Dr. Swieringa was a recipient of the Justice Foundation
Award for outstanding teaching at Cornell, where he was a professor
of accounting for 11 years. Prior to teaching at Cornell, he was
on the faculty at the Stanford University Graduate School of Business.
He has been an active consultant and member of the board of directors
of two closely-held corporations.
Dr. Swieringa earned his A.B. degree at Augustana
College in Rock Island, Illinois, an M.B.A. at the University of
Denver, and a Ph.D. at the University of Illinois. He received the
1989 Outstanding Achievement Award of the Augustana College Alumni
Association and the 1994 University of Denver School of Accountancy
Alumnus of the Year Award. He has been a member of numerous committees
of the American Accounting Association.
He is the co-author of four books: Essentials
of Financial Analysis (with Robert T. Sprouse); Some Effects
of Participative Budgeting on Managerial Behavior (with Robert
H. Moncur); Cases in Financial Accounting (with Thomas R.
Dyckman); and Financial Accounting: An Introduction (with
Harold Bierman, Jr.). He has also authored or co-authored more than
50 articles in scholarly journals, has published several book reviews
and technical reports, and has been on the editorial boards of several
scholarly journals.]
It is a great honor for me to be here this evening.
Baruch College has been blessed with a long tradition of outstanding
scholars in accounting. This lecture honors Emanuel Saxe, who, during
his 40 years at Baruch, was a professor, chairman of the Accountancy
Department, Dean, Morton Wollman Distinguished Professor of Accountancy,
and University Distinguished Professor.
One of his students was Abraham Briloff, who was a member of the
accounting faculty for 43 years and was the Emanuel Saxe Distinguished
Professor of Accountancy. I have been an avid reader of Professor
Briloff's articles and used them extensively in my classes over the
years.
The title of my lecture this evening is "FASB in My Rear View
Mirror." (2)
In two months, I will be leaving the FASB after ten and a half years
as a member of the Board. Rather than exiting the Merritt Parkway
at Exit 40B, I will continue to New Haven, and, quite literally, I
will see the FASB (at 401 Merritt 7) in my rear view mirror -- those
of you from Connecticut will add the qualifier not exactly."
But tonight, I want to talk figuratively about FASB in my rear view
mirror. As I leave the FASB, I look back on accomplishments, disappointments,
frustrations, and continuing challenges during those ten years, and
I would like to try to put them in perspective.
PERSPECTIVES
I joined the Board in January 1986, following in the footsteps of
Robert Sprouse, who was one of the original seven Board members in
1973. This was the second time that I tried to follow in his footsteps.
The first time was when I inherited his Business 311 Corporate Reporting
course at the Stanford Business School in 1973 when he joined the
FASB. Robert Sprouse was not an easy professor to follow. He was an
outstanding professor. He was also an outstanding Board member.
Arthur Northrop and I were the seventeenth and eighteenth individuals
to join the FASB. We joined a very strong Board that included Victor
Brown, Donald Kirk, Raymond Lauver, David Mosso, and Arthur Wyatt.
(3) At this point, all of those individuals
have left the Board. (4)
Agenda Projects
Recently, there has been increased interest in the productivity and
efficiency of the FASB. Concerns have been expressed about how long
it takes to resolve important issues. My term on the Board provides
a perspective about what was and was not achieved during the last
ten years.
The Board issued FASB Concepts Statement 6 on elements of financial
statements and Statements 87 and 88 about employers' accounting for
pensions in December 1985. Nine items were included on the technical
agenda at January 1, 1986 (see Table 1). The project on postemployment
benefits other than pensions was added in 1979, the projects on accounting
for income taxes and consolidations were added in 1982, the projects
on financial reporting and changing prices and on nonrefundable loan
fees and costs were added in 1984, and the projects on regulated enterprises,
insurance company issues, and cash flow statements were added in 1985.
Exposure Drafts were issued in December 1985 for the projects on nonrefundable
loan fees and costs and on regulated enterprises.
From January 1, 1986, through December 31, 1995, the Board considered
80 possible agenda items and added 29 of those items to its technical
agenda. Of the 51 items that were not added to the technical agenda,
nine items resulted in Technical Bulletins, two items resulted in
AICPA pronouncements, and four items were deferred. During that period,
the Board completed eight of the initial nine projects, completed
21 of the 29 projects added during that period, and removed two items
from the agenda. In other words, 31 items (or 82 percent) of the 38
available projects were resolved during that period.
At January 1, 1996, the Board had seven items on its technical agenda
(see Table 1). The project on consolidations that was added in 1982
was not completed during the ten-year period. The other six projects
were added during that period, including the financial instruments
project that was added in 1986, the present-value-based measurements
project that was added in 1988, the earnings per share and liabilities
for closure or removal of long-lived assets projects that were added
in 1994, and the not-for-profit organizations project about intermediaries
and the comprehensive income project that were added in 1995. Exposure
Drafts were issued in 1995 for projects on consolidations, transfers
of assets and extinguishments of liabilities, and not-for-profit organizations.
Exposure Drafts were issued in 1996 on earnings per share, disaggregated
disclosures, liabilities related to closure or removal of long-term
assets, comprehensive income, and derivatives and hedging activities.
