After spending a day on the congressional hot seat, FASB chairman Robert Herz and the FASB have proposed expedited guidance on fair value for a 15-day comment period. The proposal guides companies on how to determine whether an asset's market can be considered not active, and whether a transaction being used to estimate an asset's value is not distressed.
Under FAS 157, which provides a measurement framework for fair-value accounting, financial instruments' fair values cannot be based on distressed sales. Fair-value accounting has been in existence for years, but has recently been criticized for worsening the financial crisis and leading to massive write-downs in the financial-services sector. (Of course, if you ask me, blaming fair value accounting for the financial crisis is kind of like placing the blame for a burning building on the smoke alarm! Maybe we should, instead, be looking for the bank execs who are holding the matches!)
Critics imply that the current rules require banks to unduly write down their asset values, even though they believe those assets are actually worth more than the amounts they feel mandated to report. The truth in FASB's view, however, is more complex: To avoid second-guessing by auditors, firms are tending to use any price they can find when estimating the fair values of their assets — even prices that are basically unreliable and too low to truly reflect an asset's current worth, because the prices resulted from a so-called forced transaction. Those types of transactions are not representative of an asset's fair value, according to FASB.
FAS 157 calls on companies to use a three-step hierarchy when estimating the current worth of their financial assets and liabilities. The evaluations must be based on prices that have been used in orderly transactions, not those that are considered forced or distressed.
Level 3 requires the most judgment, as it is designated for thinly traded or untraded assets that have a value derived from "unobservable inputs." For that reason, there has been a stigma attached to Level-3 numbers. So financial-statement preparers have tended to reference Level 2-type prices, although they shouldn't always do so.
Firms may have been wary of exploring Level-3 pricing because those inputs do require more judgment — which can result in more scrutiny from auditors and more work on the part of their internal staff and the need for outside help, such as valuation experts. Only 9 percent of financial instruments subject to fair value were classified under Level 3 since FAS 157 was implemented, compared to 76 percent of those instruments that fell under Level 1, according to a Securities and Exchange Commission study of financial institutions' use of fair value issued late last year.
To be sure, FASB board members acknowledged, these days it seems like nearly every financial instrument's market is inactive, and nearly every transaction is distressed, making the job of accountants that much harder. If a company determines, under the new proposal, that a price cannot be relied upon, then it needs to use another valuation technique, which falls under Level 3. As it is, many (including this blogger) believe, issuers were not taking the extra steps necessary to figure out the fair value of an asset that is not actively being traded.
If approved, companies will follow a two-step approach to determine whether they're justified in straying from observable prices because those valuations aren't truly representative of an asset or liability's current fair value. First, they will consider the signs that could indicate a market is inactive, such as there being too few transactions on which to judge pricing on an ongoing basis, or that price quotations are derived from outdated information.
Then, if all the evidence indicates the market is not active, companies will evaluate whether the price they are referencing was made under a distressed transaction. If it was not, then the price can be used for estimating fair value. But if it was, companies must use alternative valuation techniques.
FASB will vote on the proposal on April 2, one day after the public-comment period ends. FASB expects companies to use “significant judgment," which Herz acknowledges could result in different companies reporting different values of the same type of asset.
Monday, March 23, 2009
Tuesday, March 3, 2009
New FASB Proposal: A Balance Sheet That Doesn't Balance!
A balance sheet that doesn't balance? Financing and operating classifications that depend on your company type? A cash-basis income statement?
Well, not quite. But accounting standards-setters are online and on the road urging investors and companies to weigh in now on a proposal to radically alter financial statements. And while accrual accounting isn't going away, accountants might be surprised to find that the above descriptions do accurately describe the look and feel that financial statements might have just two years from now.
Issued as a discussion paper in October by both the FASB and the International Accounting Standards Board, the goal of the redesign is to address investor complaints that items on each of the financial statements are not linked across the three statements, and that dissimilar items are often aggregated.
Among the notable features: all three statements — balance sheet, income statement, and cash-flow statement — will be divided into two major sections: business and financing.
The "business" section — which is subdivided into operating and investing categories — will focus on what a company does to produce goods and provide services. The operating category will include its primary or "core" revenue and expense-generating activities, and the investing category will include activities that generate a return but are not "core."
The "financing" section will include those activities that fund a company's business activities. For nonfinancial institutions, that would primarily include cash, bank loans, bonds, and other items that arise from general capital-raising activities.
One effect of the new format is that the balance sheet won't balance the way we expect it to. That is, assets won't equal liabilities and equity because assets and liabilities will be in each category.
Another feature guaranteed to generate some controversy is that management will decide whether items in the financial statements are related to operations or to financing. That means different companies might account for the same item differently. A manufacturer might record proceeds from mortgage-backed securities as investment earnings, while a bank might record identical proceeds as operating earnings.
Although the new statement categories may resemble those used on current cash-flow statements, they won't actually be handled the same way. For example, under SFAS No. 95, if you've invested in property, plant, and equipment, you would call that an investing activity. But under the FASB's new proposal, capital expenditures may well end up in the operating category (property, plant, and equipment used to develop your inventory is an operating asset).
