Friday, January 22, 2010

FASB, IASB Agree on Something!

The Financial Accounting Standards Board and the International Accounting Standards Board finally agreed on something after a number of public differences of opinion over the last year. They have agreed to define fair value as an exit price, as a result of a recent joint meeting.

Both the FASB and the IASB have been controversial recently as they have come under pressure to revise fair value and “mark to market” standards to give financial institutions more flexibility in valuing assets that became difficult to trade during the crisis.

The two boards have decided to meet on a monthly basis, to resolve outstanding issues in areas such as fair value, revenue recognition, leases and consolidation.

The agreed-upon definition provides that when markets become less active, the two boards tentatively decided that an entity should consider observable transaction prices unless there is evidence that the transaction is not orderly. If an entity does not have enough information to determine whether the transaction is orderly, it should perform further analysis to measure the fair value.

The boards also decided (tentatively):

  • that a transaction price might not represent the fair value of an asset or liability at initial recognition if, for example, the transaction is between related parties, the transaction takes place under duress or the seller is forced to accept the price in the transaction, the unit of account represented by the transaction is different from the unit of account for the asset or liability measured at fair value, or the market in which the transaction takes place is different from the market in which the entity would sell the asset or transfer the liability.
  • to confirm that a fair value measurement is market based and reflects the assumptions that market participants would use in pricing the asset or liability. Market participants should be assumed to have a reasonable understanding about the asset or liability and the transaction based on all the available information, including information that might be obtained through due diligence efforts that are usual and customary. A price in a related-party transaction may be used as an input to a fair value measurement if the transaction was entered into at market terms.

Thursday, January 14, 2010

Why IFRS Adoption will Slow Down in the U.S.

Recent political battles in Europe over IFRS may have slowed the timeline on progress of adoption of an IFRS road map in the U.S.

Reports suggest that the International Accounting Standards Board is in turmoil over the independence of standard-setters among other issues. With the U.S. watching on the sidelines, conflicting signals are being sent and questions are being asked about what the rush is toward adoption of IFRS in the U.S.—if the IASB, which sets IFRS standards, can’t agree on things, why would the U.S. buy in?

Politics won’t go away if and when the U.S. buys in to IFRS. The U.S. will not submit to the whims of accounting standards controlled by Europe, especially with the French government recently refusing to adopt certain IFRS standards affecting financial institutions. That is why the SEC has called for certainty about governance and funding before it sets a firm adoption date for IFRS.

In a recent article, Alfred M. King, vice chairman of Marshall & Stevens, a financial valuation and consulting practice cited six IFRS myths—a bit too late for Canadians, who are on track to adopt in 2011, and Australia and Europe, who have already adopted.

What follows below is Mr. King's article.


No. 1: IFRS will improve U.S. accounting. I have yet to see any proof that financial reporting by U.S. companies will be improved if we substitute IFRS for GAAP. However one slices it, accounting is an artificial construct. That GAAP and IFRS are different is self-evident. That IFRS is superior to GAAP is an assertion, not a proven hypothesis. The principal argument of proponents is that IFRS is "principles-based" while GAAP is "rules-based."

Who says principles are better than rules? If IFRS is so superior, shouldn't it produce better economic outcomes? Few people would support the thesis that the U.S. economy somehow suffers in comparison to countries that use IFRS - our capital markets are larger and stronger.

If IFRS is superior, economic data do not make that case. That leads us to principles versus rules.

No. 2: IFRS is principles-based while GAAP is rules-based. Why do we have rules-based accounting in the U.S.? Because auditors want certainty against the threat of lawsuits. The proponents of IFRS have not asserted that the legal system in our country will be modified to prohibit class-action lawsuits against accounting firms. Until or unless the legal system changes, auditors need the protection they get when they follow accounting "rules."

Further, every observer with deep IFRS experience says the same thing: Whenever an IFRS accounting issue arises, the usual response is, "What does GAAP say?" In other words, IFRS itself defers to GAAP as being intellectually superior.

No. 3: To be competitive, U.S. companies must adopt IFRS. This assertion sounds good, but it's only a sound bite. There is not a shred of evidence either that accounting under GAAP is a hindrance or that there would be any positive change in economic performance were IFRS to become the dominant accounting system in the U.S. The track record of the countries in the EU, however, does suggest a high probability of economic decline.

