1998 priorities & projects questionnaire

2015 Survey

Priorities of the Financial Accounting

Standards Board

June 2015

C O N T E N T S

Page

Background—The FASB’s Future Technical Agenda .......................................4–5

Section A—Prioritization of the Future Agenda .................................................6–7

Section B—Potential Projects: What Should be in the Pipeline and Why? .......8–9

Section C—Certain Projects on the FASB’s Technical Agenda ...................10–11

Section D—Stakeholder Specific Questions .................................................12–13

Appendix A—Project Descriptions ................................................................14–27

Appendix B—Sample Response to Section A.....................................................28

2015 SURVEY ON THE PRIORITIES OF THE FASB

June 2015

One of the roles of advisory group members is to share their views and experience with the Board on matters related to projects on the Board’s agenda, possible new agenda items, practice and implementation of new standards, and strategic and other matters.

Historically, a mechanism that FASAC has used to gather input and advise the FASB on future project priorities and on possible new agenda items is a periodic survey. Participation in this year’s survey includes members of FASAC, the Investor Advisory Committee (IAC), the Not-for-Profit Advisory Committee (NAC), the Small Business Advisory Committee (SBAC), the Private Company Council (PCC); and the Emerging Issues Task Force (EITF).

The survey results will be used by the FASB to develop a Discussion Paper seeking broad stakeholder input on possible agenda ideas to help the Board develop its thinking and structure an action plan.

A compilation of the survey responses will be shared with the FASB and made public; responses will not be attributed to specific individuals.

Respondents are asked to provide their information in the next section. Your

response is requested no later than Friday, July 31, 2015.

In order to accumulate the response information more efficiently, we are asking that you respond to the Survey electronically (responses can be copied and pasted from MS Word). Appendix B includes a sample response to Section A (prioritization of potential projects) of the survey.

If you are unable to respond electronically, or have questions about the survey (or technical questions about the possible projects described in the Appendix A), please contact Alicia Posta at (203) 956-5207 or [email protected].

mailto:[email protected]

Respondent Information

Please provide the following information with your response.

First Name:____________________________

Last Name:____________________________

Title: ____________________________

Company: _________________________

Email address: _____________________

FASB affiliation, if applicable: (please check all that apply)

EITF member

FASAC member

IAC member

NAC member

PCC member

SBAC member

Your primary background: (please check one)

Preparer (CFO, controller, etc.)

User of financial statements (analyst, investor, lender, etc.)

Accounting firm/auditor

Academic

Other, please specify _______________________.

[Ask only if User is selected] Which of the following best describes your role?

Buy-side analyst/portfolio manager

Sell-side analyst

Lender (credit analyst/relationship manager/loan officer)


Your involvement with various types of reporting entities: (please check all that apply)

Public companies

Private companies

Not-for-profit organizations

Large entities

Medium entities

Small entities

Plan accounting (defined benefit pension plans, defined contribution benefit plans,

health and welfare benefit plans)

Foreign (non-U.S.) entities or subsidiaries

Entities that utilize IFRS at the parent or subsidiary level

Your involvement with various industries: (please check all that apply)

Agriculture

Airlines

Charities or Foundations

Contractors

Development Stage Entities

Education

Entertainment

Extractive Activities

Financial Services

[If Financial Services is selected]

Banking/Investment Banking

Insurance

Investment Management

Broker/Dealer

Franchisors

Healthcare Entities

Manufacturing

Real Estate

Services

Energy/Utilities (including Regulated Operations)

Software/Technology/Ecommerce


Background—The FASB’s Future Technical Agenda

How Are Potential Standard-Setting Projects Identified?

There are many different ways that financial reporting issues that require standard-setting activities are surfaced. Some of those sources include:

Unsolicited comment letters

Technical inquiries

Meetings with advisory groups and other stakeholders

Findings resulting from the FAF’s Post-Implementation Review process

Convergence opportunities (i.e., whether there are areas of IFRS that should be incorporated into US GAAP).

How Does the Board Decide on Which Projects to Add? After receiving input from stakeholders, the FASB decides which projects to add to its technical agenda. To aid in that decision-making process, the following is a list of factors used to assist in thoroughly evaluating projects. Those factors include consideration of:

Pervasiveness of the issue—the extent to which an issue is troublesome to users, preparers, auditors, or others; the extent to which there is diversity of practice; and the likely duration of the issue (i.e., whether transitory or likely to persist);

Alternative solutions—the extent to which one or more alternative solutions that will improve financial reporting in terms of relevance, reliability, and comparability are likely to be developed;

Technical feasibility—the extent to which a technically sound solution can be developed or whether the project under consideration should await completion of other projects;

Practical consequences—the extent to which an improved accounting solution is likely to be acceptable generally, and the extent to which addressing a particular subject (or not addressing it) might cause others to act, for example, the SEC or Congress;

Convergence possibilities—the extent to which there is an opportunity to eliminate significant differences in standards or practices between the U.S. and other countries with a resulting improvement in the quality of U.S. standards; the extent to which it is likely that a common solution can be reached; and the extent to which any significant impediments to convergence can be identified;

Cooperative opportunities—the extent to which there is international support by one or more other standard setters for undertaking the project jointly or through other cooperative means with the FASB; and

Resources—the extent to which there are adequate resources and expertise available from the FASB, the International Accounting Standards Board (IASB), or another standard setter to complete the project; and whether the FASB can leverage off the resources of another standard setter in addressing the issue (and perhaps thereby add the project at a relatively low incremental cost).

