Wednesday, December 9, 2009

FASB Chairman: Fair Value Not Cause of Crisis; Separate Banking Regulation from Accounting

Journal of Accountancy is monitoring the AICPA SEC PCAOB conference this week.
They report here on a speech by FASB Chairman Robert Herz on Tuesday that addressed head on criticism of the role of accounting standards in the financial crisis and called for GAAP to be “decoupled” from bank regulation.

Herz, speaking at an AICPA conference, contended that many of FASB’s critics simply do not understand its mission. “There seems to be some confusion in the media and elsewhere about the relationship between the accounting standards we set and regulation of financial institutions,” said Herz. He explained that FASB does not determine the capital levels banks are required to maintain, but under laws enacted in the wake of the savings and loan crisis, bank regulators determine regulatory capital caccstarting with GAAP numbers. But bank regulators can adjust the GAAP figures, and they also have other tools to address capital adequacy, liquidity issues, and concentrations of risk at regulated institutions, Herz said.

He said that while FASB has a deep interest in the strength and stability of the financial system and the economy, its public policy mission and focus is designed to be different from that of banking regulators. “Our focus as accounting standard setters is on the communication of relevant, reliable, transparent, timely, and unbiased financial information on corporate performance and financial condition to investors and the capital markets,” he said. “The transparency provided by external financial reports contributes to financial stability by reducing the level of uncertainty in the system—and a lack of transparency can hide the extent of risks facing financial institutions from both investors and regulators.”

The mandate of the Federal Reserve and other banking regulators, according to Herz, differs in that it relates to ensuring the soundness of banks and the overall stability of the financial system. He says most of the time FASB and banking regulators can find common ground, but in some situations they’re actually in conflict. “In dire situations, bank regulators may be appropriately concerned that public release of data on severe losses and asset impairments could spark a run on a bank,” said Herz. “But investors would likely want to know the extent of the problems on a timely basis.”

The answer to this problem, according to Herz, is to “decouple” bank regulation from U.S. GAAP reporting requirements. “Doing so could enhance the ability of both the FASB and the regulators to fulfill our critical mandates,” he said.

And Herz, citing a
1991 GAO report following the S&L crisis, seemed to indicate that he believes that although GAAP and specifically much-criticized fair-value accounting did not cause the financial crisis, a GAAP unencumbered by pressure from banking interests would have done a better job of alerting investors and other stakeholders of an impending crisis. “The [1991] GAO report found that regulatory call reports significantly overstated the values of loans and debt securities (and hence the financial condition and capital) of failed banks,” he said.

He pointed out that the stress tests banking regulators recently conducted of the 19 major U.S. bank holding companies also found that the bulk of the $600 billion of potential additional losses revealed under the more adverse scenario related to loans and other receivables carried on a historical cost basis such as that used in the 1980s and not to items carried on a mark-to-market or fair value basis. In other words, fair value accounting, which is currently applied to only some financial assets, has done a better job of indicating the true financial condition of those assets than the cost basis.

Addressing another criticism of fair-value accounting, Herz admitted that reporting fair values can have procyclical effects on behavior. But he contends that “timely recognition of problems at financial institutions can have countercyclical effects through lessening the impact of financial downturns by providing an early warning of developing problems.”

This year both FASB and the IASB, under pressure from political influences, have struggled to agree on changes to accounting for financial instruments, which involves the fair value applications that have been most widely criticized. Herz provided assurances that FASB and the IASB would continue to work together on these issues, while acknowledging that the two boards have recently had differences in approach and timing. “Next year, once we have received comments and other input on our proposal, we will redeliberate at public board meetings all the key issues identified including discussing them with the IASB and making changes as appropriate,” he said. “Only after having completed this very extensive and thorough public due process will we issue a final standard carefully considering effective dates and transition.”

Original Journal of Accountancy article by Matthew G. Lamoreaux

Tuesday, December 8, 2009

Top Ten U.S.Non-IFRS Accounting Issues and Articles from 2009

The AICPA has an interesting daily email list providing interesting articles from various sources. Below is their summary of the top non-IFRS issues and articles of 2009. Where they use "we" below, they are referrng to CPAs or the AICPA.

This past year brought historical changes and challenges for everyone, CPAs included. Much has been written about the worldwide financial collapse and the hard road to economic stability. In looking back, what strikes me is how CPAs in all work environments held fast to our values of integrity, objectivity and competence despite great adversity. The AICPA joined forces with CPAs throughout the nation to educate Americans on
financial literacy and fiscal accountability, helping to move our country forward.

In protecting the interests of the public and investors, as well as those of the dedicated members of our profession, we spoke out on a range of issues and achieved success for our positions. For instance, pending congressional legislation to create a
Consumer Financial Protection Agency would provide CPAs with a specific exclusion for the advice and counsel they offer to individuals and businesses. The AICPA, along with state CPA societies, wrote letters requesting a delay in enforcement of the Federal Trade Commission's "Red Flags" rule, which was granted -- twice. Last month, the AICPA filed a lawsuit challenging the FTC's application of the rule to CPAs. In support of the Financial Accounting Standards Board's independence, we worked with a House committee to revise an amendment that would have moved accounting standards oversight authority from the Securities and Exchange Commission to a new proposed government agency. Another example is a letter we sent to a Senate committee expressing our opposition to expansion of aiding and abetting liability to third parties in securities fraud claims.

At the same time, we maintained focus on the resources and issues needed to keep CPAs up to date and technically prepared to serve their clients, employers and communities. Major advances were made in pressing areas, from
private company financial reporting and globalization of business and the CPA profession, to sustainability and filling the CPA pipeline for the future. We also won mobility for CPAs, extending interstate practice privileges to a total of 45 states in a collaborative effort with state CPA societies, state boards of accountancy and the National Association of State Boards of Accountancy.

Top 10 news stories clicked by the AICPA's SmartBrief readers in the past year.
Madoff critic: Fraud case "gift-wrapped and delivered" to SEC (2/4)
CPAs get pre-filing-season update on tax laws governing individuals (1/2009)
Does personal goodwill still exist? (4/2009)
Tax aspects of debt modification and discharge (4/2009)
Stimulus bill contains several tax breaks for individuals (2/15)
New tax laws increase 401(k) contribution limits (1/6)
Senate reaches deal on tax credit for home buyers (10/28)
How to calculate gambling gains and losses for tax purposes (2/2009)
Obama's tax proposal draws fire from legislators, business (5/5)
Analysis: Letting estate tax lapse will cause problems

AICPA SEC Conference: No Deadline for IFRS Adoption Yet

Those waiting for clarity from the SEC regarding its road map for adopting International Financial Reporting Standards in the U.S. are still waiting following a speech by the agency’s chief accountant Monday.

In an October
speech, Chief Accountant James Kroeker said the Commission would provide greater clarity on the future of its proposed road map by Dec. 21. In his speech Monday at an AICPA conference in Washington, he gave few additional details, but added, “You can expect to hear more from us in the short term.”

However, during a question and answer session, Kroeker addressed issuers’ concerns over whether they should invest in making changes to their systems. “It’s something that I think you can all expect we’re taking very seriously,” said Kroeker. “If, for example, there was a determination about a date, I don’t think you’re going to wake up in the morning and realize that date means you suddenly have to convert tomorrow to IFRS.”

Kroeker emphasized that the effect on investors would take precedence over other concerns in the SEC’s decision process. “I believe the fundamental focus of our evaluation of implementing a single set of high quality standards must be on the impact to investors,” Kroeker said. “I believe that implementing a set of global accounting standards for U.S. issuers can and must be done only in a manner that is beneficial to U.S. capital markets and consistent with the SEC’s mission of protecting investors.”