Some Demographics
The 36 standards issued from January 1, 1986, to December 31, 1995,
are listed in Table 2. Three observations help to put those standards
in perspective. First, the standards differ dramatically in the amount
of time and effort that it took to complete them. On average, it took
about three years to complete a standard. But, like many averages,
that average is somewhat misleading. The range was from four months
to almost twelve years, and the median was two years. Ten standards
took less than a year to complete. Statements 99, 100, 103, and 108
reflected deferrals of effective dates; Statements 102, 104, 111,
and 118 were amendments to existing standards; and Statements 112
and 119 were narrow-scope standards. Statements 106, 109, and 123
took more than ten years to complete. Statements 94, 96, 116, and
117 took more than five years to complete.
If the four deferred effective date standards (Statements 99, 100,
103, and 108), one technical correction standard (Statement 111),
and three narrow amendments (Statements 102, 104, and 118) are eliminated
from the analysis, the average becomes about three years and nine
months. However, if the three standards that took the longest to complete
(Statements 106, 109, and 123) are adjusted from the agenda date to
the date when serious work began on the development of a standard,
the average again becomes about three years.
Second, the standards were not equally distributed across years.
Given that 36 standards were issued in ten years, the average per
year was 3.6 standards. But that average also is somewhat misleading.
Six standards were issued in 1987 and five standards were issued in
1992 and 1995. Four standards were issued in 1988 and 1993, three
standards were issued in 1986 and 1989, and two standards were issued
in 1990, 1991, and 1994.
Third, the standards were not equally distributed across topics.
Eighteen standards focused on three topics -- financial instruments
(eight standards), not-for-profit organizations (five standards),
and income taxes (five standards). Nine standards focused on three
topics -- rate-regulated enterprises (three standards), insurance
company issues (three standards), and cash flow statements (three
standards). The remaining nine standards focused on nine different
topics.
THE STANDARDS
I would like to put the 36 FASB Statements that were issued from
1986 through 1995 in context.
1986-1987
The year 1986 was very hectic. Public hearings were held on nonrefundable
loan fees and on regulated enterprises. Projects on accounting for
not-for-profit organizations and on financial instruments were added
to the technical agenda. Six Exposure Drafts were issued on financial
reporting and changing prices, accounting for income taxes, cash flow
reporting, universal life insurance contracts, consolidations, and
depreciation accounting by not-for-profit organizations. Late in 1986,
the Board issued Statement 89 on financial reporting and changing
prices, Statement 90 on abandonments and disallowances, and Statement
91 on nonrefundable loan fees and costs.
The hectic pace carried over into 1987. Public hearings were held
on income taxes and on consolidations. Statement 92 on accounting
for phase-in plans by regulated enterprises, Statement 93 on depreciation
accounting by not-for-profit organizations, and an Exposure Draft
on sale and leaseback transactions were issued in August 1987. Statement
94 on consolidation of majority-owned subsidiaries was issued in October
1987; Statement 95 on cash flow statements and an Exposure Draft on
disclosures about financial instruments were issued in November 1987,
Statement 96 on accounting for income taxes and Statement 97 on universal
life insurance contracts were issued in December 1987. Deliberations
continued on postemployment benefits other than pensions, stock compensation,
rate-regulated enterprises, and contributions to not-for-profit organizations.
1988-1991
Relatively few standards were issued during 1988-1991. The Board
issued four narrow standards in 1988: Statement 98 focused on sale
and leaseback transactions, Statements 99 and 100 merely deferred
the effective dates of two standards that were issued in 1987, and
Statement 101 focused on how to discontinue application of Statement
71.
The Board focused on implementation problems for applying Statement
96, reconsidered the direction of the financial instruments project
based on comments on the 1987 Exposure Draft, and merged the stock
compensation project into the liability and equity phase of the financial
instruments project. The Board developed tentative conclusions on
the postretirement benefits other than pensions project. Projects
on interest methods and on impairment of long-lived assets were added
to the technical agenda in 1988.
In 1989, the Board issued Statements 102 and 104, which amended Statement
95 on cash flow statements, and issued Statement 103 to defer the
effective date of Statement 96. Exposure Drafts on postretirement
benefits other than pensions and on disclosures about financial instruments
also were issued in 1989. The Board continued to deliberate possible
amendments to Statement 96 on income taxes.
The Board issued Statement 105 on disclosures about financial instruments
and Statement 106 on postretirement benefits other than pensions in
1990. Exposure Drafts on disclosures about the market value of financial
instruments and on contributions to not-for-profit organizations were
issued in 1990, as well as Discussion Memorandums on impairment of
long-lived assets, present-value-based measurements, and distinguishing
between debt and equity financial instruments. The Board continued
to focus on financial instruments, accounting issues of not-for-profit
organizations, and a possible replacement for Statement 96 on income
taxes. The Board issued Statement 107 on disclosures about market
value of financial instruments and Statement 108 to delay the effective
date of Statement 96 on income taxes in 1991. The long-awaited Exposure
Draft on accounting for income taxes was issued in 1991, as well as
Exposure Drafts on accounting for investments with prepayment risk
and Discussion Memorandums on consolidations, financial instruments,
and new basis accounting.
1992-1993
The pace quickened again in 1992 and 1993. The Board issued five
standards in 1992, including Statement 109 on accounting for income
taxes, and four relatively narrow standards: Statement 110 on investment
contracts, Statement 111 on technical corrections, Statement 112 on
postemployment benefits, and Statement 113 on reinsurance contracts.
