STATEMENT OF

BARRY K. ROGSTAD

PRESIDENT, AMERICAN BUSINESS CONFERENCE



BEFORE THE SUBCOMMITTEE ON COMMERCE, TRADE AND CONSUMER PROTECTION

U.S. HOUSE OF REPRESENTATIVES



JULY 31, 2001



CURRENT ISSUES BEFORE THE FINANCIAL ACCOUNTING STANDARDS BOARD

Mr. Chairman and Members of the Committee.

I am Barry Rogstad, president of the American Business Conference (ABC). ABC is a nonpartisan coalition of chief executives of fast-growing, mid-size companies. Before coming to ABC, I served as chief economist and Managing Partner for International Consulting at Coopers & Lybrand

I congratulate the Subcommittee for holding this hearing. Oversight of the Financial Accounting Standards Board (FASB) is a wholly legitimate responsibility of Congress. Congress created the Securities and Exchange Commission and charged the Commission with the setting of accounting standards. The SEC, in turn, endowed the FASB with operational responsibility for setting those standards. Thus, there is a chain of accountability emanating from Congress, through the SEC, to the FASB. Critics of Congressional oversight of the FASB forget this important fact.

To be sure, past Congresses have not always exercised the oversight authority with much vigor. That is because the FASB typically has acted in ways that have not carried much political urgency. That has changed. Looking ahead, I think it is safe to say that this Subcommittee can anticipate exercising its oversight authority with ever greater diligence, as more and more Americans invest in the equities markets and as the changing nature of the international economy forces the FASB to address highly controversial issues - such as stock options accounting - under the rubric of international accounting harmonization.

For the purposes of today's hearing, I have been asked to confine my testimony to an evaluation of the effectiveness of the FASB process with respect to the recently concluded project on Business Combinations and Intangible Assets.

The members of ABC have a long-standing interest in the health and stability of the Nation's capital markets. Central to their successful performance is the private sector standard setting process, of which the FASB is the central custodian. This process has served our nation well, and the focus of all participants in the capital markets should be on its continued viability.

The ABC has had significant involvement with the FASB on numerous issues. Since Mr. Ed Jenkins became FASB Chairman, we have sustained a dialogue on the broader FASB agenda as well as the business combination project. These discussions, together with our significant participation in the business combination project form the basis of the remainder of my testimony.

This testimony constitutes my personal views, since time does not permit its formal approval by ABC management. However, I do believe it incorporates the views of the members of the ABC.

The stated mission of the Financial Accounting Standards Board is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information. This challenging task is made more daunting by the increased emphasis in our economy on intangible assets, and the acknowledged inadequacy of the traditional historical cost accounting model to capture today's business and economic reality.

There is also one other important change impacting the FASB process. With fifty percent of households now equity owners in American businesses, Main Street and Wall Street have become closely aligned. This growing constituency of users of financial statements understands the significance of accounting standards on the performance of financial markets.

This has important ramifications for the FASB and for the Congress. Confronted with this reality, FASB will find it increasingly difficult to separate its deliberations from any public policy considerations. The Congress will face increased pressure to intervene, and move beyond its traditional oversight role. Strengthening the FASB process is essential if for no other reason than to insure these two external forces are properly addressed.

My view of the role of FASB is one of consensus builder across the users of financial statements. The Board has a responsibility to put forward a proposed standard and the reasons underlying the required changes. It then seeks views of interested parties, and uses these views to evolve a position that represents the best possible technical accounting and business judgment. Achieving the broadest possible consensus across the dominant viewpoints is essential to the ultimate acceptance and utility of the finalized standards.

The FASB process as it applied to the Business Combinations Project did not perform well. FASB reached interim conclusions that to the objective reader of the record could not be justified. Lack of transparency in the process generated significant frustrations among user groups, in particular many of us in the business community. Given our perception of FASB intransigence, we reluctantly initiated discussions with members of Congress responsible for Congressional oversight of the FASB. This action led to a letter of concern from ten members of the Senate, and the introduction of legislation in the House calling for a moratorium on the FASB project.

It is important to emphasize to this committee the degree of discomfort I felt about involving the Congress in this issue. The members of ABC as well as my Washington colleagues who were involved in the effort shared that concern. We felt the FASB process had broken down and the only recourse was to the Congressional oversight function. The acknowledged danger of our action was the potential for Congressional involvement in the standard setting process itself.

Faced with these circumstances, it was important for the FASB to reconsider its position. It initiated steps designed to achieve what I referred to throughout the process as a win-win outcome. A win for the FASB meant a standard that conformed to sound technical accounting basis and addressed the requirements of all users of financial statements. A win for users in general, and the business community in particular, meant a standard that correctly portrayed business and economic reality and facilitated efficient and effective reporting.

FASB did reconsider its position. It now appears the results of the project have achieved this desirable win-win result. Much of the credit goes to Chairman Jenkins for his management skills and willingness to reconsider positions already taken.

It was always clear to this observer that FASB wanted to eliminate the pooling of interests approach to accounting for business combinations. If the FASB were to place sole reliance on the purchase accounting option, then it had to be sure that the methodology addressed all of the key technical and operational issues. Merely to list the issues involved indicates the importance of the discussion: goodwill amortization, valuation of intangibles, separation of identifiable intangible assets from goodwill, and the associated effects on reported earnings.

FASB's response focused on consideration of a major change to purchase accounting methodology: the substitution of an impairment approach to goodwill in place of required use of fixed depreciation schedules. This was a major breakthrough and, because it was controversial, required courage on the part of the FASB. I was privileged to be part of a team that met with FASB last September to discuss a proposed impairment test that would apply to goodwill. The FASB expanded this proposal, and discussed it with users through interviews and another opportunity for user input during a comment period in March of this year. ABC together with two of its members, NASDAQ and Grant Thornton, conducted a survey of businesses to provide FASB with as many views as possible.

This impairment approach to accounting for purchased goodwill is a major part of the final standard recently published by the FASB. It represents a technically correct and workable approach to the challenge of how to account for business combinations. FASB is to be congratulated for this breakthrough.

Did the FASB process as used in the business combinations project produce a good result? Yes. Did this experience demonstrate a profound need to strengthen the FASB process to insure successful outcomes in the future? Yes.

My major recommendation to the FASB would be to focus on consensus building across user groups. FASB, to its credit, has been attempting to involve users much earlier in the process. This emphasis needs to be continued. Of prime significance, however, is the need for the FASB to document its decision process showing in particular, how it balanced technical considerations and the views of interveners in reaching its positions. This process, I believe, requires greater transparency and the sustaining of a dialogue until the necessary consensus is achieved. It was a failure on this issue that led to the breakdown of the process during the business combination project.

It is clear to this observer that the FASB does have the capacity to develop among the users of financial statements generally accepted standards on highly controversial subjects. Based on our experience with the business combinations project it is also clear that the FASB process needs to be significantly improved. Absent this, FASB will not have sufficient support to succeed in the long term.

The stakes are very high. We in the ABC look forward to working with the FASB to insure that its process continues to produce win-win outcomes in the future.

Thank you. I would be pleased to answer any questions.

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