The activities of the AICPA Accounting Standards Executive Committee (AcSEC) in establishing accounting standards are generally not as well known as those of the Financial Accounting Standards Board (FASB).

How do they set their agenda? How often do they meet? What is their relationship with the FASB? These are just a few of the questions that come to mind when the work of AcSEC is discussed. The CPA Journal's Managing Editor James L. Craig, Jr., visited the office of AcSEC Chairman Norman Strauss to discuss these and other issues.

The CPA Journal: Let's start with the basics. Who or what is AcSEC?

Norman Strauss: AcSEC is the senior technical committee of the AICPA and the body authorized to speak on behalf of the AICPA on accounting and financial reporting issues. We have two major functions: To develop accounting standards and to respond to standards proposed by others, principally FASB and GASB.

With respect to standard setting, we have a number of vehicles we issue that fall under the generally accepted accounting principles (GAAP) umbrella. They include audit and accounting guides, statements of position (SOP), and practice bulletins. The deliberations leading to guides and SOPs are subject to due process (i.e., exposed for public comment), and when issued AcSEC's guidance must be followed by practicing CPAs under the GAAP hierarchy as set forth in SAS 69, The Meaning of "Present Fairly in Conformity With Generally Accepted Accounting Principles" in the Independent Auditor's Report. Audit and accounting guides and statements of position are in the second tier of the hierarchy, right under FASB and GASB pronouncements. This means that if the FASB has not dealt with an issue and we have, our pronouncement is GAAP. Practice bulletins, which are not exposed for public comment, are in the third tier. SAS 69 has elevated the level of AcSEC pronouncements in the hierarchy effective after March 15, 1992.

In our standard setting we have two basic goals: First, we want to narrow alternatives. We think users are better served when similar transactions are accounted for the same way. Second, we want to improve financial reporting. In the process of narrowing choice we want to end up with the best or most appropriate method.

CPAJ: What is the make-up of the committee?

Strauss: AcSEC is a fifteen person board made up of CPAs from practice-- large, medium, and small firms--academia, and business. Terms generally are for three years. There are always representatives from the "Big Six" firms.

We are the senior technical committee, but there are AICPA specialized industry committees that we work with--health care, government, banking, insurance, and not-for-profit, to name a few. If an issue relates to a specialized area, it will be given to the appropriate industry committee. However, AcSEC must approve the accounting guidance developed by the committees.

We also put together task forces to work on issues that are not specific to the industry committees. For example, we have task forces on accounting for advertising costs and software revenue recognition.

CPAJ: Are your meetings open to the public? Do you publish an agenda before meetings and minutes afterward?

Strauss: We usually meet in the offices of the AICPA in New York, and the public is permitted to attend our meetings. The dates and items to be discussed are published in The CPA Letter. Minutes are prepared and circulated among the committee members. The minutes and agenda papers are available from the AICPA under one of its subscription plans. We have six to eight meetings a year which last two to three days. A representative of the FASB attends all our meetings.

Like FASB, we recently changed our voting procedures to require a super majority of ten of the fifteen members to approve a project. We did this at the urging of FASB and in light of the new hierarchy of GAAP in SAS 69.

CPAJ: Where do you fit among the standard setters?

Strauss: Our role is more narrow than FASB and GASB, which are the premier accounting standard setting boards. We are not a competing body. The FASB deliberates on the very broad issues--financial instruments, the reporting entity, income taxes, post-employment benefits--that takes a lot of time and have a pervasive impact. We typically deal with more narrow issues and with industry-specific matters. But since the FASB can't work on everything, AcSEC periodically deals with broader issues as well.

We try to deal with issues when it doesn't make sense for FASB to work on them. However, if the FASB prefers to handle a particular subject, rather than AcSEC, that is fine with us. In addition to FASB and GASB, the Emerging Issues Task Force of FASB (EITF) also sets generally accepted accounting principles. It works on emerging issues that can be dealt with quickly without the need for public exposure. AcSEC's role is somewhere in the middle.

CPAJ: Who sets the agenda?

Strauss: AcSEC's planning subcommittee which I chair. Projects come from many sources. Some we think of ourselves. Our committees suggest projects, the SEC and EITF make suggestions, and often the FASB will ask us to look at something because our members or committee have the industry background.