Individual FASB members may consider certain factors collectively. For example, a Board member may consider alternative solutions together with technical feasibility, or convergence possibilities together with cooperative opportunities.

The Board’s agenda includes different types of projects:

Projects to develop or improve the conceptual framework—the foundation for future accounting standards. That foundation is essential to fulfilling the Board’s goal of developing standards that are principles based, internally consistent, and that lead to financial reporting that provides the information capital providers need to make decisions in their capacity as capital providers.

Projects that are primarily focused on improving or developing the requirements for

recognition and measurement. These projects also may include accompanying improvements to the related disclosure and presentation requirements. They can have a broad or a narrow objective. For example, the objective of the FASB’s project on leases is broad; it is “to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information.” Some examples of projects with narrower objectives include: accounting for measurement period adjustments in a business combination, clarifying the definition of a business, and employee benefit plan simplifications. Projects with narrow objectives may be addressed directly by the FASB or by utilizing the EITF (with ratification by the FASB).

Projects that are primarily focused on improving or developing the requirements for

presentation and disclosure. For example, the FASB’s project on not-for-profit financial statements is a reexamination of existing standards for financial statement presentation by not-for-profit entities. It is focused on improving the net asset classification requirements, as well as the information provided in financial statements and notes about liquidity, financial performance, and cash flows.

Section A—Prioritization of the Future Agenda

1. Detailed Project Prioritization

In light of the anticipated completion of certain major projects (such as leases, accounting for financial instruments: impairment, and classification and measurement), soliciting advisory group members’ views about the FASB’s future agenda will be helpful and timely. Below is a listing of the FASB’s research projects, as well as other potential projects that are not on the FASB’s agenda.

For purposes of this exercise:

Appendix A includes a brief description of each of the potential projects listed. That information is limited because additional research is needed to develop or refine a project objective (or possible alternatives) for the FASB’s consideration.

Please add any other significant areas of needed improvements to financial reporting in the next 5 years that are not included (including those needed in light of business, economic, industry, or other trends).

You are given 100 points to “spend” on the potential projects that you think should be on the FASB’s agenda for the next 5 years, including any significant areas that you add.

o Please allocate your points to the projects below to reflect how a) deficient US GAAP is and b) urgent it is that the FASB address the topic.

o Points can be allocated to a single project or among numerous projects. o Projects can be allocated zero points.

For each potential project to which you assign points, you also are asked to identify and provide rankings below, with “1” being the highest priority.

Please do not feel compelled to allocate points to potential projects that are not among your highest priorities.

Points – Respondents should allocate points to each potential project that they think should be a priority for the Board’s agenda. The total points should be 100.

Relative Rank – For each potential project that is assigned points, respondents also should give that project a rank, with “1” being the highest.

Appendix B includes a sample response to this section. That sample is provided as an aid for respondents, and is not intended to predispose or represent the views of the Board or survey respondents.

Potential Projects

FASB Research Projects1 Financial Performance Reporting (formerly Financial Statement Presentation)2

Improving Classification Guidance in the Statement of Cash Flows

Other Potential Projects Recognition and Measurement

Inventory and Cost of Sales (recognition and income statement classification)

Equity Method

Intangible Assets, including the Capitalization of Certain Development Costs (recognition, initial measurement, and amortization)

Pensions and Other Postretirement Benefits

Accounting for Liabilities with Characteristics of Equity

Income Taxes

Presentation and Broad Transactions

Segment Reporting

Collaborative Arrangements

Other Comprehensive Income (including recycling)

New Basis of Accounting

Consolidations

RESPONDENTS PLEASE ADD: Other Significant Areas of Needed Improvements to Financial

Reporting, including Those in Light of Business, Economic, Industry, or Other Trends

TOTALS 100 pts n/a

1 The IASB’s research agenda includes a disclosure initiative and research projects on the equity method of accounting, financial instruments with characteristics of equity, performance reporting, post-employment benefits (including pensions), and income taxes. 2 In January 2014, the FASB added the Financial Performance Reporting (formerly called Financial Statement Presentation) to its research agenda. The project was added to the FASB’s Technical Agenda in 2001. In July 2010, the FASB and IASB issued a Staff Draft of an Exposure Draft on Financial Statement Presentation. In 2011, the Boards decided to focus on certain higher priority convergence projects and to return to the project when resources were available.

Section B—Potential Projects: What Should be in the Pipeline and Why?

Before the FASB adds a project to its technical agenda, information is needed about why improvements are needed, whether there are feasible alternatives that could address the problem, how widespread the problem is, and when a solution is needed. For respondents completing this survey electronically, based on your selections in Section A, your top 3 potential projects are pre-populated below.

Please provide your input in those areas by completing questions 2 – 7.

2. What is the primary reason an improvement is needed (for your top 3 projects)? For

example, is there a lack of information, a disconnection between the underlying economics and the accounting, a cost/complexity that needs to be removed from the system, disagreements on how to apply the current guidance, antiquated guidance, etc.

