The FASB's mandate: where Statement 96 falters.

• Author: Wrathall, T. Wallace

The FASB's mandate: where Statement 96 falters

Is the FASB missing its mandate to devise practical financial reporting standards? One businessman believes so and says the preparation of Statement 96, Accounting for Income Taxes, is a prime example.

Five years have passed since the FASB started its project on accounting for income taxes. The prolonged process leading to the development and implementation of Statement 96 has raised sufficient concern to invite a review of the methods. Statement 96, a 126-page document, was issued a year ago and is being followed with implementation guidelines, which are just beginning to arrive. More undoubtedly will be issued later. This bulk is required because of a narrow and detailed approach to implementation as opposed to reliance on a professional partnership between the financial executive and the independent accountant. In short, the process is taking too long, and the standards are too burdened with complex rules.

Fitting with reality

The decision to review accounting for income taxes and the adoption of the liability method for deferred tax accounting met with considerable favorable response. Some dissent, however, was expressed. The most difficult job of the FASB is to reconcile all opinions and advice. In any event, it is necessary to ensure that accounting standards are practical and the public interest is served.

The approach used with FASB Statement 96 does not offer a practical resolution. Incorporating detailed implementation rules as part of communicating accounting standards has resulted in some answers that do not fit well with reality.

Top-down responsibility of corporate management is emphasized in the findings of the National Commission on Fraudulent Financial Reporting (the Treadway Commission). If this same top-down responsibility had been emphasized in Statement 96 implementation, the problems encountered would have been substantially alleviated. Moreover, had this approach been followed for accounting within specific industries, such as thrift and energy, we would now have better and more workable standards. The same can be said for the issues encountered in accounting for foreign taxes, leases, and leveraged buy-outs. Finally, implementation of the standard would have been simpler if management had been given the responsibility to account for the expected results of tax planning rather than being required to follow a set of artificial and rigid rules.

A study group headed by...