While acknowledging that there was no clear consensus on how to conduct the transition, Kroeker highlighted “widespread and strong support” from investors and issuers for U.S. publicly-held companies to migrate to a single set of global accounting standards.

He went on to outline SEC considerations that had similarities to milestones laid out in the SEC’s proposed
road map including:
  • Carefully and fully assess U.S. investors’ understanding of and perspectives on IFRS;
  • The development and application of IFRS, particularly for its use as a single set of standards within the U.S. capital markets;
  • The impact on the U.S. regulatory environment;
  • Preparer considerations including changes to accounting systems, changes to contractual agreements, corporate governance considerations and litigation contingencies;
  • Human capital readiness; and
  • The role of the FASB in achieving the goal of a single set of global standards.

He emphasized the fundamental nature of changes currently being made to both IASB and U.S. GAAP under the boards’ Memorandum of Understanding (MoU) which identifies major projects due to be completed jointly by June 2011. “If revenue recognition is going to be changing and the platform in the U.S. and the platform under IFRS is changing, I don’t know how an entity would go about putting a system in place to adopt IFRS.”

But he seemed to indicate that the Commission does not plan to wait until after FASB and IASB complete their MoU projects before providing more clarity on its intentions. “That doesn’t mean people don’t need or want a greater level of clarity; I said earlier you can expect to hear more from us in the short term.”

But Kroeker said that regardless of future action by the SEC he believes it is important for “FASB to continue to work closely with the IASB to raise the quality of financial reporting standards in the U.S. and around the globe.”

Original article by Matthew G. Lamoreaux, Journal of Accountancy

Top Ten IFRS Stories from 2009

The AICPA has an informative IFRS mailing list. Listed below is a summary of the year’s most clicked IFRS articles on their site.

It has been an interesting year for International Financial Reporting Standards. After a flurry of activity in 2007 and 2008, the first eight months of 2009 were fairly quiet. Other than stakeholders commenting on the
proposed IFRS road map released in November 2008, there was no regulatory action. Then, in mid-September 2009, the Securities and Exchange Commission's chairwoman and chief accountant began to make public statements that would reignite the IFRS discussion. Most importantly, they said more information on IFRS for public companies would be provided by winter, which is right around the corner.

The
SEC's draft Five-Year Strategic Plan released in early October included support for a single set of high-quality global accounting standards and promotion of ongoing convergence initiatives between the U.S. Financial Accounting Standards Board and the International Accounting Standards Board. Moreover, in late October, the FASB and the IASB reaffirmed their commitment to improve both U.S. GAAP and IFRS and to intensify their efforts to complete the major projects described in their 2006 memorandum of understanding, as updated in 2008, by June 2011.

The AICPA is on record as supporting one set of high-quality global accounting standards for public companies, and we are working to ensure a smooth transition should the SEC decide to adopt IFRS.

Regarding private companies, in July the IASB released
IFRS for Small and Medium-sized Entities (IFRS for SMEs). The AICPA welcomed the introduction of the new standard, which gives private companies an additional accounting and financial reporting option.

Now, we eagerly await the SEC's next move for public companies. Private companies already have the option to use IFRS or IFRS for SMEs because of the AICPA governing Council's action in May 2008 to recognize the IASB as an international accounting standard setter.

Members can stay current on developments and access many helpful resources from the AICPA
IFRS resources Web site.

Top 10 news stories identified by the AICPA SmartBrief readers in the past year.
IASB publishes accounting standard for SMEs (7/9)
G-20 calls for single set of accounting standards by June 2011 (9/27)
Survey: Execs say IFRS will cost U.S. firms more than Europeans spent (3/30)
Schapiro discusses IFRS with IASB's Tweedie (2/12)
Accounting-rule changes would affect equipment leasing (8/14)
IFRS conversion to affect most aspects of operations (9/2009)
FASB, IASB will work more intensely to reach common set of standards (10/29)
CPA Exam to get makeover, include IFRS questions (9/30)
Herz: Full convergence shouldn't delay U.S. adoption of IFRS (4/30)
How to launch a successful IFRS conversion (4/2009)

Thursday, December 3, 2009

IFRS News Roundup

This news roundup is courtesy of the AICPA, and includes a plug for their product at the end.

Monitoring Board lauds convergence talks between IASB, FASBThe Monitoring Board, a key accounting oversight panel, said it is pleased with the direction of the convergence talks between the International Accounting Standards Board and the Financial Accounting Standards Board. "The Monitoring Board is pleased by the responsive approach of the IASB and the FASB to address concerns regarding the potential for the IASB and the FASB to reach different [conclusions] on the major projects," the board said. Accountancy Age (London)

Will convergence be enough?: If efforts to merge international accounting standards are successful, the idea of U.S. companies having to switch standards may become a nonissue, according to this article. The Financial Accounting Standards Board and the International Accounting Standards Board are trying to complete their convergence projects in 2011. CFO Magazine

IASB completes part of new financial-instruments accounting standardThe International Accounting Standards Board has published a new standard on classifying and measuring financial assets. The standard completes the first phase of a three-part project to replace IAS 39, Financial Instruments: Recognition and Measurement. JournalofAccountancy.com (

IFRS aims to level playing field but causes some concernsThe possible adoption of International Financial Reporting Standards by the U.S. is meant to level the global playing field and make it easier to compare financial statements of companies around the world. However, as this article notes, critics and concerned parties say that the benefits of the global accounting standards would vary considerably among different companies in the U.S. CFO.com (11/20)

EU postpones introduction of changes to accounting rulesA major overhaul of accounting rules for financial instruments came into force in much of the world recently, but the European Commission decided to postpone adoption of the rules. Analysts said the changes would disproportionately hit some European banks. Other banks in Europe are upset with the decision because they are concerned they will be at a disadvantage compared with their international counterparts. Financial Times (tiered subscription model) (11/13) , Risk.net (11/13)

SEC's Casey urges continued development of single set of accounting standardsSecurities and Exchange Commission member Kathleen Casey called for continued efforts to converge international accounting standards. The SEC is considering a plan that would have companies use International Financial Reporting Standards. "The commission and the [Financial Accounting Standards Board] would be remiss and fail the needs of investors if we do not continue to support the development of a single set of high-quality global accounting standards," Casey said. Reuters (11/17)

Some companies may use new IASB rules despite delay in BrusselsSome European companies may prepare "proforma" accounts as if new accounting rules were in place even as the EU signals it may delay implementation of the so-called IFRS 9 rules. Four companies said they may use the rules to prepare accounts for internal use before the end of 2009. The new rules from the International Accounting Standards Board address how financial institutions value assets. For IFRS daily updates, training courses, case studies and other resources, visit IFRS.com. Financial Times

OCC questions IASB's proposed loan-loss accounting standardJohn Dugan, comptroller of the currency, said a loan-loss accounting standard proposed by the International Accounting Standards Board is "potentially too restrictive." Dugan said accounting standard setters are heading in the right direction, but he raised concern about some of the proposals. "If expected loss is interpreted in a way that constrains it so you don't get to look forward, then we will not have made much progress," Dugan said. Risk.net

CESR chairman says review of IASB governance is neededEddy Wymeersch, chairman of the Committee of European Securities Regulators, told the European Parliament's economic and monetary affairs committee that an assessment of the governance of the International Accounting Standards Board is needed. Wymeersch raised questions about the accountability of the accounting standards setter. The New York Times/Reuters

HSBC's CFO urges Europe to quickly adopt IFRS 9Douglas Flint, chief financial officer at HSBC, says he wants to see Europe adopt the International Accounting Standards Board's new rule on fair-value accounting, known as IFRS 9. Flint says he believes critics pressured the IASB for political purposes. "Many of the objectors to IFRS 9 sought to take the IASB to a position they knew it could never support, because their agenda was to create conflict with the IASB as part of a larger political agenda," Flint said. Accountancy Age (London)

AICPA to release IFRS Accounting Trends & Techniques; order now to get pre-publication discount IFRS Accounting Trends & Techniques provides a close look at the reporting practices of international companies that have already tackled the conversion to IFRS. Like other titles in the best-selling Accounting Trends & Techniques series, this international version captures today's prevailing financial reporting practices with illustrative examples from the actual financial statements of 100 publicly traded companies from around the world. IFRS Accounting Trends & Techniques is available for pre-order. Order now and get a special pre-publication 10% discount (use coupon code SLR); time is running out.

