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US Accounting Standard Setting

FASB and FASB-Lite

Do we really need more bureaucracy in accounting standard setting? On January 26 a blue-ribbon panel submitted a report to FASB’s parent organization—the Financial Accounting Foundation (FAF)—recommending significant changes to the future of accounting standard setting for private companies, including a separate standard-setting board. The panel concluded that “there are urgent and growing systemic issues that need to be addressed in the current system of U.S. accounting standard setting,” the report states. FAF is expected to discuss this report at its Feb. 15 meeting. The panel believes that “the system should focus on making exceptions and modifications to U.S. GAAP for private companies Standards that better respond to the needs of the private company sector rather than move toward a separate, self-contained GAAP for private companies or a wholesale reorganization of GAAP,” at least in the near term, according to the report. The report recommends establishing, under FAF’s oversight, a separate private company standards board to help ensure that appropriate and sufficient exceptions and modifications are made, both for new and existing standards. The new board would work closely with FASB to create a coordinated and efficient standard-setting process but would have final authority over such exceptions and modifications. I call the proposed new board “FASB- Lite.”

This makes no sense at all – at least not now. The SEC has indicated that effective 2015, US accounting standard setting would change for public companies because we would adopt International Financial Reporting Standards (IFRS) in lieu of US GAAP established by FASB. While a final decision has not been made, there is great pressure on the SEC to transition to IFRS because those standards have already been adopted in the European Union and over 100 countries use IFRS. Why not wait until the SEC makes a final decision that may come as early as 2012, before creating another bureaucracy? If we adopt IFRS, as we should do, then FASB can become the standard setter for private companies.

On a personal note, some claim that we have the best accounting standards in the world and shouldn’t move to IFRS. Our standards are rules-based and allow for lots of wiggle room around the rules. IFRS is principles-based and seem to create stronger ethical reporting standards. Now, that doesn’t mean IFRS are better. However, we have to look at the evidence and concede that the number of accounting frauds over the years by companies that applied US GAAP seems to contradict the assertion that we have the best standards in the world. Unless you want to say we have the least ethical business and accounting practitioners in the world.