• Simplifying Accounting Standards Still Complicated

    By | November 10, 2017

    Too bad accounting standard simplification doesn’t follow the same rules as Marie Kondo’s The Life-Changing Magic of Tidying Up. Eliminating the available for sale security classification doesn’t exactly spark the joy.

    Every time the FASB drops a new Accounting Standard Update (ASU), it leaves you feeling weary. Maybe all the U.S. GAAP decluttering and other guidance purging only sparks joy for standard setters?

    Sure, it’s meant to make your life easier, and maybe long-term, it will, but right now, it definitely doesn’t.

    Enough already?

    There have been many “completed FASB projects” in recent years that have modified how we recognize revenue, leases, investments, inventory… and the list goes on and on. In 2017, there have been 13 ASUs issued. 20 in 2016. 17 in 2015. It’s a hassle to keep up.

    When I last covered standard overcomplication, it seemed like the FASB’s simplification initiative had hit a wall.

    Lawrence Smith, a FASB member, alluded to the fact that resistance to change is crippling them from proceeding with the initiative… “When we started the simplification initiative we had a list of roughly 65 to 70 items that were suggested improvements–things that we could simplify. We probably did about five of them with relatively little resistance and everything we’ve tried to do since then has met with some resistance in one way or another.”

    It may be picking up the pace again. Another couple of simplifications dropped in ASU 2017-11. Or, if it isn’t, at least the FASB is still shaking things up, whether it’s officially part of the simplification or not. Some changes, like dropping the temporarily restricted category from not-for-profit accounting seems easy enough: just combine temporarily restricted and permanently restricted net asset classes into one net asset class and, bingo, you’re done.

    Others make your eyes cross. For example, the changes to revenue recognition still seem a little ominous even with Tim’s expert portrayal of the separation of performance obligations. But, we need to learn to love these five recognition steps ASAP. They start becoming mandatory for lots of companies in a little over a month. The one-year deferral graciously granted by the FASB flew by; the first deadline for public companies is December 15, 2017.

    How did we get into this mess?

    Not only did we let this complexity happen, we asked for it like a grande, iced, sugar-free, vanilla latte with soy milk. Written almost 20 years ago, this 1999 Journal of Accountancy article spells it out:

    The main reason for the increase in the volume and complexity of accounting guidance is that many auditors, corporations and regulators ask for it. They want to have clear answers for nearly all possible situations they might encounter. While most business people and senior partners of audit firms support general principles in theory, they often ask for much more detailed standards in practice.

    One explanation for this is what I call the show me syndrome: the tendency for many companies or auditors to treat accounting standards as a book of laws and take the position that an accounting treatment not explicitly prohibited must be permissible. Thus, we sometimes hear clients say to their auditors show me the specific rule that says I cannot do so-and-so.

    I’m glad at least we started dumping everything into one spot: the Codification. That was a massive step in the right direction. It’s basically the guest-room closet for accountants, so full you can’t close the door. If it’s somewhere, it’s in there.

    The problem is that it’s really not fun to start going through the closet, to continue the analogy, and decide what to ditch.

    And, we — as accountants — don’t just have one messy closet. We’ve got at least two. Dare I throw in taxes? Ugh, tax reform. Can we pick on another profession for a little while?

    Is it worth it?

    Is all of this consternation worth anyone’s time? On one hand, the reluctance to make changes could end up hurting us and we will have a convoluted set of standards forever, and never reach convergence with IFRS. As an aside, I remember when my professor in college said that would happen around 2011. I think 2030 is more like it.

    But is that pace too fast or too slow?

    Too much rapid change is bound to result in comparability and consistency issues. Right now, we may be tottering on the side of too much, and there are bound to be lots of reporting mistakes made over the next couple years. But, would slowing down help? We are known for standard update procrastination, so it may not matter. Unless someone conjures up some urgency like this guy suggests for ASC 606 (and I don’t know how you’d manage that), we’re dealing with quite the catch-22.

    Image: Photo by Jeffrey Wegrzyn on Unsplash