Wednesday, June 29, 2011

PwC Recommends FAF Form Advisory Committee On Reducing Complexity

In a June 28, 2011 Point of view article entitled, “Reducing Complexity,” audit firm PwC called for the formation of an advisory committee by the Financial Accounting Foundation, to advise the FASB on reducing complexity in accounting standards. PwC notes:

Accounting and financial reporting complexity continues to increase, presenting challenges for investors, preparers and auditors. While some complexity is necessary, complicated scope provisions, exceptions to general principles, and overly detailed guidance often make standards difficult to understand, interpret, and apply. New standards continue to be issued, further adding to complexity.

In our Point of view on reducing complexity in financial reporting, we note unnecessary complexity diminishes the value of accounting and reporting for
investors, who may look elsewhere for information. Complexity is also costly for
preparers (and investors who ultimately bear such costs), and the costs may not
be commensurate with the benefits to investors.

Given the above, we recommend the Financial Accounting Foundation establish
an advisory committee to the Financial Accounting Standards Board (FASB) focused
on complexity. The committee, comprised of a variety of stakeholders, would
advise the FASB on sources of complexity in existing accounting standards and
standards under development, and help propose balanced solutions that improve
the quality of information for investors while reducing complexity.

Related SEC Initiatives: Pozen Committee (CiFIR), 2011 Fin. Reporting Series

Among the Q&A's included at the conclusion of the PwC's paper, the firm references some related efforts headed up by the SEC to address complexity in financial reporting including the work of the SEC Advisory Committee on Improvements to Financial Reporting (aka "CiFIR" or the "Pozen Committee" for committee chairman Bob Pozen), as well as the SEC's upcoming Financial Reporting Series.

With respect to the work of the Pozen committee (CiFIR), which issued its report and recommendations in 2008, including recommendations aimed at accounting standard-setting, PwC says:

Our proposal, while consistent with the spirit of those recommendations, is different because it focuses on establishing a sustainable mechanism to address both existing
complexity and potential complexity through involvement early in the standard-setting process. We believe that our proposal addresses the necessary mechanism, process, and resources to help achieve the goal of reducing complexity.

Regarding the SEC's upcoming Financial Reporting Series, PwC notes that, in addition to having the advisory committee on complexity conduct a survey of all constituents of financial reporting (users, preparers, auditors, others), "The committee also would consider any complexity-related suggestions from the [FAF's] new post-implementation review process and the SEC's planned Financial Reporting Series of round tables."

My Two Cents
(I remind you of the disclaimer posted on the right side of this blog.)

An interesting point made by PwC is that the work of an advisory committee focused on reducing complexity can benefit private companies and public companies.

The firm observes that FASB resources have been directed at convergence with IFRS (note: in my view, this relates mainly, but not entirely, to public companies, given the SEC's current consideration of whether to permit or require public companies to report using IFRS instead of U.S. GAAP). Before leaving the topic of convergence, PwC states:

We observe that the current uncertain path toward convergence with, or possible
adoption of, international standards represents a major challenge. Some may question why the complexity issue should be addressed at this time. To us, too much complexity already exists in both sets of standards. This means that focusing attention on developing a systematic process for addressing this issue and getting started now are important.

PwC also observes that the FASB's existing advisory groups include advisory groups on private companies (which in my view, are looking for, in part, simplification of standards designed or driven by the needs of public companies, investors, regulators or analyts, but are viewed by some as needlessly complex for private companies and the users of private company financial reporting.)

A key point that lies below the surface of some of the discussions of the need to simplify private company accounting, (such as the deliberations of the Blue Ribbon Panel on Standard-Setting for Private Companies, whose report and recommendations are currently under consideration by the FAF, which is conducting outreach to obtain constituent views; see also FEI CPC-S position) is that public companies and the users of public company financial reporting are looking for, and could benefit from, a reduction in complexity in financial reporting as well.

This is particularly the case regarding accounting standards that appear to reflect 'unneccesarily complexity" - i.e., beyond that required by the level of complexity of the underlying transaction or economic event itself.

Complexity is exacerbated, however, for private companies and their users, when certain levels of complexity appear to follow from the needs of certain public company constituents, whereby the resultant reporting is either not as relevant or not as cost effective for private companies and the users of their financial statements, based on the differing needs of public vs. private company users, and different forms of access to information. [UPDATE 6:12 PM - This afternoon, FASB announced the launch of a web portal for nonpublic entities. ]

As noted by PwC, if a broad based advisory committee on complexity were formed, such as recommended by the firm, "Its output would benefit all companies."

Read more in PwC’s Point of View: Reducing Complexity.

Print this post


Joel Ungar said...

I'm with you Edith. I'm perpetually frustrated by the standards issued by the FASB. They never are clearer or easier or less complex than the ones they replace. And the checklists keep getting longer.

J Alan said...

A perfect place to start is mark to market accounting. It is of little value (and not to any investor I have ever spoken to) with regarding valuation of our debt (we are a $250 million manufacturing company and do not trade securities as part of our business). In addition it is of little meaning in that the data for our type of debt is so thinly traded that the data is virtually meaningless.

kittygoespotty said...

Quite effective material, thank you for the article.

gilipollas said...

So much useful data for everyone!