Another big change for preparers: using the direct method to generate a cash-flow statement. Though companies have the option to do so under current accounting, that option is almost universally ignored in favor of the indirect method.
Although this is only in the “discussion stage” at this point, one thing’s for sure: huge changes are coming to financial statement presentations.
Well, not quite. But accounting standards-setters are online and on the road urging investors and companies to weigh in now on a proposal to radically alter financial statements. And while accrual accounting isn't going away, accountants might be surprised to find that the above descriptions do accurately describe the look and feel that financial statements might have just two years from now.
Issued as a discussion paper in October by both the FASB and the International Accounting Standards Board, the goal of the redesign is to address investor complaints that items on each of the financial statements are not linked across the three statements, and that dissimilar items are often aggregated.
Among the notable features: all three statements — balance sheet, income statement, and cash-flow statement — will be divided into two major sections: business and financing.
The "business" section — which is subdivided into operating and investing categories — will focus on what a company does to produce goods and provide services. The operating category will include its primary or "core" revenue and expense-generating activities, and the investing category will include activities that generate a return but are not "core."
The "financing" section will include those activities that fund a company's business activities. For nonfinancial institutions, that would primarily include cash, bank loans, bonds, and other items that arise from general capital-raising activities.
One effect of the new format is that the balance sheet won't balance the way we expect it to. That is, assets won't equal liabilities and equity because assets and liabilities will be in each category.
Another feature guaranteed to generate some controversy is that management will decide whether items in the financial statements are related to operations or to financing. That means different companies might account for the same item differently. A manufacturer might record proceeds from mortgage-backed securities as investment earnings, while a bank might record identical proceeds as operating earnings.
Although the new statement categories may resemble those used on current cash-flow statements, they won't actually be handled the same way. For example, under SFAS No. 95, if you've invested in property, plant, and equipment, you would call that an investing activity. But under the FASB's new proposal, capital expenditures may well end up in the operating category (property, plant, and equipment used to develop your inventory is an operating asset).
Another big change for preparers: using the direct method to generate a cash-flow statement. Though companies have the option to do so under current accounting, that option is almost universally ignored in favor of the indirect method.
Although this is only in the “discussion stage” at this point, one thing’s for sure: huge changes are coming to financial statement presentations.
Friday, February 27, 2009
Keep an Eye on Those Leases!
Could a change in lease accounting be on the horizon? While the basic lease accounting model hasn't changed in more than 30 years, it has been the subject of significant criticism for almost as long. At a time when there is a push for more principles-based accounting standards, SFAS No. 13, Accounting for Leases , with its many "bright-line" thresholds that determine lease classification is the example cited most often as reflecting the problem with form-driven rules. The arbitrary "bright lines" in the guidance also allow companies to structure lease transactions to result in operating lease classification. For example, take a look at the financial statements of any airline and you’ll find no airplanes on the balance sheet!
In June 2005, the SEC recommended that existing lease standards be rewritten. In 2006, the FASB and the International Accounting Standards Board (IASB) added a joint project to address lease accounting. A significant step in the FASB/IASB project plan is the issuance of a Discussion Paper, anticipated to be released for comment in March 2009. Based on the Boards' deliberations to date which may be subject to change, the Discussion Paper is expected to propose significant changes to lessee accounting; and the direction of the leasing project is clear. After considering a number of alternative models and debating their relative merits, the Boards have tentatively settled on a “right-of-use model.” This model would require the lessee to recognize an asset representing its right to use the leased asset, and a corresponding liability for its obligation to pay rent. Under the right-of-use model, operating lease accounting under SFAS No. 13 would be eliminated, and lessees would account for all leases in a manner similar to that used for capital leases today.
Although the Boards are sensitive to the cost-benefit considerations for small-dollar and short-duration leases, the Boards have yet to address this concern. The idea that small-dollar leases would be exempt from the new standard is troubling to certain Board members because leases that are individually low dollar may be material when aggregated. Further, it is likely that some type of bright-line threshold would be necessary to implement such an exception. As noted, similar bright lines in the current model have been the target of significant criticism.
The proposed accounting model would have the greatest impact on lessees of significant amounts of "large-ticket" items, such as real estate, manufacturing equipment, power plants, aircraft, railcars, and ships. However, the revised standard would also affect virtually every company, including those who lease computer equipment, copiers, office furniture, and telecommunications equipment. The proposed model would require lessees to remeasure their lease obligation at each balance sheet date based on updated estimates, including the probability of exercising renewal options and the amount of contingent rent that the lessee expects to pay over the revised lease term. The remeasurement of the obligation would be reflected as an adjustment to either earnings or the right-of-use asset, depending on the nature of the change. (This would require significantly more effort compared to the current model where lease accounting is set at inception and revisited only if there is a modification or extension of the lease!) Because these changes may change the economics of leases written in the future, you may need to reexamine "lease versus buy" decisions.
Also, given the long-term nature of many leases and the desire for comparability, it is unlikely that accounting for existing leases will be grandfathered. Accordingly, you should consider the implications of these potential changes as you negotiate long-term leases, even before the effective date of the new standard.
