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FASB Faces Conundrum Over ESG Reporting Issues

Denise Lugo  Editor, Accounting and Compliance Alert

· 6 minute read

Denise Lugo  Editor, Accounting and Compliance Alert

· 6 minute read

The FASB would need precise suggestions from the accounting profession on environment, social, and governance (ESG) matters to consider taking up a project on the topic, because the issues are very broad and nuanced, the board’s April 8, 2021, advisory discussions signalled.

Under its purview, the FASB’s focus is accounting rules that are directly linked to financial statement line items, and many ESG matters are very, very broad, remarks by board members indicated. Investors however are clamoring for streamlined disclosure rules on the topic.

“‘E’ is a broad category, ‘S’ is even bigger, because I don’t know what social issues we would be talking about,” FASB Vice Chair James Kroeker said. “Cage free eggs might be a social issue, but all of consumer demand is social – we’re social creatures so I don’t know how to distinguish between which social issues ought to be the distinguishing characteristics that drive demand,” he said.

E, S, and G are very different, broad issues, said Kroeker. “And so when I hear we ought to get into governance disclosures, I think there’s a lot of governance disclosure in SEC documents already, so I think as we have this discussion, be very precise about what it is you’re asking the FASB to engage in – is it sort of take over the proxy?” he said. “That we don’t have enough disclosure of executive compensation and analysis and so we need governance disclosure, or disclosure about audit committees and composition and how they govern? Cause that sounds like “G” to me. So when I hear we’re being asked to get involved in – I view those as three different categories, and three undefined categories.”

IMA Talking to SEC in June

Kroeker’s remarks were in response to comments by Lara Long, vice president and chief accounting officer of AGCO Corp., regarding the challenges of slicing and dicing information to get at ESG matters investors want.

“We’ve done the shareholder and investor outreach—it is a prominent, prominent item. We’ve done extensive outreach. I will tell you that the two main things that we’ve heard is human capital and governance. They rarely talk about financial statement impact, but when they do they say we want to know how your efforts in sustainability drive revenue, drive productivity, remove cost, remove risk, enhance customer relationships and improve the asset optimization,” said Long. “And I get that, but it’s very hard sometimes to differentiate between the ESG factors and the non-ESG factors in running our business every day. Sometimes you can – like the egg example I gave, sometimes you can’t,” she said.

Long also said the plethora of rules that have been developed, both in the U.S. and overseas, add an unsustainable burden. She said that the broader issue will be brought to the SEC in June by the Institute of Management Accountant’s (IMA) Financial Reporting Committee (FRC).

There are a large number of standards by various bodies in the U.S., in Europe, China, Japan, and South America, and some countries require that companies put sustainability-related metrics on their local websites in those countries, Long said. “And so we’re having to comply with a multitude of metrics right around the time that we’re also putting out 10Ks, proxy statements, annual reports – it’s becoming unsustainable and very hard to keep up with it. I think it’s not maybe a FASB but more for the SEC to contemplate,” she said.

Investors Clamoring ESG Disclosures

ESG is a topic the Financial Accounting Standards Advisory Council (FASAC) flagged as a priority area for the FASB’s future agenda. The FASB plans to issue an agenda consultation document mid-year to solicit the public’s feedback on its five-year work program. (See Non-GAAP Figures, ESG Disclosures Are Priority Topics, FASB Advisers Say in the April 9, 2021, edition of Accounting & Compliance Alert.)

FASAC members said ESG is an emerging issue that will not go away and it would be prudent for the board to get ahead of the issue.

“This is a big deal and we’re all just drinking from the fire hose right now trying to understand where it’s going to be, how it’s going to happen,” David Gonzales, vice president—senior accounting analyst at Moody’s Investors Service, Inc., said.

“I do think that there is a way to be patient with this – letting some things resolve itself in the financial statement, but also looking at some projects that could be out there with a different lens and that lens is no longer ‘hey investor what risk is this for you’; or ‘hey investor what financial gain do you need from this information,’” Gonzales said. “It could be ‘hey investor socially would you invest in this company if you knew this information? And I think that puts a little bit of lens on the way materiality is looked at and that could be in the realm of the FASB when you look at performance reporting,” he said.

Investors may need the board to revise its purview and address EGS matters more broadly, the discussions indicated.

“Investors are actually focused on these issues and we’re asking FASB to reimagine its work,” James Andrus, investment manager, at CalPERS, said. “It’s not enough in terms of whether or not it fits into the existing financial statements, but whether or not it can be reimagined in the way that better fits with what investors are actually looking at and what they value,” he said.

Might be a FASB Trustee Issue?

The topic might be more fitting for the FASB’s trustees, the Financial Accounting Foundation (FAF), in light of the debate taking place overseas, one FASAC member said.

Specifically, the IFRS Foundation, the trustee body of the IASB, is in the process of establishing a sustainability accounting standards board, Rudolf Bless, chief accounting officer at Bank of America, observed. That board would function alongside the IASB to focus on climate risk and sustainability matters for companies that use international financial reporting standards (IFRS).

“The question does pose itself ‘what does the process look like?’ And do you have sort of like a similar organization [alongside] the FASB similar to what the IFRS Foundation is going?” Bless said. “That seems to be the bigger question, but doesn’t seem like a direct FASAC-FASB discussion, rather a higher level governance” issue for the FAF, he said.


This article originally appeared in the April 13, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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