Also in 1992, the Board added projects on loan impairments and marketable
securities to its technical agenda, and issued Interpretation 39 on
offsetting and Exposure Drafts on loan impairments, marketable securities,
accounting by mutual life insurance companies, financial statements
of not-for-profit organizations, and contributions.
In 1993, the Board issued Statement 114 on loan impairments, Statement
115 on accounting for marketable securities, Statement 116 on accounting
for contributions, and Statement 117 on financial statements of not-for-profit
organizations. Exposure Drafts were issued on accounting for stock-based
compensation and on impairment of assets, and Interpretation 40 was
issued on mutual life insurance and other enterprises. The Board's
deliberations focused on derivative financial instruments.
1994-1995
In 1994, the Board issued two narrowly focused standards: Statement
118 amended Statement 114, and Statement 119 focused on disclosure
about derivative financial instruments. The Board continued to deliberate
issues about stock-based compensation, derivatives and hedging, asset
impairment, and consolidation policy. The Board issued Exposure Drafts
on accounting by mutual life insurance enterprises and on accounting
for mortgage servicing rights, and Interpretation 41 on offsetting.
In 1995, the Board issued five standards: Statement 120 on accounting
for certain insurance contracts, Statement 121 on impairment of long-lived
assets, Statement 122 on mortgage servicing rights, Statement 123
on stock-based compensation, and Statement 124 on certain investments
held by not-for-profit organizations. The Board also issued Exposure
Drafts on consolidated financial statements on transfers of assets
and extinguishments of liabilities, and on a proposed interpretation
of certain terms in Statement 116. Board deliberations continued on
derivatives and hedging, and Exposure Drafts were developed on reporting
disaggregated information, earnings per share, and accounting for
closure or removal of long-term assets.
The Board is working hard to issue standards on consolidation policy
and procedures and on transfers of assets and extinguishments of liabilities
before 1996. (5)
The Board is also trying to develop Exposure Drafts on derivatives
and hedging activities and on comprehensive income.
(6)
Accomplishments
I believe that the most significant accomplishment during my time
on the Board was Statement 106. It required new information about
the obligation and related costs of postretirement health benefits
and changed the way people viewed the obligation and related costs.
There are various reasons why that standard was successful.
- Statement 87 paved the way for Statement 106. The important
battles took place over the extended period to develop and issue
Statement 87. Statement 106 was based on the terminology, measures,
and approach in Statement 87. Many people were comfortable with
the measures and disclosures required by Statement 87. The Board
and others expected that over time, postretirement health and
other benefits plans would evolve to be like pension benefits
plans, and therefore a Statement 87 approach was appropriate.
- Entities were experiencing escalating health care costs, and
those increased costs made this issue more important, even in
a pay-as-you-go world.
- Entities were considering amendments to their postretirement
health benefit plans and arrangements. The consideration of amendments
made some of the arguments for eligibility date more plausible
than otherwise.
- The basic issues of recognition and measurement of a post-retirement
health benefit obligation were appealing to matching and measurement
advocates.
- The field test was important in the development of Statement
106 because it demonstrated that the obligation could be measured
and it revealed how large the numbers were.
- Six seminars were held from April 1989 through June 1989 to
describe and discuss the Exposure Draft.
- The process used to develop Statement 106 worked reasonably
well. At a crucial point in that process, the question changed
from whether to recognize and measure the obligation and
related cost of postretirement health benefits to how to
recognize and measure that obligation and cost.
The second most important accomplishment was the project on not-for-profit
accounting. Statements 93, 116, 117, and 124 are having a major impact
on the financial reporting of not-for-profit organizations. Members
of governing boards and others are finding the new financial statements
more understandable and useful because the statements focus on the
organization as a whole and on measures of performance and because
they will provide a basis for comparing the organization's performance
with that of other organizations.
The third most important accomplishment was maintaining the credibility
of accounting for rate-regulated enterprises under Statement 71. Statement
71 reflected the environment of cost-plus regulation that existed
when it was developed. In the mid-1980s, that environment began to
change. The costs of new capacity increased dramatically because of
double-digit inflation, construction delays, and more stringent nuclear
construction requirements after the accident at Three Mile Island.
The costs of existing capacity, some of it excess capacity, were also
increasing. The large rate increases required to cover those costs
focused public attention on electric rates and galvanized opposition
to rate increases.
Statements 90 and 92 were responses to those developments and the
changing tone of regulation. Discussions that took place during the
development of Statement 92 on phase-in plans led to Statement 101
about how to discontinue the application of Statement 71. Deregulation
of certain industries and changes in the method of regulating others
caused several enterprises to discontinue application of Statement
71 for all or some of their operations.
In recent years, the natural gas industry and telecommunications
industries have been deregulated and restructured. The eight largest
telecommunications companies reported restructuring charges in excess
of $10 billion and have written off regulatory assets in excess of
$30 billion. It is expected that electric utilities also will be deregulated
and restructured in the years ahead, resulting in over $100 billion
of regulatory and other assets being written off.
Disappointments
The most disappointing standards have dealt with financial instruments.
We are in the midst of a sea change in finance. Fundamental changes
in global financial markets have transformed the financial activities
of all entities. Increased volatility in foreign exchange and interest
rates and other market prices have greatly increased market, credit,
and liquidity risks. Efforts to manage those financial risks, competition,
and government deregulation of financial markets and services, structural
changes in the economies and taxation of different countries, and
technological advances in computers and information services have
stimulated financial innovation.
