conceptual impediments to convergence james leisenring, fasb senior advisor the views expressed in...

Conceptual Impediments to ConvergenceJames Leisenring, FASB Senior Advisor

The views expressed in this presentation are my own and do not necessarily represent official positions of the Financial Accounting Standards Board. Official positions of the FASB Board are arrived at only after extensive due process and deliberations

Convergence: The End of an Era

Original vision A single set of high-quality global standards Used on the global capital markets

Last effort at convergence has been on Revenue Recognition

Brief history of the convergence effort of the FASB and IASB

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Convergence


Memorandum of Understanding (SEC “Roadmap” 2005)

Focus on major projects on agenda

Don’t try to address every reconciling item

Don’t try to converge inadequate standards

Process identified an agenda to address problems with both US GAAP and IFRS

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MOU Projects—Convergence Agenda

Established in 2006 (Refocused in 2008 and again in 2010)

Intangible Assets (never added to the agenda) Business Combinations (completed 2007, revised SFAS 141 (2001)

and IFRS-3 (2004)) Fair Value Measurements (completed 2011, revised SFAS 157 (2006)) Revenue Recognition (completed 2014) Leases (In process) Financial Instruments (In process—FASB only) Consolidations Derecognition Liability and Equity Distinction Postretirement Benefits Financial Statement Presentation

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Convergence Agenda


Record of accomplishment is not stellar

Projects identified had long been vexatious

Progress has been limited because of lack of agreement on basic conceptual issues Inconsistent application of asset and liability definitions No agreements on accounting for forward contracts or

options written or held No agreement on measurement issues No agreement on what we mean by control

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In-Process Projects: Leases Agreement a right of use is an asset and acquisition of

that right can create a liability Renewal options:

Can the asset held by the lessee create a liability? Can the option written by the lessor create an asset?

Why are various service rights or obligations disaggregated from leasing contracts?

If a default on a contract can occur, why isn’t there a performance obligation of the lessor and liability of the lessee?

6Conceptual Impediments to Completion


In-Process Projects: Financial Instruments Why can’t we agree on an impairment measure for

loans? Day one loss?

Why can’t we agree on measurement attribute(s) for financial instruments?

Is presentation the cause of our measurement disagreements?

How can anyone believe the present measurement and presentation systems create comparable information?

Complexity?



Consolidations What do we mean by control? What do we do with options and forward

contracts? Do we really mean control or do we mean

assurance of perpetuation of control? Would we apply “stickiness” notions to control of

an entity? Conceptual Framework Exposure Draft on the

Reporting Entity never completed in part because of common control concerns



Derecognition Why not derecognize when the right or

obligation fails the definition of an asset or liability?

Why do we confuse risk and rewards with assets and liabilities?

Why are we afraid we might get it back? What should we do with options and forward

contracts? What is the basis for “stickiness”? History

matters?



Liability and Equity Distinction Basic liability definition issue: Is a liability the result of

an obligation to deliver an asset of the obligor or not? Why do we distinguish between an obligation to

deliver a fixed from a variable number of shares? Why are gain and losses on derivative contracts in

equity instruments of the entity (however defined) not recorded in comprehensive income?

Why do we create different accounting for an option held or forward contract to acquire the entity’s outstanding stock?

What should be done with issued shares that are puttable?



Postretirement Benefits Does an unvested obligation meet the definition

of a liability? Does the projected benefit obligation meet the

definition of a liability? Why can’t we resolve issues related to the

discount rates? What do we mean by a constructive obligation? Does a funded postretirement plan represent an

SPE that, absent a scope exception, would be consolidated?



Financial Statement Presentation

Why won’t we just require a single statement of comprehensive income?

If we think a subtotal for net income, (earnings, profit or loss) is important, why don’t we define the term and require it?

What is the conceptual basis for items in OCI? What is the conceptual basis for recycling?



Conceptual Framework Issues

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“Assets are probable future economic benefits obtained or

controlled by a particular entity as a result of past transactions or

events.” (Con 6, paragraph 25)

Problems:Probable(1)

Future economic benefitsControlledPast transactions or events

(1)See footnote 18 (Con 6)

Assets

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Liability

“Liabilities are probable future sacrifices of economicbenefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.” (Con 6, paragraph 35)

Problems:

Probable(1)

Future economic benefits Obligations (uncertainties) Past transactions or events(1)See footnote 21 (Con 6)



Conceptual Framework IssuesAsset/Liability Definitions Where should (must) the focus be with respect to an asset:

Present right A right either exists or does not exist

Not on probable future benefit (cash inflow) The outcome of having a right (which could be zero)

Contingent asset? Where should (must) the focus be with respect to a liability:

Present obligation An obligation either exists or does not exist

Not on probable future sacrifice (cash outflow) The outcome of having an obligation (which could be zero)

Contingent liability?

