Question

The following letter was sent to the SEC and the FASB by leaders of the business community.

Dear Sirs:

The FASB has been struggling with accounting for derivatives and hedging for many years. The FASB has now developed, over the last few weeks, a new approach that it proposes to adopt as a final standard. We understand that the Board intends to adopt this new approach as a final standard without exposing it for public comment and debate, despite the evident complexity of the new approach, the speed with which it has been developed and the significant changes to the exposure draft since it was released more than one year ago. Instead, the Board plans to allow only a brief review by selected parties, limited to issues of operationality and clarity, and would exclude questions as to the merits of the proposed approach.

As the FASB itself has said throughout this process, its mission does not permit it to consider matters that go beyond accounting and reporting considerations. Accordingly, the FASB may not have adequately considered the wide range of concerns that have been expressed about the derivatives and hedging proposal, including concerns related to the potential impact on the capital markets, the weakening of companies’ ability to manage risk, and the adverse control implications of implementing costly and complex new rules imposed at the same time as other major initiatives, including the Year 2000 issues and a single European currency. We believe that these crucial issues must be considered, if not by the FASB, then by the Securities and Exchange Commission, other regulatory agencies, or Congress.

We believe it is essential that the FASB solicit all comments in order to identify and address all material issues that may exist before issuing a final standard. We understand the desire to bring this process to a prompt conclusion, but the underlying issues are so important to this nation’s businesses, the customers they serve and the economy as a whole that expediency cannot be the dominant consideration. As a result, we urge the FASB to expose its new proposal for public comment, following the established due process procedures that are essential to acceptance of its standards, and providing sufficient time to affected parties to understand and assess the new approach.

We also urge the SEC to study the comments received in order to assess the impact that these proposed rules may have on the capital markets, on companies’ risk management practices, and on management and financial controls. These vital public policy matters deserve consideration as part of the Commission’s oversight responsibilities.

We believe that these steps are essential if the FASB is to produce the best possible accounting standard while minimizing adverse economic effects and maintaining the competitiveness of U.S. businesses in the international marketplace.

	Very truly yours,
	(This letter was signed by the chairs of 22 of the largest U.S. companies.)

Answer the following questions.

1. Explain the “due process” procedures followed by the FASB in developing a financial reporting standard.

2. What is meant by the term “economic consequences” in accounting standard-setting?

3. What economic consequences arguments are used in this letter?

4. What do you believe is the main point of the letter?

5. Why do you believe a copy of this letter was sent by the business community to influential members of the U.S. Congress?

Answer 1

Ans : 1) The mission of the FASB “is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information. The work of the FASB is an integral part of the United States economy as it demands that financial information put forth by companies is “credible, transparent, and comparable”.

Let us know the standard setting process of FASB:

1. The Board identifies financial reporting issues based on requests/recommendations from stakeholders or through other means.

2. The FASB Chairman decides whether to add a project to the technical agenda, after consultation with FASB Members and others as appropriate, and subject to oversight by the Foundation's Board of Trustees.

3. The Board deliberates at one or more public meetings the various reporting issues identified and analyzed by the staff.

4. The Board issues an Exposure Draft to solicit broad stakeholder input. (In some projects, the Board may issue a Discussion Paper to obtain input in the early stages of a project)

5. The Board holds a public roundtable meeting on the Exposure Draft, if necessary.

6. The staff analyzes comment letters, public roundtable discussion, and any other information obtained through due process activities. The Board redeliberates the proposed provisions, carefully considering the stakeholder input received, at one or more public meetings.

7. The Board issues an Accounting Standards Update describing amendments to the Accounting Standards Codification.

2) Economic consequences of accounting standard-setting means:

(a) Standard-setters must give first priority to ensuring that companies do not suffer any adverse effect as a result of a new standard.

(b) Standard-setters must ensure that no new costs are incurred when a new standard is issued.

(c) The objective of financial reporting should be politically motivated to ensure acceptance by the general public.

(d) Accounting standards can have detrimental impacts on the wealth levels of the providers of financial information.

3) The economic consequences used in this letter are:

(a) The potential impact on the capital markets,

(b) The weakening of companies’ ability to manage risk, and

(c) The adverse control implications of implementing costly and complex new rules imposed at the same time as other major initiatives, including the Year 2000 issues and a single European currency.

4) The main point of this letter is that the FASB must follow the prescribed procedures and solicit all comments in order to identify and address all material issues that may exist before issuing a final standard and provide sufficient time to affected parties to understand and assess the new approach.