The FASB was ahead of the curve when it added the project on financial
instruments and off-balance-sheet financing to its technical agenda
in May 1986. But the FASB has fallen behind the curve in the 1990s.
After ten years of effort, we have yet to come to grips with financial
instruments. Instead of developing broad standards, the Board has
issued a patchwork of inconsistent standards for marketable securities,
loan impairment, and other issues.
- Financial instruments include a broad class of items. Some
items can be readily valued; other items are difficult to value.
- Financial instruments are held by financial institutions, so
trying to deal with those instruments necessarily requires that
the Board try to deal with accounting and operating issues that
arise in those institutions.
- Practices for financial instruments have become well established.
It is more difficult to change accounting practices when they
are well established.
- Financial instruments are used in a variety of ways. It is
difficult to understand their varied uses in setting accounting
standards.
Another disappointing project has been consolidations and related
matters. Several issues papers from the AICPA provided the impetus
for adding this project to the agenda in 1982. Even though the project
was added in 1982, it was inactive for a couple of years, and the
first staff paper was discussed early in 1986. The Board disagreed
with several important details about the economic unit approach advocated
in that paper. But, instead of pursuing those details, the Board decided
to issue Statement 94 about majority-owned subsidiaries. At this point,
in 1996, the Board is still grappling with those details. The fundamental
issue in this project is the objective of financial reporting.
A third disappointing item has been the present-value-based measurement
project. That project initially was linked with the project on impairment
of assets. The interest methods and impairment of assets projects
were on a parallel track, with Discussion Memorandums being issued
and public hearings being held at about the same times. But the Discussion
Memorandum for this project was not successful in defining the issues
and alternatives. In addition, deliberations on this project were
usurped by projects on loan impairment and asset impairment, and even
the example of the warranty obligation used to stimulate discussion
drew fire because of ongoing debates about how to measure financial
liabilities.
Frustrations
The most frustrating standard was accounting for income taxes. Statement
96 was fashioned in a net deferred tax liability world. Discussions
about criteria for deferred tax assets shifted from a probability
assessment approach to an events approach that reflected very restrictive
criteria for recognition. The prospects of tax legislation that would
reduce corporate tax rates put considerable pressure on the Board
to develop and issue a standard that would make measurement of deferred
tax assets and liabilities more responsive to changes in tax rates.
But then, the tax world changed dramatically with the Tax Reform
Act of 1986. That Act reduced corporate rates, but it also made the
most significant changes in corporate income taxes in history. The
Act enlarged the tax base by eliminating many items that had created
deferred tax liabilities and added an alternative minimum tax that
tied income tax calculations to book income measures, among other
provisions. That Act changed interperiod tax allocation from a world
of tax credits to, eventually, a world of tax debits. The likely effects
of that Act were not well understood in 1986 and 1987.
Then, the Board began serious consideration of postretirement health
benefits, and corporate America began its restructuring process. The
recognition of liabilities for those benefits and restructuring provisions
accelerated the movement to a net tax debit world.
The Board encountered continuing difficulties in dealing with an
increasing list of implementation issues, some of which were new and
others that were carried over from the debates before the standard
was issued. Changes in Board membership and continuing pressures to
reconsider decisions in Statement 96 made it even more difficult to
reconsider and rethink a recently issued standard. That reconsideration
process also exposed a very real limitation of the Board's process
-- it focuses on one possible solution at a time. Rejection of that
solution often results in a fresh start.
Another very frustrating standard was Statement 123 on stock-based
compensation. We could spend the rest of the evening talking about
this standard. The development of other standards has reflected political
behavior. However, the focus of the stock-based compensation project
increasingly was on Washington as the project progressed. People decided
to go around the Board's due process. They were told by people in
Washington and elsewhere to participate in our process, but their
hearts were not in it. In addition, other political agendas were being
pursued by various parties that affected the stock-based compensation
project.
But we learned many things during that project:
- Valuation of stock-based compensation is widespread among consultants
and academics.
- Some companies trade off salaries and bonuses for stock-based
compensation.
- Some executives choose between bonuses and stock-based compensation.
- Some directors choose between fees and stock-based compensation.
- Some employees receive annual total compensation reports that
include the fair value of stock-based compensation.
- Some companies routinely value stock-based arrangements with
professional golfers (Calaway) and with college coaches (shoe
companies).
An analyst from Boston said that the "jack was now out of the
box," but AT&T Chairman Robert Allen's remarks last week
that at-the-money options have no value at grant date suggest that
some senior executives should have participated in the debates on
this project. (7)
With hindsight, the Board could have proposed a disclosure solution
ten years ago.
CHALLENGES
Controversy has surrounded many of those 36 standards. I would like
to conclude by focusing on several challenges we faced in resolving
financial reporting issues.
Fair Values
One challenge is whether to expand the use of fair values or market
values in financial reporting. The current accounting model is a mixed-attribute,
transaction-based model. That model has worked reasonably well over
the years, but some believe that this model should be replaced with
a fair value model. Fair value is the price that would be obtained
under normal conditions between a willing buyer and a willing seller.