IFRS usage worldwide might make the task of security analysts easier, but within both GAAP and IFRS there are still significant differences among companies in the same industry. That adoption of IFRS will suddenly make accounting differences disappear flies in the face of experience over the last 75 years.

No. 4: To be a good international citizen we cannot continue to be the only country with GAAP. Hogwash. This could easily be turned upside down by an assertion that IFRS users would be better citizens were they to adopt GAAP. After all, the U.S. accounts for a substantial portion of global GDP. Perhaps the economic health of many European firms is worsened by IFRS. Indeed, they might be better off with a more robust accounting system, i.e., GAAP.

No. 5: We are going to do it sooner or later, so why not start now? This sounds like the used-car salesman who says, "If you don't buy this beauty (wreck?) today, you'll be left behind tomorrow."

Implicit in this concept is that convergence will happen because of some innate superiority in IFRS. The real issue is that proponents fear a public debate with knowledgeable opponents of this bad idea. Advocates say that the faster the U.S. gets on board, the sooner we will see the "benefits" of IFRS. But what are those benefits?

No. 6: The upfront costs of conversion or convergence will be more than offset by future savings. That there would be substantial cost in converting to IFRS is a given. To companies, that cost would represent cash outlays to auditors and consultants. No wonder the major firms support IFRS. They see tons of revenue awaiting them.

The costs to companies are real and tangible. The future savings are speculative and opaque. Will companies spend less time on internal controls and financial reporting if IFRS replaces GAAP? If that is the case, let IFRS proponents prove the case. Not assert it - prove it.

Much more likely is that the cost to companies of developing and disseminating financial information under IFRS will be about the same as it is today, once the initial conversion costs are past. So where will these savings come from? Maybe, like the current health care debate, the Congressional Budget Office could "score" a conversion to IFRS. Skepticism abounds that the Obama administration's estimate of cost savings from its health care proposals will ever come to pass. Will Medicare really be reduced by $400 or $500 billion?

It is possible that IFRS can generate savings. But where the savings will come from, and whether anyone other than consultants and accounting firms will actually gain, appear to be well-kept secrets.

KING'S CONCLUSIONS--Mr. King's conclusions are set out below.

There appears to be a rush to judgment to dump GAAP and embrace IFRS. But once we see who benefits from such a change, the case for IFRS becomes much weaker.

It is up to IFRS supporters to lay out a detailed explanation of all the costs and to quantify all the benefits. Hiding behind generalizations such as we must be good corporate world citizens or principles are better than rules does not provide rigorous support to offset the known costs that switching to IFRS would entail.

Wednesday, January 13, 2010

SEC and Goodwill Impairment

In the current economic environment, the SEC continues to ask issuers to support their assertions around goodwill impairment. SEC staff comments often arise when a company’s revenues significantly decline or when market capitalization significantly declines below book value, since such declines may indicate impairments in intangible assets and goodwill.

SEC staff also request additional disclosures about goodwill impairments. SEC staff have indicated that in future they will request even more disclosures about how the conditions that caused impairment will affect a company’s business in the future.

Documentation of support for impairment test results is important as SEC staff includes valuation experts who may request and review a company’s goodwill valuation reports.

The staff has also been asking for more robust and comprehensive disclosures about goodwill impairments, including the following:

  • Policies for impairment testing
  • Organization of reporting units
  • Goodwill allocated to the reporting units
  • Description of the steps performed to review goodwill for recoverability
  • Nature of the valuation techniques used, including descriptions of the significant estimates and assumptions used to determine the fair value of the reporting units
  • Results of the most recently completed impairment tests.

Examples of SEC Comments
Goodwill Impairment Testing — We see that goodwill comprises approximately [XX%] of your assets at [year-end]. We also note that revenues and net income continued to decline in the first quarter of 2009 due to decreases in volume, a slowdown in the economy, declining demand from the [XXX] and [YYY] markets and increased competition from imports. Please tell us how you considered these factors in determining whether goodwill was impaired at [year-end]. In addition, tell us whether these items are indicators of potential impairment that would require you to perform a goodwill impairment analysis subsequent to [year-end].