Missing information

Better information needed

Costly to provide

Simplification needed

Does not provide decision useful information

Other

[Priority 1 – based on response]



3. Do you have any additional comments about why improvements are needed?

If yes, please describe.




4. Are there feasible alternatives that could solve the problem?

Yes/No If yes, please describe.




5. How widespread is the problem (for your top 3 projects)? (Please select all that apply)

Public companies

Private companies

Not-for-Profit organizations

Large companies

Small companies

Multinational companies

Domestic companies

[Priority 1 – based

on response]



6. How pervasive is the issue (for your top 3 projects)? (Please select all that apply) Usually

material Frequently recurring

Affects lots of companies

Exists in many countries

Affects lots of industries




7. When is the solution needed?

Within the

next 2 years? (Yes/No)

Why?




Section C—Certain Projects on the FASB’s Technical Agenda

Developing the right solutions means identifying the right problems. As with all aspects of the FASB’s due process, that means listening—carefully—to stakeholders’ experiences, input, and concerns.

For certain projects that are currently on the FASB’s technical agenda, input is needed about whether the FASB is addressing the right problem, whether the solution is dependent on another project, and when the solution is needed. That input is most helpful to the FASB for major projects that are closer to the beginning of the Board’s due process (rather than for projects that are nearing completion, or for projects that the Board will otherwise be seeking public comments on in the near-term). Therefore, the project listing below excludes:

Agenda projects that the FASB expects to complete in 2015.

Agenda projects in which the FASB has issued an Exposure Draft (or expects to issue within 2Q 2015). The FASB website includes a complete list of the Exposure Drafts open for comment.

Agenda projects (including EITF projects) that focus on relatively narrow implementation issues (that have an expected timeframe for completion of less than two years).

8. Which of the following projects are the most important ones for the FASB to address? (Please select up to three projects.)

Certain Projects on the FASB’s Technical Agenda (see page 22 in Appendix A for Descriptions)

Conceptual Framework (Measurement and Presentation)

Accounting for Financial Instruments: Hedging

Business Combinations: Accounting for Goodwill and Identifiable Intangible Assets for Public Business Entities and Not-for-Profit Entities

Disclosure Framework (Disclosure Review and Interim Reporting)

Based on your selections in Question 8, please complete Questions 9 - 12.

9. Why are these areas the most important ones for the FASB to address? Why?

[Selection 1 – based on response]



10. Do you agree with the FASB’s description of the problem (included in the Appendix A, starting on page 22)? Why or why not?

Yes/No Why or why not?




http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1175805074609

http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1175805074609

11. Is reaching a solution on the project dependent on another area that needs to be addressed first? For example, a past FASAC survey respondent suggested that resolving the distinction between liability and equity instruments should be undertaken at the same time, or sequentially, with considering earnings per share.

Yes/No If yes, which project is this dependent on?




12. When is the solution needed?

Within the

next 2 years? (Yes/No)

Why?




13. Are there any projects on the FASB’s technical agenda that you’d recommend removing or deferring for the next 5 years?

Yes

No

14. If yes, which projects and why?

http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176164187985

Section D—Stakeholder Specific Questions

15. [For preparers/auditors] Are there areas of GAAP that seem obsolete?

16. [For preparers/auditors] Are there areas of GAAP that are common sources of auditor or preparer misapplication? Are there areas of GAAP where further guidance is needed?

17. [For users] On a scale of 1 to 10 (with 10 being “extremely useful” and 1 being “useless”), how useful is the current statement of cash flows?

Why? How could your analysis be simplified or enhanced with improvements to the cash flows statement (e.g., classification, further disaggregation, etc.)?

18. [For users] On a scale of 1 to 10 (with 10 being “completely adequate” and 1 being “completely inadequate”), how adequate are the current footnote disclosures included in the financial statements in providing you with the information that you need to develop your cash-flow or investment models? What additional footnote disclosure would help your analysis?

APPENDIX A - 2015 SURVEY ON THE PRIORITIES OF THE FASB

June 2015

PROJECT DESCRIPTIONS

For purposes of completing the survey, this Appendix provides a description of each potential project, as well as certain projects on the FASB’s Technical Agenda (those listed in Section C). Links to the FASB and/or IASB webpages also are included, where applicable.

Potential Projects

FASB Research Projects

Financial Performance Reporting (formerly Financial Statement Presentation)

The primary objective of this research project is to evaluate ways to improve the relevance of information presented in the performance statement. The project will explore and evaluate improvements to the performance statement that would increase the understandability by presenting certain items that may affect the amount, timing, and uncertainty of an entity’s cash flows.

In June 2014, the Board decided to focus this project on two areas: (1) determining an operating performance metric and (2) distinguishing between recurring and nonrecurring or infrequently occurring items within the performance statement.

In addition to these two areas, the project will consider potential related changes that may arise from (1) and (2) in the following respects:

A. Additional disaggregation in the performance statement

B. Transparency of remeasurements

C. Related changes to segment reporting

D. Linkages across the primary statements.

Board deliberations on this project are ongoing. The Board directed the staff to focus its research efforts first on distinguishing between recurring and nonrecurring or infrequently occurring items, after which the Board will consider whether and how it would like to proceed with defining operating activities.

