SEC committee calls for FASB reform
Sept. 26, 2022
The Securities and Exchange Commission (SEC)’s Investor Advisory Committee (IAC) issued a draft report criticizing the Financial Accounting Standards Board (FASB)’s rule-making process for falling short of providing the new or updated guidance needed by investors to analyze company value in today’s fast-changing markets.
There “is a significant backlog of high-priority accounting topics that need to be addressed (e.g.intangibles and key performance indicators). The nature of public companies has changed dramatically over recent decades, and the FASB has yet to promulgate standards to account for these changes,” the Sept. 14 draft posted on the SEC website states.
Updated guidance is particularly needed for such topics as the statement of cash flows, which the IAC asserts hasn’t been refreshed since the 1980s, and intangible assets, according to the report. The value of corporate intangible assets has “ballooned” to represent 90% of the S&P 500’s market value in 2020, up from 17% in 1975, the report states.
In contrast to the U.S. accounting standards setter’s rule-making reputation for being deliberative and sometimes even by some accounts tediously slow, FASB has moved comparatively decisively on a few topics in recent months. In May it reversed course and added cryptocurrency to its list of prioritized topics set for standard-setting and in June it dropped a four-year project on goodwill accounting.
Yet historically, over the past 20 years, the report asserted that FASB had only completed three major projects: revenue recognition, leases and credit loss accounting. In addition, FASB has recently focused on so-called “simplification” projects that reduce the burden on financial report preparers and fine-tune narrow standards rather than substantive projects, it asserts.
The report focused largely on the impact on investors but the lack of guidance affects finance chiefs and others as well, the report asserts. For instance, existing guidance on treatment of cash flows indicates that the preferred accounting approach is the direct method but that is “seldom used.”
The report cited a 2016 article written by David Katz, a partner at Wachtell, Lipton, Rosen & Katz, which outlined the difficulties that the uncertainty surrounding the cash flow issue poses. “CFOs are at sea about whether to classify many kinds of cash inflows and outflows in the operating, investing, or financing sections of the cash-flow statement,” Katz wrote in the article cited in the report from Industry Dive sister publication CFO.com. “Investors, on the other hand, are confused about how to compare different companies in terms of how they use their cash.”
Other pressing accounting topics that need to be addressed include financial statement presentation, labor cost accounting, segment reporting and measurement of the financial impacts of climate change and energy transition, the draft report stated.
A FASB spokesperson declined to comment. The SEC did not respond to requests for comment.