1000 WORD ESSAY

© 1998 American Accounting Association Accounting Horizons Vol. 12 No. 2 June 1998 pp.184-187

COMMENTARY

David Kaplan and Elizabeth A. Fender

David Kaplan is Chairman of the AICPA Accounting Standards Ex- ecutive Committee and Elizabeth A Fender is the Director of Account- ing Standards at the AICPA.

The Development of Comment Letters on FASB Proposals by the

AICPA Accounting Standards Executive Committee

BACKGROUND The Accounting Standards Executive Committee (AcSEC) of the American Insti-

tute of Certified Public Accoimtants (the Institute) is the senior technical committee of the Institute responsible for determining the Institute's policies regarding financial reporting matters. AcSEC is authorized to make public statements on behalf of the Institute on financial reporting matters without the clearance of the Board of Directors of the Institute. AcSEC is also authorized to clear public statements of other Institute committees that include references to financial reporting positions. AcSEC is composed of 15 members of the Institute, who are knowledgeable in financial reporting matters, and who are drawn from public accounting, industry and academe.

AcSEC considers its comment letters important in supporting the private-sector standard-setting process. It is AcSEC's goal to respond to all significant accounting proposals issued by the Financial Accounting Standards Board (FASB) and the Inter- national Accounting Standards Committee (IASC).̂ Because AcSEC believes that due process and the free exchange of ideas on issues are vital in the development of quality accounting standards, AcSEC reviews and debates various positions on proposed stan- dards in public meetings in order to provide members with the opportionity to examine and evaluate each other's views.

This paper summarizes (1) the objectives AcSEC seeks to achieve in providing feedback to the FASB, (2) the process AcSEC follows in conceptualizing, drafting and debating the positions taken in its comment letters on FASB proposals, and (3) the underlying factors that AcSEC considers implicitly while developing its positions. AcSEC

' In addition, AcSEC reviews comment letters prepared by the AICPA's Government Accounting and Au- diting Committee on proposals issued for comment by the Governmental Accounting Standards Board (GASB).

The Development of Comment Letters on FASB Proposals 185

believes that its comment letter objectives, process and the underlying factors are all important in obtaining an understanding as to how AcSEC's responses are developed.

OBJECTIVES OF COMMENT LETTERS AcSEC wishes to provide valuable input to the FASB in its responses to proposed

documents. Accordingly, in preparing and finalizing its responses, AcSEC seeks to in- clude in its responses: • The positions supported by AcSEC and AcSEC's underljdng rationale. • Issues that may not have been identified or considered by the FASB and AcSEC's

underljdng rationale as to why those issues should be addressed. • Alternative solutions to accounting issues that AcSEC believes are preferable to

the proposed solutions, together with AcSEC's supporting rationale. • Questionable practices that may develop if the proposed standard is implemented

and why such practices may develop. • Implementation problems that may result from adoption of proposed standards

and why those problems may result. • Minority views, where appropriate, so that the Board has access to valid, mean-

ingful views of AICPA members who might not agree with the majority views and who may not otherwise respond to FASB documents.

AcSEC's Process Responses are drafted initially by a designated AcSEC task force or by an AICPA

industry committee (preparing units) for dehberation by AcSEC. The process begins with identification of a standing committee or, more frequently, appointment of a chair of a task force that will draft the letter. This decision is made jointly by the Chair of AcSEC and the Institute's Director of Accounting Standards (the Director). Task force chairs generally are selected fi-om the membership of AcSEC, but they may be any AICPA member known to be knowledgeable regarding the particular area of financial reporting.

Task force chairs determine the size and composition of task forces in consultation with the AcSEC Chsiir and the Director. In selecting a task force, the objective is to assemble a group of knowledgeable individuals who may represent diverse perspec- tives (for example, the perspectives of different size pubhc accounting firms, industry or users) yet who will maintain the pubhc interest as their highest objective.

Each member of the preparing unit is expected to be familiar with all aspects of the proposed FASB document. The preparing imit meets in person or by conference call and together develops and debates the views that the preparing unit will propose that AcSEC adopt. A comment letter is then drafted and reviewed by individual members of the preparing unit prior to distribution to AcSEC members.

Draft responses are forwarded to AcSEC members in accordance with AcSEC's op- erating policies. These policies provide that AcSEC members should have sufficient time to become familiar with the proposed FASB document and the preparing unit's draft letter.

The AICPA staff liaison to the preparing unit, the preparing unit chair, and possibly selected preparing unit members present the draft letter to AcSEC for its consideration. Contentious issues are highlighted for discussion either prior to or at the meeting. For proposed standards that are complex, AcSEC may participate

186 Accounting Horizons/June 1998

in an educational session prior to deliberation of a draft comment letter, or AcSEC's preliminary views may be sought before drafting a comment letter for AcSEC's consideration.

Although the draft letter initially may present the views of the preparing unit, the draft is revised as necessary to consider issues rsiised and views expressed by AcSEC. Ultimately, the letter presents AcSEC's views and is signed by the AcSEC Chair, as well as the preparing unit chsdr.

