Slow Going for Principles-based Accounting

''Reasonable judgment should have resulted in the same conclusion,'' says one observer about a new FASB staff position, ''without the need for still another rule.''

Proponents of principles-based accounting may want to avert their eyes from the Financial Accounting Standards Board’s soon-to-be-released guidance on stock options.

Last week, the board agreed to finalize its FASB staff position (FSP) on applying the grant-date provisions of Statement 123R, the board’s revised rule on stock-option expensing. The wrangling that led up to this latest FSP — which is expected to be issued in the next week or two — shows just how difficult it’s been for the board to promulgate standards based less on rules (which might be circumvented) and more on principles (which require more judgment by preparers of financial statements).

Indeed, FASB board members maintain that they’ve been feeling increased pressure to clarify rules and to draw bright lines because so many auditors fear being second-guessed by regulators. In the case of 123R, practitioners had expressed confusion over the definition of “grant date” and over just when an employer and an employee reach a “mutual understanding” of a share-based payment award.

As discussed in “Whys and Wherefores of Stock Grants,” FASB determined that if all other criteria are in place, the mutual understanding can be presumed to have been met on the grant date if 1) the employee doesn’t have the ability to negotiate any of the key terms, and 2) the key terms are expected to be communicated to employees within a “relatively short time” from the date of board approval.

Last Wednesday, the board finalized its FSP, adding a transition provision that allows entities that have already adopted Statement 123R the ability to apply the final FSP in the earliest reporting period for which financial statements have not been issued. Board members resisted adding details, requested by one respondent during the comment period, that would have further specified how to figure the grant date when the payment award contains a performance condition.

Even so, former FASB chairman Dennis Beresford opined that “if we continue to require the kind of detailed rule as in this proposal, there is clearly no hope for a move toward more general standards.” Beresford, now a professor of accounting at University of Georgia, wrote those remarks in response to the exposure draft. Although he agreed with the substance of the staff position, Beresford nevertheless called it “another example of why accounting rules have proliferated and have become unnecessarily complicated.”

At last count, this year the board has issued 10 final and 8 proposed FSPs. Last year, the board issued 13 staff positions, and a year earlier, 9. Preparers’ fear of second-guessing isn’t the only reason that FSPs are growing in number; the documents can serve as a fast mechanism for FASB to amend generally accepted accounting principles, to delay an effective date, to change a small section of an existing statement, or to handle cases that the Emerging Issues Task Force can’t agree on.

In the case of this particular staff position, however, Beresford maintained in his comments that “reasonable judgment should have resulted in the same conclusion as in the proposed FSP without the need for still another rule.” FASB board members, too, vocalized similar and sometimes more adamant frustration at having to address the grant-date issue during a meeting last month.

Speaking more broadly during an interview last week, current FASB chairman Robert Herz took a longer-range view. “I yearn for a world where we have to issue very few [FSPs],” said Herz, a champion of principles-based accounting. But with so much “shock and change” in the industry, the increasing number of FSPs is understandable; there’s still “a ways to go in the accounting system culturally and behaviorally” before principles-based rulemaking can take hold.

Last Wednesday, FASB also discussed the transition provisions and effective date for a proposed staff position on intangible assets. The board determined that the provisions of the FSP should be applied 1) prospectively for all preexisting renewable intangible assets that are renewed subsequent to the effective date of the proposed FSP, and 2) prospectively for all renewable intangible assets that are acquired subsequent to the effective date, which will be for the first reporting period ending after June 15, 2006.

Separately, FASB dealt with a staff position for Statement 133, on derivatives.

This Wednesday, the board will discuss:

• Whether to add a project to its agenda to provide certain one-time accommodations to foreign private issuers registered with the SEC who are adopting International Financial Reporting Standards for the first time;

• Whether a debtor electing the fair-value option for its debt liabilities should recognize changes in fair value resulting from changes in the debtor’s creditworthiness in earnings;

• Comments received on a proposed FSP regarding the accounting for life-settlement contracts by investors; and

• Comments received on a proposed FSP for the transition election related to accounting for the tax effects of share-based payment awards.

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