Let me walk you through the steps we follow in our standard setting process. After we decide that an issue should be placed on the agenda, a prospectus is prepared that explains the problem, describes what we hope to accomplish, includes cost/benefit considerations, states whether there are any potential conflicts with existing FASB pronouncements, and sets forth what we plan to do and what the final product will be. The prospectus is reviewed and approved by the committee.

CPAJ: Are these prospectuses published anywhere?

Strauss: No, they are not. But in keeping with the close relationship we have with FASB, each prospectus is cleared with FASB. This is done in an open FASB meeting and if FASB clears the prospectus, it is announced in their status reports.

I'll use the 1992 SOP on accounting for revenue recognition in the software industry as an example of the process. After the prospectus was cleared, we put together a task force of experts in the software industry, both from public accounting and in the industry to deliberate the issues. The task force presented its tentative conclusions to AcSEC. If an industry committee rather than a task force were involved, it would have presented its recommendations to us in a similar fashion. We deliberated the issues, and, with the help of AICPA staff, the task force drafted a proposed statement of position presenting our views of the appropriate accounting. Before we exposed the proposal, we submitted it to FASB for clearance. At an open meeting of FASB with a representative of AcSEC present, FASB deliberated whether to object to the issuance of the exposure draft. FASB's action is in the nature of negative assurance. It doesn't formally agree with our conclusions; it just says it has no objections to our proceeding. We then exposed the SOP for comment.

We are trying to explore ways to obtain more publicity so that we obtain a broader review of our EDs. We want to hear from the people who will be affected by our proposals. The Journal of Accountancy publishes summaries of our proposals and the FASB Status Report reports when EDs have been cleared. We notify the Financial Executives Institute and the Institute for Management Accountants when we issue an ED and I would also like The CPA Journal to inform its readers when EDs are issued. We send copies to all the state CPA societies for comment, and copies of our proposal are available by writing the AICPA.

Back to our procedures, the task force or industry committee evaluates responses to the EDs and makes recommendations to AcSEC whether to make any changes to the ED. After AcSEC approves what it considers to be the final statement, it goes back to FASB a third time for clearance. Our final conclusions will not come as a surprise to FASB. The FASB representative to our meetings keeps the Board informed of our thinking, and we consult with FASB staff where we feel there may be differences of opinion. We also have a close relationship with the SEC staff. They get copies of all our drafts, and our planning subcommittee meets with them twice a year to see what issues concern them. Periodically we receive their suggestions on our draft papers. Finally, after FASB is satisfied and clears the SOP, AcSEC publishes it.

CPAJ: The software revenue recognition project took some time to produce a final SOP. Was it difficult to get a consensus?

Strauss: Our projects take time. I've been chairman for over a year now, and I haven't figured how to move things through more quickly. There are two months or so between meetings, and often it takes several meetings before AcSEC approves the draft. We typically have a 90-day comment period for our EDs. Obtaining three separate clearances from FASB takes time. At the fastest, a project will generally take two years. The software revenue recognition project may have taken four years because of the number of possible approaches and the range of practices that existed at the time. We narrowed the alternatives to restrict revenue recognition to the date the software is shipped. This is a conservative position that was not by any means universally applied in industry. The SOP deals with many other issues that took time and extensive due process.

CPAJ: At any time you have a list of ten or twelve projects you are working on. One that seems to be controversial at the moment is the risks and uncertainties project.

Strauss: The goal of the project is very worthwhile--to give users of financial statements additional information about the significant risks and uncertainties of the entity. In evaluating Company A versus Company B, the varying business risks of the two become very important. One of the reasons the project is somewhat controversial is the subjectivity that is inherent in evaluating and measuring risks and uncertainties which some believe will create risks to the preparer and its auditor if they are questioned whether a faulty evaluation was made.

For example, what if a financial statement preparer in good faith decides a particular risk is minimal and therefore not worthy of disclosure, and subsequently the event occurs and adversely affects the company? The question may be asked why that risk had not been disclosed. On the other hand, many believe having more explicit guidance about disclosures of risks and uncertainties will make it easier for financial statement preparers and will result in making financial statements more useful.

Another concern on the part of small businesses is the cost of developing the information. For many small businesses the only qualified party to develop the information would be their auditors.

Another complicating factor is that some of the information we are considering for disclosure overlaps with existing FASB pronouncements. We therefore are trying to carefully differentiate between new and existing guidance. By agreement, our role is not to modify existing FASB requirements, and we are careful not to do that. I'm pleased to report that FASB recently gave us clearance to expose this important proposal.