The Public Oversight Board of the SEC Practice Section of the AICPA
has urged the FASB to study comprehensively the possibility of fair
value accounting. The General Accounting Office has recommended that
the FASB consider the development of a market value rule for all financial
instruments. However, a top-level government working group on financial
markets that included Treasury Secretary Lloyd Bensten, Federal Reserve
Chairman Alan Greenspan, and SEC Chairman Arthur Levitt urged the
FASB to go slow on market value rules for financial instruments, and
the AICPA Special Reporting Committee recommended that the FASB not
devote attention to value-based accounting at this time.
The debate at the FASB has not been about changing to a different
model; rather, it has been about changing the mix of the attributes
in the current model. The debate has focused on four areas.
First, we have debated whether fair value should be used to initially
measure certain assets. That debate has taken place in the context
of contributions (Statement 116), mortgage servicing rights (Statement
122), and stock-based compensation (Statement 123). Contributions
and stock-based compensation recognized under Statement 123 are required
to be measured at fair value, but mortgage servicing rights are required
to be measured at carryover basis.
Second, we have debated whether fair value should be used to remeasure
certain assets when recorded amounts are not likely to be recovered.
That debate has taken place in the context of loan impairment (Statement
114) and asset impairment (Statement 121). An assumption inherent
in an enterprise's statement of financial position prepared in accordance
with generally accepted accounting principles is that recorded amounts
for assets will be recovered. If that condition does not hold, recorded
amounts should be adjusted. Impaired loans may be recognized at fair
value, but impaired assets are required to be recognized at fair value.
Third, we have debated whether fair value should be used to account
for certain assets that are readily marketable. That debate has taken
place in the context of marketable debt securities (Statement 115).
During an extended period of reduced interest rates, financial institutions
reported significant amounts of realized gains while concurrently
having underwater investment portfolios. That behavior was described
as gains trading, "cherry picking," or "snacking."
Statement 115 retains amortized cost for some held-to-maturity debt
securities. Statement 124 requires that all debt securities held by
not-for-profit organizations be accounted for at fair value.
Fourth, we have debated whether fair value should be used to account
for certain assets when underlying rights are unbundled. Loans or
receivables can be pooled or packaged into homogeneous portfolios
and transferred to a trust or special-purpose entity. The trust or
entity can then issue debt or equity securities that are securitized
by those receivables. Through the securitization process, receivables
have been unbundled into rights and obligations. An Exposure Draft
that was issued in October 1995 proposed that some of those rights
and obligations should be recorded at fair value and some should be
recorded at carryover basis.
The debate about fair value currently is taking place in discussions
about accounting for derivatives. We have been told by the SEC chairman
that the three most important issues in financial reporting are derivatives,
derivatives, and derivatives. Statement 119 improved disclosures about
the way entities use derivatives. But, until recently, the Board has
been at an impasse about how to account for derivatives and hedges.
The challenge of whether to expand the use of fair values in financial
reporting is being driven by the ongoing development of markets and
the development of methods to approximate prices in those markets.
The sweep of the sea change in finance has raised questions about
the continued use of amortized cost for many financial instruments.
Present Values
A second challenge is whether to expand the use of present-value-based
measurements in financial reporting. APB Opinion 21, which was issued
in August 1971, requires the use of present values for receivables
and payables. Yet, a close reading of Opinion 21 reveals that the
use of that method is limited to contractual rights to receive or
pay money on fixed or determinable dates. Moreover, trade receivables,
purchase deposits, security deposits, lending activities, intercompany
transactions, and certain other tax-related or restricted receivables
and payables are excluded from the requirements of Opinion 21. Recent
debates have focused on whether present-value-based measurements should
be used in accounting for loan impairment (Statement 114), asset impairment
(Statement 121), provisions for credit losses, and certain environmental
liabilities.
The Board issued an Exposure Draft in February 1996 that focuses
on accounting for obligations for certain closure or removal costs
of long-lived assets such as nuclear power plants. Measuring those
obligations requires estimates of uncertain future events. The amounts
and timing of expected future payments for closure or removal activities
have to be projected over periods ranging from 40 to 60 years, those
payments have to be discounted back to their present value at an assumed
interest or discount rate to reflect the time value of money, and
the discounted amounts have to be allocated between current and future
accounting periods. Between now and then, laws and technologies may
change. Actual payments may differ dramatically from expected amounts.
The challenge of whether to expand the use of present values in financial
reporting is being driven by assets and liabilities that are far removed
from contractual rights to receive or pay money on fixed or determinable
dates. The focus is on risky assets and risky liabilities for which
actual cash flows may differ dramatically from expected amounts.
Use of Estimates
A third challenge is whether to expand the use of estimates in financial
reporting. The use of fair values and present values reflects the
use of estimates of cash flows and of other factors in valuation.
Accounting tends to be viewed as objective and precise and as reflecting
measures of past transactions and events. Yet, those measures are
based on assumptions or estimates about future events.
Estimates are becoming more prevalent because contract relations
are increasingly prevalent. Accounting for contracts is easy if they
are simple, discrete, and of short duration; if they reflect limited
relations among the parties; and if precise measures exist for objects
of exchange, no further cooperation is anticipated, and no sharing
relations exist.
