FASB Chair Jones Looks Ahead

Richard R. Jones

With all the major accounting standards issued by the Financial Accounting Standards Board the last few years, it’s tempting to believe that finance departments are due a few years of relative quiet. However, there are plenty of issues lurking just outside the strict confines of accounting rules. Among them are whether standard setters need to formulate new accounting standards for cryptocurrencies and how involved FASB should be in creating rules around climate-risk disclosures. Inside those confines are controversies like an impending change to accounting for goodwill.

Enter Richard R. Jones, Ernst & Young’s Chief Accountant appointed to be FASB chair in December 2019. Jones assumed the FASB post on July 1, 2020, in the throes of the pandemic. So far, Jones has laid out a relatively conservative approach to standard setting but one consistent with an organization that understands the huge responsibility it carries as a financial standards setter.

In a Zoom call last week with CFO, we asked Jones about the issues above, his personal goals for his seven-year tenure, and the plan for an agenda consultation project.

What have you focused on in the first seven or so months of your term?

I was getting to know our stakeholders and conducting a lot of outreach with our different stakeholders. The pros and cons of Zoom and similar media are that you can meet with many people. In some ways, that turned out to be a positive. Even though there’s rarely a day that goes by where I’m not doing some form of outreach with our stakeholders, there is something to seeing people face to face. It makes for a different kind of interaction, and I certainly missed that. The other thing I was focused on was getting to know the [FASB] staff. My predecessor left me a high-quality, very qualified staff. So, that means hitting the ground running.

How do you view the accounting standards environment right now? Do you think there’ll be a lot of change during your tenure?

We have agenda items today to gauge areas that we should be working on and how investors will use that information for better decision-making. Twenty or thirty or forty years ago, we had half the volume or a third of the volume of accounting standards that we have today. We also have a much more developed set of standards. That doesn’t mean that there aren’t emerging issues or different ways of doing things that might provide better information or reduce unnecessary cost and complexity. Businesses are evolving, and as a result, so does accounting.

The last few years have been a period of significant accounting change. In a December speech, you talked about an agenda consultation project. Why do you think that’s necessary?

I didn’t initiate it when I first got here. But I did recognize we had just gone through a significant period of accounting change — the three big projects [leases, revenue recognition, current expected credit losses] that are have either been adopted or are in the process of being adopted by preparers and the new information being processed by users. I instituted an agenda outreach project in December [2020] that will be carried out throughout 2021. We will have an active dialogue with stakeholders on what we should be working on and what projects we should be adding to our agenda. There will also be a published document, which we’re targeting for release this summer, to collect further comments and input. … The last agenda consultation project was in 2016. I think it’s important to do it periodically, and I think that doing it at the beginning of my term makes sense.

The IASB’s Hans Hoogervost, in his farewell speech in March, said the explosion of debt and “free money driving asset prices through the roof” has distorted the global economy. When the bubble pops, he said, “do not be surprised if accounting [comes] under pressure again as it did in 2008.” Is there any way for FASB to prepare for such a crisis?

If you knew exactly what was going to happen, you would certainly prepare for it. One of the things that I tried to get an understanding of when I first got here was how quickly we could take action when there were emerging issues. We had an example of that in the fourth quarter when an issue related to reference rate reform came up. We were able to add an item to our agenda and issue a standard very quickly that addressed [reference rate reform] before it became a financial reporting issue — or we would have had some accounting that probably didn’t follow the economics. … I would also note that we have over the years built financial accounting standards to address things that maybe we didn’t think of before.

What do you as FASB’s possible role in developing standards for climate risk disclosure?

A couple of things. First off, the charge we [have] from the SEC is financial accounting and reporting standards. That’s our goal. When people talk about ESG [environmental, social, and corporate governance], some of those areas intersect with financial reporting. The environment is usually the easiest one to talk about. There are changes in customer preferences, cost structures, environmental regulations, and existing standards are designed to address those — evaluating lives of assets, recoverability of assets, impairments. …

We have standards, for example, that require entities to make assumptions about future cash flows. Sometimes they are entity-specific assumptions and sometimes they’re market-participant assumptions. What we don’t do is say those assumptions have to do X or have to do Y. They are supposed to be objective assumptions, and they’re supposed to be unbiased.

