The Financial Accounting Standards Board’s 2021 agenda consultation report summarizes the extensive feedback FASB received when it asked stakeholders where it should focus its time and resources.
The consultation project’s importance, in the words of FASB Chair Richard Jones and Technical Director Hillary Salo, is that the organization “sought to do more than create a new project lineup. We wanted to offer stakeholders a broader opportunity to weigh in on the FASB’s future direction.”
FASB projects are either added to its research or technical agenda. The organization’s chair can solely direct and set research projects that may be added to the technical agenda at a future date, but at least a majority of FASB members must approve projects added to or deleted from the technical agenda. Only projects on the technical agenda can result in new accounting standards.
Below is my take on some of the highlights from FASB’s consultation report.
Projects added to technical agenda
Based on feedback received, FASB added projects on accounting and disclosure for a number of topics, including these three.
Digital assets: Out of the 522 total responses to FASB’s invitation to comment , 445 solely addressed digital assets. Comments called for this to be a top priority for FASB, and almost all recommended these assets be initially and subsequently measured at fair value.
The responses came from all categories of stakeholders, and many of the comments focused on crypto assets, like bitcoin.
The project includes improving the accounting and disclosure of certain digital assets, with its scope to be determined at a future FASB meeting. Digital assets will also remain on the research agenda for now.
This is an emerging area where investors are craving more financial statement information about assets held and their costs and fair values. Many companies responding hold digital assets or plan to be involved in digital assets or services. There is no specific guidance in generally accepted accounting principles (GAAP) today, and the intangible accounting model under Accounting Standards Codification Topic 350 used by many does not reflect the economics or how companies are using digital assets.
The emerging types of digital assets add complexity for preparers and users of financial statements. All these issues, along with the market volatility for these assets, indicate there is an identifiable and sufficiently pervasive need to improve GAAP, one of the technical agenda’s criteria.
Environmental credit programs: Comments identified transactions related to environmental, social, and governance (ESG), including renewable energy credits, emissions allowances, and carbon offsets, as an emerging area where FASB requested feedback.
Responses noted lack of guidance in GAAP causes diversity in practice and the lack of clarity on accounting for ESG-related transactions and credits requires significant time and judgment. Surprisingly, there were some who responded ESG-related transactions were not presenting widespread challenges.
FASB added accounting for regulatory credits to its research agenda in December and added a project on accounting for environmental credits to its technical agenda in May . The preliminary scope is to improve the recognition, measurement, presentation, and disclosure by participants in compliance programs and voluntary programs that create environmental credits, along with nongovernment creators of environmental credits.
Software costs: More than one-third of respondents provided feedback about accounting for software, and half of those identified it as a top priority for FASB.
Many noted the prevalence of companies developing software and incurring software costs as a result of moving to cloud-based solutions. They noted changes in the software industry might have made existing accounting guidance that differentiates between software developed for internal use and software developed for sale, lease, or other marketing irrelevant or more difficult to apply.
FASB decided in December to consider software costs as part of its research project on intangible assets. In June, it added a separate project to its technical agenda to modernize accounting for and enhance disclosure of costs to internally develop or acquire software.
As a former accountant in industry and an auditor, I experienced firsthand the pervasive difficulties practitioners had in tracking costs and categorizing them as they were incurred to decide whether they should be expensed or capitalized under existing GAAP. I agree standards should reflect changes in the industry and the potential benefits of change would be greater than the costs.
Projects not added to technical agenda
FASB identified a number of topics in its invitation to comment as areas in GAAP it thought had unnecessary cost and complexity. But based on feedback received, some topics, including balance sheet classification, debt modifications, and distinguishing liabilities from equity, were not added to the technical agenda.
I agree with that determination. There is sufficient information included in classified balance sheets for investors, with no major areas needing improvement. I agree with feedback provided that there is enough guidance available on accounting for debt modifications and extinguishments, and while the accounting can be challenging, it is not an area where more rules would help.
FASB has been working on liabilities versus equity accounting for years and has projects related to improving and clarifying existing accounting standards in this area, which can also be challenging to apply. While feedback in this category was mixed, I agree with those who responded there are no pervasive concerns that warrant changes to the longstanding guidance.
Topping the response list of low-priority projects was materiality considerations for disclosures. Since GAAP already includes overall guidance that the codification does not need to be applied to immaterial items, most respondents did not see any benefit to adding materiality guidance to each codification topic.
Discussing the definition of “materiality” is a topic that never seems to go away. The Securities and Exchange Commission (SEC) has drawn attention to materiality recently with its proposed rules on climate-related disclosures that include a different standard than the agency has historically used (the Supreme Court definition, based on importance to investors in their decision-making). In my view, there is no need to add additional complexity (and cost) to financial reporting by adding more prescriptive materiality standards. Financial statement preparers and auditors can apply informed judgment and existing auditing and SEC standards to their materiality assessments.
FASB will continue to use comments it received, along with stakeholder outreach, as it works on its technical and research agenda projects. For more information, review the organization’s feedback summary on its invitation to comment.