Accounting for contracts is difficult if contractual relations are
complex and of long duration; if they reflect close relations among
the parties; and if some objects of exchange cannot be measured currently,
some future cooperation is anticipated, sharing relations exist, some
troubles are anticipated, and interactions are assumed. Complex contractual
relations exist for parent and subsidiary relations, financial instruments,
contributions, postretirement benefit arrangements, compensation plans,
insurance arrangements, warranty and service arrangements, regulated
enterprises, software contracts, and so forth.
Accounting for objects of exchange that cannot be measured currently
makes extraordinary demands on accountants as measurers. Consider
postretirement health benefits -- arrangements that may cover up to
80 years. The benefits are in kind and indexed rather than fixed;
the contracts are not well-defined, like pension contracts; and the
contracts are changing as arrangements evolve.
Also consider reclamation costs that can cover up to 90 years, decommissioning
costs for nuclear power plants, and the costs of significant extended
warrantees. All of those costs rely heavily on estimates of uncertain
future events to make initial and subsequent measurements. Accountants
are increasingly making interim measures of unfolding events. Estimates
are difficult; changes in estimates are prevalent.
Recent debates have focused on accounting for restructurings. A restructuring
occurs when an entity makes a fundamental change in its business strategy,
operations, or structure in hope of achieving improved results of
operations in future periods, often as a result of reduced costs.
Companies in industries that have been deregulated have reported significant
restructuring charges.
Restructuring charges have included costs of employee benefits, such
as costs of severance and termination benefits; costs associated with
the elimination and reduction of product lines; costs to consolidate
or relocate plant facilities; costs for new system development or
acquisition; costs to retrain employees to use newly deployed systems;
and losses on asset impairments and disposals of assets.
In 1994, the Emerging Issues Task Force (EITF) discussed and reached
several consensuses in Issue 94-3 about when an entity should recognize
a liability and an expense for costs associated with a restructuring.
In addition, Statement 121 addresses the accounting for the impairment
of long-lived assets to be held and used by an entity and for long-lived
assets to be disposed of. EITF Issue 94-3 and Statement 121 likely
will result in lower restructuring liabilities and charges and in
increased visibility of restructuring activities. However, EITF Issue
94-3 and Statement 121 now have been added to the tangled web of pronouncements
that may apply to restructuring activities. The challenge of whether
to expand the use of estimates in financial reporting is being driven
by the increased reliance on contractual relations and by the increased
uncertainty associated with judgments, assumptions, and estimates.
Distinctions between Organizations
The challenges of whether to expand the use of fair values, present
values, and the use of estimates all relate to matters of valuation
and measurement. A fourth challenge is whether to distinguish between
organizations in financial reporting.
Distinctions between organizations are part of the fabric of generally
accepted accounting principles. Those principles developed by industry
and their codification became the articulation of generally accepted
accounting principles. However, distinctions between organizations
are becoming blurred.
Consider the distinction between governmental entities and other
entities. That distinction is central to the jurisdiction agreement
between the FASB and the GASB. That agreement requires that the FASB
and the GASB distinguish between entities.
(8) Yet, some organizations are both private
and public. Cornell University, where I spent almost twelve years,
is both governmental and private. Moreover, governmental and other
organizations are increasingly engaging in the same transactions and
competing in the same markets. Health care organizations provide both
immediate and real examples.
A distinction is also made between not-for-profit organizations and
other entities. But, increasingly, not-for-profit organizations and
for-profit entities are operating in the same markets. Not-for-profit
organizations have frequently moved into service areas previously
dominated by for-profit entities (e.g., vocational rehabilitation,
job placement, family, and other human services), and for-profit entities
have moved into service areas previously dominated by not-for-profit
organizations (e.g., health clubs and health care providers).
Distinctions are also made between financial and other entities.
Specialized accounting exists for financial institutions and different
requirements exist for savings and loans, banks, finance companies,
insurance companies, and credit unions. But some financial institutions
have all of those entities. A company like Citicorp has savings and
loans, banks, finance companies, and insurance companies. And some
nonfinancial institutions have savings and loans, banks, finance companies,
and insurance companies. Those entities engage in the same transactions
and compete in the same markets. It is not desirable to have different
accounting treatments that depend on which entity engages in a transaction.
And, distinctions are made between U.S. and other organizations.
We tend to accept the view that because different practices, legal
systems, capital markets, tax systems, technical methods, social norms,
and so forth exist across countries, different accounting treatments
are appropriate. Yet, increasingly, entities in different countries
are engaging in the same transactions and competing in the same markets.
In particular, those entities are seeking capital in the same capital
markets.
International Accounting Standards
A fifth challenge is international accounting standards. The FASB
has become more active with standard-setting organizations around
the world as the market for accounting standards has become global.
The Board has worked closely with standard setters in other countries
and with the International Accounting Standards Committee (IASC).
In January 1996 the FASB issued Exposure Drafts on segment reporting
and on earnings per share calculations. The segments Exposure Draft
was a joint effort between the FASB and the Accounting Standards Board
of the Canadian Institute of Chartered Accountants, which simultaneously
issued an identical exposure draft. The EPS Exposure Draft is very
similar to one issued by the IASC, with which we coordinated our efforts.
Other publications that have resulted from joint efforts include special
reports on financial reporting in North America (with Canada and Mexico)
and on future events, hedge accounting, and provisioning (with Australia,
Canada, the United Kingdom, and the IASC).
During 1995, the FASB formed an "American Free Trade Agreement
Committee for Cooperation on Financial Reporting" with representatives
of Canada, Mexico, and Chile to explore areas in which the four countries
could more fully cooperate on minimizing differences in their accounting
standards.