Monday, November 23, 2009

Proposed U.S. Law Changed, FASB Independence Maintained

A U. S. Congressional committee last week removed language from an bill that would have given a new regulator power to oversee FASB standard-setting activities for U.S. GAAP.

The legislation, from the House Financial Services Committee would have transferred the SEC's accounting standards oversight authority to a proposed new regulator with a mandate to take an active role in accounting standards that it deemed could pose systemic risks.

The SEC has statutory authority to establish financial accounting and reporting standards for publicly held companies under U.S. law. Historically, however, the SEC has supported FASB’s independence and relied on FASB to set accounting standards.

The amendment passed Thursday acknowledged that the proposed systemic risk regulator that would be created under the bill would have the ability to comment, like other interested parties, on FASB standards-setting issues.

The AICPA, the Center for Audit Quality (CAQ) and many state CPA societies opposed earlier versions of the legislation and the CAQ held a joint press conference to highlight opposition to a legislative proposal that they said could put bank regulators in control of U.S. accounting standards and circumvent the key role of due process in standard setting.

Earlier in November, AICPA President and CEO Barry Melancon sent a
letter to the leadership of the House Financial Services Committee to state that the Institute is “strongly opposed” to any legislation that would “undermine the independent accounting standard process as currently carried out by FASB.” Melancon noted that the SEC and FASB “have made great strides” to improve financial reporting, and that if Congress were to follow through, “it will be viewed by many as disregard for the interests of investors.”

The CAQ, the U.S. Chamber of Commerce and the Council of Institutional Investors expressed similar opposition to the idea.

Tuesday, November 17, 2009

Accountants to Politicians, Bankers: Hands Off Accounting Standards

Leaders of the American Institute of CPAs and the Center for Audit Quality told legilators that bankers should not regulate accounting.

The accounting and auditing organizations are worried about proposed legislation setting up a systemic risk regulator for the financial sector. The legislation proposes creation of an oversight council that would have the ability to change accounting standards in the event of a crisis—replacing the FASB as SEC’s acconting standard-setter.

The Centre for Audit Quality states that standards are for the benefit of investors so that they can get the information that they need so that they can make valid investment decisions, and that the SEC acts as an investor advocate and is the right oversight party for helping the FASB maintain independent standard setting. Having financial and banking regulators be part of that process with veto power over accounting and auditing standards is not a good model. Particularly in this time of financial crisis, it is a bit ironic that we would be talking about watering down the process that’s designed to protect investors.”

AICPA president and CEO Barry Melancon noted that banking regulators already have the ability to adjust capital requirements and the SEC can suspend accounting rules when needed, as the SEC has the ability to suspend accounting rules, even without a crisis situation. Accountants fear a circumvention of the rule of due process in the accounting standard-setting process.


The legislation would go against SEC chair Mary Schapiro’s recent warning against interfering with the independence of the accounting standard-setting process, which seh referred to as “race for the bottom”.

Monday, November 16, 2009

Politics and Accounting: EU Delays Adoption of Fair Value Accounting Rule Changes

Politicians in the European Union have held up a radical overhaul of accounting rules for banks and insurers which came into force yesterday across most of the non-U.S. accounting world.

Politics comes to the fore in this as the rules have been postponed at a time when the commission itself is a lame duck because the commissioner’s job will come open with the new Commission beginning next year. Diplomats in Brussels say France is interested in the internal market commissioner's job in the next Commission.

The move highlights a major split among European financial institutions over the fair value new rules.

Analysts say some French, German and Italian banks with large investment banking activities would be hit disproportionately by the changes, forcing them to book losses on large holdings of derivatives.

The decision by the European Commission to delay the changes within Europe has angered other banks in the region who fear they will be put at a disadvantage compared to international peers.

The International Accounting Standards Board recently published major changes to the rules on fair value accounting, where assets are marked to market prices. Supporters of the new rules say this makes reporting more transparent. Critics believe fair value rules made the financial crisis worse by forcing banks to take losses on assets when markets fell.

The IASB fast-tracked the changes in response to calls by the G20 to make the changes by the end of the year. The European Commission said it would not adopt the changes until it had carried out an in-depth analysis, and would consider adoption in the new year.


The decision means that European banks and insurers will not use the new rules for their 2009 accounts while companies in more than 80 countries outside the EU will be required to do so.

Friday, November 13, 2009

IASB Issues New Standard on Financial Instruments

The International Accounting Standards Board (IASB) issued today a new International Financial Reporting Standard (IFRS) on the classification and measurement of financial assets.

Publication of the IFRS represents the completion of the first part of a three-part project to replace IAS 39 Financial Instruments: Recognition and Measurement with a new standard—IFRS 9 Financial Instruments.

The second part, the impairment methodology for financial assets has been exposed for public comment, and proposals on the third part, on hedge accounting, continue to be developed.

The new standard enhances the ability of investors and other users of financial information to understand the accounting of financial assets and reduces complexity – an objective endorsed by the Group of 20 leaders (G20) and other stakeholders internationally.


IFRS 9 uses a single approach to determine whether a financial asset is measured at amortised cost or fair value, replacing the many different rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments (its business model) and the contractual cash flow characteristics of the financial assets.

The new standard also requires a single impairment method to be used, replacing the many different impairment methods in IAS 39. Thus IFRS 9 improves comparability and makes financial statements easier to understand for investors and other users.

The effective date for mandatory adoption of IFRS 9 Financial Instruments is 1 January 2013. Consistent with requests by the G20 leaders and others, early adoption is permitted for 2009 year-end financial statements.

To read the standard, interested parties wilI need to purchase it hard copy from the IASB or subscribe to eIFRSs at www.iasb.org.

IFRS: Political Sharks in the Waters

Recently the G-20 has taken an initiative in pushing for global accounting standards—specifically nudging the U.S. toward converging GAAP with IFRS. They stated that this initiative is important to restoring trust in the global financial system.

Sharks are circling in the IFRS convergence water—political sharks in the form of governments that want to accept greater political control of the accounting standard-setting process.

French minister Christine Lagarde plans to lobby other G-20 finance ministers meeting in Scotland this week and France seems determined to block the European Union's adoption of a new accounting standard for financial instruments. If France’s initiative succeeds, the goal of global accounting convergence will face a serious setback.

The IASB, which set rules for Europe and much of the rest of the world, has already bent over backwards to meet French objections over a replacement for IAS39, the accounting rules for financial instruments that were much criticized during the crisis. For example, the IASB agreed to fast-track changes limiting the use of mark-to-market accounting. The IASB also controversially agreed its new rules should apply only to financial assets and not liabilities, leaving in place widely discredited rules letting banks mark their own debt to market.

The IASB's new standard is widely recognized as an improvement on IAS 39. The European Financial Reporting Advisory Group last month endorsed the new standard -- a first step toward EU ratification. Yet Paris still isn't satisfied.