The Discussion Paper is expected to be issued at the end of March 2009, with comments due by July 2009. The Boards will then consider the comments received and continue their deliberations on specific issues, with the expectation of issuing an Exposure Draft of the new standard in the first half of 2010. The Boards expect a final standard to be issued is 2011, although the Boards have yet to discuss the effective date and transition provisions.
In June 2005, the SEC recommended that existing lease standards be rewritten. In 2006, the FASB and the International Accounting Standards Board (IASB) added a joint project to address lease accounting. A significant step in the FASB/IASB project plan is the issuance of a Discussion Paper, anticipated to be released for comment in March 2009. Based on the Boards' deliberations to date which may be subject to change, the Discussion Paper is expected to propose significant changes to lessee accounting; and the direction of the leasing project is clear. After considering a number of alternative models and debating their relative merits, the Boards have tentatively settled on a “right-of-use model.” This model would require the lessee to recognize an asset representing its right to use the leased asset, and a corresponding liability for its obligation to pay rent. Under the right-of-use model, operating lease accounting under SFAS No. 13 would be eliminated, and lessees would account for all leases in a manner similar to that used for capital leases today.
Although the Boards are sensitive to the cost-benefit considerations for small-dollar and short-duration leases, the Boards have yet to address this concern. The idea that small-dollar leases would be exempt from the new standard is troubling to certain Board members because leases that are individually low dollar may be material when aggregated. Further, it is likely that some type of bright-line threshold would be necessary to implement such an exception. As noted, similar bright lines in the current model have been the target of significant criticism.
The proposed accounting model would have the greatest impact on lessees of significant amounts of "large-ticket" items, such as real estate, manufacturing equipment, power plants, aircraft, railcars, and ships. However, the revised standard would also affect virtually every company, including those who lease computer equipment, copiers, office furniture, and telecommunications equipment. The proposed model would require lessees to remeasure their lease obligation at each balance sheet date based on updated estimates, including the probability of exercising renewal options and the amount of contingent rent that the lessee expects to pay over the revised lease term. The remeasurement of the obligation would be reflected as an adjustment to either earnings or the right-of-use asset, depending on the nature of the change. (This would require significantly more effort compared to the current model where lease accounting is set at inception and revisited only if there is a modification or extension of the lease!) Because these changes may change the economics of leases written in the future, you may need to reexamine "lease versus buy" decisions.
Also, given the long-term nature of many leases and the desire for comparability, it is unlikely that accounting for existing leases will be grandfathered. Accordingly, you should consider the implications of these potential changes as you negotiate long-term leases, even before the effective date of the new standard.
The Discussion Paper is expected to be issued at the end of March 2009, with comments due by July 2009. The Boards will then consider the comments received and continue their deliberations on specific issues, with the expectation of issuing an Exposure Draft of the new standard in the first half of 2010. The Boards expect a final standard to be issued is 2011, although the Boards have yet to discuss the effective date and transition provisions.
Tuesday, February 24, 2009
IFRS Light
While the SEC contemplates use of International Financial Reporting Standards (IFRS) for public companies, a new Deloitte poll suggests that a significant number of private companies have interest in having a single set of globally accepted financial reporting standards.
More than 40 percent of 1,700 finance professionals, mostly from private companies, responded to a set of polling questions during a Deloitte webcast by stating that their companies would take positive action when the International Accounting Standards Board (IASB) completed its project on private entity reporting (“IFRS Light”). Almost 14 percent said they would consider adopting the IASB's new standard in the near-term, while 26 percent reported they would assess the costs and benefits of adoption.
The IFRS Light project, expected to be completed later this year, is expected to be a simplified, roughly 250-page tailored version of full IFRS. While approximately 12,000 public companies await the SEC's final decision on adopting IFRS, there are even more private companies in the U.S. that could look to adopt either full IFRS or the IASB standards for private entities.
Nearly 85 percent of those polled found something appealing about the project, including more than 33 percent that liked the idea of having a simplified, self-contained set of accounting standards that are appropriate for private entities. Close to 30 percent believed these standards would reduce their financial reporting burden, and just over 21 percent cited better comparability for users of private company financial information.
The IASB's project on private entity reporting could go a long way toward addressing many small business needs by providing an easier, more user-friendly set of standards that have the potential to help companies reduce costs, while at the same time provide better information and more transparency to users of private company financial information.
More than 40 percent of 1,700 finance professionals, mostly from private companies, responded to a set of polling questions during a Deloitte webcast by stating that their companies would take positive action when the International Accounting Standards Board (IASB) completed its project on private entity reporting (“IFRS Light”). Almost 14 percent said they would consider adopting the IASB's new standard in the near-term, while 26 percent reported they would assess the costs and benefits of adoption.
The IFRS Light project, expected to be completed later this year, is expected to be a simplified, roughly 250-page tailored version of full IFRS. While approximately 12,000 public companies await the SEC's final decision on adopting IFRS, there are even more private companies in the U.S. that could look to adopt either full IFRS or the IASB standards for private entities.
