Financial Reporting Rules: Will You Change Them?

By Bisbee, William F. | Business Credit, February 1995 | Go to article overview

Financial Reporting Rules: Will You Change Them?


Bisbee, William F., Business Credit


A powerful voice booms from each special interest group when a financial reporting change ox attempts to gore its ash cow. Where is the balance for a neutral position? As an NACM credit professional, you can help forge that balance. The Financial Accounting Standards Board (FASB) does not receive enough opinions from users of financial statements and would welcome more input, according to FASB member, J.M. (Neel) Foster. That is an open invitation to comment, but to be effective, you must know the process.

Typically, when FASB accepts a major project, it thoroughly researches and studies the issue and shares the research in a "discussion memorandum." Alternatives are provided and comments are solicited from the public. Generally, FASB tries to provide a 90- to 120-day window for public response, although only a 30-day response period is required of the Board. The good news is that FASB will read letters received after the comment period closes, as long as the issue is unresolved.

After completing an analysis of the public response, the Board rewrites the document, issues an "exposure draft," and circulates it for public response. Again, public comments are considered and weighed by the Board as it steers the standard toward passage. To become a financial standard, five of the seven board members must approve it.

The Controversy

Any new financial reporting standard creates change (some people read "pain"). Opponents launch attacks against the ill effects of the new standard. Proponents rally to defend the change. But is the emotional response totally unexpected? From the Board's perspective, not at all. Foster said that all easy issues have either been settled or do not require accounting standards and that difficult questions, the kind that need FASB action, engender strongly held views and much disagreement.

Merging of Interest

A common bond should exist between the desires of credit professionals and FASB members. Simply stated, investors and credit professionals want financial information that is useful, credible, and preferably neutral. FASB is looking for these traits as it attempts to formulate new standards.

Adverse consequences can occur when financial reporting standards abandon neutrality by concealing the true impact of certain transactions. Foster illustrated this point by recalling the collapse of the thrift industry. In the 1970s and 1980s many people argued that if thrift institutions were required to follow generally accepted accounting principles they would be at a competitive disadvantage. Many thrifts subsequently closed at much greater cost. That is the value of hindsight.

When FASB considered the recognition of pension liabilities, a cry went up. Again the voice of despair was heard bemoaning the burden of recording post-retirement benefits. More recently, the subject of accounting for stock options has generated heated interest. Foster observed that FASB pronouncements almost always have consequences that some consider undesirable.

Crafting a Favorable Response

There is no preferred format for comment letters and you may discuss one or several points on a given topic. The FASB staff suggested that you should identify the specific document of concern; give a perspective - i.e., I am chairman of NACM, whose membership exceeds 38,000 members; provide a general reaction to the proposal and summarize your reasons of agreement or opposition; and state the detailed reasons why you have chosen this particular position.

Foster added that since the Board is guided by concept statements in their deliberations, support for your position by referencing the concept statements would be of particular value. Foster stated those types of letters have the most impact and get the most attention. FASB generally receives letters of this nature from the Big Six accounting firms and major industry sources.

The FASB Board wants more input from user groups. …

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