A recent Financial Accounting Standards Board (FASB) webcast, “The Investor, an important voice in standard setting,” examined, from the investor perspective, how the Board accomplishes its mission “to ensure that financial statements provide ‘decision useful’ information for customers of financial accounting information -- investors, analysts and others who participate in investment decisions.” Panelists discussed FASB’s investor outreach activities and the kind of information they need, how the input is organized and presented to the Board, and current FASB agenda projects of importance to investors.
Gaining investor input is not always easy, because some investors think that they need to be accounting experts to provide their perspectives. But removed from the process, analysts in particular, “often feel like they are the victims of accounting standards” said Board Member Marc Siegal, a former analyst, in his introductory remarks.
What investors bring to the process
The investor voice is the most important one in setting accounting standards, Siegal said. Investors provide key input. They can say what might be missing, whether the standard meets the objective analysis, and what may be the benefits of a prospective rule. Auditors will speak directly to the costs, but FASB is also looking for qualitative information from investors -- what are the benefits and what are the costs of not issuing the new standard.
“Investors have a very wide range of views, unlike auditors or companies, which tend to be consistent,” Siegal said. “We want to make sure we hear from investors and make sure that any opinions they have are conveyed to the whole board.”
Chandy Smith and Jeff Brickman, senior investor liaisons at FASB, participated in the discussion of how FASB obtains input from investors. FASB reaches out to the investor community through a complex network of internal and external working groups and advisory groups like Financial Accounting Standards Advisory Council and the Investors Technical Advisory Group (ITAC), which includes members from outside the FASB.
Their goal is to gather as wide a range of investor perspective as is possible, Smith and Brickman said. They obtain direct input from the Certified Financial Analysts (CFA) Institute, for example, and from comment letters, and maintain regular dialogue with users through working groups.
The investor liaisons reach out to individuals who have accounting knowledge but also to “those who have minimal accounting knowledge but who can enlighten us about how they will use the information,” they said. The Investors Task Force and Emerging Issues Task Force (EITF) identify investors who will have knowledge on a particular issue and Smith or Brickman will call them. The calls may or may not include a Board member. Many companies have rules prohibiting their employees from speaking on the record on some issues, and often investors agree to participate on condition of anonymity. “We don’t get many comment letters from investors,” Brickman said, “which is why it is essential to reach out.”
The investor liaison group communicates what they have learned to Board members and staff through meeting minutes and memoranda. External communication takes place through handouts for public Board meetings, minutes for public meetings, and comment letter summaries.
Current FASB agenda projects important to investors.
Projects on FASB’s current agenda that may be of interest to investors include financial instruments, off-balance sheet accounting, financial statement presentation and conversion, and U.S. adoption of international financial reporting standards (IFRS).
“Our [discussion] of financial instruments is taking up a lot of our time at the board and staff level,” Brickman said. “There is a lot of tension in the accounting model around how you account for financial assets and liabilities on bank financial statements.”
The Board is trying to take a step back to look at costs, fair value for all financial instruments. “Impairment is a key issue,” Siegal said,”because the rules we had for OTI were quite complex for companies, quite difficult for auditors, and not completely understood by investors.”
FASB has not issued a proposal yet, Smith said, but they have formed a resource group specifically for the project and have already received comment letters and phone calls.
FAS 166/167, effective January 1, 2010, will move a lot of off-balance-sheet structures back on to the balance sheet -- more off balance sheet items will be consolidated, they said.
FASB is working with IASB on a project to establish a common high quality standard for presentation of financial information in the financial statements. Among the proposed changes is a direct cash flow statement.
FASB has sent a comment letter to the SEC supporting the principle of IFRS and the SEC roadmap. One panelist expressed doubt that conversion would take place without a definite date.
When asked for an example of the kind of input FASB looked for from investors, Smith cited the April fair value discussions. Investors said they wanted more information on loss content in financial statements.
Another questioner raised the issue of how investor input is weighed relative to preparers and auditors. “At the present time preparers and auditors are complaining about disclosure overload,” one panelist said. “A future FASB project is a disclosure framework.”