FASB Project Update on Financial Performance Reporting

http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FProjectUpdatePage&cid=1176164178963

Improving Classification Guidance in the Statement of Cash Flows

Diversity in practice exists in how certain cash receipts and cash payments are classified in the statement of cash flows. Stakeholders indicated that the primary reason for the diversity in classification is the result of lack of specific accounting guidance and inconsistent application of the existing principles within current GAAP (Topic 230).

The objective of this research project is to evaluate ways to improve the guidance on the classification of cash receipts and cash payments. The research project does not include in its scope, consideration of the use of the direct cash flow method. This research project was added in April 2015.

The FASB also plans to complete a separate Emerging Issues Task Force (EITF) project in the near-term. That project (EITF Issue No. 15-F) includes nine specific cash flow issues to reduce the existing diversity in practice.

Other Potential Projects – Recognition and Measurement

Inventory and Cost of Sales (Recognition and Income Statement Classification)

Significant differences in existing practices for classifying costs in cost of sales or in sales, general, and administrative expenses result in different sales margins for otherwise similar entities or industries.

Some stakeholders also have raised concerns about the number of, and inconsistency among, existing inventory models and suggest that the FASB should reduce the number of acceptable inventory models.

The FASB has a separate project on the subsequent measurement of inventory on its current agenda (Simplifying the Subsequent Measurement of Inventory) as part of its simplification initiative. Current GAAP (Topic 330, Inventory) requires a company to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. In this project, the Board decided that inventory should be measured at the lower of cost and net realizable value. The Board decided to exclude inventory measured using the last-in, first-out (LIFO) and retail inventory methods from the scope of the proposed changes, so there would be no change to the accounting for inventory measured using those methods as a result of this project. The Board plans to issue a final Accounting Standards Update in the third quarter of 2015.


Users have stated that the existing pension accounting requirements are extremely complex, difficult to understand and produce misleading results. Some specific examples are:

1. Smoothing is misleading. The problems cited are:

http://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=1176164069142


o Assets and liabilities are not reflected at their current value. Actuarial gains and losses are not recognized unless the accumulated gain or loss exceeds 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets (the 10 percent corridor).

o Investment earnings are based on an assumed long-term expected rate of return instead of actual returns. This can result in reporting earnings that are greater or less than actual investment earnings. It also can result in the recognition of earnings while actually incurring losses.

o Investment earnings and the 10 percent corridor are often based on the market-related value of plan assets instead of fair value.

o Prior service costs relating to plan amendments are amortized over future service periods even if attributable to retirees.

2. The existing accounting model is complex, not well understood, and necessitates additional disclosures. The extensive disclosure requirements are, in part, to compensate for the lack of transparency.

3. Selection of assumptions, such as the asset return assumption, is difficult to substantiate. The ability to recognize earnings based on assumed investment returns creates the potential for misstatement.

Near-term Anticipated Improvements to Presentation

Many stakeholders have criticized the net presentation of defined benefit cost in the income statement. The presentation of defined benefit cost on a net basis combines elements that are distinctly different in their persistence and character, resulting in a number that does not have predictive value for users. The lack of transparency in the presentation of net benefit cost also reduces usefulness of financial information. This issue was discussed with FASAC at their June 2015 meeting.

In response, the Board recently directed the staff to consider improvements in the presentation of net periodic pension cost and net periodic postretirement benefit cost (collectively, net benefit cost). The improvements focus on disaggregated presentation of the components of net benefit cost. Net benefit cost is made up of the following components that reflect different aspects of an employer’s financial arrangement as well as the cost of benefits earned by employees (net benefit cost may be capitalized as part of an asset):

a) Service cost

b) Interest cost

c) Expected return on plan assets, if any

d) Amortization of any prior service cost or credit included in accumulated other comprehensive income

e) Gain or loss (including the effects of changes in assumptions) to the extent recognized

f) Amortization of any net transition asset or obligation existing at the date of initial application of Statement of Financial Accounting Nos. 87, Employers’ Accounting for Pensions, and 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, and remaining in accumulated other comprehensive income.

There is no specific guidance in GAAP, and only limited guidance in IFRS, on where the amount of net benefit cost should be presented in an employer’s income statement.

In June 2015, the Board added a project that addresses the presentation of net benefit cost for pension and other postretirement benefit plans to its technical agenda.

Possible Paths Forward Beyond Presentation

Some alternatives beyond disaggregated presentation of the components of benefit cost that have been raised by stakeholders include:

1. Clean sheet approach – consider the best measurement for the long-term liabilities; address whether balance sheet amounts should be presented gross or should continue to be presented net.

2. Consider adoption of IFRS – One possible path forward would be to consider potential opportunities for convergence with the recently revised IFRS requirements. The new IFRS requirements result in the immediate recognition of prior service cost in profit or loss, the immediate recognition through OCI of actuarial gains and losses (with no recycling3), and disaggregated presentation of the components of benefit cost (into service cost, net interest income/expense, and remeasurements).

3. Encourage/require immediate recognition of all gains and losses (except plan changes) immediately – for pension plans, OPEB, or both; outside of a corridor; implications to segment and non-GAAP results.

