Mr. WYDEN. Our next panel will be Donald J. Kirk, chairman, Financial Accounting Standards Board; and Mr. Wayne Upton, practice fellow, Financial Accounting Standards Board. Both gentlemen hail from Stamford, CT. Welcome.

Gentlemen, you have been with us, I think, throughout the morning and are aware that it is the practice of the subcommittee to swear all witnesses. Do either of you gentlemen have a problem with being sworn?

Mr. KIRK. No.

Mr. UPTON. No.

[Witnesses sworn.]

Mr. WYDEN. Let me also advise you of your right to counsel. Do you desire to have counsel with you during your appearance today? Mr. KIRK. No, sir.

Mr. UPTON. No, sir.

Mr. WYDEN. You have a right to a copy of the subcommittee rules which are before you and we will make a copy of your prepared remarks a part of our hearing record in their entirety.

If you could summarize in 5 minutes your principle concerns, it will allow us some time for questions. I know this has been a lengthy proceeding.

Mr. Kirk.

TESTIMONY OF DONALD J. KIRK, CHAIRMAN, FINANCIAL ACCOUNTING STANDARDS BOARD, ACCOMPANIED BY WAYNE UPTON, PRACTICE FELLOW

Mr. KIRK. Thank you, Mr. Wyden.

I am prepared to be brief. My calendar watch indicates it is 2:25. I am sure everyone would appreciate that.

We have submitted a written response dated November 7. It is in large part a duplication, but for purposes of the record, a reproduction of our July submission updated to address the questions of Mr. Dingell in his letter of October 29. Pages 18 to 25, in particular, deal with the subjects of business combinations and the management consignment program.

I will submit for the record my prepared summary and will summarize my summary so that I can turn to your questions promptly. Our submission describes the Board and its activities in establishing generally accepted accounting principles. It points out reasons why regulatory accounting might differ from general purpose financial reporting requirements.

It notes that we have been dismayed in the past when regulatory accounting principles have been used in publicly available information and those principles have at times been designed to enhance net worth and avoid violation of regulatory requirements.

Our submission indicates several instances where we have communicated that concern. The submission also notes a number of the projects we have dealing with S&L problems and the submission closes with a rundown on the accounting for business combinations and some of the accounting issues as we see them that relate to the management consignment program.

I will be pleased to express my opinions on that program and at least let you know what issues are being addressed today in New

York by the FASB's emerging issues task force on that very subject.

[The prepared statement and attachment of Mr. Kirk follows:]

PREPARED STATEMENT OF

DONALD J. KIRK, CHAIRMAN

FINANCIAL ACCOUNTING STANDARDS BOARD
TO THE

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
COMMITTEE ON ENERGY AND COMMERCE

U.S. HOUSE OF REPRESENTATIVES
NOVEMBER 7, 1985

Good afternoon Mr. Chairman, members of the Subcommittee, and staff. I am Donald J. Kirk, chairman of the Financial Accounting Standards Board. Seated next to me is Wayne Upton, a Practice Fellow on the Board's professional staff. We appreciate the opportunity to appear before the Subcommittee and answer your questions.

My prepared remarks today will be brief. We submitted a written statement describing accounting issues related to the thrift industry on July 12 and have updated that submission to include the questions raised in Chairman Dingell's October 29 letter.

As I indicated in my testimony on February 20, the FASB is the designated private sector organization for establishing standards of financial reporting. FASB pronouncements apply to all business enterprises, including thrift institutions, and form the primary component of generally accepted accounting principles (GAAP). The term generally accepted accounting principles describes a body of literature and accepted practice that is designed to provide relevant, reliable and useful information to a wide group of investors, creditors and other users of general purpose financial statements.

For financial information to be useful as a decision-making tool, it must satisfy the needs of recipients of the financial statements and it must be neutral. Useful financial information must report economic activity as faithfully as possible without coloring the image it communicates to influence behavior in any particular direction. The FASB rejects the view that financial accounting standards for general purpose financial statements should be slanted to favor, or avoid hurting, one economic interest or another. The FASB believes that its primary responsibility is to the integrity of the financial reporting system, not to the protection or promotion of any special interest.

The objectives of regulatory reporting do not always parallel those of general purpose financial reporting. The needs of regulatory bodies sometimes differ from those of the users of general purpose financial statements. For example, regulators may need information that is designed to meet specific legislative direction and thus may require a different basis of measurement. Reports filed by insurance companies with state insurance commissions are a case in point. Other regulators, while they may require assets, liabilities, and net worth using the same principles that are employed in general purpose financial statements, may require information that is more detailed than is included in general purpose financial statements.

The FASB acknowledges the separation of regulatory and general purpose reporting requirements as a natural result of the differing needs and objectives described above. However, the credibility of

publicly available general purpose financial statements is best maintained by accounting measurements that are neutral and unbiased. When financial statements prepared in accordance with regulatory accounting principles are widely distributed to nonregulatory users, the differences between regulatory accounting principles (RAP) and generally accepted accounting principles become a significant concern for the FASB. The differences are particularly troubling when regulatory accounting principles are established, at least in part, to enhance net worth and avoid violation of regulatory requirements. Revising publicly available financial statements, for example, so that certain institutions will meet regulatory net worth requirements does little for the credibility of financial information. In such cases, it would seem better to revise the requirement rather than the public representation of the institutions' financial condition.

In

The FASB currently has one project on its agenda to address accounting issues of particular concern to the thrift industry. that project, the accounting for loan fees, the Board is preparing to issue an Exposure Draft of an accounting standard in the fourth quarter of this year. The Board is aware that there is diversity in the timing of recognition of loan fee income among different types of financial institutions. The Board's project is designed to address that diversity and to provide accounting guidance that can be applied to all lending activities.