Dive Brief:

• The Financial Accounting Standards Board on Wednesday opted not to consider a change to current accounting guidance used by airlines to account for settlement payments they receive from aircraft manufacturers to compensate them for lost revenues and/or higher costs due to planes grounded because of equipment failure. 
• Currently Generally Accepted Accounting Principles require companies to account for such payments from a vendor as a reduction to the cost basis of the goods or services acquired except under certain circumstances, according to a meeting handout.
• But some stakeholders have said that approach doesn’t accurately reflect the underlying economics of the deal due to the “significant losses” incurred by airlines in the events. Instead, the stakeholders recommended that FASB consider several ways to improve the guidance. One option: requiring the settlement payments to be recognized in “current period earnings.” 

Dive Insight:

The airline-related project was one of a number of issues that the accounting standards-setter decided this week not to add to its technical agenda or pursue for further research. On Wednesday the board also denied a request to review and clarify rules related to personal financial statements, a project tied to President Donald Trump’s civil fraud case. 

FASB’s decision against moving ahead with a potential change to Subtopic 705-20, Cost of Sales and Services — Accounting for Consideration Received from a Vendor, came after FASB staff did not recommend that the board take the project on. A staffer at the meeting noted that plane groundings and other events that lead to the settlements are relatively infrequent and the issues have not been raised outside of the airline industry, adding too that changes could potentially have unintended consequences. 

Board members expressed mixed views on the issue. 

In casting her vote for taking up the issue, Board Member Joyce T. Joseph said she was concerned that the existing guidance delays the recognition of the payments over the depreciable life of assets that could stretch out over 20 years and provide an unclear picture of the equipment’s value to investors.

“When vendor payments represent compensation for losses, treating it as a cost reduction by burying the impact and depreciation expense for years instead of accounting for it as income or gain can misrepresent performance in my view,” Joseph said, “The reduced cost of the asset does not provide investors, I think, with informative financial statements.”

If added, Joseph said the project should be narrowly scoped to apply to the airline industry, but cautioned that other industries might be interested in similar treatments. 

In contrast, Board Member Susan M. Cosper voted against adding the project to the agenda. In explaining her decision, she noted there was not a “groundswell” of requests for the issue to be addressed. She also said it wasn’t demonstrated to be a “pervasive” issue, a key element that needs to be present for adding a project to the board’s agenda. Cosper also pushed back against the idea that investors might be left in the dark. 

“As it relates to the airline industry the staff noted there haven’t been a lot of instances…when we’ve had to employ this,” Cosper said. “But it does strike me that when those things happen they’re disclosed. We haven’t heard specifically that investors are actually lacking information in this space.”