Some French objections are technical. Although the new standard would mean less fair value accounting, Paris doesn't think the reduction goes far enough, particularly in relation to derivatives -- a major concern to French banks with large exposure. French and Italian members criticized IASB for its piecemeal approach to reform, even though it was done this way to address French concerns.

Paris's real objection is to the IASB itself, which it believes is too focused on investor interests and not sufficiently accountable to politicians. Never mind that the G-20 in Pittsburgh specifically endorsed the independence of standard-setters. Never mind the G-20 also endorsed efforts by the IASB to improve its accountability by establishing a monitoring board and consulting more widely with stakeholders such as regulators. Ms. Lagarde's objective is a greater role for national governments.

Ms. Lagarde stands little chance of convincing the G-20, with most governments accepting that rules must be free from political interference to carry credibility with investors. But she may have more luck with the European Commission, which is once again threatening to introduce European "carve-ins" to existing rules if the new standard isn't agreed to. Instead of tighter convergence on accounting, that would lead to accounting fragmentation.

Thursday, November 12, 2009

High Profile Accounting Monitoring Board for IFRS Hints at Support for Convergence from U.S.; SEC's Schapiro is a member

Talks to harmonise standards receive boost from a high-powered international oversight body this week.

The oversight board, known as the Monitoring Board, said in a statement that it was “pleased” by the approach of both boards.

The full statement:

“The Monitoring Board welcomes the commitment of the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) to implement enhancements to provide greater transparency to the standard setting process and to increase their efforts to reach conclusions in these major projects.

The commitment of the IASB and FASB in the joint statement issued on 5 November is endorsed by the Trustees of their respective oversight bodies, the International Accounting Standards Committee Foundation and the Financial Accounting Foundation.

The Monitoring Board believes that efforts of the IASB and the FASB will result in a set of high-quality international accounting standards that are not only converged but that improve the information provided to investors.
The Monitoring Board is pleased by the responsive approach of the IASB and the FASB to address concerns regarding the potential for the IASB and the FASB to reach different conclusion on the major projects in the Memorandum of Understanding and the impact that would have on the potential for global accounting standards.”

The members of the Monitoring Board are:

Hans Hoogervorst (Chairman) Chairman Hoogervorst represents the IOSCO Technical Committee on the Monitoring Board and is the head of the Netherlands Authority for the Financial Market

The Honorable Takafumi Sato Commissioner of the JFSA

Guillermo LarraĆ­n Chairman of the IOSCO Emerging Markets Committee and the Superintendencia de Valores y Seguros of Chile

Mary Schapiro Chairman of the US SEC

Observers

Sylvie Matherat Representative of the Basel Committee on Banking Supervision

Tuesday, November 10, 2009

Accounting Rules Mess Up Lending Market

New accounting rules on securitizations have messed up the market for bonds backed by credit-card debt.

No new credit card securities have been issued since the beginning of October. Such securities are created when card loans are packaged into bonds and sold to investors.

The new rules (FAS 166 and 167) require banks issuing the securities to account for them as if they were on their balance sheets. Previous treatment allowed off-balance sheet treatment for the securities.

On-balance sheet treatment gives federal regulators the right to claim those assets should the institution file for bankruptcy, effectively diminishing bondholders' claim to the assets.

On-balance sheet treatment also may increase banks’ capital requirements.

The Federal Deposit Insurance Corp. plans to discuss the issue at a board meeting Thursday and may make a ruling that clears up the confusion. The rule takes effect on the date companies begin their 2010 fiscal years.

From the start of the year until October, issuers had sold an average of about $3.5 billion worth of credit-card deals each month.

Under the old accounting standard, card issuers -- such as Citigroup, Bank of America, American Express, Capital One, J.P. Morgan Chase, and Discover packaged up pools of credit-card loans and sold them to investors.

Citigroup' said on Friday that the result should be an addition of about $154 billion to its assets, based on Sept. 30 figures.

If the Federal Deposit Insurance Corp does not change the rules regarding how it treats debt from these securities when a bank collapses, rating agencies may downgrade the securitized debt. The debt may not be rated triple-A securities.

The new debt could potentially be rated no higher than Citigroup's own ratings. That would likely lift the bank's borrowing costs when funding new credit card loans or other debt.

Until the accounting rule was changed, these securities didn't have to be included on the banks' balance sheets, so they weren't subject to the same accounting standards and disclosures required for on-balance-sheet items.

Critics of the old treatment argued this rule allowed companies to hide risky assets in these off-balance-sheet items. The new rule will force card issuers to bring off-the-book credit-card loans onto their balance sheets and set aside additional reserves to account for potential losses in these securities.

No new credit-card-backed bonds have emerged in the market since Bank of America issued a $300 million deal on Oct. 2.

Year-to-date issuance of securities made up of credit-card loans has fallen 41% to $32.3 billion from $55.2 billion a year ago, according to a Deutsche Bank note published Nov. 5.

The FDIC could issue guidelines Thursday on the accounting-rule change, which will include the grandfathering of existing credit-card securities so as to minimize the disruption caused to the issuance of such deals.

Monday, November 9, 2009

SEC Hints at U.S. IFRS Adoption

Following a joint meeting of the IASB and the FASB last week, SEC chairman Mary Schapiro provided a hint on U.S intentions on convergence with IFRS.

Schapiro read a 40-word statement last week that included the words "I am greatly encouraged by the commitment of the IASB and the FASB to provide greater transparency to the standard setting process and their convergence efforts. I believe that these efforts will result in improved financial information provided to investors."

Schapiro and the Obama administration have given
conflicting signals in the past as to what direction the SEC would take in light of the financial crisis. She has been quiet on the subject of IFRS convergence since taking over as SEC Chairman last in January. Schapiro has now provided a degree of direction for companies looking to decide whether to ramp up their IFRS adoption efforts. The SEC have said that they will decide in 2011 whether U.S. companies will switch from U.S. GAAP to IFRS. The SEC had previously hinted at what the convergence timeline would be.

The IFRS
road map would have the largest companies reporting under IFRS in 2014, with all public companies following by 2016. The SEC has sought feedback and received over 200 comment letters. The comments have not had an overall theme and 200 is a small number considering the number of potential stakeholders, which include public companies, investors such as pension funds mutual fund issuers, auditors, educators, and others.

Some U.S.-based companies, such as Microsoft have ramped up their convergence efforts and companies like United Technologies have made a decision to switch to IFRS ahead of the SEC's decision. These companies have significant operations in countries that have already converged, such as the EU. Ultimately they will save on accounting and audit costs by converging.

The SEC has previously indicated that there are a number of significant
issues to be resolved including working out convergence paths for differences between IFRS and U.S. GAAP on critical issues and funding and governance.

Thursday, November 5, 2009

SEC Calls for Less Words, More Substance in Financial Reporting

The SEC has called for corporations to stop providing thousands of pages of mind numbing needless boiler plate information in financial reports.

In recent speeches the SEC seemed to admit to some culpability in the excessive disclosures by stating that it is looking at its rules to determine whether companies are being asked to provide the right information.

The SEC complained about companies that provide laundry lists of risks they may face in dense lengthy reports containing impenetrable legalistic language.

One staffer said that quality of analysis is not measured by the length.

The SEC has pushed for plain language reporting for years. Litigation-shy companies have not been able to simplify reporting in the way the SEC desires.

In 2008, the SEC adopted rules for mutual funds to make their prospectuses easier for investors to read, understand and access.

The agency has also convened panels to make MD&A more accessible to unsophisticated investors.

Monday, November 2, 2009

SEC Chief Accountant says SEC will Clarify IFRS Roadmap by end of Fall

Last Friday, October 30, SEC Chief Accountant James Kroeker announced that the SEC remains committed to its IFRS road map.

