Cloudy Future for GAAP

Robert Herz's retirement and the need for FASB to replace him as well as add two new members will likely delay significant changes to U.S. accounting rules.
Sarah Johnson and Alix Stuart - CFO.com | US
August 31, 2010

By historical measures, U.S. accounting rule-makers were on a relatively fast track this year to improve and meld their rules with those of the International Accounting Standards Board. But that progress may be severely delayed as a result of the surprise exit of Financial Accounting Standards Board chairman Robert Herz and the expansion of the board from five members to seven, accounting experts say.

The departure of Herz, who will retire October 1 after eight years at the FASB helm, comes two years shy of when his second term was scheduled to end and in the midst of the most intense and what many accounting experts call a crucial time for the overhaul of several U.S. generally accepted accounting principles. "Bob was presiding over a very large conceptual transition, and the exposure drafts that are out there right now...are proposing a whole new framework for accounting," says John Hepp, partner in Grant Thornton's accounting principles group and a former FASB project director. "They're moving in many ways to a very different look and feel to financial statements," with a focus on companies' future cash flows rather than historical information.

FASB has nine exposure drafts waiting for public comment, including ones on lease accounting, fair-value measurements, and revenue recognition. That's an unusually high number, particularly considering the breadth of their changes and the fact the bulk of them will have a significant impact on companies. In addition, FASB had planned to wrap up the nine major remaining joint projects (five of which are now waiting for public feedback) with the IASB by December 2011 at the latest. (The boards recently extended their original timeline from June 2011 to later in the year).

For Herz to retire now, adds Hepp, "is like Eisenhower resigning as the troops were landing on the beach on D-Day."

Adding to the complexity of shifting frameworks will be the arrival of three new board members — Herz's replacement plus two new seats. FASB's trustees have decided to make FASB a seven-member board rather than five (reversing a decision made two years ago that gave the FASB chairman more authority and was touted as making the board more nimble).

That development will likely affect the pace of GAAP changes, as well as the ongoing convergence work between FASB and the International Accounting Standards Board, observers predict. "The change in board size is certainly going to slow down the convergence project," says Dennis Beresford, an accounting professor at the University of Georgia's J.M. Tull School of Business and a former FASB chairman. "Not much will get done in the next eight months on major projects."

FASB says it plans to have the new board members in place by early next year. However, they will need time to become familiar with the various proposals on FASB's plate and feel comfortable enough to vote on them. "It's going to take many months for these board members to get up to speed, [and be] willing to weigh in on projects," says Jay Hanson, national director of accounting at McGladrey & Pullen and a member of FASB's Emerging Issues Task Force.

In the meantime, when Herz leaves, the four-member board — led by acting chairman Leslie Seidman — may also be reluctant to put any controversial proposals to a final-rule vote. For instance, FASB had hoped to finalize its revisions to the contentious fair-value measurement rule (previously known as FAS 157 and referred to now as Topic 820) by January, but that now appears unlikely.



A final draft of the changes is open for public comment through next week but would likely garner a tie with the new board. Hepp notes that Herz had been the deciding vote on previous debates about financial instruments accounting, voting against Seidman. That tipped the board in favor of the current proposal, which would force more fair-value into banks' financial statements. "With Bob stepping down, it's anybody's guess what will happen to that," he says.

Another controversial proposal regarding contingent liabilities could also be tabled in the interim.  While the board recently extended a comment-letter deadline for the proposal, it was scheduled to go into effect at the end of this year, despite the delay. That now appears unlikely as well. "If I were a board member, I would want to wait until all the new board members are in place before making a final decision on anything other than an absolutely necessary project," Beresford says.

That's not to say finance departments can take a break from paying attention to the developments at FASB and IASB and thinking about how they will affect their financial-reporting systems. With both Herz and IASB chairman David Tweedie stepping down in the near future, the outcome is uncertain, warns Neri Bukspan, chief quality officer and chief accountant at Standard & Poor's, who is also a member of FASB's Financial Accounting Standards Advisory Council. "The issues of convergence do not necessarily hinge on a single person," he says. Herz's early resignation "could either catalyze...decisions, or it could slow them down, you can't really tell," he says.

What is known is that uncertainty about what the future version of GAAP will look like has increased. "We were already in anxious times because of [the convergence project]," says Bob Uhl, a Deloitte & Touche partner who leads the firm's accounting standards and communications practice. "Now, because of the change in the makeup of the board, it's going to add more anxiety."

New York Bureau Chief David M. Katz contributed to this article.