CPAJ: Can you give us an example of what the project would require?

Strauss: Consider two companies with $10 million of inventory. The first consists of a well known brand of soft drink that has an established market. The second includes $4 million of a product severely at risk because of the expected introduction of a significantly improved item by a competitor that may be offered at a lower price. Our thoughts are that the two companies are different, the uncertainty about the ultimate realization of the $4 million of inventory should be disclosed. Our proposal would also require disclosure of certain significant concentrations of risk and possible cash flow problems in the near term.

CPAJ: I can see the reason for the controversy. Experience with public companies has shown their reluctance to disclose that kind of information in management's discussion and analysis of results of operations. Moving those kind of disclosures into general purpose financial statements may be asking for trouble.

Strauss: Yes, but in today's environment, changes happen so rapidly that to the extent these kinds of disclosures can be made, the usefulness of financial statements would be considerably enhanced. I'm very supportive of this project. Our proposal would be applicable to all companies; but we are asking respondents about their concerns and whether we should require the disclosures just for public companies or companies above a certain size.

The last aspect of the controversy is AcSEC's authority to deal with this. This is not the typical, narrowly defined project AcSEC is used to. AcSEC issued a white paper a few years ago that suggested that FASB give more guidance in the risk and uncertainties area. While FASB has dealt with uncertainties in some areas in recent pronouncements, AcSEC feels it has not done enough. While we recognize it has far reaching implications, we believe we are on the side of the angels in trying to improve financial reporting. FASB cleared our prospectus to work on the project. We have a good task force that developed the prospectus, and now that FASB has cleared it, the proposal should be issued for exposure soon. However, there is still a long way to go before it will be issued as a SOP.

CPAJ: How many comment letters do you usually get?

Strauss: It depends on the subject. We are often surprised at the EDs that get the most responses. Our proposal for an audit and accounting guide for insurance agents and brokers attracted 250 comment letters. On the other hand, we issued a proposal on mutual fund accounting issues, and received about ten letters. Comment letters generally are thoughtful and helpful. We get letters from the large accounting firms, affected industry associations, companies in the industry, state societies, and some small practitioners. We read every comment letter, and the staff summarizes them by type of response. We submit all our responses to FASB to help in its clearance of our final standards.

CPAJ: Can you issue a pronouncement that is not cleared by FASB? SAS 69 specifically mentions cleared pronouncements.

Strauss: The Board of Directors of the AICPA technically has reserved the right of AcSEC to issue pronouncements that are not cleared by FASB. However, this will not become an issue while I'm Chairman. We have no intention of issuing something to which FASB has objected. We will work out a compromise and have done so because there is a spirit of cooperation between the two standard setters. As an aside, even though we will not issue an uncleared document, under SAS 69 if we did so, it would not have authoritative status.

CPAJ: The AICPA guides are called "Audit and Accounting" guides. You are only responsible on the accounting side. How does that work?

Strauss: The audit and accounting guides are developed by the AICPA's industry committees. The auditing portion is reviewed by the Auditing Standards Board. We have to clear the accounting portion, and FASB also clears the accounting sections. Like SOPs, guides are exposed for public comment.

CPAJ: My recollection is that the Common Interest Realty Association Audit and Accounting guide went back and forth to the FASB. Was there a problem there?

Strauss: The situation surrounding the issuance of that guide has been given as an example of a strained relationship with FASB. In the end a compromise was reached, and FASB supported the issuance of the guide. The issue had to do with whether the common areas should be shown as an asset on the association's balance sheet and it was resolved.

CPAJ: What about AcSEC's activities in responding to proposals of FASB and GASB?

Strauss: We try to respond to all their proposals. For major, ongoing projects, we put together task forces to monitor and comment as the project moves toward completion. For example, we have a financial instruments task force that is very busy responding to the many things FASB is doing in this area. The task forces produce their responses, which are presented to us. We either adopt or modify them.

The end product is an AcSEC letter in which we give the majority view-- on a simple majority basis--of the proposal. We also often participate in FASB public hearings.

CPAJ: How does someone keep track of what AcSEC is doing? At The Journal we try to keep up with what you are doing and are not always successful.

Strauss: While our activities are published in the Journal of Accountancy, the CPA Letter, and FASB Status Report, we recognize we need a newsletter like the FASB to keep interested parties informed of what we are doing. Such a newsletter may be forthcoming.

