THE ROAD TO CONVERGENCE

Global Salon


Global Finance sat down with Russell Golden, chairman of the Financial Accounting Standards Board, to discuss the current activities of the FASB—including its recently issued standard on revenue recognition, a joint effort with the International Accounting Standards Board (IASB).


Global Finance: The revenue recognition standard was 12 years in the making and will take another few years to be fully implemented. Why did the Boards tackle this project?

Russell Golden: In the United States, under generally accepted accounting principles (GAAP), multiple methods were being used by different industries to record their revenues. For example, the computer software and hardware industries each had different standards. We felt that it was important to have one or two models that could align all industries—an important feat, given that investors often follow companies across different industries. For the IASB, the situation was totally different—international financial reporting standards (IFRS) had two standards, while the FASB had over 100. It took a long time, but we were able to work through many of our differences and come up with a standard that greatly converged a critical area of financial reporting.

One thing that will remain different in GAAP and IFRS is the timing of the reporting. That’s because in the United States, certain revenue recognition disclosures are required quarterly, whereas that’s not the case in other parts of the world.

GF: What is next for convergence?

Golden: Currently, the FASB is working with the IASB to complete our work on leases. We hope to continue down a path where leases will be recorded on the balance sheet, and that our standards will result in similar conclusions. Right now there is a difference of opinion: The FASB and the IASB are not in agreement on how to reflect leases in financial statements. We are also trying to come to agreement on financial instruments, and how to account for impairment of financial assets.

Reserve requirements in the United States are greater than anywhere else in the world, and this is partly due to differences between GAAP and IFRS. The IASB’s conclusions are more similar to the application of GAAP before the 2008 financial crisis. But while that is an improvement for their system, it would not make our system better. 

What are we doing on impairment? We are introducing the forecast of full expected losses, or an understanding of the cash flow that the financial institutions expect to collect. We believe this approach will actually improve our financial reporting system. For example, if financial institutions expect they will not collect 100 cents on the dollar, we ask them to reflect what they do expect to collect.

GF: How does FASB set the agenda?

Golden: The Board sets its own agenda, and allocates resources to various projects according to their priority. At present our main priority project is the evaluation of impairment of financial assets. Another priority is our disclosure framework project, which seeks to improve disclosures in footnotes to the financial statements. When setting our convergence agenda, we work with the IASB and discuss what areas are in need of improvement.


GF: How is the FASB dealing with political pressures?

Golden: It is important that we educate various individuals, whether they are elected officials or regulators, that making decisions based on what we learn during our due process across a range of stakeholders will improve information provided to the capital markets. Increased capital market confidence in the quality of information provided will, in turn, reduce the cost of capital for companies, thus facilitating growth for the economy. Leases, for example, are a politically charged issue. Some companies are concerned about having to put leases on the balance sheet because they feel that there will be fewer leases, or that the life of the leases will be decreased.

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