Goodwill Impairment Testing — We note that you recognized a goodwill impairment charge during the year. . . . In the interest of providing investors with a better insight into management’s judgments in accounting for goodwill impairments, please revise future filings to provide the following disclosures as part of your critical accounting policy:

  • The reporting unit level at which you test goodwill for impairment and your basis for that determination;
  • Sufficient information to enable an investor to understand how you estimate the fair value of your reporting units and why management selected that method as being the most meaningful in preparing your goodwill impairment analyses;
  • A . . . description of the material assumptions used;
  • If applicable, how the assumptions and methodologies used for valuing goodwill in the current year have changed since the prior year, highlighting the impact of any changes; and
  • If or how you consider your market capitalization relative to your net book value in evaluating goodwill for impairment.

Goodwill Impairment Testing — We note there was a significant decline in your market capitalization during the third quarter. . . . It appears this is a triggering event that could require you to reassess your goodwill for impairment. Please tell us what consideration you gave to reassessing the recoverability of your goodwill in the third quarter. If you did not perform impairment tests, please explain why. To the extent that impairment tests were performed tell us how you determined that no impairment existed including in your response what impact the current economic environment had on your cash flow assumptions.

Long-Lived-Asset Impairment Testing — Please revise to describe the impaired long-lived assets or asset groups, the facts and circumstances leading to the impairments and the segment in which impaired long-lived assets or asset groups are reported.

Wayne Carnall, chief accountant in the SEC’s Division of Corporation Finance, recently observed that even though “registrants have provided voluminous disclosures regarding goodwill impairments within the critical accounting policy section of [MD&A], it is not always clear how the information is meaningful to investors.” The disclosures have often focused on the noncash nature of the goodwill impairment but have not addressed the business and economic conditions that gave rise to the charge. We understand that the SEC staff will be asking for more disclosures in MD&A about what the conditions that resulted in impairments mean to the registrant’s business as well as for more forward-looking information about the risk of future impairments, such as:

  • Percentage by which the fair value of the reporting unit exceeds its carrying value as of the most recent step 1 test
  • Goodwill allocated to the reporting unit
  • Assumptions that drive the estimated fair value and a discussion of the uncertainty associated with the key assumptions
  • Discussion of any potential events, circumstances, or both, that could have a negative effect on the estimated fair value
  • Carnall also stated that the SEC staff “is considering providing . . . guidance in the near-term to provide registrants with a better understanding of its expectations in this area.”

Control Premium and Goodwill Impairment

Robert Fox, a professional accounting fellow in the SEC’s Office of the Chief Accountant, recently raised several points about goodwill impairment. For example, he remarked that the market capitalization of a registrant may not fully reflect the aggregate fair values of all the registrant’s reporting units. Mr. Fox pointed to ASC 350-20-35-22 and 35-23 (formerly paragraph 23 of Statement 142), noting that “an entity might derive ‘substantial value’ from the ability to obtain control.” Accordingly, this control premium may cause the fair value of all the registrant’s reporting units to exceed the registrant’s market capitalization. He also indicated that while it would be “prudent” for an entity to reconcile the aggregate fair value of its reporting units to its market capitalization, the entity should also consider other factors when assessing goodwill for impairment.

Thursday, January 7, 2010

Recent IFRS Developments and News

The AICPA has an excellent monthly news digest of current IFRS news. Below is their most recent release. You can subscribe using the link at the bottom of this post.

Panel to study issue of accounting standards for private companiesA panel created by the AICPA and the Financial Accounting Foundation with support from the National Association of State Boards of Accountancy will explore questions about the future of standard setting for U.S. private companies. Recommendations are expected this year. AICPA President and CEO Barry Melancon, CPA, said he sees potential for significant action resulting from the group's work. "There has never been an effort at this level to address this issue," Melancon said. (12/17)

Boards: Politics won't halt push to converge accounting rulesPolitical pressure has caused convergence efforts between the International Accounting Standards Board and the U.S. Financial Accounting Standards Board to drift apart. In October, the two standard setters met and subsequently issued a statement reaffirming their commitment to convergence of major topics by June 2011. Forbes (12/15)

Disregard IFRS 9 standard, says IASB's LeisenringJames Leisenring urged an audience at an accounting conference to ignore the new IFRS 9 standard for financial instruments issued by the International Accounting Standards Board in November. According to Leisenring, the board -- of which he is a member -- was influenced by political pressures when it recommended the standard. Mandatory adoption is five years away and there may be changes as the FASB works on its standards for financial instruments. WebCPA (12/10)