As occurs in the standard-setting process, developing positions for inclusion in com- ment letters on proposed standards involves evaluating considerations and factors that may confiict to some degree. Moreover, AcSEC members come to the public meetings at which positions are debated with differing viewpoints, yet a majority of AcSEC mem- bers must approve comment letters. Thus, forming an AcSEC-approved position is a process that often involves mutual education, a weighing of advantages and disadvan- tages of various accoimting solutions, and negotiation concerning the content and wording of the letter in order to arrive at a letter that has the support of a majority of AcSEC members.^ AcSEC believes this process is one that enhances the quality of its comment letters.

Depending on the significance of the changes made to a draft comment letter subse- quent to the pubhc meeting, AcSEC will either vote to positively clear, negatively clear or have the AcSEC Chair clear the final letter.

AcSEC may occasionally be required to comment on documents with relatively short comment periods without having sufficient time to gather members' views. For example, proposed FASB Technical Bulletins may have comment periods as short as 15 days. The responsible preparing unit prepares comment letters on such documents for ap- proval and signature of the AcSEC Chair, subject to AcSEC's negative clearance.

Factors Considered Although AcSEC does not use a specific set of criteria in evaluating FASB propos-

als, AcSEC does consider, explicitly or implicitly during the course of its deliberations, particular factors in evaluating proposed standards. Although the terminology may differ, many of these factors are also used by the FASB in evaluating its own and AcSEC's projects.

The factors listed below were not prioritized by AcSEC, or even listed prior to AcSEC's most recent meeting. These factors tended, however, to imderlie and support the vari- ous positions debated by AcSEC members during AcSEC's dehberations. As part of the process of preparing this paper at its most recent meeting, AcSEC formahzed its think- ing with respect to the factors listed below. 1) Substance (or representational faithfiilness). Will the proposed guidance result in

reporting the substance of the transaction or event? 2) Relevance. Will the proposed accounting result in the reporting of information that

will be useful to users in making resource-allocation decisions? (AcSEC is composed of auditors, preparers and academicians. AcSEC's judgments about what is useful information to users are based on intuition rather than specific research or statisti- cal studies.)

' Three or more AcSEC members who hold a minority view on an issue may have their view and rationale stated in the comment letter. Views held by fewer than three members are not included in comment letters.

The Development of Comment Letters on FASB Proposals 187

3) Improvement. Will the proposed standard be an improvement over current GAAP? (An accounting solution need not be the one that is most closely aligned with the FASB's Concepts Statements to be an improvement over current GAAP.)

4) Uniformity. Does the proposed standard permit options in accounting for transac- tions? In the absence of economic substance that would justify differences, AcSEC usually supports the elimination or minimization of financial reporting options.

5) Clarity. Are the words in the proposed standard easily understood and will they be applied in the same manner? Is uniformity accomplished without setting forth ex- cessive detail?

6) Consistency. Is the guidance consistent with (1) the conclusions reached for similar transactions in other standards and (2) the FASB's Conceptual Framework?

7) Conflicts. Will the proposed guidance minimize unnecessary confiicts, such as with regulatory bodies or between United States and international standards? Are con- fiicts justifiable based on an evaluation of the proposed guidzince in relation to the other factors listed herein?

8) Simplicity. Is the complexity of the proposed accounting or disclosure excessive considering the transaction or event being addressed? Can the accounting be sim- plified yet refiect the substance of the transaction, or can disclosures be simplified or eliminated?

9) Minimal potential for misapplication. Is the wording of the proposed standard suf- ficiently rigorous to prevent misapplication of the standard? (This factor has been referred to with increasing frequency as the potential for "scoundrel accounting.")

10) Comprehensiveness. Are all aspects, transactions and events that should be addressed by the proposed standard included? Are there understandable reasons for not ad- dressing certain aspects, transactions or events?

11) Operationality. Will the proposed standard be operational in practice? Will preparers and auditors evaluating similar facts arrive at similar accounting and reporting conclusions? Will the standard stand a reasonable test of time without excessive maintenance?

12) Benefits / costs. Are the benefits of the proposal expected to exceed the costs of imple- menting and applying it? This factor is considered at various levels. For example, AcSEC considers whether there is a sufficiently significant practice problem to warrant a new accounting standard, as well as whether the benefit of a conceptu- ally superior aspect of proposed guidance outweighs the cost of implementing it.

AcSEC remains cognizant of previous AcSEC positions on issues and seeks to main- tain consistency where appropriate. However, AcSEC embraces the ongoing educational and learning process that is a part of standard setting and, where appropriately sup- ported by reasonable conclusions, may revise previous positions.

CONCLUSION In summary, it is AcSEC's goal to provide meaningful feedback to the FASB on the

FASB's financial reporting proposals. By considering the factors and meeting the ob- jectives listed herein, AcSEC attempts to prepare comment letters that both represent the AICPA's best thinking on a proposed standard and are useful to the FASB in its deliberations.