The FASB - suggestions to improve the process.

• Author: Barth, Mary E.
• Position: Financial Accounting Standards Board

The FASB has devoted too much of its resources to the details of implementation, say some critics. Does it need to get back to conceptual issues?

Even though the Business Roundtable, Financial Executives Institute (FEI), and the Financial Accounting Foundation (FAF) have reviewed the accounting standard-setting process in the United States, in 1989 the Accounting Principles and Auditing Standards Committee of the California Society of Certified Public Accountants decided to do its own review. The FASB's frequent need to suspend or change recent pronouncements and the California Society's own difficulties in dealing with the process have led the group to believe that the standard-setting process is indeed in trouble. What follows is a review of the Committee's findings.

Of one thing the Committee is very certain: now is not the time for the FASB to go the way of its predecessors. The Board is making progress in the betterment of financial reporting. Perhaps more important, the FASB provides the basic foundation for retaining the standard-setting process in the private sector, which best serves the public's needs.

Symptoms of the problem:

The FASB's constituents have reason to question the effectiveness of its process:

* Pronouncements issued after the FASB and the profession spent several years in their development have been modified or deferred. The most obvious example is Statement of Financial Accounting Standard 96. Statements 98, 99, 100, 101, and 102 all changed or deferred prior pronouncements. We infer from these examples that problems in implementation are discovered only after a pronouncement is issued, a symptom of inadequate testing.

* The profession has had problems in implementing statements because of over-specification of details. The most obvious current examples are Statements 95 and 96; Statement 13 is an older example. The reduction of broad accounting principles to detailed instructions invites practitioners, the "sharpie" clients, and investment bankers to try to "beat" the rules, demonstrating the impossibility of writing rules that cover all details.

* There are inconsistencies between standards. For example, Statement 96 specifies nonrecognition of a deferred tax asset, but the recent pronouncement on other postemployment benefits calls for recognition of an asset to partially offset the liability. This inconsistency demonstrates that standards often do not adhere to overall concepts.

Standards versus guidance:

The Committee believes that the principal problem confronting the FASB is the blurred distinction between accounting standards and implementation guidance. Somewhere between writing the concepts and specifying implementation, the FASB and its staff lose the way.

Accounting standards should consist of the common body of knowledge against which all transactions are measured and accounted for. To enable their consistent application across entities and industries, standards must be conceptual. But most of the FASB's current standards attempt to include both a concept and specific guidance for implementation. Further, much of the implementation guidance included in these standards is of the "you-can't-step-across-this-line" school-the cookbook approach.

As an important first step, the FASB needs to clarify the distinction between standards and guidance, and to focus its efforts on setting concepts. It needs to remove those portions of existing statements that represent implementation guidance and identify them as guidance, and to combine those elements of existing statements that are conceptual with the current statements of financial accounting concepts (SFAC). This grouping of conceptual standards should become the foundation of generally accepted accounting principles (GAAP).

These GAAP should be written in such a way that informed practitioners can reach similar conclusions about similar transactions. They should reflect economic events and not become so enmeshed in detail that concern for form overshadows substance. As a technical partner of a large national firm said recently when he was asked about a thorny problem, "This question is rule-specific-you have to meet the form of the rule, not the substance."

Unless the FASB redirects its focus to conceptual issues, continued environmental change and pressure from special-interest groups to address specific questions will cause it to spend even more time on implementation guidance, and the more important conceptual issues will not receive the attention they deserve. The result will be the erosion of the FASB's effectiveness and deterioration of accounting standards overall.

Further, by wrestling with implementation issues, the FASB may compromise its objectivity in dealing with conceptual issues.

Where can you get implementation guidance?

But if we separate implementation from concepts, who will develop implementation guidance?

Implementation issues are best delegated to other bodies. Implementation guidance for both specific transactions and industry related issues can be developed either by a group such as the present FASB staff or by another entity, such as the AICPA's Accounting Standards Executive Committee (AcSEC). The AICPA industry committees have enabled it and ACSEC to deal with many industry-specific issues in the past.

Implementation guidance that cuts across industry lines is perhaps best handled by the FASB staff or a similar group, supplemented by a group of fellows from industry and public accounting to make certain the guidance is practical-and necessary. Rotation of those participating in the fellows program helps to insure that their input reflects current practice and issues.

If implementation is separated from concepts, a new standard will not be required every time the economic or business climate changes or Wall Street develops a new transaction. Some implementation guidance should be issued at the same time the FASB issues a new standard. Other guidance will evolve as the use of the standard evolves. Further, the FASB should have the authority to request that guidance be issued when it perceives a need.

Implementation guidance must not...