The Financial Accounting Standards Board (FASB) will very soon publish an agenda consultation document to solicit input on standard-setting projects the board should pursue in the coming years, and the top accountant of the Securities and Exchange Commission (SEC) at a conference suggested working on the statement of cash flows and intangible assets, both of which are on the standard-setter’s research agenda.
The accounting board has been studying the statement of cash flows in response to investor demand for improvements. And “a clear and accurate depiction of the nature and quality of an issuer’s cash flows can serve as an important tool for investors to make informed judgments regarding an issuer’s ability to generate positive future net cash flows, meet its financial obligations, and pay dividends or otherwise return cash to investors,” SEC Chief Accountant Paul Munter said in a speech at the AICPA & CIMA Conference on Current SEC and PCAOB Developments on December 9, 2024, in Washington.
“I am supportive of the FASB continuing to evaluate approaches to improve this critical component of high-quality financial reporting for investors, including ways to improve consistency and comparability in cash flow classification, transparency of the relationship between the statement of cash flows and the balance sheet and income statement, and more information about non-cash transactions,” Munter said.
During a question-and-answer session at the conference, Munter said accounting for intangibles can be improved, “whether we are talking about accounting for recent developments or internally generated intangible. Secondly, intangible assets, another research project is another area where there I think are opportunities for improvement, whether we’re talking about accounting for recent developments or internally generated intangibles.”
Today internally generated intangibles are not on the balance sheet and are not capitalized in the books.
“Business models have changed an awful lot over time,” Munter said in explaining the need for change. “Our guidance on research and development costs goes back to 1973 so 50 plus years ago, and among other things, predates the conceptual framework.”
Thus, he said it would be to look for opportunities to make improvements whether it would specifically be for R&D accounting or more broadly on intangibles.
In the meantime, FASB representatives at the conference said that the board will revisit goodwill accounting in its upcoming agenda consultation document, a topic it previously abandoned due to lack of board consensus.
The SEC as capital markets regulator oversees the accounting standard-setter.
And Munter noted that the FASB about three years ago issued an invitation-to-comment (ITC), and “the board did a terrific job of using that input to set the priorities on their agenda that have driven their standard-setting over the last two to three years that they have made very good progress on. And I think going through that process again … will be extremely valuable, and … help set the FASB’s agenda looking forward over the next two to four years.”
The staff in the SEC’s Office of the Chief Accountant (OCA), which Munter heads up, will also look at the suggestions that the FASB gets for its agenda. And OCA will continue to engage “as proactively as possible” with stakeholders, including preparers, auditors, investors, audit committees to understand the issues they are experiencing, such as challenges in the application of current standards or areas where current standards do not provide useful information for investors.
“That will certainly inform our thought process that we will use, and we will engage with [FASB Chair] Rich [Jones] and board members and staff to help share some of the things that we have learned and what we are hearing about that hopefully will provide input to the FASB as they are evaluating the input that they receive,” Munter added.
Meanwhile, he had a few more thoughts on cash flow.
He reminded preparers and auditors to make sure that the statement of cash flows and related cash and non-cash disclosures are provided the same level of focus as other components of the financial statements because that information is important to investors.
It is also “important to dig deeper into that input and better understand what investors are telling us about their informational needs,” he said. “For example, I have heard some investors say they either do not want or need a direct method cash flow statement. Instead, some investors say they want more information about things like cash collected from customers, cash paid to employees, cash paid to suppliers and other creditors, etc., all of which sounds like direct method cash flow information without the label.”
This article originally appeared in the December 13, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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