University of Southern California, Leventhal School of Accounting
Los Angeles, California | June 6, 2019
It's a pleasure to be here at the Millennium Biltmore Hotel, former home of the Academy Awards® and the setting of the historic sliming scene in "Ghostbusters."
Speaking of ghosts, I'm told this is one of the most haunted hotels in Los Angeles. Maybe it's appropriate, because this morning I plan to conjure a topic that has possessed me since I became chairman in 2013—namely, implementation of accounting standards.
This month begins my last full year as FASB chairman. It will mark the end of a decade on the Board, and a 16-year career with the organization.
It's been an honor to serve on the FASB. I've learned a lot, due in no small part to the people I've met and worked with along the way. They include my colleagues on the Board, the outstanding FASB staff—and stakeholders like you, who follow our activities, share your input, and even listen to my speeches.
I thank you for that.
When I gave my first speech as chairman in 2013, I pledged to improve how the FASB supports companies and organizations that implement our standards.
If there's one thing I've learned throughout my FASB career, it's that implementation is critical to the overall success of a project. The greatest standard in the world won't improve financial reporting if preparers, auditors, or users can't reasonably apply it or even understand it.
In earlier years, though, the FASB treated implementation as an afterthought—"we issue the standards, you figure them out."
But in 2013, major changes were on the horizon. The next four years would bring all-new standards on revenue recognition, leases, credit losses, and hedge accounting. And we knew that when those standards took effect, they'd represent a tidal wave of change in financial reporting.
If that transition was to succeed, we needed to take a more hands on approach to help our stakeholders.
Today I'll talk about what we did together to support a successful transition to new standards. I'll discuss the new culture we created, the resources we developed, and how together these helped us build accounting standards that work, now and in the future.
I'll conclude with a look at what's left to do in this area. Spoiler alert: it involves your continued input.
Before I get started, though, let me pause to remind you that official positions of the FASB are reached only after extensive due process and deliberations. In other words, what I am about to say are my views and only my views.
I'll start with culture change.
Today, I'm proud to say the FASB devotes about 40% of our resources to implementation support.
That wasn't always the case. There was a time when the FASB staff members who designed standards were totally divorced from the implementation experience.
Once we issued a standard, we considered our work done. When questions about a new standard came up, we just punted them to one of the practice fellows on staff.
Practice fellows, for those who don't know, are recruited from accounting firms to spend two years on the FASB staff—ideally so they can then return and explain our standards to their clients and colleagues.
Yogi Berra once observed, "In theory there is no difference between theory and practice. In practice there is." Separation of church and state may be great for democracy, but it's not so great for standard setting.
We learned that the hard way. Separating standard writing and standard implementation was inefficient—and it led to a lot of unhappy stakeholders.
To fix this, we had to change our culture to make implementation part of everyone's job. Today, we consider implementation throughout the entire standard-setting process. If, during that process, we learn that a potential accounting solution is too hard, or too complicated, or too expensive, or too vague, we keep working at it until we get it right.
This starts at the beginning of a project and continues throughout its lifespan.
When we issued the revenue recognition standard in 2014, it represented a major achievement in our efforts to improve—with the International Accounting Standards Board, or IASB—one of the most important areas of financial reporting. "Rev rec," as it was inevitably nicknamed, affected virtually all organizations. And, as we learned from our extensive project outreach, it also required significant changes to how some industries recognize revenue in their financial statements.
For the standard to succeed, preparers and auditors would have to agree on how to interpret it.
So we initiated the creation of the joint Revenue Recognition Transition Resource Group, or TRG, with the IASB.
A wide spectrum of stakeholders around the globe got involved, including preparers across many industries, auditors, users, regulators, the Private Company Council—or PCC—and the AICPA. Their input helped us quickly identify issues that might lead to diversity in practice—before the standard was implemented.
Based on what we learned from previous groups, we decided that the TRG should hold public meetings. This allowed all stakeholders to follow our discussions and learn from each other about best implementation practices.
TRG discussions and other stakeholder input helped the Board identify opportunities to clarify or simplify the revenue recognition guidance.
We also posted 60 staff papers to the TRG website. While they're not authoritative, they were excellent educational tools that provided real world examples of how to apply the standard.
That set the groundwork for public companies to make a relatively seamless transition to the standard—which they did, starting in 2018.
More than a year later, we continue to support organizations applying the standard. Since January 1, 2018, we've fielded 77 questions about the standard from our Technical Inquiry Service.
Our advisory groups have helped us monitor implementation progress on revenue recognition. Last year, members of the Financial Accounting Standards Advisory Council—or FASAC—weighed in on the costs and benefits of the revenue recognition standard transition. While some noted that initial costs were a bit higher than expected, most agreed that recurring costs would be lower. And, in some cases, repurposing existing IT systems helped keep overall costs down.