FASB Project Update on Pensions


In 2004, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) added a joint project to their agendas to develop an improved, common conceptual framework. The objective of the joint FASB/IASB project was to improve and simplify the financial reporting requirements for financial instruments with characteristics of equity. On November 30, 2007, the Boards issued their Preliminary Views, Financial Instruments with Characteristics of Equity. In 2010 the Boards acknowledged that they did not have the capacity to devote the time necessary to deliberate the project issues. At that point the project became inactive. A summary of the activities and decisions of the Liabilities & Equity project can be found on the previous project page.

Near-term Anticipated Improvements U.S. stakeholders have continued to express support for a project on distinguishing liabilities from equity. At the November 5, 2014 agenda prioritization meeting, the FASB decided to add a narrow-scope project to its technical agenda in lieu of a broader project on distinguishing liabilities from equity. The objective of that narrow-scope project is to make targeted improvements that simplify the accounting guidance related to financial instruments with characteristics of liabilities and equity.

3 “Recycling” is the reclassification of components of other comprehensive income to net income. In U.S. GAAP,

all components of other comprehensive income are subsequently reclassified. In IAS 19, the remeasurement effect recognized in other comprehensive income does not “recycle” through profit and loss.


The targeted-improvements include:

1. Determining whether an instrument (or embedded feature) is indexed to an entity’s own stock, specifically as it relates to features where the strike price adjusts down based the pricing of future equity offerings

2. The indefinite deferral in Topic 480 related to mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests by replacing the deferral with a scope exception

3. Freestanding contracts indexed to, and potentially settled in, an entity’s own stock, specifically simplification of the additional conditions necessary for equity classification

4. Improving the navigation within the Codification.

The Board will begin deliberations on the topics included within the scope of the project.

Concurrently, the Conceptual Framework project is on the FASB’s technical agenda. The current phases on the technical agenda are measurement and presentation. Those phases are planned to be followed by the liability-equity distinction.

IASB currently has a research project (separate from their conceptual framework project) in this area and is investigating potential improvements to the:

1. Classification of liabilities and equity in IAS 32 Financial Instruments: Presentation, including investigating potential amendments to the definitions of liabilities and equity in the Conceptual Framework; and

2. Presentation and disclosure requirements for financial instruments with characteristics of equity, irrespective of whether they are classified as liabilities or equity.

In the Agenda Consultation Feedback Statement published in December 2012, the IASB identified the Financial Instruments with Characteristics of Equity project as one of its priority research projects on the basis of the views that it received.

The Board also directed the staff to continue its research work on issues related to the accounting for convertible instruments. The objective of this research project is to identify ways to simplify the accounting for convertible financial instruments by reducing the number of accounting models for these instruments. The FASB plans to complete the other targeted-improvements and to possibly consider linkages with the Conceptual Framework project (distinguishing liabilities from equity) before continuing research on this project.

FASB Former Project on Financial Instruments with Characteristics of Equity Current FASB Project on Liabilities & Equity—Targeted Improvements

Equity Method

Some stakeholders question whether the information resulting from the equity method of accounting provides useful information to investors and other financial statement users. Other stakeholders raise concerns about the complexities and costs of applying the equity method.



The IASB has a research project on this topic. The objective of that research project is “to understand the financial reporting issues that application of the equity method seeks to resolve by considering the circumstances in which the method is currently applied . . . The research project will involve a fundamental assessment of the equity method in terms of its usefulness to investors and difficulties for preparers.

Near-term Anticipated Improvements

Recently, as part of its simplification initiative, the FASB undertook a project to simplify two aspects of the equity method of accounting:

1. The requirement that an entity account for the difference between the cost of an investment and the amount of underlying equity in net assets of an investee (referred to as “basis difference”) as if the investee were a consolidated subsidiary and related disclosures

2. The requirement that an entity retroactively adopt the equity method of accounting if an investment that was previously accounted for on other than the equity method becomes qualified for use of the equity method by an increase in the level of ownership interest.

The FASB reached conclusions on those areas and plans to issue an Exposure Draft in the near-term.


Existing U.S. GAAP for intangible assets is fragmented and incomplete. There are different requirements for recognition, initial measurement, and amortization or remeasurement of different types of intangible assets. There also are differences in accounting for internally generated and purchased intangibles. For example, some stakeholders have suggested that certain development costs should be capitalized. Existing US GAAP also is different than IFRS.

Income Taxes

U.S. GAAP and IFRS both account for (1) taxes currently payable (or receivable) arising from current taxable income and (2) future (deferred) taxes payable (or receivable) due to differences in financial statement bases and tax bases of assets and liabilities.

U.S. GAAP includes explicit guidance to address uncertain tax positions; IFRS does not.

Both U.S. GAAP and IFRS include certain explicit exceptions to the basic principle, and those exceptions are the primary source of the divergence. Some exceptions involve country-specific issues (for example, the exception related to U.S. steamship entity statutory reserve funds or bad-debt reserves of U.S. savings and loan associations) that do not represent a fundamental difference in the overall approach.

Additionally, there are subtle but substantive differences related to the recognition and measurement, specifically, tax rates (for example, distributed versus undistributed earnings,

http://www.ifrs.org/Current-Projects/IASB-Projects/equity-method-accounting/Pages/equity-method-accounting.aspx


and enacted versus substantively enacted) and deferred tax asset recognition (thresholds for recognition and approach to valuation allowances.

