Some red meat today for all the financial reporting diehards out there: the top accountant at the Securities and Exchange Commission has issued a statement sharing his thoughts about the Financial Accounting Standards Board’s plans for the future.
FASB, the nonprofit group that sets U.S. Generally Accepted Accounting Principles, published an “invitation to comment” last summer asking various groups — investors, corporations, auditors, academics, and so forth — to speak their piece about the future of FASB’s standard-setting agenda. FASB received more than 500 comments at the time.
Now Paul Munter, acting chief accountant at the SEC and therefore a big dog in corporate accounting, has shared his own thoughts on how FASB might proceed with its affairs, in a statement he released Tuesday.
Munter can’t personally order FASB to do anything, such as to put a specific issue on the agenda or to adopt an accounting standard in a certain way. That said, the SEC does get final approval over any proposed FASB standards, and as a senior SEC staffer Munter is attuned to the priorities of SEC chairman Gary Gensler. So if financial reporting standards are your thing, Munter’s words carry weight.
First Munter talked about the need for FASB to take an inclusive approach to setting standards. Yes, he said, FASB should always be independent so it can adopt standards free from improper influence, but…
Independence, however, does not mean isolation; but rather highlights the need for broad stakeholder engagement to enable the FASB to improve the accuracy and effectiveness of financial reporting and protect investors consistent with the federal securities laws and the objective of general purpose financial reporting.
Munter then continued, “an understanding of evolving investor needs can directly contribute to the FASB’s ability to keep standards current in order to reflect changes in the business environment, and to promptly consider changes to accounting principles necessary to reflect emerging accounting issues and changing business practices.”
Translation: FASB can’t act in a vacuum, when we have so many complicated issues — ESG concerns, crypto-currency, the widespread use of non-GAAP reporting — rushing over the horizon. Lots of people have an interest in shaping the rules for how those issues get reported, and FASB should not cause the SEC a headache by ignoring those groups.
What Are the Reporting Issues?
FASB received more than 500 comments when it published that invitation to comment last summer, on all manner of financial reporting issues. From that wide range of commentary, Munter picked up on three specific issues.
First was disaggregation of financial reporting: the idea that companies should be even more precise and fulsome in reporting financial data to investors. For example, FASB already has a project in the works that would expand the disclosures companies make about Sales, General & Administrative costs, as well as costs of services and costs of tangible goods sold. When might that project be pushed across the finish line into an actual accounting standard? That’s not clear, but it would mean significant new reporting obligations for public filers.
That might not be what corporate financial and internal control teams want to hear — but more disaggregated financial reporting is something investors want. Munter seemed to nudge FASB to keep that in mind.
“We note there was general alignment among commenting investors that greater disaggregation of financial reporting information… should be among the FASB’s top priorities,” he said. “We believe that the FASB… has received significant information on investor needs in this area and that prompt consideration of investor and other stakeholder input is merited to identify potential targeted improvements to financial reporting.”
To me that reads as accountant-speak for “get this done.”
Second was climate-related transactions and disclosures. Granted, most risks related to climate are non-financial items you’d more likely disclose in the Management Discussion & Analysis; but there are some financial issues here, such as renewable energy tax credits or maybe even depreciation of land ruined by climate change. Right now FASB is researching what role it might play in standards for ESG disclosures, climate or otherwise.
Again, Munter gave a gentle nudge: “We believe there may be opportunities for the FASB to take thoughtful action on targeted areas of accounting, disclosure, and financial reporting that are consistent with the objective of general purpose financial statements… We encourage the FASB to continue to perform outreach with investors and other stakeholders and to monitor development of climate-related accounting and financial reporting issues.”
The third issue Munter mentioned was digital assets, which can include cryptocurrency, NFTs, and related kooky electronic stuff. The big issue here is how such assets should be valued on the balance sheet, such as using fair-market estimates. This makes me wonder who in their right mind is quoting market prices for NFT photos of Melania Trump’s hat, but the larger question here is a valid one.
Munter’s comment was essentially that digital assets aren’t going away, so FASB and other standard-setting groups need to figure out some sensible solution. Or, as Munter said: “While digital assets raise a number of critical issues under the federal securities laws, and the industry continues to change at a rapid pace, we believe there may be opportunities for targeted changes to accounting or disclosure guidance that could provide useful information to investors.”
What Happens Next?
What happens next is that FASB takes Munter’s comments seriously, because FASB neither needs nor wants to get into a tiff with one of the most important voices in corporate accounting policy.
When will that translate into specific action on standard-setting projects, and what actions might FASB staff take? We don’t know. And to be clear, Munter did not order FASB to do anything; so long as the staff and board members there can articulate a thoughtful, sensible logic to whatever new standards they might adopt, the SEC will then usually give blessing to whatever FASB has adopted.
Still, for anyone playing the long game in designing financial reporting or internal control systems, items like Munter’s statement are breadcrumbs you can follow so you’ll know what’s coming next in the financial reporting world. Consider yourself informed.