The Board has become more active in IASC activities. A member of
the FASB is a member of the IASC Consultative Group and responds to
IASC proposals and attends IASC meetings.
The Board has exchanged staff members with the Australian Accounting
Research Foundation, has had an intern from Japan, and an accountant
from China will join the staff. An FASB staff member is working with
the U.K. Accounting Standards Board, and a former FASB staff member
and consultant is an international accounting fellow at the IASC.
The Board has encouraged visits with standard setters and staff from
other countries, has shared its work product with other countries,
and has focused on international standards in discussing financial
reporting issues.
The FASB is committed to promoting the development and acceptance
of superior international accounting standards. The Board will work
with other standard-setting organizations to reduce differences in
national accounting standards, promote cooperative relations and communication
between the FASB and other standard-setting organizations, and strengthen
and formalize its internal policies and procedures for international
activities. The FASB also will complete an IASC-U.S. accounting standards
comparison study that analyzes similarities and differences and assesses
their significance and implications. The results of that study will
be disseminated broadly.
However, the FASB must decide soon how to respond to the potential
acceptance of IASC standards in U.S. capital markets. Foreign issuers
and others are pushing for acceptance of IASC standards by the SEC.
U.S. companies want a level playing field vis-a-vis foreign issuers.
Emerging markets need accounting standards as a basis for financial
reporting. How the FASB responds to these developments may be the
most significant and critical actions it takes in the 1990s.
CONCLUSION
Congressman Henry Hyde of Illinois has said that when he came to
Washington he wanted to change the world. Now he feels lucky if he
can leave the room with dignity.
I didn't come to the Board to change the world, but I have had an
extraordinary opportunity to help shape 36 standards, or about 30
percent of the FASB's 124 Statements of Financial Accounting Standards.
(9)
The great American philosopher Ann Landers has said that there are
three types of people in the world: Those who make things happen,
those who watch things happen, and those who ask, "What happened?"
I have had a very special opportunity to make things happen in financial
reporting.
When I was at Stanford and Cornell, happiness was teaching and research
about accounting issues. Then I thought that joining the FASB would
be happiness. For someone who has a keen interest in financial reporting,
the FASB has been a wonderful opportunity to learn about accounting
issues that are swirling anywhere in the world. I have been enthralled
by those issues and by the judgments that I have been asked to make.
And I have enjoyed working with the people of the FASB and others
who participate in the various social networks and organizations of
standard setting. Standard setting is inherently a social activity,
and I have worked with and developed friendships with some terrific
people.
But, now, happiness is returning to teaching and research and the
world of academe, and seeing FASB in my rear view mirror.
Table 1
FASB AGENDA PROJECTS
Table 2
FASB STATEMENTS AND INTERPRETATIONS ISSUED IN 1986-1995
FASB Statement No.89, Financial Reporting and Changing Prices,
December 1986.
FASB Statement No.90, Regulated Enterprises -- Accounting for
Abandonments and Disallowances of Plant Costs, an amendment of
FASB Statement No.71, December 1986.
FASB Statement No.91, Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases, an amendment of FASB Statements No.13, 60, and
65 and a rescission of FASB Statement No. 17, December 1986.
FASB Statement No.92, Regulated Enterprises -- Accounting for
Phase-in Plans, an amendment of FASB Statement No. 71, August
1987.
FASB Statement No.93, Recognition of Depreciation by Not-for-Profit
Organizations, August 1987.
FASB Statement No.94, Consolidation of All Majority-Owned Subsidiaries,
an amendment of ARB No. 51, with related amendments of APB Opinion
No. 18 and ARB No. 43, Chapter 12, October 1987.
FASB Statement No.95, Statement of Cash Flows, November 1987.
FASB Statement No.96, Accounting for Income Taxes, December
1987.
FASB Statement No.97, Accounting and Reporting by Insurance Enterprises
for Certain Long-Duration Contracts and for Realized Gains and Losses
from the Sale of Investments, December 1987.
FASB Statement No.98, Accounting for Leases: Sale-Leaseback Transactions
Involving Real Estate, Sales-Type Leases of Real Estate, Definition
of the Lease Term, Initial Direct Costs of Direct Financing Leases,
an amendment of FASB Statements No.13, 66, and 91 and a rescission
of FASB Statement No. 26 and Technical Bulletin No. 79-11, May 1988.
FASB Statement No.99, Deferral of the Effective Date of Recognition
of Depreciation by Not-for-Profit Organizations, an amendment
of FASB Statement No. 93, September 1988.
FASB Statement No.100, Deferral of the Effective Date of FASB
Statement No. 96, an amendment of FASB Statement No. 96, December
1988.
FASB Statement No.101, Regulated Enterprises -- Accounting for
the Discontinuation of Application of FASB Statement No.71, December
1988.
FASB Statement No.102, Statement of Cash Flows -- Exemption of
Certain Enterprises and Classification of Cash Flows from Certain
Securities Acquired for Resale, an amendment of FASB Statement
No. 95, February 1989.
FASB Statement No.103, Accounting for Income Taxes -- Deferral
of the Effective Date of FASB Statement No. 96, an amendment of
FASB Statement No. 96, December 1989.