Implementation guidance has created additional differences (for example, initial recognition of deferred tax effects in certain asset acquisitions).

Some possible paths forward include:

Alternative A—Continue to try to identify high-quality solutions by selecting between existing IFRS and U.S. GAAP.

Alternative B—Undertake a comprehensive project to reconsider income taxes (including uncertain tax positions).

Near-term Anticipated Improvements: Presentation of Tax Expense/Benefit; Disclosure Stakeholders have indicated that the current guidance on allocating total tax expense or benefit to components of the income statement (or “performance statement”) and directly to shareholders’ equity and other comprehensive income is complex for financial statement preparers and does not provide meaningful information to financial statement users.

The primary objective of this research project is to evaluate the presentation of total tax expense or benefit as a single line item on the performance statement. This research project was added in August 2014.

Separately, as part of the FASB’s disclosure review process in its Disclosure Framework project, the Board began its review of disclosures related to income taxes, focusing on disclosures related to undistributed foreign earnings. The Board plans to issue an Exposure Draft describing the proposed changes resulting from that review process.

Other Potential Projects – Presentation and Broad Transactions

Segment Reporting

Some of the possible areas for targeted improvements identified by the staff include:

Identification of the Chief Operating Decision Maker (CODM) – providing additional guidance on how to identify the CODM.

Determining the operating segments – providing additional guidance on how to determine which discrete financial reports are reviewed by the CODM and the interaction with the entity’s internal structure.

Aggregating the operating segments – providing additional guidance on “similar economic characteristics”

Disclosure of certain line items, if those amounts are regularly reviewed by the CODM – requiring certain additional disclosures, such as operating cash flows and gross margins.

Collaborative Arrangements

In several industries, entities seek partners to jointly develop and commercialize intellectual property of some type, for example, a pharmaceutical product. The types of activities conducted under such arrangements may include research and development, regulatory activities, marketing, general and administrative, manufacturing, and distribution. The arrangement may provide that one partner has sole or primary responsibility for certain activities, or that one or more partners have shared responsibility for certain activities. The consideration for such arrangements may include a combination of upfront license fees and subsequent payments based on the achievement of certain milestones, generally during the development period. Payments between collaborative partners also include payments for research and development activities, cost-sharing reimbursements, future royalties, and profit/loss-sharing payments. Questions have arisen in practice as to the appropriate accounting for payments between collaborative partners, particularly during the pre-commercialization phase.


Stakeholders have suggested the FASB address the concept behind other comprehensive income (OCI), including establishing a consistent principle or basis for (1) determining which gains and losses should be reported in OCI and (2) determining whether and if so when to reclassify (or “recycle”) amounts in accumulated OCI into net income. The FASB has received feedback that OCI and the clarification of its conceptual basis should have at least the same priority as improving the presentation of financial statements.


Some stakeholders have suggested the need for a project that would identify those situations in which fresh-start (new basis at fair value) recognition and measurement of all of an entity’s assets and liabilities would be appropriate. One commonly identified candidate for application of this approach would be a multiparty business combination or other new entity formation in which no single preexisting entity obtains majority ownership and control of the resulting new entity. Similarly, joint venture formations also may be candidates for this accounting treatment.

Consolidations

There are two main consolidation models under US GAAP: (1) the voting model and (2) the variable interest entity model.

Voting Model: The principle underlying the voting model was established by AICPA Accounting Research Bulletin No. 51, Consolidated Financial Statements (ARB 51), in August 1959. The traditional reason for consolidation described in ARB 51 was "for fair presentation when one of the companies in the group directly or indirectly has controlling financial interest in the other companies." ARB 51 explains that "the usual condition for a controlling financial interest is ownership of a majority voting interest."

Variable Interest Entity Model: When an entity is not controlled by voting interest or lacks sufficient equity to finance the activities of the entity without additional

subordinated financial support, the usual condition for establishing controlling financial interest under ARB 51 does not apply. In such instances, controlling financial interest is most likely established through interests other than equity, as is the case with variable interest entities (VIEs). Under this model, a reporting entity consolidates a VIE if it determines that it is the primary beneficiary of the VIE.

The introduction of VIE guidance did not change the voting interest model; however, many stakeholders argue that it added a layer of complexity. Many stakeholders raise a concern that the VIE guidance is unduly complex and difficult to understand. If stakeholders support the need for improvement, some possible alternatives could be:

Alternative A – Rewriting the consolidations guidance to improve readability. Minor amendments to the consolidation model may result from such a rewrite.

Alternative B – Overhaul the consolidations guidance by unifying the voting interest model and the variable interest model. That is, have one consolidation model for all entities.

Certain Projects on the FASB’s Technical Agenda

Conceptual Framework (Measurement and Presentation)

The objective of the conceptual framework project is to develop an improved conceptual framework that provides a sound foundation for developing future accounting standards. Such a framework is essential to fulfilling the Board’s goal of developing standards that are principles based, internally consistent, and that lead to financial reporting that provides the information capital providers need to make decisions in their capacity as capital providers. The new FASB framework will build on the existing framework.

The Board discussed whether and how to proceed with the conceptual framework project and decided to begin with presentation and measurement followed by the liability-equity distinction (see Accounting for Liabilities with Characteristics of Equity below).

