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FASB

Investor Disinterest Push FASB to Drop Project on Distinguishing Liabilities from Equity

Denise Lugo  Editor, Accounting and Compliance Alert

Denise Lugo  Editor, Accounting and Compliance Alert

The FASB on April 13, 2022, voted 5 to 2 to drop the second phase of its project to simplify rules for distinguishing liabilities from equity, after finding no viable solution and hearing that investors do not view it as a priority issue.

Rules for distinguishing liabilities from equity were flagged last year as a troublesome area for companies that use special purpose acquisition company (SPAC) vehicles to go public—cited as the cause of frequent misstatements due to accounting for warrants.

The board’s project aimed to improve and align the two existing indexation models used to evaluate financial instruments with characteristics of equity in Topic 480, Distinguishing Liabilities from Equity, and Subtopic 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity.

Ultimately there was no clear cut path on the issue, according to the discussions.

“This is a very complex area of accounting but the complexity isn’t for complexity sake alone, the complexity is because these instruments are very complex and in my view if we change the rules the instruments will change and continue to be incredibly complex,” FASB member Fred Cannon said. “And I think the staff did a very good job going down a number of paths, and showing it does not appear there’s a viable path that we can reach consensus on – so I don’t view this as an achievable project even after these many decades,” he said. “I don’t see this as a priority for users, I see it as a priority for some folks who want to reduce the complexities, but I haven’t heard it’s a priority for users.”

A staff analysis of the project and responses to Invitation to Comment (ITC) No. 2021-004Agenda Consultation, showed that views were mixed and conflicted, the discussions indicated. The ITC, which included an analysis of the project and four potential paths forward, was issued last year to solicit public comment about the board’s five year technical agenda from 2022 to 2026.

Other topics such as disaggregation of income statement items were cited by investors as being more pressing, board member said.

“Is the guidance complex for companies and other firms?—yes, these are complex transactions, complex instruments and we are not going to come up with accounting standards that will automatically reduce complexity, FASB member Gary Buesser said. “If I was asking an investor ‘is this project on the list of the top 10 most important projects we should work on based on the agenda consultation?’ the answer is unequivocally no,” he said. “I just don’t understand why we’d want to put our valuable staff resources into a project that’s 30 years ongoing, we’ve reduced the path five to four, so maybe in five or 10 years we’re down to three paths – this is not a good use of our staff’s time.”

FASB member and academic Christine Botosan held similar views as Buesser and Cannon, the two analyst voices on the board.

Two Dissented; Two Conflicted

FASB Vice Chair James Kroeker and board member Susan Cosper, the two dissents, argued that progress could be made to further simplify the rules, though tough to do, as there are viable solutions that could be pursued.

“I think we’ve heard that the larger companies and the larger firms can handle this guidance that we have today that’s very complicated, I think once you get below that it’s a big question mark and I don’t think that we have good data on whether or if they’re applying it consistently and that concerns me a great deal,” said Cosper. “So I think this has been particularly vexing to those.”

FASB Chair Richard Jones and board member Marsha Hunt, who ultimately voted to drop the project, were very conflicted in doing so.

“While there are possible paths that we could continue to explore, it’s not clear to me that any of those paths would be received well by all of our stakeholder groups,” said Hunt. “ The other troubling point is – it’s our job to deal with things that are hard to do…but I do agree that at this time, with the feedback that we’ve received about other areas of prioritization, I’m comfortable supporting the staff recommendation that at this time [to] redirect the resources to other projects,” she said.

Similarly, Jones said the ITC responses swayed his view, because though all agreed the model was complex, there was a lack of consensus on how to fix it. “I think this is something we have to deal with at some point in time,” he said. “I’m not sure now is the time.”

 

This article originally appeared in the April 14, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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