Kroeker said he does not know the exact date the SEC will finalize its plan some time this fall. The information was provided as an answer to a question following Kroeker’s speech at an AICPA/International Accounting Standards Committee Foundation conference in New York.

The road map provides seven milestones and a tentative
timeline. The timeline depends on resolution of several issues around the milestones.

According to Kroeker,
comment letters have shown that most stakeholders support adoption of IFRS but that there are major concerns around convergence with U.S. GAAP.

Under the road map proposal, the SEC would decide in 2011 whether to require the use of IFRS. The 2011 decision point aligns with the G20 calls for accounting standard setters “to achieve a single set of high quality, global accounting standards within the context of their independent standard setting process, and complete their convergence project by June 2011.”

Key accounting issues to be resolved include joint projects on
financial instruments, financial statement presentation, leases, liabilities and equity distinctions and revenue recognition, consolidations, derecognition and post-employment benefits.

Kroeker prioritizes the list with his top three being financial instruments, revenue recognition and consolidation.

About financial instruments/fair value accounting, Kroeker also said “I believe it would be a serious mistake to take our focus off of investor needs for unbiased, transparent information in order to design what some have suggested are accounting standards that attempt to rectify the banking crisis.”.

On the
debate over fair value vs. historical cost valuation of financial instruments, per Kroeker: “it’s my personal view that it’s time to move beyond the debate over whether just fair value is relevant or cost is relevant. … It’s time to acknowledge that in some cases both sets of information are important and then how to portray that.”

With information from Journal of Accountancy

Wednesday, October 28, 2009

Opposition to IFRS among U.S. CFOs

While recent surveys have shown support for IFRS among financial executives, a recent Grant Thornton survey Forty percent of U.S. CFOs and senior comptrollers do not believe U.S. companies should be required to useIFRS.

Thirty-nine percent of the 846 senior financial executives surveyed said that U.S. companies should start using IFRS in three to five years, and only 7 percent believe that U.S. companies should be required to start using IFRS immediately.

When asked about their own companies’ actual IFRS usage, 90 percent of the senior executives surveyed reported that their companies do not prepare financial statements according to IFRS. Only 15 percent of the senior execs at public companies said they use IFRS and only 8 percent from private companies said they do.

Thirty-nine percent said they are familiar with the Financial Accounting Standards Board’s project on financial statement presentation. The majority of those that say they are familiar with the project say it is either “beneficial, but the benefits to the users of our financial statements would not justify the costs of implementing the proposed format” (49 percent) or that it “would not be beneficial to the users of our financial statements” (30 percent).

When asked if there should be different recognition and measurement principles for public entities and nonpublic entities, 51 percent of the senior financial executives said yes (including 39 percent from public companies and 56 percent from private companies), while 41 percent said no (including 54 percent from public companies and 37 percent from private companies).

Asked whether nonpublic entities should be allowed to use simpler recognition and measurement principles when preparing financial statements, 60 percent of the senior financial executives said yes (including 42 percent from public companies and 66 percent from private companies), and 34 percent said no (including 51 percent from public companies and 29 percent from private companies).

When asked if nonpublic entities in the U.S. should be allowed to use IFRS for SMEs, or small and midsized enterprises, when preparing financial statements, 52 percent said yes and 20 percent said no.

Wednesday, October 21, 2009

New IFRS Fair Value Standard will be released In November

International Accounting Standards Board chairman, Sir David Tweedie, said thath the IASB will release a new fair value accounting rule by November.

In an address to a meeting of European Finance Ministers, which have in the past been critical of the IASB’s response to the financial crisis, Tweedie has sought to ease concerns by announcing that he is on track to deliver a new fair value standard by the end of this year.

“I gave a commitment to deliver on this timetable. We will publish the new standard in November,” he said.

Fair value accounting came under fire from banks and governments in the European Union and the U.S. after the financial crisis.

Tweedie said he will not require loan books to be held at fair value which has now become a potential sticking point between the IASB and the FASB.

FASB's proposal will see all assets measured at fair value. The IASB's mixed measurement model would see banks' loan books valued on an amortized cost basis.

The two standard setters are trying to converge US and international accounting rules, in the hope that the US will eventually adopt the new rules. But the fair value standard has now emerged as a significant obstacle, highlighted by Tweedie who said he simply did have the time to co-ordinate efforts with FASB in the revision of fair value, in the wake of the financial crisis.

“As I said in June, given the urgency of the fundamental issues surrounding IAS 39, none of us can afford the potential protracted back-and-forth resulting from piecemeal changes in international and US standards that would undermine the comprehensive and desperately needed reform that is under way,” he said.

“In our discussions with the FASB aiming to reach a common global approach, we will emphasise our position in favour of a mixed measurement model over one that requires full fair value measurement on the balance sheet… I remain optimistic that we can overcome our current differences.”

Thursday, October 8, 2009

Deloitte Survey: Financial Execs want SEC to Move on IFRS

Financial executives are showing support for decisive SEC action in approving on the proposed IFRS roadmap.

The Deloitte survey, with over 150 financial executives participating, was conducted in September 2009.

Highlights of the survey results include:

  • 70% of respondents indicated approval for the SEC’s proposed roadmap
  • 51% responded that the SEC should approve the proposed roadmap, but consider pushing back the mandatory deadline a year
  • 19% responded that the SEC should approve its proposed roadmap “as is.”
  • 45% of respondents selected “delay in the finalization of the SEC’s roadmap” in characterizing the reason why their companies’ IFRS assessment plans may have been delayed
  • 9% of respondents identified “economic challenges or constraints” as the reason for delaying an IFRS assessment.
  • 34% of survey participants indicated IFRS adoption would make the U.S. more competitive in the global marketplace
  • 38% responded that IFRS adoption would not

Survey Results

Monday, October 5, 2009

Dell Settles with SEC

Dell Inc. said last week that it will improve its accounting and corporate governance rules as part of a settlement tied to an SEC investigation.

Dell will also pay $1.75 million in legal fees, according to a settlement filed with the Securities and Exchange Commission.

The SEC investigation into Dell's accounting was made public in 2006. Various shareholder groups have filed lawsuits against Dell for misrepresention of its financial results while insiders profited from selling their own shares at prices that were inflated by the overstated results.

Dell restated results for 2003 through 2007 after an internal audit found it overstated sales by $359 million and profit by $92 million during those years. The SEC continues its probe.

Under the settlement filed with the SEC, Dell agreed to make sure at least 60 percent of its board members are from outside the company. Dell also said it would train board members and give directors unrestricted access to Dell's employees.

Dell had already implemented some changes as the lawsuit moved through the courts. Under the settlement the changes must be extended and enforced for four years.

Among them:
  • an accounting code of conduct
  • enhanced ethics, compliance and insider-trading training
  • creation of a global team of accountants to focus on revenue recognition issues
  • provision to let employees make anonymous complaints about auditing or internal controls.

Monday, September 28, 2009

G-20: Converge Global Accounting Standards by 2011

Leaders at the recent G-20 summit called for a single set of high quality, fully converged global accounting standards June 2011.

This follows up on previous statements by the G-20 calling for a single set of global accounting standards and other accounting changes at summits held
last November and April.

In the Bush administration, Chairman Christopher Cox advocated published an IFRS
road map in the United States.

Following Mary Schapiro’s appointment as CES Chair, the SEC appeared to revisit and scale back the IFRS issue.

G-20 leaders also called on the International Accounting Standards Board (IASB) to “further enhance the involvement of various stakeholders.” Although the G-20 provided no specifics on how the IASB should enhance stakeholder involvement, the IASB’s parent organization, the IASC Foundation, is currently reviewing its constitution to include expanding the IASB’s liaison with other organizations such as regulatory agencies and other stakeholders..