Measurement

The Board discussed how to proceed with developing concepts related to measurement, including:

1. Agreeing on the meanings of key terms and what the objectives and qualitative characteristics imply for measurement

2. Identifying appropriate types of measurements

3. Determining which measurements to use in specific circumstances.

The Board decided that the following general categories of methods should be discussed in the proposed Concepts Statement chapter on measurement:

1. Prices in transactions in which the entity participated

2. Current prices observed or estimated by the entity

3. Discounted or undiscounted estimates of future cash flows other than estimates of market prices

4. Other adjustments to carrying amount: accruals, systematic allocations, and allowances for impairments.

Presentation

The Board decided that the following two presentation concepts should be further developed:

1. Information should be grouped into reasonably homogeneous groups. Line items or subtotals that include items that have similar characteristics in more than one respect are likely to provide more information about prospects for future cash flows than if their characteristics were dissimilar.

2. The association between (a) revenue, expenses, gains, and losses that result from changes in assets, liabilities, and equity instruments and (b) the assets, liabilities, and equity instruments that changed should be made apparent in the financial statements (and associated notes).

The Board discussed factors (for example, characteristics of an item and activity from which the recognized item results) to help it establish standards for aggregating individual assets, liabilities, equity, revenues, expenses, gains, and losses into line items in the financial statements. The Board decided that the factors recommended by the staff were appropriate but pointed out that not all of the factors can be applied in each set of financial statements because that would require more line items than can reasonably be presented. Consequently, the Board directed the staff to consider how to weigh the factors in various circumstances and how practical considerations (such as space limitation and cost) should affect the Board’s presentation decisions.

FASB Project Update on Conceptual Framework IASB Project Update on Conceptual Framework

Accounting for Financial Instruments: Hedging

This project addresses issues related to hedge accounting for financial instruments and non-financial items. The objective of this project is to make targeted improvements to the hedge accounting model based on the feedback received from preparers, auditors, users and other stakeholders. The Board will consider opportunities to align with IFRS 9, Financial Instruments.

The Board decided to include the following preliminary list of topics in the project scope:

1. Hedge effectiveness requirements

2. Component hedging:

a. Nonfinancial items

b. Financial instruments.

3. Potential elimination of the shortcut and critical terms match methods

4. Voluntary dedesignations of hedging relationships

5. Recording of ineffectiveness for cash flow underhedges


http://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Framework/Pages/Conceptual-Framework-Summary.aspx

6. Benchmark interest rates

7. Simplifying hedge documentation requirements

8. Presentation and disclosure of hedging instruments, hedged items, and ineffectiveness.

The Board instructed the staff to analyze a group of issues holistically due to their interrelated nature. The group of issues includes hedge effectiveness requirements, component hedging for financial and nonfinancial items, potential elimination of the shortcut and critical terms match methods, benchmark interest rates, and presentation and disclosure.

FASB Project Update on Accounting for Financial Instruments: Hedging

Business Combinations: Accounting for Goodwill and Identifiable Intangible Assets for Public Business Entities and Not-for-Profit Entities

Goodwill

In 2001, FASB Statement No. 142, Goodwill and Other Intangible Assets, replaced APB Opinion No. 17, Intangible Assets (issued in 1970). Opinion No. 17 required amortization of goodwill over its useful life, not to exceed 40 years. Statement 142 eliminated goodwill amortization for financial reporting purposes and instead required that goodwill be tested for impairment at least annually using a two-step process. In the first step, a reporting entity compares the fair value of its reporting units with their carrying value, including goodwill. If the carrying amount of a reporting unit is greater than its fair value, a reporting entity must calculate the implied fair value of goodwill by performing a hypothetical application of the acquisition method as of the date of the impairment test. The goodwill impairment, if any, is equal to the excess of the carrying amount of goodwill over its implied fair value.

In 2011, due to concerns about the cost and complexity of the annual goodwill impairment test, the Board developed an optional qualitative impairment test as a screen for companies to assess whether it is more likely than not that goodwill is impaired before performing the quantitative two-step impairment test (FASB Accounting Standards Update No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment).

In January 2014, the FASB issued guidance4 that endorsed the Private Company Council (PCC) decision to give private companies an alternative to amortize goodwill and simplify the impairment test. As a result, a private company can elect to amortize goodwill over 10 years, or a private company can elect to amortize goodwill over a period of less than 10 years, if it demonstrates another useful life is more appropriate.

The objective of this project is to reduce the cost and complexity of the subsequent accounting for goodwill for public business entities and not-for-profit entities.

4 FASB Accounting Standards Update No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill (a Consensus of the Private Company Council).


The Board discussed additional outreach and research performed by the staff on the subsequent measurement of goodwill, including the results of the IASB’s Post-Implementation Review (PIR) of IFRS 3, Business Combinations, and the results of a study on the use of the qualitative assessment introduced in FASB Accounting Standards Update No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment.

The Board also directed the staff to perform additional research on the amortization of goodwill, with a focus on identifying the most appropriate useful life if goodwill were amortized, and on simplifying the impairment test.

The Board asked the staff to consider the implications of potentially subsuming intangible assets into goodwill in conjunction with its additional research and to consider IASB activities on goodwill and intangible assets in response to its PIR on IFRS 3.

