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Future challenges in financial reporting, from departing FASB member

Lawrence Smith's term as a member of the FinancialAccounting Standards Board is drawing to a close, but he still sees much workfor the board and other agencies to do.

Smith has worked at FASB for more than 14 years and has saton the board since 2007; his term will end June 2017. When he left publicaccounting to join the board, WorldCom had collapsed, Congress was debatingSarbanes-Oxley, the Public Company Accounting Oversight Board did not exist andefforts to converge U.S. and the international accounting standards had not yetbegun.

During his time on the board, FASB passed guidance on leaseaccounting, financial instruments, revenue recognition and, of course, thecredit standard known as the current expected credit loss model, or CECL. Smithhas been a vocal critic of the standard and voted against the final proposal, but has remained a keyplayer in the formation and implementation of the standard, the CECL technical and transitiongroups on issues and questions that arise.

Smith predicted FASB will increasingly be unable to resolvewhat he sees as looming challenges in financial reporting on its own and willneed to work with other reporting agencies.

"It's time for the various parties [like the] SEC,PCAOB, the AICPA's auditing standards board and the FASB to put their headstogether and critically evaluate just how entities are disseminating financialinformation, what users use to make investment decisions and how thoseinvestment decisions are made and whether changes to our existing financialreporting system are warranted," he said at the AICPA National Conferenceon Banks & Savings Institutions.

One area he recommended for review is the length of U.S.financial statements, which he said is "out of control." The board triedto address this by issuing an exposure draft for companies to use whenconsidering if disclosures are needed around a specific topic, but the result"invariably suggests" adding to existing disclosures and "rarelysuggests deleting any." He said the board needs to find a better way toevaluate the totality of disclosures and whether that information detracts froman investors' ability to analyze financial statements.

Another trend in reporting the board may need to visit isthe use of what Smith called "interim" disclosures of financialinformation that are divulged well in advance of Forms 10-Q and 10-K, such asinvestor presentations or other packages. Preparers have told him that theinformation comes from the same systems as the quarterly filings, which meansthey would be subject to the same system of internal controls that go into thepreparations for audited financial statements. The board and potentially the PCAOBwill need to discuss whether there should be any standardization of thatinterim information that companies would voluntary disclose to investors. Hesuggested one way to address this could be to include a "simplereport" from auditors saying the information in the investor packet issubject to the same system of internal controls as the financial statements.But he pressed further.

"Let's think out of the box a little more: If we findthat the regulatory filings are really of confirmatory value, perhaps the SECcan consider loosening the timing of the required filings to take some of the pressureoff the system? Or go even further and just require one semiannualreport?" he proposed.

Smith also touched on a closely watched issue for reportingagencies: non-GAAP accounting. 

In May, the SEC updated its interpretiveguidance on non-GAAP financial measures and included examples ofpotentially misleading non-GAAP figures. Smith said the"proliferation" of non-GAAP disclosures should motivate FASB to lookat the bigger picture of financial reporting to see "what, ifanything" should be done to address the fundamental reasons behind theiruse. His concern is that companies may use non-GAAP measures that appear to becomparable but are different in their composition or measurement. He was alsoconcerned about the use of "anti-GAAP," or metrics that areintentionally different because the issuer disagrees with the standardcalculation.

"There's a difference between presenting anon-GAAP number that excludes infrequent and unusual charges [and] an anti-GAAPmeasure that says, 'To heck with GAAP,'" he said. "I am encouraged bythe SEC's staff's recent guidance that may result in a reduction of anti-GAAPreporting measures. But there still remains challenges on the lack ofcomparability that may exist between non-GAAP measures and other measures thatappear very similar." 

Smith's appeal may already be resonating within FASB. Theagency is engaging all of its stakeholders for agenda consultation that willset the board's key priorities for the next few years, FASB spokesman MatthewBroder wrote in an email.