Friday, September 18, 2009

SEC Reconfirms Thrust to Adopt IFRS

U.S. Securities and Exchange Commission will refocus on their IFRS roadmap.

The SEC's new chief accountant, Jim Kroeker, said in remarks to a New York State Society of CPAs conference in New York "Turning back to the roadmap will be an important priority for us this fall."

The roadmap would have U.S. companies adopting IFRS and filing financial results under IFRS by 2014, with the option for early adoption.

Kroeker said that in the 200 or so comment letters the SEC has received on the proposal, it was "resoundingly clear" that people agree there should be a single set of global high-quality accounting standards.

The comment letters identified, major differences in how different groups wanted to accomplish the goal of one standard.

Kroeker said the SEC staff, as "an important next step," would work on how to put into place various milestones to reach that goal.

Kroeker noted tha t convergence efforts to conform both sets of rules have been going on over the past few years. Recently the IASB and the FASB have accelerated certain convergence projects.

Kroeker implored standard-setters to avoid "a race to the bottom," where in a rush to converge the rules, accounting standard setters are urged to adopt the least controversial version of the rules, rather than the one that would best represent economic reality.

Kroeker said "A race to the bottom is an absolute concern I have," . "If we engage in a race to the bottom ultimately there will be no winner in that race."

Wednesday, September 16, 2009

IFRS Adoption Strategy

IFRS adoption is a complex multi-year process. It will absorb corporate resources—much like SOX implementation did for U.S. public companies. Muti-year programs should begin with a well mapped out strategy.

In setting their strategies, future IFRS adopters would be wise to leverage experiences of adopters in Europe, Australia and Canada. But also and more importantly at the planning stage, another source of leverage in the process may be leveraging the resources and experience of internal audit and SOX management. Journal of Accountancy had a recent article on this.

Some of the main points:

Based on the current SEC road map, your company will need to evaluate how to perform U.S. GAAP/IFRS parallel accounting over a multiyear period.

In creating a parallel accounting environment, your internal control and operational audit staff may need to consider the ramifications of modifying your company’s systems and processes.

Internal control and operational audit staff are in a great position to assist your company in evaluating impact areas with the IFRS conversion. Their financial and accounting backgrounds, combined with the knowledge of the underlying processes and systems, will provide in-depth knowledge for conversion planning.

It is critical for internal control and operational audit staff to get involved early to help guide the company in the planning and to ensure that their portion of the overall conversion cost estimate is included.

Strategic IFRS Planning Questions for ICFR (SOX) Management

  • How many resources should be assigned to the IFRS conversion project team?
  • Do the personnel have adequate accounting training to understand the differences between U.S. GAAP and IFRS?
  • Can the current SOX 404 process and systems documentation assist the company in estimating change impacts?
  • Does the company have sufficient resources/flexibility to handle the increased controls testing?
  • What can ICFR staff do to assist with mitigating the risks of change management in this significant conversion process?
  • Is there IT knowledge within the department to assist in identifying risks that may arise for system modifications for the parallel accounting period?

Tuesday, September 15, 2009

Best Financial Jokes of 2009

From the National Post. Not many true accounting jokes.

Timothy Geithner was out jogging without his guards. All of a sudden a man with a ski mask jumped out from behind some bushes with a gun.The masked man said “Give me all your money!”Unwilling to do so, Geithner said, “You can’t do this, I’m the US Federal Treasury Secretary!”The man then replied,... “Oh, never mind then. Give me MY money!”

Bank of America-Merrill Lynch has adjusted its investment portfolio: 50% cash and 50% canned goods

Well, the wait is over. The Obamas have chosen a new White House dog. It is a Portuguese water dog named Bo. Very cute dog. Their first choice was a wheaten terrier, but it was arrested for tax evasion. - Jimmy Fallon

Barack Obama’s daughters are very smart. They told him they will take the same responsibility for the dog that he is taking for the economy. That way, if the dog leaves a mess in the White House, it’ll be cleaned up by future generations. - Jay Leno

Banks want to return $68 billion in bailout money to the government. They were upset at all the hidden fees

I have an uncle down at Wall Street. He used to have a corner on the market. Now he has a market on the corner.

General Motors claims its new electric car the Chevrolet Volt can get up to 230 mpg in city driving. Unfortunately, in order to do so the car must first be plugged into the back of a city bus.

Lego reported a 60% rise in profits for the first six months of 2009 as it said parents were turning to its building blocks during a recession, both as toys for their children and as a basis for new homes after losing their old ones to foreclosure.

The courts allowed the bankruptcy proceedings for Chrysler to go forward. The bankruptcy was approved after the judge told Chrysler to sit in a room for a few minutes while the judge went to talk to his manager.

Barack Obama, who has a reputation for being a hands-on president, said he will not get involved in the day-to-day operations of the auto company. Obama may not take the wheel of GM, but he plans to be an annoying, backseat driver.

Resolving to surprise her husband, an investment banker’s wife pops by his office. She finds him in an unorthodox position, with his secretary sitting in his lap. Without hesitation, he starts dictating, “…and in conclusion, gentlemen, credit crunch or no credit crunch, I cannot continue to operate this office with just one chair!”

How many stockbrokers does it take to change a light bulb?Two. One to take out the bulb and drop it, and the other to try and sell it before it crashes (knowing that it’s already burned out).

Stockbroker: What is a million years like to you?God: Like one second.Stockbroker: What is a million dollars like to you?God: Like one penny.Stockbroker: Can I have a penny?God: Just a second ...

Pfizer is offering free drugs including Viagra for those who recently lost their jobs. Good to see the private sector and not just government providing a “stimulus package.”

Organizers of the “Buick Open” have assured the press that there are no hard feelings towards GM for their decision to end sponsorship, and that from now on the event will simply be referred to as the “Toyota is BIGGER than GM Open”.

David Letterman’s Top Ten Questions Bernie Madoff Asked Today in Prison
10. Has it been 150 years yet?
9. Who do I have to swindle to get a freshly-pressed jumpsuit?
8. Which way to the penthouse cell? 7. Because of my business dealings with the Latin Kings, can you keep me away from the Crips?
6. What mixes better in a toilet, sangria or daiquiris?
5. Will I get special treatment if I help the guards hide money from the IRS?
4. I’d like the truffle-crusted halibut.
3. Did I mention that it was an April Fools’ prank that just got out of control?
2. Will someone TiVo “America’s Got Talent” for me for the next 149 years?
1. Is it ok if I decline a conjugal request from my wife?

"Anybody ever been in prison? Bernie Madoff, the nasty, awful swindler, he's going to be there for 150 years. You know what he did? He hired a prison consultant. I think it's Martha Stewart." - David Letterman

Monday, September 14, 2009

Survey Says IFRS Still Alive in U.S.

A recent survey by Deloitte of over 245 financial executives from July 2009 indicates "green shoots" in what otherwise might have thought to have been an IFRS planning process that was slowing down or dead ending. In the wake of the financial crisis, other surveys indicated tha t resources allocated to IFRS were being cut back. Many thought that companies would be scaling back their activity around IFRS planning. The survey indicates that the overall thrust behind IFRS preparation in the U.S. may still be strong.

Survey highlights

89% of respondents indicated their companies
• viewed IFRS conversion to be highly or somewhat likely to become mandatory in the U.S.

Fifty-nine percent (59%) viewed mandatory conversion in the U.S. as highly likely.