CPAJ: What kind of vision do you have for AcSEC?

Strauss: The AICPA Board of Directors continues to feel a need to maintain a standard setting body to supplement and complement the other private sector standard setters. AcSEC is it, and we take our responsibility quite seriously. We are in a unique position to bring the insights of our members, with their knowledge of specific industries and many talents, as well as an excellent AICPA staff, to the standard setting process.

In the short run, my objectives are to keep the process moving, to maximize what I consider to be our excellent relationship with the FASB, to continue to communicate effectively with the SEC, and to produce accounting principles that are perceived to be improvements in financial reporting.

CPAJ: What will AcSEC look and be like ten years from now? Will it still be here?

Strauss: I think AcSEC will be operating much as it is now. FASB, despite all its resources, just can't do it all. And with the industry specialization of our committees and the willingness of professionals to participate on task forces, we bring an additional dimension to standard setting.

There will also be a continuing contribution to standard setting from our responses to FASB and GASB proposals.

CPAJ: Is the AICPA, with its budget woes, able to properly support the activities of your committee?

Strauss: The current climate has taken its toll. We do not have nearly the staff size of the FASB, and there are budget constraints. But we do a lot with what we have. The AICPA Board of Directors fully supports our efforts, and we have a dedicated staff. AcSEC itself has terrific members, so I'm confident we will continue to be quite productive.

CPAJ: Is AcSEC closer than FASB to what's really happening because of its professionally active members?

Strauss: We do have certain advantages because we are still active in practice and have industry experts on our committees and task forces. That is why it makes sense for us to work on industry specific topics.

CPAJ: How is FASB doing? From our discussions, I don't sense any tension or conflict between you and FASB. Yet a year or so ago, there seemed to be an undercurrent of conflict between the two groups?

Strauss: In my view, the concern may have arisen because we have the authority to issue pronouncements that have not been cleared by FASB. But we were never close to taking any such action. We have had disagreements along the way, but in the spirit of compromise, we work them out and go forward. FASB's input clearly helps improve our products. We commit to resolving areas where there are differences of opinion, so I don't believe there is any real tension in our relationship.

CPAJ: What do you view as the biggest challenge facing you in the next year?

Strauss: Continuing to move the risks and uncertainties project is the biggest challenge. In simple terms, when something bad happens to a company, it would be useful and helpful to users of financial statements to have had some type of warning or alert in the prior financials that the bad event might occur. This project is one of the broadest and most far reaching of all the projects AcSEC has undertaken in recent years-- it is controversial.

We also have a lot of other projects underway that I hope to help move along. Most of the other projects are in response to specific needs. For example, we are currently working on not-for-profits regarding the allocation of costs between fund raising costs and program costs. The particular issue has to do with the classification of costs incurred in producing and mailing literature that not only asks for funds but also educates the recipient as part of the not-for-profit's stated purpose. An example is the heart association that asks for money while at the same time describing the warning signs of a potential heart attack. More guidance is needed on how to allocate these costs. This project was undertaken at the request of our not-for-profit industry committee. We also hope to complete an SOP on advertising costs during 1993 that would generally require advertising to be expensed rather than capitalized. Our only exception would be certain direct response advertising.

CPAJ: Any final words for our readers?

Strauss: It is important for readers to make a greater effort to be aware of what we are doing and give us input on our proposals. What we are producing is GAAP, and every practitioner and financial statement preparer must know of our pronouncements. We'll make every effort to make it easier to do so.

CPAJ: Thank you Norman for telling us the AcSEC story. You have demonstrated a sincere and dedicated desire to improve financial reporting in those areas where AcSEC can make unique contributions. Good luck with the risks and uncertainties project. We will be watching it closely.

MEMBERS OF THE ACCOUNTING STANDARDS EXECUTIVE COMMITTEE

Norman N. Strauss, Chairman, Ernst & Young

Ernest F. Baugh, Jr., Joseph Decosimo and Co.

Gary M. Crooch, Arthur Andersen

H. John Dirks, Price Waterhouse

George P. Fritz, Coopers & Lybrand

Stuart H. Harden, Silva Harden & Co.

James E. Healey, CPC International, Inc.

Sally L. Hoffman, Richard Eisner & Co.

James A. Johnson, Deloitte & Touche

Krista M. Kaland, Clifton, Gunderson & Co.