Discussions of contingent assets/contingent liabilities are really discussions about arrangements with uncertain outcomes

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Conceptual Framework IssuesAsset Liability Definitions

Observations Some virtually certain in or out bound cash flows are not

assets or liabilities “Risks and rewards” are not liabilities and assets; they are

the results of having assets and liabilities Risks and rewards affect the measurement of both assets

and liabilities, not their existence We don’t know what to do with forward (executory)

contracts that appear to meet definitions of assets and liabilities

We are inconsistent in accounting for options written or held

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Questions about Assets and Liabilities Does a forward contract to acquire an asset

convey control of that asset? Does an option to acquire an asset convey control

of that asset? Does the owner of an asset subject to a forward

contract to sell or a call option still control that asset?

Why do we think an option or a forward contract suggests control of an asset is retained but not obtained? (derecognition, revenue recognition)

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Questions about Assets and Liabilities Can writing an option (by definition, a liability) result in an

asset? Can having an option (by definition, an asset) result in a

liability? Can an option or a forward contract create an asset for both

parties to the contract? Can one have a liability without any present obligation if

non-payment is sufficiently consequential? Can one have a liability based on a contract to refrain from

a given activity or did one just sell an unrecognized right?

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Measurement One phase of the Conceptual Framework project is

intended to address measurement attributes and measurement issues Measurement of assets is of course controversial Measurement of liabilities seems to pose even more

issues especially nonfinancial liabilities

We seldom really measure anything, we make calculations Best estimate Present value of expected cash flows

Isn’t remeasurement really the controversial issue?

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Conceptual Framework Issues Issues such as we have discussed demand resolution

Risk of retaining inconsistent answers and standards Lack of conceptual agreement has been an impediment to

resolving issues MOU projects identified because accounting was

considered to be deficient

Work on resolving Conceptual Framework issues was discontinued to focus on MOU projects

Both Boards now again beginning to look at their respective Conceptual Frameworks

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Conceptual Framework Project(1)


A. Objectives and qualitative characteristics (done 2010)

B. Elements, recognition and derecognition

C. Measurement

D. Reporting entity (Exposure Draft March 2010)

E. Presentation and disclosure (Disclosure Framework Exposure Draft in 2014) (redeliberations have begun)

F. Framework purpose and status

G. Applicability to the not-for-profit sector (IASB)

H. Entire framework

(1) Once a joint project, however, the IASB decided to proceed not as a joint

project but with the FASB and others as advisors.

Conceptual Framework Project


Project Objective

Never the intention to start with a clean sheet of paper and develop a new conceptual framework Try to address deficiencies Try to clarify and improve understanding Make amendments that experience in

application have suggested are necessary FASB has agreed to complete Disclosure

Framework and begin work on presentation and measurement

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Issues in Process

Disclosure framework—objective

Improve the effectiveness of disclosures in notes to financial statements by clearly communicating the information most important to users of those statements Framework to assist Board in establishing consistent

relevant disclosure objectives in each project (admission of an ad-hoc basis)

Framework to assist preparers in meeting disclosure objectives

How much disclosure compensates for sub-optimal accounting

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Issues in Process

Measurement We typically don’t really “measure” anything

We assign (calculate) a number to depict an asset, liability, or changes in an asset or liability

SFAC 5 states items are measured by different “measurement attributes.” “Attribute refers to the traits or the aspects of an element to be quantified or measured” (SFAS 5, footnote 42)

Entry price or exit price does depict the amount necessary to acquire or proceeds expected to be received at disposition of an item but do not seem to be “traits or aspects” of the item

Other “attributes” can only be understood by describing the calculation process to determine the number




Issues in Process

Measurement

Most debates about measurement are actually debates about remeasurement and are asymmetrical Remeasurement debates are typically about whether to

recognize gains before realized There is less debate, at least with respect to assets, that some

remeasurement is appropriate to portray an impairment− No agreement on the objective of the remeasurement

Many often assert measurement of liabilities involves issues that are unique− Own credit risk



Issues in Process

Measurement

To properly focus the debates about measurement that have been so pervasive, we need to agree:

That measurement in concept should be resolved in terms of what best meets the objective of financial reporting and enhances the decision usefulness of representationally faithful, relevant information

What we are trying to accomplish (the objective) when depicting items in terms of a number and perhaps stop suggesting the depiction even represents a measure

Conceptual Framework ProjectIssues in Process—Presentation

Presentation of the statement of comprehensive income What subtotals should be required, if any, in a statement

of comprehensive income? How should each subtotal help meet the objective of

financial reporting? What is the objective of items classified as other

comprehensive income? Should how an item is measured affect the presentation

of comprehensive income?

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Conceptual Framework Project Even with progress on measurement and presentation,

for the MOU projects to be addressed in a satisfactory manner certain basic conceptual issues need to be resolved Clarification of asset and liability definitions to emphasize

rights and obligations Resolve liability/equity distinction by a changed notion of

what must be the obligation to meet liability definition Resolve derecognition to be consistent with recognition Agree on a consistent notion of what is meant by control

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