Furthermore, what we learned from the public company experience helped us better prepare for private company implementation, which began earlier this year. We continue to work closely with our Private Company Council to monitor issues that might affect application of revenue recognition for these firms.
Preparers aren't the only ones who needed the revenue recognition standard to work. We also helped investors and other users understand the impact of the standard on financial statements. We created an investor educational webinar series focused on the standard's impact on specific industries. It includes videos aimed at the software, healthcare, and aerospace and defense industries. They are available on the investors section of the FASB website.
Taken together, we believe these efforts improved—and will continue to improve—consistency in how the standard is used and applied. That helps reduce costs and complexity for everyone.
And we've used what we've learned with revenue recognition to help make sure another major standard works: credit losses, now better known as current expected credit losses, or "CECL." Perhaps you've heard of it.
Based on the success of the Revenue Recognition TRG, the FASB created a Credit Losses Transition Resource Group. Convened in late 2015, the group includes financial statement preparers—including community banks and credit unions, auditors, users, and regulators.
Crucially, we convened the group before we issued the final standard. We learned from the Rev Rec TRG that starting earlier can help us improve certain confusing words and phrases before releasing the guidance.
This allowed TRG members to weigh in on the draft guidance before it was final. We believed it would improve CECL's clarity and reduce the need to make technical corrections later.
Since the credit losses standard was issued in 2016, the TRG has also provided us with information about questions that might arise prior to implementation. We continue to address those questions.
Like revenue recognition, our outreach for credit losses goes well beyond the TRG. It also includes presentations to preparers and practitioners at conferences like this, CPE webinars, industry meetings, and other resources.
With credit losses, we also knew it would be important to address stakeholder concerns about its effects on auditing and regulatory capital requirements. While they're not standard-setting issues, they're important to understand. For that reason, we continue to meet with regulators so that they, too, are prepared to monitor its potential impacts.
Even when a standard doesn't rise to the need for a TRG, making sure it works remains our priority.
For example: we decided not to develop a leases TRG. That's because, while the impact of the change is significant, the change itself is pretty straightforward. However, our staff monitored—and continues to monitor—the types of questions received. In public meetings, for example, the Board discussed the nature and extent of leases questions our staff had addressed to date.
We also supported implementation of the leases standard with several educational documents, an interactive CPE webcast, and three videos about the project. One video focused entirely on how a lessee might apply the new leases standard using the display approach—a frequently asked question from stakeholders. We also created educational materials specifically aimed at private companies and organizations.
Thanks to that stakeholder input, we found ways to improve the leases standard, too. For example, we issued narrow-scope standards expected to reduce unnecessary costs without compromising the quality of information provided to investors.
We issued a final standard that will reduce costs for organizations that have land easement arrangements. Land easements are a "right of way" to use or access someone else's land.
And we simplified requirements and made it easier for lessors to separate nonlease components from lease components.
Our experiences with revenue recognition, credit losses, and leases helped us improve implementation support for all our standards—and to develop and refine several other resources. They include "plain English" Q and A documents and other educational materials, a program to provide content and training to established CPE providers, and implementation agenda items for FASB's standing advisory and liaison groups.
Until recently, these resources were scattered throughout our website and, therefore, were difficult to navigate. To address this, in 2017, we created an implementation web portal that brings together all the implementation resources on a given standard.
It's become a one-stop shop of information preparers need to apply major and not-so-major standards.
It also shows the importance of stakeholder feedback. The portal was suggested by members of the FASAC. In its first six months alone, the portal gained 31,500 page views. In short, it's a good success story.
The implementation portal also features links to the FASB Technical Inquiry Service, which I referred to earlier. That system puts you in contact with members of our project teams to talk through issues and clarify provisions of applicable FASB guidance. It's there for you when you need help in addressing a particular set of facts and circumstances—no matter how big or small the standard.
We also gather information on how we need to support implementation by attending conferences like these. These events give us the chance to hear—and, hopefully, respond to—questions directly.
So if you have questions...feel free to share them with Sue Cosper during her panel later today. By the way...Sue is our newest FASB member, who previously spent eight years on staff as FASB technical director. If you know Sue, you know it was a well-deserved promotion.
Part of our job is positioning organizations for a successful and smooth transition to new standards. And that requires us to continually improve how we manage implementation.
I ended my first speech as FASB chairman with the hope that, when my term was up, we'd done a better job to support implementation of our standards. I believe, with your support, we did.
And I believe, with your support, that progress will continue.
Because we need your input to create standards that provide investors with better information at the right time. We need you to tell us if we've been sufficiently clear on "what we mean" when we issue a standard. And we need you to communicate with us throughout the standard-development process.
And I think the FASB should continue to focus on issues that are important to you—ones that can, in fact, be addressed through standard setting.
With the outstanding people and processes in place at the FASB, I believe that that work will continue long after my term as chairman ends next year.
Now I'm happy to take your questions.