Q&A: A Conversation With America's Top Accountant

In the latest of our conversations with leading thinkers in compliance, governance, and accounting, we caught up recently with Leslie Seidman, chairman of the Financial Accounting Standards Board. Seidman and her fellow board members are working to converge U.S. rules with International Financial Reporting Standards as much as possible to ease a potential transition to a global standard, ahead of a decision by the Securities and Exchange Commission on whether and how to adopt IFRS in the United States. The board is also under pressure to fix accounting standards that many believe played a prominent role in the financial crisis and the economic turmoil that followed.

Seidman shares an update on convergence to international rules, especially around financial instruments—one of the most controversial areas the board is tackling in response to the financial crisis. She also discusses the pressure of working under so much international scrutiny, the latest plan for loss contingencies, FASB's response to demands that it pay more attention to private company concerns, and what comes next after all that work is done.

Global capital markets are closely watching FASB's work to converge U.S. Generally Accepted Accounting Principles to International Financial Reporting Standards in preparation for possible IFRS adoption in the United States. What is the status of that effort?

We've already made significant progress in eliminating differences between GAAP and IFRS with some important improvements to standards on business combinations, non-controlling interests, stock compensation, fair-value measurement, other comprehensive income, and several others. We will soon issue a revised exposure draft on revenue recognition for a 120-day comment period. The core principles will be the same as we originally proposed, but we want to be sure everyone who will be affected has an opportunity to advise us of the practical effects and any unintended consequences. We will review those comments in early 2012 and make any necessary changes, and we hope to conclude it within a few months after the comment period ends. The effective date for public companies will be no earlier than Jan. 1, 2015, and private companies will have at least one additional year beyond that.

As for leasing, there have been enough changes from the original proposal that we will release it for a second round of comments. Most people accept that leases should appear on balance sheets, but many were not supportive of the classification and pattern of recognition in the income statement. We tried very hard to come up with an alternative approach, but after some very intense discussions, we decided to keep the original method. We know it is not a straight-line method of recognizing interest expense, but the complexity and novelty of the alternatives would have resulted in approaches unlike anything else in GAAP. It was very difficult to justify. Instead, we decided to provide disclosure of straight-line amounts so that people who find that useful will find it in the financial statements. We hope to complete discussions in December and re-expose it for comment for 120 days. Depending on the nature of the feedback, we hope to finalize it in 2012. We have not set an effective date, but we are committed to providing ample time to adopt.

The good news for both revenue recognition and leasing is that they will be fully converged with IFRS, except of course for cases where they make cross-references to GAAP standards for supplemental guidance.

What about financial instruments?

Impairment seems to be the area in financial instruments where most people believe an improvement is necessary in response to the financial crisis. We are working with IASB to develop a principle that focuses on the deterioration of creditworthiness of an asset based on changes in expected cash flow. This will move us away from the current approach, which is to recognize impairments based on incurred losses. We are working with IASB to turn the expected-loss model into a standard. We still need to evaluate how this basic principle will apply to debt securities and leases to assure it is equally applicable to other forms of financial assets.

In classification and measurement, we have made some significant changes to last year's exposure draft. We are working on a multi-attribute model where many items will be carried at fair value with changes recognized in net income. Then there are criteria to classify instruments that might qualify for fair value with changes recognized in other comprehensive income or cost accounting. IFRS does not have a large fair-value-through-OCI category, except for certain equity securities. I hope we can meet with IASB in the fall to see if there are any additional opportunities to reach converged solutions. I am optimistic we will have productive conversations. It is too soon to say if there will be another exposure draft or when the standard might be effective, but we will probably need to re-expose it. The message we've been hearing loud and clear is that it would be worth the extra time if we could get a converged, improved standard on financial instruments.

As you wind down these core convergence projects, what are the priorities for FASB going forward?