Nearly 85 percent of those polled found something appealing about the project, including more than 33 percent that liked the idea of having a simplified, self-contained set of accounting standards that are appropriate for private entities. Close to 30 percent believed these standards would reduce their financial reporting burden, and just over 21 percent cited better comparability for users of private company financial information.
The IASB's project on private entity reporting could go a long way toward addressing many small business needs by providing an easier, more user-friendly set of standards that have the potential to help companies reduce costs, while at the same time provide better information and more transparency to users of private company financial information.
Thursday, February 19, 2009
FASB Fair Value Fix?
The FASB has announced the addition of new agenda projects intended to improve the application guidance used to determine fair values and disclosure of fair value estimates. The guidance is intended to ease accountants’ confusion over how to measure fair value in illiquid markets. The application guidance should be available by the end of June, and the new disclosure guidelines will be done in time for year-end reporting.
The FASB said that the new guidelines will discuss how to determine whether an asset or liability’s market is active or inactive and whether a transaction should be considered distressed. In addition, the board will discuss how to apply fair value to stakes in alternative investments, such as hedge funds and private equity funds.
Moreover, FASB will call on companies to expand their fair-value disclosures related to how they make estimates. This could mean that companies will need to expand on explanations of their reasoning for moving items among the three measurement levels outlined in SFAS No. 157, which provides a framework for fair-value measurement. Level 3 is designated for assets thinly traded, or not traded at all, and that have a value derived from so-called “unobservable inputs.” It’s this group of measurements that fair-value critics say has caused extreme volatility and massive write-downs in the financial services sector.
The announcement comes after the SEC discouraged the lobbying by bankers to suspend mark-to-market accounting in light of the financial crisis. In a congressionally mandated study, the SEC instead supported the existing FASB rules but acknowledged that issuers and auditors “have faced challenges” when applying them during uncertain times, when markets have dried up, making it hard to determine how much a hypothetical buyer would currently pay for a certain asset.
To be sure, FASB and its international counterpart already have issued some guidance in response to criticism that the fair-value rules have aided, or even caused, the economy's credit problems. For example, last fall FASB issued a hypothetical example for how to estimate the fair value of a collateralized debt obligation security in an inactive market. However, practitioners were confused over this rushed guidance. And fair-value dissenters still cried foul about the very existence of the fair-value rules, believing that they lead to volatility in financial statements and have a pro-cyclical, downward effect on the markets, particularly for assets whose worth is difficult to value without an active market. In its study released in late December, the SEC disagreed, saying that in fact the majority of financial institutions’ investments were based on observable inputs. The regulator concluded that fair-value-related losses did not a have a “significant” effect on hurting banks’ capital.
The FASB said that the new guidelines will discuss how to determine whether an asset or liability’s market is active or inactive and whether a transaction should be considered distressed. In addition, the board will discuss how to apply fair value to stakes in alternative investments, such as hedge funds and private equity funds.
Moreover, FASB will call on companies to expand their fair-value disclosures related to how they make estimates. This could mean that companies will need to expand on explanations of their reasoning for moving items among the three measurement levels outlined in SFAS No. 157, which provides a framework for fair-value measurement. Level 3 is designated for assets thinly traded, or not traded at all, and that have a value derived from so-called “unobservable inputs.” It’s this group of measurements that fair-value critics say has caused extreme volatility and massive write-downs in the financial services sector.
The announcement comes after the SEC discouraged the lobbying by bankers to suspend mark-to-market accounting in light of the financial crisis. In a congressionally mandated study, the SEC instead supported the existing FASB rules but acknowledged that issuers and auditors “have faced challenges” when applying them during uncertain times, when markets have dried up, making it hard to determine how much a hypothetical buyer would currently pay for a certain asset.
To be sure, FASB and its international counterpart already have issued some guidance in response to criticism that the fair-value rules have aided, or even caused, the economy's credit problems. For example, last fall FASB issued a hypothetical example for how to estimate the fair value of a collateralized debt obligation security in an inactive market. However, practitioners were confused over this rushed guidance. And fair-value dissenters still cried foul about the very existence of the fair-value rules, believing that they lead to volatility in financial statements and have a pro-cyclical, downward effect on the markets, particularly for assets whose worth is difficult to value without an active market. In its study released in late December, the SEC disagreed, saying that in fact the majority of financial institutions’ investments were based on observable inputs. The regulator concluded that fair-value-related losses did not a have a “significant” effect on hurting banks’ capital.
Tuesday, February 17, 2009
IFRS is Coming!
Let this be a warning to owners of private companies: The shift to new global financial reporting standards may yet happen during the Obama Administration. That would be the Sasha Obama Administration.
While the SEC currently proposes to require big public companies to change from generally accepted accounting principles (GAAP) to international financial reporting standards (IFRS) around 2014, the outlook for private companies is far from settled.
Among the potential drawbacks of IFRS is the current uncertainty around inventory valuations. Now, the IRS accepts the LIFO method, which results in favorable tax treatment. LIFO is not permissible under IFRS, however, portending much bigger tax liabilities if an alternative method becomes mandatory.
