The FASB on December 20, 2023, voted against adding five new projects to its technical rulemaking agenda, including on accounting for commodities which it will continue to research. The changes would do more harm than good, according to the discussions – the last for the board this year.
The “no” vote on commodities was the biggest surprise because it has been on the board’s research agenda since last year and came with FASB staff recommendations that “there is an identifiable and sufficiently pervasive need to improve GAAP for a subset of entities whose business model is to buy and sell commodity inventory solely for trading.”
But more work needs to be done to reach the rulemaking bar, FASB members said. Further, parallels exist between commodities and a current project on environmental credits which will be addressed in several weeks.
“I think we should progress on the environmental credits project, so I would be supportive of holding this on the research agenda,” FASB Chair Richard Jones said. “Once the board has had a chance to go through environmental credits, my guess there is going to be a decision of ‘yes we want to do something with trading in that project’ or ‘no we want to send it to this project and deal with it broader in commodities,’ or ‘we don’t want to do anything,’ but at that point bring this back to the board and say ‘okay now with that additional knowledge are you interested in commodities, do you think you have a feasible scope and what would that be,’” he said. “We will bring it back at a time in the future.”
The vote followed a staff analysis that a process that addresses the measurement of commodities inventory held for trading would reduce diversity in practice for some commodities held by financial institutions and move US GAAP closer to IFRS Accounting Standards. Further, staff had recommended that a project be added to the technical agenda with a scope based on the following criteria: the inventory is fungible or interchangeable; the inventory is managed on a fair value basis; the inventory is held for trading purposes.
Overall, the board signaled: caution.
“I’ve said before I think the most important part of the decision before we put something on the technical agenda is getting the scope clear so that we have our elevator speech as to who’s affected and what’s the objective,” FASB member Marsha Hunt said. “And I’m interested because I understand today’s rules don’t present the economic consequences in as meaningful a way as maybe they could,” she said. “But I don’t know that I’m satisfied that we’ve seen a scope yet that I could support.”
Related to the four other topics that didn’t get added, adding projects would introduce problems in GAAP that did not previously exist, according to the discussions.
Specifically, the board voted against projects to:
- clarify the scope of Topic 480, Distinguishing Liabilities from Equity for legal-form debt instruments. Staff recommend that a project should not be added, flagging that there was not a solution that did not create other problems.
- reconsider the current accounting for equity securities. Staff recommended that a project should not be added for various reasons, including that proposed solutions would likely increase cost and complexity and may not have an identifiable scope. Further, staff said that the existing disclosure requirements already provide investors with sufficient transparency.
- eliminate the held-to-maturity (HTM) classification for debt securities, or make targeted amendments to any of the following: (a) balance sheet presentation of HTM debt securities (b) fair value disclosure of HTM debt securities by non-public business entities (PBEs) (c) hedge accounting guidance for HTM debt securities. Staff recommended that a project not be added to eliminate HTM classification, including because there is no technically feasible solution “with expected benefits that would justify the expected costs,” and accounting standards were not the cause of the bank failures that the agenda requester flagged. A majority of the board also voted against the other HTM issues. However, FASB members favored further research for issues related to interest rate and liquidity risks.
- to amend Topic 740, Income Taxes, to eliminate the prohibition of backwards tracing, a term for the recognition of current year changes to previously recognized deferred tax amounts in the same line item that they were initially recorded. Staff recommended that a project should not be added, noting that the board has determined in the past that the costs associated with the complexity of tackling the changes outweighed the benefits to users of applying backwards tracing. “The staff does not believe there is any new information today that has not been previously considered by the board.”
This article originally appeared in the December 21, 2023, edition of Accounting & Compliance Alert, available on Checkpoint.
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