SEC committee calls for FASB reform

Diving Brief:

  • The Investor Advisory Committee (IAC) of the Securities and Exchange Commission (SEC) has issued a disorganized criticizing the Financial Accounting Standards Board’s (FASB) rule-making process for failing to provide the new or updated guidance investors need to analyze company value in today’s rapidly changing markets today.
  • There “is a significant backlog of high-priority accounting topics that need to be addressed (tangibles and key performance indicators). The nature of public companies has changed dramatically over the past few decades, and the FASB has yet to promulgate standards to reflect these changes,” the Sept. 14 draft posted on the SEC’s website reads.
  • Updated guidance is particularly needed for topics such as the cash flow statement, which the IAC says has not been updated since the 1980s, and intangible assets, the report said. The value of business intangibles has “skyrocketed” to account for 90% of the S&P 500 market value in 2020, up from 17% in 1975, the report said.

Overview of the dive:

Contrary to the US accounting standard setter’s rule-making reputation of being deliberative and sometimes even tediously slow, the FASB has taken relatively decisive action on a few topics in recent months. In May, it reversed course and added cryptocurrency to its list of priority topics set for standard setting and in June it fall a four-year project on accounting for goodwill.

Yet historically, over the past 20 years, the report claimed that the FASB had only completed three major projects: revenue recognition, leases, and accounting for credit losses. In addition, the FASB has recently focused on so-called “simplification” projects that reduce the burden on financial report preparers and refine narrow standards rather than substantive projects, he says.

The report largely focused on the impact on investors, but the lack of guidance also affects CFOs and others, the report claims. For example, existing guidance on the treatment of cash flows indicates that the preferred accounting approach is the direct method, but that it is “rarely used”.

The report cited a 2016 article by David Katz, a partner at Wachtell, Lipton, Rosen & Katz, which described the challenges posed by uncertainty surrounding the cash flow problem. “CFOs are considering whether to categorize many types of cash inflows and outflows into the operating, investing, or financing sections of the cash flow statement,” Katz wrote in the article cited in the report by sister publication Industry Dive CFO.com. “Investors, on the other hand, don’t know how to compare different companies in terms of how their money is used.”

Other pressing accounting topics that need to be addressed include financial statement presentation, labor cost accounting, segment reporting and measuring the financial impacts of climate change and energy transition, the project says. report.

A FASB spokesperson declined to comment. The SEC did not respond to requests for comment.

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