At this point, there's no telling whether public companies will convert to IFRS on schedule, since the SEC's proposed timetable is undergoing a review under new SEC Chairman, Mary Schapiro. But assuming the changeover eventually occurs, IFRS will be an inevitability for private companies. Meanwhile, the International Accounting Standards Board plans to publish its recommendations for private companies by mid-2009.
Where do all these potentially monumental changes leave financial executives at private companies? For now, just keep an eye on what goes on, but stay busy running your business.
While the SEC currently proposes to require big public companies to change from generally accepted accounting principles (GAAP) to international financial reporting standards (IFRS) around 2014, the outlook for private companies is far from settled.
Among the potential drawbacks of IFRS is the current uncertainty around inventory valuations. Now, the IRS accepts the LIFO method, which results in favorable tax treatment. LIFO is not permissible under IFRS, however, portending much bigger tax liabilities if an alternative method becomes mandatory.
At this point, there's no telling whether public companies will convert to IFRS on schedule, since the SEC's proposed timetable is undergoing a review under new SEC Chairman, Mary Schapiro. But assuming the changeover eventually occurs, IFRS will be an inevitability for private companies. Meanwhile, the International Accounting Standards Board plans to publish its recommendations for private companies by mid-2009.
Where do all these potentially monumental changes leave financial executives at private companies? For now, just keep an eye on what goes on, but stay busy running your business.
Friday, February 13, 2009
Mark-to-Market Advocate as Chief Accountant?
SEC Chairman Mary Schapiro may choose Charles Niemeier, a supporter of “mark-to-market” rules that some banks blame for the financial crisis, as the agency’s chief accountant.
Niemeier, 52, was among the original members of the Public Company Accounting Oversight Board when it was formed in 2002. He has always been an advocate of mark-to-market, also known as fair-value.
Lawmakers including Senate Banking Committee Chairman Christopher Dodd have said regulators may need to consider temporary changes to fair-value as the government prepares to bail out banks. Blackstone Group LP Chairman Stephen Schwarzman said Oct. 30 that fair-value accounting was a “major contributor to the financial crisis.”
Proponents, such as the FASB and Treasury Secretary Timothy Geithner, say the rule adds to transparency and gives investors information about companies.
However, Niemeier has publicly criticized a the IFRS proposal pushed last year by Christopher Cox, then SEC chairman, to let large corporations switch from U.S. to international accounting rules by 2014. Moving to IFRS is unlikely to “result in benefits to investors in U.S. securities or the U.S. economy,” Niemeier said in a September speech in New York. Schapiro said in her Senate confirmation hearing Jan. 15 that she is concerned about Cox’s IFRS plan and doesn’t feel “bound” to it.
Of course, even Washington insiders are not immune from the effects of the current job market. Niemeier would be taking a pay cut if he joins the SEC. As a PCAOB member, he made $531,995 last year! The average salary in 2008 for SEC senior officers, including chief accountant, was only $203,895. Maybe he should consider a CEO position at a TARP-recipient bank—they can make up to $500,000!
Niemeier, 52, was among the original members of the Public Company Accounting Oversight Board when it was formed in 2002. He has always been an advocate of mark-to-market, also known as fair-value.
Lawmakers including Senate Banking Committee Chairman Christopher Dodd have said regulators may need to consider temporary changes to fair-value as the government prepares to bail out banks. Blackstone Group LP Chairman Stephen Schwarzman said Oct. 30 that fair-value accounting was a “major contributor to the financial crisis.”
Proponents, such as the FASB and Treasury Secretary Timothy Geithner, say the rule adds to transparency and gives investors information about companies.
However, Niemeier has publicly criticized a the IFRS proposal pushed last year by Christopher Cox, then SEC chairman, to let large corporations switch from U.S. to international accounting rules by 2014. Moving to IFRS is unlikely to “result in benefits to investors in U.S. securities or the U.S. economy,” Niemeier said in a September speech in New York. Schapiro said in her Senate confirmation hearing Jan. 15 that she is concerned about Cox’s IFRS plan and doesn’t feel “bound” to it.
Of course, even Washington insiders are not immune from the effects of the current job market. Niemeier would be taking a pay cut if he joins the SEC. As a PCAOB member, he made $531,995 last year! The average salary in 2008 for SEC senior officers, including chief accountant, was only $203,895. Maybe he should consider a CEO position at a TARP-recipient bank—they can make up to $500,000!
Thursday, February 12, 2009
Mark-to-Market Politics?
Add fair-value accounting rules to the many projects and concessions stuffed into the giant stimulus bill currently being debated on Capitol Hill. At least that's the hope of many financial services firms that blame accounting standards for massive write-downs of their mortgage-related assets. Sen. Christopher Dodd, who chairs the influential Senate Banking Committee, reportedly suggested the existing rules could be suspended temporarily or modified. According to Reuters, Dodd told reporters that a former banking regulator has ideas on how to make changes without interfering with the gist of the original standards.
Still, bankers had their hopes dashed the last time Congress waved the possibility that fair-value rules could face the knife. Only a few months ago, the Emergency Economic Stabilization Act gave the SEC 90 days to study the effects of fair value and the authority to suspend the rules.
