What is the FASB’s process for issuing standards?
The Financial Accounting Standards Board (FASB) continues to receive attention surrounding their proposed current expected credit loss (CECL) model, as final guidance is expected to be released late 2014 or early 2015. Under the proposed changes, banks would need to use historical information, current conditions and forecasts to estimate expected losses over the life of loan. Such a change would require significant modifications to ALLL methodologies and reserve levels.
Thomas Curry, comptroller of the currency, commented on the changes at the 2013 AICPA Banking Conference, stating, “There is no question that implementation of the FASB proposal will require most banks to boost their allowance; perhaps in the neighborhood of 30-50% system-wide if applied today.”
With such a substantial capital change on the horizon, many banks wonder if the FASB truly understands the costs and benefits of the standards they set.
Russell Golden, FASB chairman, recently explained the process. According to Golden, the FASB is often caught in the middle of preparers of financial statements and the investors/users. Preparers highlight the high cost to implement new standards, while investors continue to request additional financial information resulting in additional standards. Striking the right balance can be difficult.
The process starts with understanding the costs and benefits, which is in the forefront of the minds of the FASB’s stakeholders. Golden states stakeholders “want to be satisfied that the expected benefit of an accounting standard justifies the cost of implementing it.”
The FASB has an in-depth benefit analysis that begins with pre-agenda research to determine if an alleged issue is truly a problem that needs a resolution. If it is, the FASB works to “clearly articulate the issue and evaluate the range of possible cost-effective solutions.”
Then, according to Golden, the potential benefits are assessed to determine if the changes will:
• Accurately and neutrally reflect the underlying economic transactions and events
• Improve or diminish comparability of reported financial information
• Affect the effort or cost of using the information
Cost analysis is also conducted concurrently, studying effects of the changes related to:
• The process of preparing and distributing the information
• Whether the change would create a difference between GAAP and contractual, regulatory or tax requirements, requiring companies to maintain multiple accounting systems
• The effort and cost involved in auditing the information
• The effort involved in implementing the change
Golden states the aim of the FASB is “to create a neutral playing field that enables investors, lenders and other users of financial statements to make their own independent judgments about where to invest.” Naturally, the standards set forth can have positive and negative economic consequences.
Positive consequences include “fostering economic growth, by promoting more efficient capital allocation, greater market liquidity, a lower cost of capital and a better allocation of capital.” Some organizations may see adverse economic consequences, especially if the reporting “sheds light on an area that previously was not transparent.” Since it can be difficult to balance, the FASB integrates cost-benefit analysis into each of the seven major standard-setting phases.
Despite the challenges, the FASB’s goal is to “improve financial reporting in the most cost-effective manner.” To help create the right balance, investors, preparers and auditors are encouraged to provide input and feedback. For example, the FASB accepted comments on the CECL model, and it even extended the deadline to allow for additional feedback. Stakeholder feedback is critical in the FASB’s processes, and is used extensively to help improve their standards.
To learn more about FASB’s CECL model, download the whitepaper, FASB’s CECL Model: How to Prepare Now.