One of the things that I tried to get an understanding of when I first got here was how quickly we could take action when there were emerging issues.

The broader issue of climate measurements beyond financial accounting and reporting is not our domain. That being said, we have a group of trustees that oversees us, and [climate disclosure] is one of the items that they’re discussing as part of their strategic plan.

As Bitcoin’s price continues to rise and more institutions invest in it, there are more calls for clearer standards on accounting for cryptocurrencies. Will FASB be exploring new standards on crypto?

We have gotten some agenda requests to add a project on accounting for digital currencies. A few months ago, in October 2020, the board decided not to add it to the agenda. When we look at a project, we look at its pervasiveness: how many companies is it really material to? … The board decided that it hadn’t risen to the level of pervasiveness [where] it should be one of the priorities on our agenda. That doesn’t mean that couldn’t change. I do think it is important to consider whether any potential standard setting should be more comprehensive and deal with other nonfinancial assets that are typically carried at historical cost even though they are traded in active markets, such as precious metals and certain commodities such as oil. In other words, should we be standard setting on all of them versus one subset?

You have said that FASB is leaning toward a change in goodwill accounting to an amortization with an impairment [test] model. Why?

On in-process projects, I can only speak for myself. People’s views on goodwill tend to be shaped based on what they think goodwill is and what they think happens to the value of acquired goodwill over time. For example, if you believe that acquired goodwill as an asset declines in value over time, you probably lean toward an amortization model. However, when we have amortization models we also have impairment [testing]. … On the other hand, if you believe you really can’t predict goodwill going down in value, you would [support] testing it for impairments. Based on the direction so far, a majority of our board has been interested in pursuing an amortization with impairments model. … The impairment model could be the exact same as the current impairment model, or it could be tweaked. At a future board meeting, members will discuss whether there should or shouldn’t be a change in the impairment model and, if there should be a change, what it should be.

Often, public companies are subject to new accounting guidance a year or more before private companies, making it hard for analysts to make apple-to-apple comparisons. Do staggered effective dates still make sense?

Not every standard has phased effective dates or different effective dates for public and private. With some of our major standards, we purposely select different implementation dates for public companies versus private. There are a few reasons for that.

One is so that private companies and their service providers learn from the public company adoptions. The second reason would be so that they are not competing for the same resources. If you think about a major accounting change, going out and hiring people to help you with that change and making systems changes associated with that change. [Staggered effective dates] is a way to make sure private companies won’t be necessarily competing for the same resources, which would undoubtedly affect the cost [of implementation]. The third reason is that very often, after issuing a major standard, there are some things that you’d like to change or improve afterward. [The phased-in model] increases the likelihood that we can identify those items, so we can make those changes and improvements before the private companies adopt.

As far as the analysts, most cover private or public companies, but we certainly recognize some cover both. And there is no doubt that if the companies have two different models that’s something analysts would have to factor in. But if you think about an analyst and a [financial statement] user, probably the most costly thing for them would be a poor adoption of the standard. By phasing in these effective dates, we think it can improve the quality of adoption.

Finally, what do you hope to achieve during your tenure as chair of FASB?

I come with a lengthy background in public accounting, so I certainly came in with some views of what works well and where things could be improved. I am focused on making sure that I have the connections with our stakeholders to understand their perspectives, so we are working on things that are of most value to them. I also view myself as a caretaker. Part of my job is to shepherd FASB through my term while improving the information that’s provided under GAAP. But another part is to leave [the board] in good shape for my successor and all the successors that follow.

bitcoin, climate risk, cryptocurrencies, FASB, goodwill accounting, Q&A, Richard R. Jones