But, with just a few weeks left in chairman Christopher Cox's tenure, the commission declined to take up Congress' offer to put a stop to the rules, saying investors find mark-to-market accounting gives them the best view into the current value of their companies' assets. "General-purpose financial reporting should not be revised to meet the needs of other parties if doing so would compromise the needs of investors," the SEC's report said.
Of course, this time there's a new administration. Last month, Paul Volcker, one of President Obama's top economic advisors, called for a fresh look at mark-to-market rules. Commercial banks should be allowed to use a more flexible and principles-based system when gauging the worth of their assets and liabilities, Volcker said.
Of course, if you ask me, blaming fair value accounting for the financial crisis is kind of like placing the blame for a burning building on the smoke alarm! Maybe we should, instead, be looking for the managers who are holding the matches!
Still, bankers had their hopes dashed the last time Congress waved the possibility that fair-value rules could face the knife. Only a few months ago, the Emergency Economic Stabilization Act gave the SEC 90 days to study the effects of fair value and the authority to suspend the rules.
But, with just a few weeks left in chairman Christopher Cox's tenure, the commission declined to take up Congress' offer to put a stop to the rules, saying investors find mark-to-market accounting gives them the best view into the current value of their companies' assets. "General-purpose financial reporting should not be revised to meet the needs of other parties if doing so would compromise the needs of investors," the SEC's report said.
Of course, this time there's a new administration. Last month, Paul Volcker, one of President Obama's top economic advisors, called for a fresh look at mark-to-market rules. Commercial banks should be allowed to use a more flexible and principles-based system when gauging the worth of their assets and liabilities, Volcker said.
Of course, if you ask me, blaming fair value accounting for the financial crisis is kind of like placing the blame for a burning building on the smoke alarm! Maybe we should, instead, be looking for the managers who are holding the matches!
Wednesday, February 11, 2009
SEC Enforcement Director to Step Down
Securities and Exchange Commission Enforcement Director, Linda Thomsen, whose unit is the target of congressional scrutiny for failing to detect Bernard Madoff’s alleged $50 billion fraud, will step down as new SEC Chairman Mary Schapiro replaces senior management. Thomsen, head of the division since 2005, will return to private practice after 14 years at the SEC.
Schapiro, appointed by President Barack Obama, is replacing senior managers after being sworn in Jan. 27 with a pledge to “reinvigorate” an enforcement arm faulted by lawmakers for missing Madoff’s alleged Ponzi scheme. Former federal prosecutor Robert Khuzami, now a top Deutsche Bank AG lawyer, is the lead candidate to succeed Thomsen.
Schapiro on Feb. 7 named David Becker, 61, a partner at Cleary Gottlieb Steen & Hamilton in Washington, to be the SEC’s chief legal officer and senior policy adviser. She has also asked Commissioner Elisse Walter, a Democrat, to seek candidates who may replace other senior managers, people familiar with the matter said last week.
While it’s not unusual at all for a chairman to bring in his or her own people, Schapiro is wasting no time in making her "mark" on the SEC!
Schapiro, appointed by President Barack Obama, is replacing senior managers after being sworn in Jan. 27 with a pledge to “reinvigorate” an enforcement arm faulted by lawmakers for missing Madoff’s alleged Ponzi scheme. Former federal prosecutor Robert Khuzami, now a top Deutsche Bank AG lawyer, is the lead candidate to succeed Thomsen.
Schapiro on Feb. 7 named David Becker, 61, a partner at Cleary Gottlieb Steen & Hamilton in Washington, to be the SEC’s chief legal officer and senior policy adviser. She has also asked Commissioner Elisse Walter, a Democrat, to seek candidates who may replace other senior managers, people familiar with the matter said last week.
While it’s not unusual at all for a chairman to bring in his or her own people, Schapiro is wasting no time in making her "mark" on the SEC!
Tuesday, February 10, 2009
SEC Delays IFRS Roadmap
The Securities and Exchange Commission has given businesses two more months to respond to its proposed timeline for moving all U.S. public companies to international financial reporting standards. The extension of its public-comment period could hinder the hopes of the few companies that had wanted to get the go-ahead to apply IFRS to their U.S. filings later this year.
Still, even those companies eager to eliminate their U.S. GAAP-based books asked the SEC in their comment letters to give finance executives — currently busy finishing up their quarterly filings — more time to think about the commission's 165-page proposal.
There are the many factors slowing last year's momentum toward IFRS eventually replacing U.S. GAAP as Corporate America's main accounting language. Since former SEC chairman Christopher Cox presented the timeline in late August, the commission has become enmeshed in responding to the financial crisis, the effect on its own reputation from the Bernard Madoff's alleged Ponzi scheme, and a change in leadership. "The change in administration and in political viewpoints is having an impact on the appetite for IFRS," says Brian Minnihan, assurance partner with the technology practice at BDO Seidman.