Over two-thirds (67%) of respondents indicated
• that their company had designated a person or team to focus on IFRS or monitor IFRS developments

Eighty percent (80%) of respondent companies
• are positioning themselves to address IFRS: 40% are performing or have performed a high-level IFRS assessment, while 40% plan to perform an assessment.


When it comes to seeking outside assistance with planning activities, such as assessments, some respondents indicated that their companies are accessing help from either their external auditor or another outside professional services firm.

The survey indicates that approximately sixty percent (60%) of companies who performed or are performing a high-level IFRS assessment sought or are seeking external assistance.

However, a significant number of respondents (around 40%) are taking on the task themselves. Given the economic climate and the pressure on cost-reduction, the go-it-alone strategy may not be surprising.

For post-assessment plans, many survey respondents are looking at cross-functional approaches that include not only accounting, but also tax, technology/systems, and training personnel/human resources.

The SEC will likely be discussing its proposed roadmap in the fourth quarter.

Wednesday, September 2, 2009

Another SEC Fraud Bust

SEC Charges Terex Corporation with Accounting Fraud

The Securities and Exchange Commission (SEC) charged Terex Corporation, a Westport, Connecticut-based heavy equipment manufacturer, with accounting fraud for making material misstatements in its own financial reports to investors, as well as aiding and abetting a fraudulent accounting scheme at United Rentals, Inc. (URI), another Connecticut-based public company.

The SEC's complaint alleges that Terex aided and abetted the fraudulent accounting by URI for two year-end transactions that were undertaken to allow URI to meet its earnings forecasts. These fraudulent transactions also allowed Terex to prematurely recognize revenue from its sales to URI.

The fraud occurred through URI's sales of used equipment to a financing company and its lease-back of that equipment for a short period. As part of the scheme, Terex agreed to sell the equipment at the end of the lease period and guarantee the financing company against any losses. URI separately guaranteed Terex against losses it might incur under the guarantee it had extended to the financing company.

Without admitting or denying the SEC's charges, Terex agreed to settle the Commission's action by consenting to be permanently enjoined from violating the antifraud, reporting, books and records and internal control provisions of the federal securities laws and by paying an $8 million penalty.

Thursday, August 27, 2009

More on GE Accounting Fraud Allegations--Smooth Flying on Jet Engines

The SEC recently settled allegations of fraudulent accounting with GE. More details:

GE was worried that volatility in its revenues would wreck its plans to meet earnings expectations. The SEC alleged that GE engaged in complex hedge accounting manipulations to smooth earnings, and in a scheme to further smooth profits in its aircraft engine business.

The earnings smoothing was done by hiding losses from interest-rate derivatives, improper accounting for hedging transactions, and a messy scheme to smooth profits in its aircraft engine business.

The SEC did not charge GE with deliberately breaking rules on the hedging and aircraft engine transactions.

The SEC’s lawsuit referred to internal e-mails in which a GE accountant said "we've got to fix this" about the "extraordinarily big deal" of possibly losing the right to use legitimate accounting to allows companies to ignore losses in the fair value of derivative assets.

GE had bet on interest rates by writing more derivatives contracts than it needed to hedge its floating rate debt exposure. The SEC claims that GE retroactively changed how it accounted for derivatives, but the plan was rejected by KPMG, its external auditors. The Sec claims that GE then altered the plan and then went ahead with the retroactive change anyway. This allowed GE to avoid reporting a $200 million loss.

Wednesday, August 26, 2009

More on GE Fraud--Locomotives on a Bridge

Additional information of GE's settlement with the SEC over bad accounting.

SEC says that in 2002 and 2003 GE booked locomotive sales before the end of their December 31 fiscal year even though they had not delivered the equipment until the next year. They arranged bridge financing in which finance companies purchased the locomotives and then resold them to GE's customers in the next quarter. This violates the “risks and rewards” guidance in revenue recognition accounting standards as the risks and rewards of ownership of the locomotives remained with GE and did not transfer to its ultimate customers.

GE promised at least one customer that it would reimburse about $4 million of tax hits that would arise using the financial intermediary. In 2002, 131 of the 191 locomotives GE originally said it sold were not actually sold. This overstated revenues and profits by more than 39%. In 2003, using the same manipulation, GE overstated revenues and profits by over 16%.

As part of the locomotive manipulation, GE asked that the financial intermediaries avoid explicitly stating in their invoices that GE was paying for the costs of storage and insurance for fear of negatively impacting GE’s revenue recognition in the quarter.

Tuesday, August 25, 2009

American Bankers' Association Criticizes FASB, IASB over mark to Market Changes

The American bankers Association (“ABA”) has written to Robert Herz, Chairman of the FASB and Sir David Tweedie Chairman of IASB, about their concerns around the process being taken on the FASB and IASB projects relating to financial instruments.

The ABA has lobbied against mark to market accounting for years and their response is no surprise.

The ABA says that the changes that the FASB and IASB are considering represent the most significant accounting changes the ABA has ever experienced. The ABA encourages the FASB and IASB to make such changes only "with utmost caution and the appropriate level of due process to correspond with the magnitude of the changes."

The ABA agrees that a certain amount of change is urgently needed, but that the FASB and IASB direction may cause significant disruption, with both preparers and users of financial statements.

They state that rule-makers must be very careful in this effort to ensure that any changes:

1) represent solid and meaningful change that is valuable and understandable to financial statement users;
2) focus on the business models used by entities that prepare the financial statements, and
3) can be implemented and maintained at a reasonable cost.

Other points made:

  • The rapid paces at which both organizations are working, as well as the paths being taken, are causing some to question whether there is due process in evaluating these important issues.
  • Some bankers also question whether such efforts are driven by a search for simplicity, transparency, and accuracy or by an appetite to expand fair value accounting, no matter the implications.
  • A major concern is that the current directions in which the FASB and IASB are moving appear to be similarly requiring more mark to market accounting (MTM) within the financial statements, more capital for many existing banking activities, and more operational challenges to comply with these rules for banks of all sizes.
  • The cost of accounting compliance puts continued participation in certain market activities at risk for some smaller institutions.
  • Concern over the current divergence between the FASB and IASB proposed models and time frames for completion. The IASB plans to finalize its accounting standard in 2009, and the FASB's completion date will be subsequent to that date. In such case, the FASB will have only one of two choices: (1) to follow the IASB model – which will not provide U.S. companies with appropriate due process for providing input, or (2) a lack of international convergence – which should be avoided.
ABA says that the IASB appears to be solving the accounting puzzle on a piecemeal basis, which may result in pre-determining the outcome for subsequent parts of the puzzle that may not fit.

ABA feels that it is extremely important that new standards be developed jointly by the FASB and IASB, with proper due process and open consultation with a wide range of constituents that ensures a holistic review.

ABA's points for consideration when making substantial changes to the accounting model:
  • Serious consideration must be give to field testing proposals prior to implementation, and sufficient transition time must be provided.
  • Regulatory accounting rules should be consistent with GAAP.
  • Accounting changes must meet a “costs vs. benefits” test.

Wednesday, August 5, 2009

Trains that Ran Ahead of Time: GE Takes Big Reputation Hit and pays SEC Fines

General Electric broke accounting rules to meet or beat earnings expectations
SEC claims they intentionally defrauded investors

GE has paid $250-million in fines and legal costs to settle a claim by the SEC that they intentionally defrauded investors.

The SEC fined GE $50-milion and lawyers and accountants advising General Electric on the fraud settlement earned $200-million on “external legal and accounting expenses” from the case.

The SEC slammed GE for almost ten years of earnings manipulation through accounting practices. GE consistently beat analyst consensus estimates by a few cents a share in nearly every quarter.

The SEC stated that “high-level GE accounting executives or other finance personnel approved accounting that was not in compliance with Generally Accepted Accounting Principles.