ABOUT LESLIE SEIDMAN

Leslie Seidman,Chairman, Financial Accounting Standards Board

Leslie F. Seidman was named chairman of the Financial Accounting Standards Board by the Financial Accounting Foundation, effective Dec. 23, 2010. She was originally appointed to FASB in July 2003 and reappointed to a second term in July 2006.

As chairman of FASB, Seidman is responsible for managing the organization's day-to-day activities and leading the board's efforts to develop high-quality financial reporting standards that result in decision-useful information for investors and other users of financial statements.

From 1994 to 1999, Seidman was a member of FASB staff. She initially joined the organization as an industry fellow, after which she served as a project manager and as the assistant director of research and technical activities. As assistant director, she supervised staff members dealing with implementation and practice issues, including FASB's Emerging Issues Task Force, and had liaison responsibilities for the Securities and Exchange Commission and the regulators of financial institutions.

In between her two tenures at FASB, Seidman founded and managed a financial reporting consulting firm, serving corporations, accounting firms, and other organizations. Prior to her Fellowship at FASB, Seidman was a vice president in the accounting policies department of J.P. Morgan & Co., where she was responsible for establishing accounting policies for new financial products, particularly securities and derivatives, and analyzing and implementing new accounting standards. Seidman started her career at Arthur Young & Co. (now Ernst & Young), as a member of the audit staff, serving clients in the retail, publishing, and venture capital industries.

Our effort to develop a disclosure framework is one of our most strongly supported projects. We hear complaints all the time about disclosure burden. When I meet with C-suite executives and directors, it's their number one complaint. People just don't feel that the current financial reporting package allows them to communicate effectively about the performance of their business. Is it because of redundancies? Or disclosures that are obsolete? Or do we need a more dynamic process? We want to get to the root of the problem. We don't know yet conceptually what the final document will be, but we want to bring more discipline to the standard-setting process and have more consistent disclosures over time.

There are also some convergence projects that we deferred—financial statement presentation, liabilities and equities, and others. We want to take a fresh look at those and any other priorities. We will consult with our numerous advisory groups this fall to determine what we should be working on to improve financial reporting. I don't see a lot of capacity on our agenda in the next few months, but the window will start to open sometime next year.

Do you expect to resume working on a new standard for loss contingencies?

We deferred our work on contingencies to see if the staff of the Securities and Exchange Commission could encourage companies to do a better job of complying with existing disclosure requirements. We will meet with the SEC staff soon to see if there's been an improvement, and we will take an independent look at the filings. We need a current read on whether this is something to handle through standard setting or whether it needs to be addressed by the SEC or perhaps the Public Company Accounting Oversight Board.

How is FASB addressing the concerns of private companies, who are clearly calling for some differences in accounting standards to address their particular circumstances?

There were a handful of standards in the 2000s, on consolidations and uncertain taxes in particular, that really brought this issue to the fore. They were just too complex and too difficult to implement for non-public companies. That led to recommendations for differences in accounting standards for private and not-for-profit companies, and perhaps even a different standard-setting body. We are developing criteria that would guide decision-making on when and where it might be appropriate to adjust accounting standards to the circumstance of private

companies, and we have increased the number of staff members and even board members who have significant private-company experience to infuse that perspective into all stages of standard setting. The private-company viewpoint is embedded into all of our standard setting, and we think ultimately that will make all of our standards better for all preparers. The Financial Accounting Foundation will soon issue a proposal to respond to requests for a separate standard-setting body for non-public companies. I fear if we have two separate bodies setting standards, this type of sharing of information will be cumbersome. We are already institutionalizing some pretty significant changes that will have a lasting positive effect on all accounting standards.

There's been plenty of debate on whether accounting played a role in the economic crisis, bringing unprecedented global attention to your work. How has that affected the standard-setting process?

It is undeniable that recent events have brought more attention to our organization than ever in the past. We welcome it. We sincerely desire active participation in every step of our due process. We need feedback on a timely basis from all stakeholders to do the best possible job of writing standards. We have always operated in the sunshine, and that won't be changing anytime soon.