Indeed, Mary Schapiro, who replaced Cox last week, has many concerns about the current roadmap, namely its pace. At her Senate confirmation hearing, Schapiro said, "I will not be bound by the existing roadmap that's out for public comment." She also expressed reservations about the independence of the overseas standard-setter that writes IFRS and the quality of the rules themselves.
So far, the SEC has received little feedback about its proposal. As of today, only about 30 comments have been filed, half of which were from finance executives. Many of them solely asked for the SEC to extend its original deadline for public comments of February 19. For example, Kenneth Heintz, chief accounting officer at Northrop Grumman, told the SEC that companies are dealing with their current filings and the recession and need "adequate time for more thorough and thoughtful responses."
Yesterday, the SEC gave in to Heintz and other finance executives' requests, extending the comment period to April 20. The delay will "give the public additional time to consider thoroughly the matters addressed by the release," the commission said in a document on its website dated February 3.
As proposed, the roadmap would let about 110 companies, depending on their size and industry, use IFRS for their SEC filings at the end of fiscal years ending after December 15, 2009. The catch: they would also have to provide an audited GAAP reconciliation report or three years' worth of unaudited reconciliation reports. Later, large accelerated filers would begin using IFRS in 2014, followed by accelerated filers in 2015, and smaller companies in 2016.
The SEC's latest extension does not indicate that the commission's plan will change dramatically, according to D.J. Gannon, a Deloitte & Touche partner, who closely watches the roadmap developments. However, it does put a wrinkle in the likelihood that early adopters could use IFRS for fiscal year 2009 — a prospect, he says, that didn't seem "realistic to begin with." Unless companies already began working on their IFRS transition plan last year, they'll be unlikely able to stick to the SEC's early-adoption timeline if it's adopted, according to BDO's Minnihan.
When the comments do come rolling in, expect to see pushback from companies, auditors, and investors to provide more direction than the current roadmap, Gannon predicts. As it is, the SEC gives itself a 2011 "escape hatch," Gannon explains, to back out of the entire plan. At that time, the commission will decide whether to move forward with the roadmap and mandate its use. It may be hard for many people to take the commission seriously on its IFRS plan until then.
For the few executives who did find time to respond to the SEC's call for comment, they are wary of the commission's dates and how they don't mesh with U.S. and global standard-setters' plans for converging their standards by 2011. What's more, the more than 100 countries that use IFRS — one of the main reasons Cox gave for pushing the SEC's roadmap — don't follow the exact set of rules published by the International Accounting Standards Board. As a result, companies could be stuck "devoting considerable resources to minimize inconsistent application of IFRS by developing increased policies and procedures," wrote Jim McGinty, CFO of retailer Hot Topic.
Others took issue with the cost of implementation. According to James Barlow, corporate controller for health-care company Allergan, audit firms have estimated that a GAAP-to-IFRS switch will cost between 0.5 percent and 1 percent of a company's annual revenue in addition to two to three years of hard work. He figures his own company will spend at least four times the amount of money to implement IFRS as it spent on implementing the internal-control provision of the Sarbanes-Oxley Act — a prospect that surely won't sit well with the many CFOs still shaking their heads over the headaches caused by Section 404.
"Is this the best use of our limited company resources during these uncertain economic times, and why should we not continue to take a more gradual, natural evolution to improving accounting standards in the United States and the rest of the world?" Barlow asked in his letter.
Carl Berquist, executive vice president of financial information and enterprise risk management at Marriott International, went further in his criticism of the SEC's proposal. While he believes companies should eventually be granted the choice of using IFRS, Berquist doesn't think the SEC should mandate it. "We do not believe that any U.S. issuer should be forced to change its current basis of accounting," he wrote.
Still, even those companies eager to eliminate their U.S. GAAP-based books asked the SEC in their comment letters to give finance executives — currently busy finishing up their quarterly filings — more time to think about the commission's 165-page proposal.
There are the many factors slowing last year's momentum toward IFRS eventually replacing U.S. GAAP as Corporate America's main accounting language. Since former SEC chairman Christopher Cox presented the timeline in late August, the commission has become enmeshed in responding to the financial crisis, the effect on its own reputation from the Bernard Madoff's alleged Ponzi scheme, and a change in leadership. "The change in administration and in political viewpoints is having an impact on the appetite for IFRS," says Brian Minnihan, assurance partner with the technology practice at BDO Seidman.
Indeed, Mary Schapiro, who replaced Cox last week, has many concerns about the current roadmap, namely its pace. At her Senate confirmation hearing, Schapiro said, "I will not be bound by the existing roadmap that's out for public comment." She also expressed reservations about the independence of the overseas standard-setter that writes IFRS and the quality of the rules themselves.
So far, the SEC has received little feedback about its proposal. As of today, only about 30 comments have been filed, half of which were from finance executives. Many of them solely asked for the SEC to extend its original deadline for public comments of February 19. For example, Kenneth Heintz, chief accounting officer at Northrop Grumman, told the SEC that companies are dealing with their current filings and the recession and need "adequate time for more thorough and thoughtful responses."
Yesterday, the SEC gave in to Heintz and other finance executives' requests, extending the comment period to April 20. The delay will "give the public additional time to consider thoroughly the matters addressed by the release," the commission said in a document on its website dated February 3.