"GE bent the accounting rules beyond the breaking point," said Robert Khuzami, Director of the SEC's Division of Enforcement. "Overly aggressive accounting can distort a company's true financial condition and mislead investors."

David P. Bergers, Director of the SEC's Boston Regional Office, added, "Every accounting decision at a company should be driven by a desire to get it right, not to achieve a particular business objective. GE misapplied the accounting rules to cast its financial results in a better light."

There is always a risk that companies that take pride in consistently being slightly above market or analyst predications are not unlike Bernie Madoff’s fraudulently consistent positive returns on his portfolio over a long periods. GE has been in that slightly better than expected position for years and the SEC, to its credit, hit them hard for diddling with the quarterly earnings amounts.

Some of the years in question were presided over by Jack Welch, some by Jeffrey Immelt. The reputation of those leaders and GE takes a serious setback with the SEC’s actions.

The SEC found the accounting irregularities through a risk-based investigation of GE’s accounting. Their first clue was wrong hedge accounting, and the case developed from there to full blown fraud investigation.

The SEC plowed through millions of emails. Some of the smoking guns found by the SEC included the following statements:

  • “How do we intend to deal with the SEC “one strike and you’re out” position? Doesn’t this mean that potentially we can no longer qualify for cash flow hedging??? Urgent that you find disclosures of others who have had cash flow failures. Isn’t this an extraordinarily big deal?”
  • “I just went back to the SEC speech on this point, and don’t see any flexibility whatsoever. We’ve got to fix this.”
  • “this was the one to go with until today . . . but when the initial quantification got finished today, it showed a $(200MM) or bigger hit would have to be considered”
  • “[auditors] . . . looking into this, and might struggle to agree with this”
  • a senior accountant in GE’s corporate accounting group sent a powerpoint describing GE’s outside auditor’s view that, if GE’s practice of recognizing margin on spare parts pursuant to RAM “Was Observed and Challenged [it is] . . .Virtually Assured We Would Lose.”
  • A document stated that...“accounting justification [was] crumbling” based on expected GAAP changes
  • A powerpoint presentation by a GE accountant implied that a change could be accomplished without having to make a disclosure. “$1 billion unexplained balance in GE’s [deferred charge balance] could draw the attention of the SEC and would not survive.”

The alleged misstatements:

  • improper application of the accounting standards to GE's commercial paper funding program to avoid unfavorable disclosures--estimated approximately $200 million pre-tax charge to earnings
  • sales of locomotives that had not yet occurred to accelerate more than $370 million in revenue
  • improper accounting for sales of commercial aircraft engines spare parts increasing earnings by $585 million.

GE neither admitted nor denied the allegations and said it had co-operated with the SEC and revised its financial statements. Civil suits may still be launched against some individuals.

The SEC’s complaint does not implicate either Welch or Immelt, or GE’s CFO.

Recently Immelt has ended earnings guidance for analysts. GE had an unexpected earnings miss in April last year, sending its stock into a pre-financial meltdown slump from a 2007 high of over $40 to about $26, before the intraday meltdown low of under $6.

FASB, IASB Support Moving to Direct Method For Cash Flow

As the FASB and IASB consider their proposed overhaul of financial statement presentation, one of the
significant changes would be the utilization of the direct method
rather than the indirect method for calculating cash flows.


The requirement to use the direct method is part of the proposed
changes that the two boards introduced in Discussion Paper (DP) No.
1630-100, Preliminary Views on Financial Statement Presentation.


The boards are planning to discuss the proposal in the near future, as
part of a broader discussion on financial statement presentation. In
this paper, the boards are advocating greater use of the direct method
of calculating operating cash flows.


Under the direct method, companies would present separately the main
categories of their operating cash receipts, such as cash collected
from customers, and operating cash payments, such as cash paid to
suppliers to acquire inventory. This approach is also known as the
income statement method because it requires companies to compute the
net cash provided by operating activities by adjusting each item in
the income statement.


Currently, most companies use what is known as the indirect method, by
reconciling profit or loss or net income to net operating cash flows.


Both U.S. GAAP and IFRS permit both the direct and indirect methods of
presenting operating cash flows. However, in DP No. 1630–100, the
boards said a major deficiency of the indirect method is that it
derives the net cash flow from operating activities without separately
presenting any of the operating cash receipts and payments.

Tuesday, August 4, 2009

SEC Comment Letters--In Your Mailbox Soon?

The accounting firm Crowe Horwath has published an article Recent Trends in SEC Comment Letters--Reproduced in its entirety below.

In December 2008, the Securities and Exchange Commission (SEC) staff indicated at the American Institute of Certified Public Accountants’ (AICPA) National Conference on Current SEC and PCAOB Developments that they would be conducting targeted reviews of fair value, other-than-temporary impairment (OTTI) of securities, and other asset impairments. As a result, several recent examples of SEC staff comment letters on periodic filings (Form 10-Qs and 10-Ks) have a clear focus on these issues.

Following are some general themes present in comment letters from the SEC staff on recent filings that might be helpful for registrants to consider as they prepare periodic filings. Management should carefully review their company's accounting policies as well as related financial statement and management’s discussion and analysis (MD&A) disclosures related to these issues.

Accounting
OTTI of Securities
The SEC has:

  • Asked registrants to justify why securities with fair values significantly below cost are not considered to be OTTI.
  • For securities with ratings of "default" or "speculative," the SEC has asked how management determined that an adverse change in cash flows had not occurred.
  • Challenged registrants on whether the losses for sales of securities after a period end should have been recognized in the prior period.
  • Asked registrants to provide specific information about securities with significant unrealized losses.
  • Requested information includes the specific issuer and name of each security; type of underlying collateral, credit rating, severity, and duration of the unrealized loss; and how the financial condition and near-term prospects of the issuer were considered when determining that no OTTI was present.


Securities/Other
The SEC has asked registrants to:

  • Provide implied discount rates used in determining fair value of securities when using Level 3 inputs (in accordance with the guidance in Financial Accounting Standards Board Staff Position 157-3 (FSP FAS 157-3), “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” and FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”).
  • Reconcile the cash flows used to determine fair value with the cash flows used to assess OTTI.
    Indicate the systems and controls used to validate prices received from third parties when valuing securities.

Goodwill and Other Intangible Assets
The SEC has commented on:

  • Implied control premiums used to determine fair value of reporting units for purposes of step one of goodwill impairment tests. Assumptions used to determine fair value must be supportable and should not contradict observable data about recent transactions.
  • The lack of support for a reasonable period in the context of determining market capitalization of a reporting unit.
  • The lack of support for assumptions used when determining the fair value of an intangible asset – for example, when a multiperiod earnings approach has been used.

Presentation and Disclosure

Loans and the Allowance for Loan Losses
The SEC has:

  • Asked registrants to consider more disaggregated disclosure about loan portfolios – for example, providing disclosures by exposure to subprime, alt A-paper, or other relatively high-risk loans.
  • Commented on disclosing reasons for changes (or lack thereof) in general loan reserves considering changes in credit risk.
  • Commented on presenting the basis for each risk category and the method for determining the loss factor applied to each category. It has asked companies to specifically identify how historical loss trends were adjusted based on current factors.
  • Asked registrants to explain reasons for directional inconsistencies in loan-loss allowances – for example, when impaired loans increased but specifically identified reserves decreased.

Securities
The SEC has requested:

  • More disclosure of reasons for transfers into and out of the Level 3 category and more robust discussion of how fair value was determined when classified as Level 3.
  • Support for securities being presented as Level 2 that appear to require Level 3 classification based on other disclosures.

www.crowehorwath.com