It's Time to Simplify Accounting Standards

Abstract

Just say to more detail in financial reporting. derivative financial instruments are assets or liabilities based on their fair value. Gains and losses on those instruments are reflected in income in the same periods as offsetting losses and gains on qualifying hedged These two relatively straightforward statements are the essence of FASB Statement no. 133, Accounting for Derivative Instruments and Hedging Activities, an excellent pronouncement that will result in long-needed improved financial reporting in this important area. However, one drawback is that the statement runs 245 pages long, much of it among the most complex text of any accounting standard to date. Many pages of Statement no. 133 are devoted to examples of how the standard applies in certain contexts. Another hefty section, Basis for Conclusions, includes FASB's reasoning for its positions. These sections are helpful to implementing Statement no. 133. However, accountants must carefully read and understand all 245 pages to ensure that the statement is adopted properly--a formidable challenge even for those relatively few accountants with a good understanding of derivatives. In addition to the length and complexity of Statement no. 133--or more likely because of them--FASB had all the Big Five accounting firms help it prepare an educational course on the new standard. A FASB-sponsored derivatives implementation group began meeting in early September and is expected to develop even more detailed interpretations. The FASB's emerging issues task force (EITF) and the SEC accounting staff may weigh in with still more guidance in time. CREEPING COMPLEXITY Regrettably, this level of complexity of generally accepted accounting principles has become more the norm than the exception. For example, FASB Statement no. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, specifies when assets can be considered sold for accounting purposes and thus removed from the balance sheet. Although Statement no. 125 is very detailed, after it was issued many parties asked FASB to be even more specific about the accounting for securitizations and certain other common transactions, so the EITF developed several interpretations. FASB itself is in the process of amending the statement in certain respects, and a document has been recently issued by FASB staff covering numerous other implementation questions and answers. All of this is designed to help accountants apply the fairly basic concept in Statement no. 125 that assets are considered effectively sold when they are no longer controlled. It is not only the length or complexity of FASB standards that creates the challenge for companies, auditors or others attempting to apply GAAP in good faith. The number of different sources of GAAP creates an added challenge. No longer is it possible for a CPA to pick up a single publication and find all the pertinent information on a given subject. In addition to FASB statements, all the following sources may also apply: * FASB interpretations * FASB technical bulletins * FASB staff question-and-answer publications * EITF consensus positions * Announcements by FASB or SEC staff members at EITF meetings * AICPA statements of position * AICPA practice bulletins * AICPA audit guides * SEC staff accounting bulletins Even more problematic is that the SEC expects public companies to follow guidelines set out in speeches by SEC accounting staff members at various conferences, particularly the annual AICPA National Conference on Current SEC Developments. Thus, interested parties must search the above sources--and perhaps others, too--to see whether there is accounting literature on point and then decide how it applies to the issue under consideration. …

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