The Financial Accounting Standards Board’s longstanding requirement that companies write-off Research and Development costs was heavily criticized by Rep. Brad Sherman (D-CA) at a September 22nd Congressional hearing on, “Examining the Agenda of Regulators, SROs, and Standards-Setters for Accounting, Auditing, and Municipal Securities.”
The hearing, convened by the Capital Markets and Government Sponsored Enterprises Subcommittee of the House Financial Services Committee, featured testimony from FASB Chair Russell Golden, PCAOB Chair James Doty, and SEC Interim Chief Accountant Wes Bricker on their standard-setting agendas and priorities. Representatives of FINRA and municipal rulemaking authorities also testified at the hearing.
FASB’s power, process questioned
“FASB exercises tremendous government power,” Sherman said. “It’s funded by a tax,” he continued, referencing the mandatory fee that public companies are charged, approved by the SEC, to fund the FASB and PCAOB. As to the FASB, he continued, “If you don’t follow its rules, you go to jail; yet it gets little attention and is not subject to the cost benefit analysis requirements suggested by our chairman, nor to the FOIA requirements, Open Meetings Act, or Senate confirmation of its members. That would be ok if it didn’t make one bad decision: the requirement to write off R&D expenses.”
“You say accounting standards are not intended to drive behavior,” continued the Congressman. “But when you violate every accounting principle for the convenience of accountants, and provide tens of billions of dollars of punishment to those companies that choose to do research, can you ignore that you are driving behavior?”
Sherman, a CPA, argued that FASB violated the basic tenets of accounting theory by not permitting companies to capitalize (record as assets) R&D costs, which would allow them to adhere to the ‘matching’ principle of netting expenses against related revenue for products or services sold. The FASB voted in 1974 to require expensing of R&D due to the uncertainty of realization of related future revenue.
Golden replied, “I’ve enjoyed the conversations we’ve had over the years over accounting for research and development,” adding that FASB completed a number of standards this year and is in the midst of setting its future agenda projects.
“If I can interrupt,” said Sherman, “I’ve talked to your predecessor, I’ve talked to your predecessor’s predecessor, I’ve talked to your predecessor’s predecessor’s predecessor; and I’ve talked to your predecessor’s predecessor’s predecessor’s predecessor; and they’ve all promised to look at this and they’ve all done absolutely nothing and you sound just like them, so telling me you are going to finally go back to good solid accounting of expensing an expenditure when it generates revenue – you know you’re not going to do that, I know you’re not going to do that – it’s pretty clear that your decision making process is broken.”
Four approaches to intangibles/R&D
FASB is formally considering whether to add a project on accounting for intangibles – including R&D, to its agenda. Golden pointed out this was among “four very important issues raised by a number of stakeholders” included in FASB’s Invitation to Comment (ITC): Agenda Consultation on which comments are due October 17.
FASB’s ITC describes “four potential approaches to provide financial statement users with more information about intangible assets,” including R&D:
- Recognize at cost or fair value internally generated intangible assets
- Recognize at cost or fair value research and/or development costs
- Disclose internally generated intangible items
- Adopt International Accounting Standard No. 38
Although additional information on intangibles, including R&D, is desired by some users of financial statements, concerns have also been voiced by preparers about the cost and complexity of providing such information -particularly if an ongoing fair value or impairment valuation model is required.
Roundtables in November
“We plan to seek feedback throughout the fourth quarter, and have a public discussion with our stakeholders, as to whether or not we should change the accounting for intangible assets, including research and development,” Golden said to Sherman, adding, “I look forward to talking to your office as that process continues.”
“I look forward to a situation in which you can’t build a two-story apartment building in my community without a public hearing, FOIA request, and people paying attention,” said Sherman, adding, “But you can do damage to the entire state of science and research for decades, and as long as your ruling comes out of Norwalk, Connecticut nobody pays any attention.”
Norwalk, CT will be the site of the first of two public roundtables on FASB’s agenda consultation on November 16, followed by a roundtable at the Stanford University Graduate School of Business on November 29.
Ciesielski, Others React
Jack Ciesielski author of The Analyst’s Accounting Observer , a former member of various FASB advisory committees, and one of the nine people with ties to MACPA included in AccountingToday’s Top 100 most influential people in accounting, shared his thoughts.
“Rep. Sherman has got a good point on R&D, and that’s certainly a sentiment shared in Silicon Valley,” said Ciesielski, adding, “The FASB is going about it in a more thorough way that reflects the whole economy’s problem with intangibles. It’s a problem with all intangible assets that get expensed, not just R&D, and though it may seem like they’re plodding, I support their methodical, ‘non-targeted’ approach.”
Asked which of the four alternatives for R&D he favors, he replies, “I can’t say for now whether disclosure or asset recognition is better – each has its points – but these have to be explored much more fully by FASB before one can say one is definitively better than another.” Look for details in Ciesielski’s forthcoming comment letter on the ITC.
As of October 9, there are currently four letters in FASB’s comment file on the ITC, including one from Rep. Sherman that attaches a related letter he sent to SEC Chair Mary Jo White asking for action on his request to have FASB undo its requirement to expense R&D.
Letters from two CPAs ask FASB to slow down, pointing out the pressure practitioners are under to keep up with new standards.
“Please take a sabbatical,” Jeffrey Peskin asks the FASB, “so that those members, like myself, who need to perform client service in addition to studying the rules, have a realistic possibility of complying with the ever changing standards.”
“Stop! We are drowning in changes and the last thing we need is new standards,” writes Darren Landry. “Let everything set for a while, take a vacation or something and let us catch up.”
As noted by Rep. Sherman at the Congressional hearing, “Just because accounting’s boring, doesn’t mean it’s not important.”