Tuesday, June 29, 2010

G20 Slows Goals for IFRS Adoption

The G20 group of countries has dropped an accelerated timetable for adoption of IFRS by June 2011.

At the recent Toronto summitt, the G20 stated that while they continue to emphasize the importance of completing a single set of high quality improved global accounting standards, they decided to relieve pressure on convergence of US and international standards by making no reference to the urgency of the project. Earlier, the G20 had called for convergence by a June 2011 deadline.

Prior to the summit, the IASB stated that some convergence projects would not make the June 2011 cut-off point.

Monday, June 28, 2010

Retailers Must Make Major Adjustments for New Lease Accounting

Accounting rules on leases are sure to change in the near future. International and U.S. standard-setters have both introduced new proposed standards are likely to be finished in 2011 and take effect in 2013.

The New York Times quotes the SEC as stating that $1.3 trillion in leases will be added to public company balance sheets.

The standards will add significant liabilities to balance sheets and may jack up expenses as well.

All leases will be affected, including those currently classified as operating leases and fully expensed as there is no grandfathering clause when the rule takes effect.

The standards require companies to record as a liability the cost of rent over the remaining term of the lease and record as an asset their right to use the space.

This could have diverse impacts, including weakening companies in the eyes of investors and activating debt covenants with lenders.

It could also affect credit ratings. Ratings agencies say they already take into consideration rent obligations by using a multiplier on operating lease payments to arrive at an estimate of capital lease obligations. However the new standard requires significant additional disclosures that could provide readers of financial statements with additional information about corporate leases, possibly not known before, and possibly damaging to credit capacity.

The thrust of the change is part of the trend to limit off-balance-sheet activity. The standard-setters received almost 300 comment letters commenting on the proposal.

Certain companies with high debt loads may be adversely affected by adding new debt to their balance sheets. Also impacted heavily will be large retailers that may have thousands of premises leases, as well as commercial banks with multiple branches. Tracking leases and analyzing them to convert them to on-balance-sheet status may be problematic.

The standards may have the impact of persuading companies to purchase rather than lease real estate, to avoid either the ongoing administrative burden of analyzing and classifying and accounting for capitalized leases, or to have more conventional and possibly lower-cost debt on their balance sheets.

Companies may also opt for shorter leases as they will have less debt on their balance sheets that if they have longer terms.

Renewal options may become less popular. The new rules require that if a company expects to execute a renewal option, they must account for the lease as if it included the option, in many cases doubling or tripling the face/undiscounted amount of the lease liabilities and adding debt to balance sheets.

Contingent rents, based on a percentage of sales will trigger additional debt as well, based on estimated sales over a lease term. Most retailers in shopping malls fall under these types of structures. Retailers forced now to estimate sales way into the future, and to reassess these estimates at every (quarterly).

On the other side of the lease arrangements, landlords will also change their accounting. Landlords would record as a liability their obligation to provide space and record as an asset the rents they expect to receive. Under the new standard the rents will be recorded partly as interest income and partly as a reduction in the obligation to provide space.

Friday, June 25, 2010

Big Revenue Recognition Changes to Come

FASB and the IASB yesterday released a proposed accounting standard that would create one harmonized revenue recognition standard for both U.S. GAAP and IFRS.

The standard claims to simplify and standardize accounting for revenue across industries and update standards to remedy inconsistencies in current standards and practices.

In keeping with the general thrust of principles-based standards, the new proposal will require more disclosures.

The proposal also includes guidance to clarify accounting for contract costs.

On its release, the proposal was cited as one of the most important and pervasive areas in financial reporting.

According to the IASB, the proposed standard “would make it absolutely clear when revenue is recognized—and why.” The core principle was explained as “a company should recognize revenue when it transfers goods or services to a customer in the amount of consideration the company expects to receive from the customer.”

The standard is expected to impact some long-term contracts, especially those using percentage-of-completion revenue recognition.

Significant changes:
1. Revenue would be recognized only from the transfer of goods or services to a customer.
2. A company would be required to account for all distinct goods or services, which could require it to separate a contract into different units of accounting from those identified in current practice.
3. Collectibility would affect how much revenue is recognized, rather than whether revenue is recognized.
4. Greater use of estimates would be required in determining both the amount to allocate and the basis for that allocation, which would better reflect the economics of a transaction.

FASB also created a chart showing the five steps a company would follow to apply the new revenue recognition proposals; see below.

The proposal is intended to apply to all contracts to provide goods or services to customers, except leases, insurance contracts and financial instruments.

Disclosures that are new under the proposal include qualitative and quantitative information about contracts with customers, including a maturity analysis for contracts extending beyond a year, and the significant judgments and changes in judgments made in applying the proposed standard to those contracts.

The deadline for comments on the proposal is Oct. 22. The final standard is expected in the second quarter of 2011. The modified convergence timeline keeps the June 2011 target end date for projects that have the most urgent needs.

Click for the full proposal or the overview and here for the podcast.

Wednesday, June 2, 2010

FASB, IASB to Miss G20 Convergence Deadline

The FASB and the IASB are set to announce that they will not meet the June 30, 2011 deadline for convergence with IFRS , requested by the G20.

FASB and IASB will announce changes to their convergence work plan that will delay completion by six months and allow for greater public comment on convergence proposals.

While it is not uncommon for accounting rulemakers to reset deadlines during their standard-setting process, the June 2011 deadline had been discussed by the G20 several times and is seen as particularly important in potentially moving U.S. companies to international standards.

According to Robert Herz, chair of FASB, to issue final standards by June 2011, the two boards would have to release about 10 proposals in the next two months and rush through the public comment process.

In the past FASB and IASB have redoubled their efforts toward convergence and in some cass have fast-tracked the comment process, in May the boards received letters from corporate executive groups saying they were "extremely concerned" about the quality of responses FASB and the IASB would get on more than 10 proposals for new rules by mid-2011.

While the G20 set a mid-2011 deadline for creating a single set of high-quality accounting rules, the U.S. Securities and Exchange Commission's chief accountant has said recently that the deadline should not be met at the cost of lower-quality standards.

The areas of focus are revenue recognition, leases, financial instrument accounting and financial statement presentation.

Herz said he still expects a staggered release of proposals over the next seven to nine months, meaning most or all would be released by the end of 2011.