As proposed, the roadmap would let about 110 companies, depending on their size and industry, use IFRS for their SEC filings at the end of fiscal years ending after December 15, 2009. The catch: they would also have to provide an audited GAAP reconciliation report or three years' worth of unaudited reconciliation reports. Later, large accelerated filers would begin using IFRS in 2014, followed by accelerated filers in 2015, and smaller companies in 2016.
The SEC's latest extension does not indicate that the commission's plan will change dramatically, according to D.J. Gannon, a Deloitte & Touche partner, who closely watches the roadmap developments. However, it does put a wrinkle in the likelihood that early adopters could use IFRS for fiscal year 2009 — a prospect, he says, that didn't seem "realistic to begin with." Unless companies already began working on their IFRS transition plan last year, they'll be unlikely able to stick to the SEC's early-adoption timeline if it's adopted, according to BDO's Minnihan.
When the comments do come rolling in, expect to see pushback from companies, auditors, and investors to provide more direction than the current roadmap, Gannon predicts. As it is, the SEC gives itself a 2011 "escape hatch," Gannon explains, to back out of the entire plan. At that time, the commission will decide whether to move forward with the roadmap and mandate its use. It may be hard for many people to take the commission seriously on its IFRS plan until then.
For the few executives who did find time to respond to the SEC's call for comment, they are wary of the commission's dates and how they don't mesh with U.S. and global standard-setters' plans for converging their standards by 2011. What's more, the more than 100 countries that use IFRS — one of the main reasons Cox gave for pushing the SEC's roadmap — don't follow the exact set of rules published by the International Accounting Standards Board. As a result, companies could be stuck "devoting considerable resources to minimize inconsistent application of IFRS by developing increased policies and procedures," wrote Jim McGinty, CFO of retailer Hot Topic.
Others took issue with the cost of implementation. According to James Barlow, corporate controller for health-care company Allergan, audit firms have estimated that a GAAP-to-IFRS switch will cost between 0.5 percent and 1 percent of a company's annual revenue in addition to two to three years of hard work. He figures his own company will spend at least four times the amount of money to implement IFRS as it spent on implementing the internal-control provision of the Sarbanes-Oxley Act — a prospect that surely won't sit well with the many CFOs still shaking their heads over the headaches caused by Section 404.
"Is this the best use of our limited company resources during these uncertain economic times, and why should we not continue to take a more gradual, natural evolution to improving accounting standards in the United States and the rest of the world?" Barlow asked in his letter.
Carl Berquist, executive vice president of financial information and enterprise risk management at Marriott International, went further in his criticism of the SEC's proposal. While he believes companies should eventually be granted the choice of using IFRS, Berquist doesn't think the SEC should mandate it. "We do not believe that any U.S. issuer should be forced to change its current basis of accounting," he wrote.
Tuesday, February 3, 2009
Don't Miss the FIN 48 Disclosure Requirement!
On December 30, 2008, the FASB issued FASB Staff Position (FSP) No. FIN 48-3, Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises. This FSP defers the effective date of FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, for certain nonpublic enterprises. However, nonpublic enterprises that applied the recognition, measurement, and disclosure provisions of FIN 48 in a full set of annual financial statements issued prior to the issuance of this FSP are not eligible for the deferral. The deferred effective date is intended to give the FASB additional time to develop guidance on the application of FIN 48 by pass-through entities and not-for-profit organizations. The deferred effective date also will give the FASB time to amend the disclosure requirements of FIN 48 for nonpublic enterprises.
Of particular importance for 2008 year-end financial statements is paragraph 10 of the FSP. It states:
Of particular importance for 2008 year-end financial statements is paragraph 10 of the FSP. It states:
A nonpublic enterprise that elects to defer the application of Interpretation 48 in accordance with this FSP shall explicitly disclose that fact and shall disclose its accounting policy for evaluating uncertain tax positions for each set of financial statements where the deferral applies. (emphasis added)
In an effort to find additional guidance on this issue, I contacted the FASB to inquire if the FASB had developed an illustrative disclosure. Here is the answer given by FASB communications manager, Christine Klimek:
We have not developed a sample disclosure.
There are two required disclosures. One indicates that the entity has not implemented FIN 48 if it hasn’t. The other disclosure requires entities that have not yet applied FIN 48 to describe what policy they use instead to evaluate uncertain tax positions. That note will depend on the policy in use and will vary.
Since private companies are using FAS 5, Accounting for Contingencies, for evaluating contingencies, and since an uncertain tax position is a contingency (you don’t owe it unless you’re audited), that is likely to be the most common policy. How it is worded is up to the preparer.
Given this response from the FASB, I have developed an example of a note disclosure that meets the requirement in the FSP. Contact me (russ@madray.com) if you would like a copy of this note. This note would typically be included in the first note, “Summary of Significant Accounting Policies.”
NOTE: If you conclude that FIN 48 will not apply to a particular entity (e.g., an S-Corp with no potential entity-level income tax liability), there is no requirement to elect this deferral, nor is there any requirement to state that FIN 48 does not apply.
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