Robert S. Kay, New York University

Aram G. Kostoglian, Grant Thornton

John M. Lacey, California State University

James T. Parks, Fannie Mae

Edward W. Trott, KPMG Peat Marwick

AICPA Staff: Arleen K. Rodda, Director Accounting Standards

Albert F. Goll, Technical Manager, Accounting Standards

CURRENTLY ACTIVE ACSEC PROJECTS

Employee Stock Ownership Plans. A proposed SOP has been issued which would require using fair value of the common stock at the time of allocation to measure compensation expense.

Accounting for Foreclosed Assets. A proposed SOP has been issued that generally would require foreclosed assets held for sale to be depreciated.

Advertising. A proposed SOP has been issued that would require advertising to be expensed as incurred or at the time of the first showing. An exception is made for certain direct response advertising.

Risks and Uncertainties. A proposed SOP will be issued that would increase disclosures of risks and uncertainties as well as financial flexibility.

Joint Cost of Not-for-Profit Organizations. A proposed SOP is being developed to amend guidance for allocating certain joint costs between programming and fund raising.

Recession of APB Statements No: 1-4. A final SOP will be issued rescinding APB Statements (APB Opinions are not affected by this SOP).

Insurance Companies' Disclosure. An SOP is being developed that would require certain additional disclosures to be provided by insurance companies.

Insurance Agent's and Broker's Guide. A proposed guide had been exposed for comment.

Audits of Brokers and Dealers in Securities. Revised guide being developed.

Real Estate Projects Being Developed for Exposure. Supplemental current value reporting, participating mortgages, real estate ventures.

Acquisition, Development, and Construction and Other Real Estate Loans. A proposed SOP updating guidance for creditors is being developed.

Investment Companies: Final SOPs to be issued. Foreign operations, reporting of high yield securities, and return of capital determination.

Not-for-Profit Organizations. SOPs to be exposed, application of Rule 203 pronouncements and consolidation and combination issues.

Reporting of Investment Contracts by Defined Contribution Plans. A proposed SOP is being developed.

RECENTLY ISSUED ACSEC PRONOUNCEMENTS

Statements of Position

SOP 91-1. Revenue recognition in software industry, December 1991-- effective in 1992. To be adopted retroactively.

SOP 92-1. Accounting for real estate syndication income. February 1992, effective after March 15, 1992.

SOP 92-3. Foreclosed assets, April 1992--effective December 1992.

SOP 92-5. Foreign reinsurance, June 1992--effective 1993

SOP 92-6. Accounting and reporting by health and welfare benefit plans, August 1992--effective commencing in 1993 (and later for certain plans.)

Practice Bulletins

PB 9. Disclosure of insurance fronting arrangements--December 1991 PB 10. Amendment of PB 7 on insubstance foreclosure--June 1992

ACSEC IN ACTION

AcSEC met at the offices of the AICPA in New York on January 26 and 27, 1993. The agenda for this typical two-day meeting was full. The first day the Committee discussed at length a proposed SOP on accounting for advertising costs. By the conclusion of the discussions, a super majority (at least 10) agreed with the general direction of the SOP. AICPA staff will rework the wording and present a revised document for approval at the March meeting. A representative of the SEC was present for the first day; a representative from FASB was present for both days.

An editor of The CPA Journal observed the meeting on the second day. The fifteen members sat around the circular table in the AICPA Board of Directors' room and were joined by members of the AICPA staff and members of the AICPA Not-For-Profit Organizations (NFPO) Committee. AcSEC was considering a draft SOP developed by the NFPO Committee on allocating costs of informational materials and activities of not-for- profit organizations that include a fund-raising appeal.

Observers of the meeting, which is open to the public, sat at curved tables at two higher levels facing the back half of the circular table at which AcSEC sat. The meeting was very informal. AcSEC was reviewing the draft document almost on a word-by-word basis. As questions were raised, members of the NFPO Committee responded. At several points, the NFPO Committee suggested revised wording which appeared to be satisfactory to AcSEC. The draft SOP was cleared by a 15 to 0 vote. A redraft will be submitted to AcSEC for reaffirmation at the next meeting. The draft will then be submitted to FASB for clearance, and, if cleared, will be issued for public comment.

Norman N. Strauss, CPA, is a partner and National Director of Accounting Standards of Ernst & Young. Mr. Strauss also serves as Ernst & Young's representative on FASB's Emerging Issues Task Force. He has contributed articles to professional journals and taught graduate school.