The Financial Accounting Standards Board (FASB) is putting some flesh on the bones of the much idealized but little understood "principles-based" approach to U.S. standard-setting. The board wants your reaction to a proposal that provides an indication of what you can expect from the new approach:
- Fewer exceptions. In the past, as part of its "rules-based" approach, FASB made lots of exceptions. Some were designed to limit volatility in earnings; others to ease the transition to new standards. In FAS 133 on derivatives, FASB went to extremes, making exceptions to the principles and then adding exceptions to the exceptions. A switch to the "principles-based" approach would mean fewer exceptions and shorter, less detailed standards.
- Less interpretive and implementation guidance. Currently, FASB's statements are augmented by guidance for specific industries and situations. This takes the form of an "alphabet soup" of accounting literature issued by FASB, its Emerging Issues Task Force (EITF) and its Derivatives Implementation Group (DIG), as well as outsiders, including AICPA's Accounting Standards Executive Committee, and the U.S. Securities and Exchange Commission (SEC). You can expect less of it under the new approach.
- More reliance on judgment. A key goal of the new approach is to give investors the right to expect companies and auditors will use their best judgment, rather than simply complying with rules. To reach this goal, FASB might try to improve and expand its conceptual framework. Or it might issue a standard with an overriding principle, saying financial statements must clearly convey the economic substance of transactions, rather than simply complying with individual standards.
- Changes in costs and benefits. Under the new approach, companies and auditors might incur more costs due to increased litigation. Or they might be embarrassed by restatements due to the increased likelihood of being second-guessed by the SEC. The benefits are less clear. Despite its examples and rhetoric, the proposal does not make it clear how switching to a "principles-based" approach will benefit investors, and the proposal does not address the impact on small accounting firms and their clients.
Download the proposal. The comment due date is January 3, 2003. FASB plans to hold a roundtable meeting with respondents on December 16, 2002. You can help by sending FASB your comments, even if they don't fall neatly within the framework of the specific list of issues identified in the proposal.