By Denise Lugo
Recent efforts by U.S. legislators to push the FASB to stop and further study the economic impacts of new credit loss accounting rules interferes with the independence of standard-setting, critical to the success of U.S. capital markets, Jeffrey Mahoney, general counsel of the Council of Institutional Investors, told Thomson Reuters on October 30, 2019.
“The intent of accounting is to try to report the economic activity of companies and we’ve decided, historically at least, that it’s best to have experts in the private sector going through a public due process with oversight by the government through the SEC – that that’s the best way to get standards that are responsive to the needs of investors in the marketplace,” Mahoney said.
“And if you look at our policy you’ll see that it’s supportive of a plural, public due process where investors are given the opportunity to provide input,” he said.
Mahoney, also a former counsel to prior FASB chairs, said when congress gets involved it’s typically never on behalf of investors and the users of financial reports. “It’s always on behalf of someone else who is trying to subvert the process to obtain some short-term benefit, notwithstanding whatever long-term damage,” he said.
Mahoney’s insights bring to surface a long-time accounting topic: whether politicians should be allowed to weigh in when warranted into the accounting standard-setting process, a hot-button issue in accounting circles. Those in agreement with Mahoney said politicians should follow the FASB’s due process, a rigorous one that solicits broad public input.
“Last time I checked the first amendment was still effective,” Peter Bible, Chief Risk Officer at EisnerAmper LLP, said. “I do believe that the private sector standard-setting process is the way to go. Politicians have views but they have got to vet those views through the FASB’s due process,” he said.
Bible, however, said he was sympathetic to the arguments being made about the credit loss standard because of the complexities of the guidance, which requires the use of significant judgement.
Typically, groups that push for legislative input fear they do not have sufficient control over changes whereby the outcome is unknown. The Credit Union National Association (CUNA), for example, earlier this year issued a statement in support of a legislative “stop and study” push, citing concerns over the compliance burden the new standard will bring, as well as its effect on the financial standing of credit unions. In addition, the American Bankers Association (ABA), the voice of the nation’s $18 trillion banking industry, said it is not in favor of political interference generally in the accounting standard-setting process, but in the case of the credit loss standard, a quantifying impact study was necessary.
“Congress should not be in specific accounting standard-setting. Legislative proposals in the House and Senate, however, would simply delay CECL until a rigorous economic analysis can be completed,” Mike Gullette, SVP of tax and accounting at ABA, said on October 31. “As it could significantly impact many aspects of the economy, including consumers and other borrowers, this is the kind of analysis that should be conducted before trying to implement the biggest accounting change in many years. We applaud that kind of bipartisan, congressional oversight on this critical issue.”
Much of the push back stems from worry the rules would discourage lending.
Legislators have taken up the topic. Rep. Blaine Luetkemeyer on September 27 introduced legislation that would subject the FASB’s actions to additional checks under the Administrative Procedure Act. H.R. 4565, the Responsible Accounting Standards Act, would require the FASB to “abide by the same rulemaking guidelines in place for every federal financial regulator, including the Federal Reserve,” according to the Missouri Republican. (See GOP Bill Would Subject FASB Standard-Setting to Additional Checks in the October 1, 2019, edition of Accounting & Compliance Alert.)
Rules Issued After Eight-Year Process
The FASB issued ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (Credit Losses), in 2016. The provisions, referred to as “CECL,” take effect January 2020 for large public companies (calendar year-end). It requires banks to forecast into the foreseeable future to predict losses over the life of a loan, and then immediately book those losses. The guidance was developed in response to the 2007-2008 global financial crisis, the biggest financial meltdown since the Great Depression.
The rules will be deferred to 2023 for smaller public companies and private companies, according to a recent FASB vote.
The FASB adopted CECL after an eight-year process that included 25 field work meetings with financial statement preparers from banking institutions of various sizes, nonfinancial companies and insurance companies. The board held 10 roundtables with more than 100 representatives including financial statement users, preparers, regulators and auditors. It held 85 meetings and workshops, and met with 200 financial statement users. When it issued a proposal in 2010 to change the rules, the board received 3,360 comment letters.
Political Interference Topic Spans Decades
Concerns about political interference in the accounting standard-setting process go back decades.
In 2000, then FASB Chairman Edmund Jenkins spoke out against potential legislation introduced in the House of Representatives, against a proposed business combinations standard. “The potential legislation must be seen for what it is – legislative interference with the FASB’s ability to do its job,” Jenkins wrote at the time. “The proposed bill would directly hamper the FASB’s independence by legislating the timing of the FASB’s proposed improvements to the transparency of the accounting and reporting for business combinations. The bill, if passed, would have a serious and negative impact upon consumers of financial information,” he said.
Four years later in 2004, the Senate and the House held hearings over stock option accounting after the FASB proposed that public companies should book them as an expense. They feared it would impact public company profits.
In 2008, a group of more than 60 U.S. lawmakers from both political parties urged the SEC to suspend fair value accounting rules and replace it with what more accurately reflects the true value of assets.
The debate on the topic was so stringent that groups such as the AICPA wrote in support of FASB’s independence. “The accounting profession believes this debate wrongly confuses the roles of accounting standards setters and the Securities and Exchange Commission with the role of regulatory supervisors of financial institutions,” the AICPA wrote at the time. “The profession believes it would be a significant mistake—and unnecessary—for Congress to subvert the role of the SEC, FASB and public financial reporting in general by undermining fair value accounting standards.”
The FASB is an independent private-sector organization established in 1973 and that operates under the oversight of Trustees of the Financial Accounting Foundation, to develop U.S. GAAP. In 2002, Congress enacted Sarbanes-Oxley Act, which included provisions protecting the integrity of the FASB’s accounting standard-setting process. The legislation provides the FASB with an independent, stable source of funding.
For in-depth analysis of the FASB’s guidance for credit losses, please see Catalyst: US GAAP—Financial Instruments-Impairment, also on Checkpoint.
Additional analysis of the credit loss standard can be found at Accounting and Auditing Update Service[AAUS] No. 2016-29 and SEC Accounting and Reporting Update Service[SARU] No. 2016-34 (July 2016): Special Report: Accounting for Credit Losses on Certain Financial Assets—An Explanation and Analysis of Accounting Standards Update No. 2016-13.
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