Other News

Adoption of IFRS 9 prompts confusion in year-end reportingComputeractive (U.K.) (12/19)

Tokyo Stock Exchange's chief cites concern about move toward U.S. fair-value systemFinancial Times (tiered subscription model) (12/31)

Issues remain regarding harmonization of accounting standardsDirector of Finance (U.K.) (12/21)

IPSASB achieves convergence with IFRSWebCPA (12/22)

Regulatory Developments

SEC signals that action on IFRS is forthcomingThe Securities and Exchange Commission could consider further action on IFRS adoption early this year, according to Commissioner Elisse Walter. Walter's comments came at an AICPA conference, on the heels of SEC Chief Accountant James Kroeker's comments that more information about IFRS adoption would be coming "in the short term." For daily updates, training and other resources, visit (12/9)

EU regulator warns of division on standardsSenior European Union regulator Eddy Wymeersch has called for an independent review of international accounting standards and said the International Accounting Standards Board is increasingly at odds with U.S. standards. The IASB's mixed-model method of valuing assets, the first part of so-called IFRS 9, differs from the U.S. fair-value model. Meanwhile, officials from 33 countries met in Paris in early December to discuss enforcement of IFRS around the world. Financial Times (tiered subscription model) (12/2) , (12/7)

Analysis: How IFRS adoption will impact taxesAn analysis by John R. McGowan and Matt Wertheimer examines how a shift to International Financial Reporting Standards by the Securities and Exchange Commission would affect tax policy in the U.S. The Tax Adviser (12/2009)

Japan's voluntary IFRS adoption puts pressure on U.S.Japan's Financial Services Authority put pressure on the U.S. to adopt International Financial Reporting Standards after it said it would allow voluntary domestic use of the standards, starting with fiscal years ending on or after March 31, 2010. Japan had been the biggest country after the U.S. to hold out on adopting the standards. "The FSA's decision to permit domestic use of IFRS represents a first step towards a mandatory use of IFRS in Japan, and is an important milestone on the path towards global standards," International Accounting Standards Board Chairman Sir David Tweedie said in a statement. WebCPA (12/11)

China would get boost from Hong Kong's acceptance of standardsHong Kong intends to accept Chinese accounting standards. The move would push forward Beijing's efforts to globalize China's financial sector. The effort has faced delays over concerns about Chinese auditors. The New York Times/Reuters (12/30)

Argentine companies to use IFRS accounting rules by 2012All Argentine companies with publicly traded securities will be required to adopt International Financial Reporting Standards starting in 2012, the government announced Dec. 29. Companies will have the option of adopting the standards in 2011. The Wall Street Journal/Dow Jones Newswires (12/30)

2010 will be year of new regulationsWith new financial regulations seemingly imminent, Menaka Doshi asked three of India's most prominent chief financial officers whether the country is ready for such changes in regulatory and tax law. Neither companies nor regulators are prepared to adopt International Financial Reporting Standards, according to Y.M. Deosthalee of Larsen & Toubro. (India)/CNBC-TV18 (India) (1/4)

Financial executives give advice on implementing IFRS In a new article on, three financial executives from large international companies discuss their experiences with preparing to move to International Financial Reporting Standards. Learn what they believe are the keys to a successful transition from U.S. GAAP.

Contribute to wiki on IFRS for Small and Medium-Sized Entities comparison to U.S. GAAP The AICPA is developing a resource that compares the International Financial Reporting Standard for Small and Medium-Sized Entities with corresponding requirements of U.S. generally accepted accounting principles. This resource is available in a wiki format and all are invited to contribute to its development. To learn more, view available sections and contribute to its content, click here.

AICPA looking for IFRS experts to help develop certificate of accomplishment program The AICPA Learning team is developing an IFRS Certificate of Accomplishment program for CPAs and chartered accountants that will equip participants with the knowledge and experience to apply IFRS in the U.S. The AICPA is seeking subject matter experts with extensive IFRS knowledge and experience in IFRS application and/or training to help develop the program. SMEs should have active CPA or CA credentials; broad knowledge of both IFRS and U.S. GAAP; experience applying IFRS at the transaction and financial reporting levels; experience converting an entity from a national GAAP to IFRS; and experience training others in IFRS. For more information, click here.

Learn key IFRS concepts with IFRS Digest