financial statements. This says if you depart from GAAP, you’ll get a qualified audit opinion.”
FASB has said it intends to shift from a system of highly detailed accounting rules to a more principles-based system that would allow professionals more room to exercise judgment. “Detailed standards create the need for an exception” that would allow departure from GAAP when it will lead to more informed financial statements, Bahnson said. “But as you move to a broader standard, the details are still there. The move to broader standards doesn’t happen overnight.”
Herz
FASB did not respond when asked to explain the elimination of allowance from departure from GAAP. FASB Chairman Robert Herz said in a written statement that the hierarchy is an “important first step” toward improving GAAP hierarchy.
“Several other FASB projects, such as the codification and retrieval project, aim to simplify standards and the standard-setting process,” Herz said. “This proposed statement facilitates those future improvements.”
European Regulators Want More Information from U.S. Companies
As U.S. regulators speak of relaxing reporting requirements for non-U.S. companies listed on U.S. exchanges, European regulators say they need more information from U.S. companies that are listed or want to list on European exchanges.
The Committee of European Securities Regulators issued a report to the European Commission last week saying U.S. generally accepted accounting principles are equivalent to International Financial Reporting Standards, which the Commission required all publicly held companies to adopt in 2005 to unify the continent’s accounting practices. CERS added, however, that U.S. GAAP lags IFRS in some key areas, recommending the Commission require more information from U.S. companies in those areas.
CERS identified stock options and special-purpose entities as the two areas of greatest concern. It acknowledged that U.S. companies will be required to begin expensing stock options when a highly controversial new accounting standard takes place for most U.S. companies in 2006. The regulator committee recommends the European Commission require U.S. GAAP filers who have off-balance-sheet, special-purpose entities to provide additional information on those unconsolidated subsidiaries.
The European Commission requires that beginning in 2007 all companies listed in Europe must report using either IFRS or a national accounting system deemed equivalent to IFRS. CERS was charged with examining national accounting differences to determine if U.S. GAAP and other systems were equivalent.
CERS acknowledges that some of the differences it points out between IFRS and U.S. GAAP are in the rule-making pipeline as a result of international efforts to streamline accounting practices. “It can therefore be expected that many of these differences are likely to disappear over the coming years,” the committee said in a written statement.
The U.S. Securities and Exchange Commission recently indicated it plans to ease up the reporting requirements for companies adopting IFRS for the first time this year by allowing them to reconcile their financial statements to GAAP for only two years instead of three. The Commission also has said it’s looking for ways to make it easier for non-U.S. companies to exit U.S. markets if they wish.
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