Magazine article The CPA Journal

Are FASB Statements Becoming More Understandable?

Magazine article The CPA Journal

Are FASB Statements Becoming More Understandable?

Article excerpt

Since the beginning of this decade, the move toward principles-based accounting standards has been touted as a means to reduce the complexity of financial reporting. While many blame the complexity of financial reporting for accounting scandals such as those at Enron and WorldCom, there can be Me dispute that the failure to have principles-based accounting standards increases the amount of time professionals must spend learning about new accounting standards and how to apply them.

The Sarbanes-Oxley Act of 2002 (SOX) required the SEC to study the feasibility of a principles-based accounting system. The SEC presented its recommendations in 2003, and the FASB responded to these recommendations in 2004. The FASB agreed to move toward a more principles-based approach in standards setting, and described specific changes it would make, including changes to the format and content of standards to improve dieir understandability.

This article investigates the progress the FASB has made in incorporating these changes in subsequently issued standards. Standards issued since the FASB's response to the SEC in 2004 are compared with the improvements detailed in its response. Results indicate that although progress has been made in all areas, additional work is needed to more fully meet the FASB's original goals.


In October 2002, the FASB issued a proposal for a principles-based approach to standards setting in the United States. This was in response to criticisms that accounting standards had become overly complex and inundated with guidelines that allowed companies to structure accounting transactions to meet the specific rules of the standard, but not the intent of the principle behind it.

During the same year, Congress passed SOX, which required the SEC to study the feasibility of a principles-based accounting system. The SEC recommended that standards:

* Be based on an improved and consistently applied conceptual framework.

* Clearly state the accounting objective of the standard.

* Provide sufficient detail and structure, so that the standard can be applied on a consistent basis.

* Minimize exceptions from the standard.

* Avoid the use of percentage tests (i.e., "bright lines") that allow financial engineers to achieve technical compliance with the standard while evading the intent of the standard.

The FASB issued a response to the SEC in July 2004. The board stated: "Almough its existing standards are based on concepts and principles, the understandability of its standards could be improved by writing its standards in ways tìiat (a) clearly state the accounting objective(s), (b) clearly articulate the underlying principles, and (c) improve the explanation of me rationale behind those principles and how they relate to the conceptual framework." The board also stated that it would begin to develop a new format for standards that would support this process by including changes such as "describing the underlying objective of the standard in the introductory paragraphs, using bold type to set off the principles, and providing a glossary for defined terms."

Because the FASB's response to the SEC was issued in July 2004, statements issued from 2005 through the first half of 2008 should provide evidence of whether the FASB has made progress on the proposed improvements to standards. The statements issued during this three-year period are as follows:

* SFAS 154, Accounting Changes and Error Corrections, issued May 2005

* SFAS 155, Accounting for Certain Hybrid Financial Instruments, issued February 2006

* SFAS 156, Accounting for Servicing of Financial Assets, issued March 2006

* SFAS 157, Fair Value Measurements, issued September 2006

* SFAS 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, issued September 2006

* SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities, issued February 2007

* SFAS 141(R), Business Combinations, issued December 2007

* SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, issued December 2007

* SFAS 161, Disclosures about Derivative Instruments and Hedging Activities, issued March 2008

* SFAS 162, The Hierarchy of Generally Accepted Accounting Principles, issued May 2008

* SFAS 163, Accounting for Financial Guarantee Insurance Contracts, issued May 2008

SFASs 161 and 162 were not examined by the author. …

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