FASB Project Update on Accounting for Goodwill for Public Business Entities and Not-for-Profit Entities

Identifiable Intangible Assets

In 2001, FASB Statement No. 142, Goodwill and Other Intangible Assets, superseded APB Opinion No. 17, Intangible Assets (issued in 1970). Opinion 17 required companies to record as assets the costs of intangible assets acquired from other enterprises or individuals, and to amortize those intangible assets over their useful lives, not to exceed 40 years. Opinion 17 stated that the cost of identifiable assets were not to be included in goodwill. Statement 142 maintained the requirement to separately record identifiable intangibles, but allowed for indefinite life intangibles to remain at cost and not be amortized and removed the 40-year maximum amortization period.

In December 2014, the FASB issued guidance5 endorsing the PCC’s changes to GAAP for private companies on the accounting for identifiable intangible assets in a business combination. As a result, a private company can elect to subsume into goodwill customer-related intangible assets (unless they are capable of being sold or licensed independently from the other assets of the business) and noncompetition agreements. An entity that elects this accounting alternative must also adopt the private company alternative to amortize goodwill as described above.

The Board decided to add a separate project to its agenda for public business entities and not-for-profit entities on the accounting for identifiable intangible assets in a business combination, which will evaluate whether certain intangible assets should be subsumed into goodwill, with a focus on customer relationships and noncompete agreements. The Board asked the staff to consider the implications of potentially subsuming certain intangible assets into goodwill.

FASB Project Update on Accounting for Identifiable Intangible Assets in a Business Combination for Public Business Entities and Not-for-Profit Entities

Disclosure Framework (Disclosure Review and Interim Reporting)

5 FASB Accounting Standards Update No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination (a Consensus of the Private Company Council).




The objective and primary focus of the Disclosure Framework project is to improve the effectiveness of disclosures in notes to financial statements by clearly communicating the information that is most important to users of each entity’s financial statements. (Although reducing the volume of the notes to financial statements is not the primary focus, the Board hopes that a sharper focus on important information will result in reduced volume in most cases.)

The objective of improving effectiveness will require development of a framework that promotes consistent decisions about disclosure requirements by the Board and the appropriate exercise of discretion by reporting entities. To achieve this objective, the Disclosure Framework project comprises two components: the Board’s Decision Process and the Entity’s Decision Process.

The Board’s Decision Process is intended to aid the FASB in identifying disclosures to be considered6 when setting disclosure requirements for individual accounting standards and evaluating existing disclosures requirements. As part of this component, the Board considered the application of materiality to disclosures and plans to describe materiality in its Concepts Statement by (1) describing materiality as a legal concept that varies by jurisdiction and (2) including the U.S. Supreme Court’s description, and (3) retaining the notion that materiality is an entity-specific judgment that is different from relevance.

The Entity’s Decision Process is intended to promote the use of discretion by reporting entities when evaluating the requirements as set forth by the Board.

Currently four sets of disclosure requirements are being reviewed as part of the Disclosure Framework project. Each review will include (1) an evaluation of existing disclosure requirements within the Topic after applying the concepts in the Board’s decision process and (2) consideration of ways to promote the appropriate use of discretion specifically within the Topic. The Board’s decision process and the entity’s decision process are being used together to modify the disclosure sections in the following Topics:

Fair Value Measurement (820-10-50) Defined Benefit Plans (715-20-50) Income Taxes (740-10-50) Inventory (330-10-50)

Additionally, the FASB is considering whether and how interim disclosure requirements should be modified. The Board directed the staff to analyze how the proposed Concepts Statement (which was developed as part of the Board’s Decision Process) would affect existing interim disclosures related to fair value measurement and revenue recognition. The Board also decided to amend current GAAP (Topic 270, Interim Reporting) to reflect that disclosures about matters required to be set forth in annual financial statements should be 6 The FASB will not automatically require all of the disclosures that it identifies using its decision process. That process involves the FASB and its staff continuing to evaluate the costs, negative consequences and benefits associated with each potential disclosure at the standard level.






provided on an updated basis in the interim report if there is a substantial likelihood that the updated information would be viewed by a reasonable investor as significantly altering the “total mix” of information available to the investor.

FASB Project Update on Disclosure Framework IASB Discussion Forum Disclosures in Financial Reporting


http://www.ifrs.org/Meetings/Pages/IASB-Disclosure-Forum-January-2013.aspx

APPENDIX B – Sample Response to Section A

June 2015

NOTE: This sample is provided as an aid for respondents, and is not intended to predispose or represent the views of the Board or survey respondents.

Potential Projects

FASB Research Projects 15 4 Financial Performance Reporting (formerly Financial Statement Presentation)

20 3 Improving Classification Guidance in the Statement of Cash Flows

Other Potential Projects Recognition and Measurement

30 1 Inventory and Cost of Sales (recognition and income statement classification)

Equity Method




Income Taxes

Presentation and Broad Transactions

15 5 Segment Reporting

20 2 Collaborative Arrangements



Consolidations

RESPONDENTS PLEASE ADD: Other Significant Areas of Needed Improvements to Financial

Reporting, including Those in Light of Business, Economic, Industry, or Other Trends

TOTALS 100 pts n/a

1998 priorities & projects questionnaire

Documents

Transcript of 1998 priorities & projects questionnaire