FASB Statement No.104, Statement of Cash Flows -- Net Reporting
of Certain Cash Receipts and Cash Payments and Classification of Cash
Flows from Hedging Transactions, an amendment of FASB Statement
No. 95, December 1989.
FASB Statement No.105, Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments
with Concentrations of Credit Risk, March 1990.
FASB Statement No.106, Employers' Accounting for Postretirement
Benefits Other Than Pensions, December 1990.
FASB Statement No.107, Disclosures about Fair Value of Financial
Instruments, December 1991.
FASB Statement No.108, Accounting for Income Taxes -- Deferral
of the Effective Date of FASB Statement No. 96, an amendment of
FASB Statement No. 96, December 1991.
FASB Statement No.109, Accounting for Income Taxes, February
1992.
FASB Statement No.110, Reporting by Defined Benefit Pension Plans
of Investment Contracts, an amendment of FASB Statement No. 35,
August 1992.
FASB Statement No.111, Rescission of FASB Statement No. 32 and
Technical Corrections, November 1992.
FASB Statement No.112, Employers' Accounting for Postemployment
Benefits, an amendment of FASB Statements No. 5 and 43, November
1992.
FASB Statement No.113, Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts, December 1992.
FASB Statement No.114, Accounting by Creditors for Impairment
of a Loan, an amendment of FASB Statements No. 5 and 15, May 1993.
FASB Statement No.115, Accounting for Certain Investments in Debt
and Equity Securities, May 1993.
FASB Statement No.116, Accounting for Contributions Received and
Contributions Made, June 1993.
FASB Statement No.117, Financial Statements of Not-for-Profit
Organizations, June 1993.
FASB Statement No.118, Accounting by Creditors for Impairment
of a Loan -- Income Recognition and Disclosures, an amendment
of FASB Statement No. 114, October 1994.
FASB Statement No.119, Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments, October 1994.
FASB Statement No.120, Accounting and Reporting by Mutual Life
Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration
Participating Contracts, an amendment of FAS13 Statements No.
60, 97, and 113 and Interpretation No. 40, January 1995.
FASB Statement No.121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, March 1995.
FASB Statement No.122, Accounting for Mortgage Servicing Rights,
an amendment of FASB Statement No. 65, May 1995.
FASB Statement No.123, Accounting for Stock-Based Compensation,
October 1995.
FASB Statement No.124, Accounting for Certain Investments Held
by Not-for-Profit Organizations, November 1995.
FASB Interpretation No. 39, Offsetting of Amounts Related to Certain
Contracts, March 1992.
FASB Interpretation No. 40, Applicability of Generally Accepted
Accounting Principled to Mutual Life Insurance and other Enterprises,
April 1993.
FOOTNOTES
(1) Robert J.
Swieringa was a member of the Financial Accounting Standards Board
(FASB) at the time that he delivered this lecture. The views expressed
here are those of Dr. Swieringa. Official positions of the FASB on
accounting matters are determined only after extensive due process
and deliberations.
(2) The context
for that title is a song by Mac Davis, entitled "Texas in My
Rear View Mirror." In that song, Davis describes a teenager's
desire to leave Lubbock, Texas "Happiness is Texas in my rear
view mirror." The teenager faces several challenges in writing
songs in Hollywood and in wrestling with what is important in life.
The song concludes with the adult returning to Lubbock, Texas, and
observing that now, "Happiness is Lubbock, Texas ... and, when
I die, you can bury me in Lubbock, Texas, in my jeans."
(3) Over the years,
Dennis Beresford replaced Donald Kirk, James J. Leisenring replaced
Arthur Wyatt, Clarence Sampson replaced David Mosso, Joseph Anania
replaced Raymond Lauver, Robert Northcutt replaced Arthur Northrop,
James (Neel) Foster replaced Victor Brown, and Anthony Cope replaced
Clarence Sampson.
(4) When I leave
the Board in June 1996, I will be one of five individuals who have
served more than ten years on the Board. Donald Kirk served fourteen
years, Robert Sprouse served thirteen years, Victor Brown served ten
and a half years, and David Mosso served ten years.
(5) The Board
was not able to issue a standard on consolidation policy before June
1996, but it did issue Statement of Financial Accounting Standards
No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, in June 1996.
(6) Exposure Drafts
on Reporting Comprehensive Income and Accounting for Derivative
and Similar Financial Instruments and for Hedging Activities were
issued in June 1996.
(7) The following
excerpt of Mr. Allen's remarks at the April 17, 1996, AT&T annual
meeting is from the April 29, 1996 edition of The News Hour with
Jim Lehrer:
If you as share owners don't benefit, I don't benefit, and when
we get to the other issue that's had a good deal of mis-reporting,
and I'd like to clarify it, it goes to the options that were awarded
to me and other senior officers by the board late last fall. They
were options that today have no value, absolutely none. They are
not worth the paper that they're written on. But they do have an
incentive for all of us at the senior level to be sure that this
restructuring, this transition is successful on behalf of AT&T's
share owners and its employers. And the way they do this, if the
stock price goes up, you benefit; the stock price goes up, I benefit.
[Transcript by Strictly Business, page 7]
(8) The FASB and
the GASB recently agreed on a definition of governmental entities.
(9) Actually,
I ultimately helped shape 37 standards, since Statement of Financial
Accounting Standards No. 125 was issued in June 1996, two months after
I presented this Emanuel Saxe lecture.
