March 1999 Issue


FASB's director of research, Timothy Lucas, recently gave an update on some of the major projects receiving serious attention by the board.

Business Combinations. An exposure draft on business combination accounting is planned for the summer of 1999. Preparatory to that, a G4+1 paper circulating on business combinations in the western world poses that just one method of accounting--purchase--is the right answer. According to Lucas, this is likely the way FASB will go, but with greater disclosure and shorter time periods for the amortization of purchased goodwill. The board is discussing a maximum write-off period of 20 years for goodwill, or perhaps a presumed write-off period of 10 years, with the burden of proof on the company to justify longer write-off periods.

Consolidations. An ED scheduled for release early this year basically says that if one entity controls another, the financial statements of the controlled entity should be consolidated. The trouble, in Lucas' mind, is that the ED lacks specific guidance or "how-tos." The ED consists of about 100 pages of broad principles on the meaning of control. Lucas fears the SEC will want more specific guidance and perhaps seek to add some operational guidance in one form or another. The draft statement does not exempt not-for-profit

International Standards. The International Accounting Standards Committee (IASC) has completed its core standards, and the various constituent securities regulators around the world must now decide the extent to which they will accept the standards for cross-border securities filings. FASB said it is willing to help the SEC evaluate the core standards and plans to update its comparison of U.S. GAAP to IASC standards by the end of March.

Lucas observed, based upon a trip last year to Japan, that high standards of financial accounting are not the sole requirement for a successful financial reporting process in a securities market. A number of factors have to be present--effective regulation, high quality audits, a common mindset on the part of the issuers of financial information, and the like. The objective of the governmental regulators is critical. The SEC is unique, with a well-defined mission--investor protection.

SEC Initiatives. Lucas commented that the SEC, in its desire to deal with perceived financial reporting abuses, has changed its spots to some extent. In the past it was often concerned about soft debits in the balance sheet--prepaids and deferred charges. Now it is concerned with soft debits in the income statement--restructuring charges and in-process research and development in a business combination. The SEC is also stressing revenue recognition principles. FASB has not yet decided to put that on its agenda, although the Financial Accounting Advisory Council may be speaking to FASB about this as part of its annual survey of concerns.

Derivatives. Lucas informed the gathering about a derivative implementation group that it has formed along the lines of the EITF model. FASB has brought together a number of knowledgeable professionals that meet periodically to discuss derivative implementation issues. Their work is available on FASB's website ( *

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