Friday, January 28, 2011

Leases--Comments on IASB FASB Exposure Draft

Following is a summary of recent comments received by the IASB and FASB on the Leases Exposure Draft, courtesy of PWC

Scope exclusions
While there was general agreement that most arrangements accounted for as leases today should be governed by the standard, many have encouraged the boards to revisit the proposals on short-term leases and leases of intangibles.

Lessee accounting
Many respondents supported the right-of-use model for lessees, at least with respect to the balance sheet implications for simple leases. However, many disagreed with the measurement provisions for more complex leases. In addition, many expressed concern about the “deemed financing” premise and resultant accelerated expense recognition pattern in the ED.

Lessor accounting

Views on lessor accounting are more diverse. The ED proposes a “hybrid” model under which certain leases are accounted for under a performance obligation approach while others would be required to use a derecognition approach. Many believe that the case has not yet been made that the proposed hybrid model for lessor accounting represents a significant enough improvement from the current model to warrant a change. Some believe that a hybrid model is necessary to deal with different business models (e.g., financing models vs. contracts to use) while others believe a hybrid model is not consistent with concepts in the revenue recognition exposure draft and that only a derecognition approach is warranted.

Extension options
Almost all respondents disagreed with the definition of lease term as the longest possible term “more-likely-than-not” to occur. They believe this may result in recognition of amounts for extension periods that do not meet the definition of a liability. They also believe this approach would be highly subjective in application, result in significant volatility and be subject to manipulation in practice. While most respondents believe that some extension options should be included, there were differing views regarding the threshold at which respondents believe they should be recognized.

Contingent payments

The ED requires that contingent payments generally be included in the amounts recorded using a “probability-weighted” approach. Most respondents were critical of a probability-weighted approach and believe a “best estimate” approach is more appropriate. Some respondents also believe that certain types of contingencies (usage, performance, or index-based) should be treated differently—although there were differing views as to which types should be included and why.

Profit and loss recognition pattern
The ED includes an inherent financing element in the right-of-use model. This model results in a recognition pattern for the lessee that changes the expense recognition pattern of operating leases from rental expense to a combination of amortization and interest expense. It will also typically result in the acceleration of expenses compared to today's operating lease accounting and the timing of cash payments. Many respondents questioned the usefulness of this model.

Purchase options
The ED proposes that purchase options should be accounted for only when exercised. Many respondents believe they should be considered as part of the lease model.

Multiple-element contracts, executory costs and service arrangements
The ED includes guidance for distinguishing a lease from an in-substance sale/purchase and from a service contract. It also includes guidance for identifying the service components of an arrangement that contains a lease. Many respondents (both lessee and lessor) had concerns about accounting for an embedded lease in a multiple-element arrangement in which the vendor can replace the underlying asset or there is no specific asset identified in the contract. Multiple-element contracts that include a lease and a service arrangement represent a significant concern to many, especially for real estate leases. Many respondents believe the standard should specifically exclude service and executory costs from lease payments rather than try to link to the definition of a distinct service under the revenue recognition exposure draft. Many respondents have also raised concerns about the potential volume of “embedded leases” which now could have a significant accounting impact on multiple-element arrangements.

The ED provides for reassessment of significant assumptions if facts and circumstances indicate there would be a significant change in the amounts from a previous reporting period. Many respondents raised concerns about the operationality and cost/benefit of this approach. These respondents indicated that an annual reassessment may be appropriate while others suggested a “trigger-based” reassessment.

The ED provides for a “simplified retrospective” approach and does not allow for early adoption. While many respondents supported this approach for cost/benefit reasons, others observed that it creates an artificial and nonrecurring expense pattern. Many respondents also asked for more guidance on transition issues in general (e.g., use of hindsight) and for specific issues (e.g., sale leasebacks, leveraged leases and build-to-suit leases).

Most respondents supported the overall disclosure objectives, but believe that preparers should be allowed to exercise judgment in determining the volume of disclosures and financial statement presentation.

Thursday, January 27, 2011

The SEC’s IFRS Hit List

Companies that will be filing IFRS financial statements for the first time in 2011 (hello to all 377 Canadian Foreign Private Issuers!) will potentially have their 2011 statements subject to review by the SEC. Following are the SEC’s top ten IFRS issues, from a speech made at the 2010 AICPA National Conference on Current SEC and PCAOB Developments:

1. Financial instruments – IAS 39, 32 and IFRS 7
2. Impairment of assets – IAS 36
3. Financial statement presentation -- IAS 1 & 7
4. Operating segments – IFRS 8
5. Revenue -- IAS 18
6. Income taxes – IAS 12
7. Property, plant and equipment – IAS 16
8. Employee benefits – IAS 19
9. Provisions, contingent liabilities – IAS 37
10. Consolidated financial statements -- IAS 27

Wednesday, January 26, 2011

FASB Reversal a Major Step Toward International Convergence

The FASB has made a major compromise in the area of impairment of financial instruments. Full details will be released later, but this is a major concession to U.S. and European banks. It is also a major step toward convergence of U.S. accounting rules with IFRS and the end to what what previously called a "religious war" over fair value accounting. As well, political influence over accounting may be resolved by the compromise.

This new FASB approach is similar to the International Accounting Standards Board’s model in IFRS 9. FASB has agreed that at least some assets should qualify for cost accounting, whereas banks were forced to use a fair value model for all loans under the new rules. Existing rules forced fair value on portions of banks’ loan portfolios.

The FASB’s original proposal was opposed by the banking industry as being pro-cyclical (making problems worse as business cycles worsened). Banks say that proposed the fair value approach is a danger to the survival of marginal financial institutions that could have their capital called by bank regulators because the rules have and would continue to force banks to take large and inappropriate write-downs on temporary market declines. They also lobbied that the rules would hurt lending and unfairly reduce banks' book value. They argued that banks would not make loans if the value of the loan could be written down immediately due to temporary market fluctuations.

Supporters of the FASB fair-value proposals say it would have improved transparency and unmasked potential weaknesses at banks. Proponents of fair value accounting, including the CFA Institute, argue it is what is needed to make the financial statements of banks reflect their true financial positions and operations more clearly to investors.

FASB said that financial statement users, including preparers, auditors and others would prefer to have loans held for collection recorded on the balance sheet at amortized cost, but with a more robust impairment test.

The FASB will go back to users for input toward an impairment model for loans. The original proposal required a fully fair value-based approach that the banks have lobbied against for years. The new approach would recognize a portion of the estimated loan losses over time unless greater losses are expected in the foreseeable future, in which case that larger floor amount would be recognized currently. Some loans, including loans traded actively by banks instead of held to collect payments will be valued at market prices.

The changes are partly the result of a fierce lobbying campaign by the American Bankers’ Association and others and seen as a major victory for the banking industry. However it was not solely the banks in opposition to the proposals. The FASB reported an overwhelmingly negative reaction to its proposal from companies and investors, who wrote more than more than 2,800 comment letters.

Thursday, January 13, 2011

Top 50 Most Powerful Accountants

Check it out. Acountancy Age lists the Financial Power List 2011: accounting intelligence

Wednesday, January 5, 2011

Best of 2010: Accounting

After creating an ambitious agenda for the year, the standard-setters had to play hurry up and wait.

Article by Marie Leone and David M. Katz, US

In the realm of accounting, no one moved more rapidly this year than the Financial Accounting Standards Board and the International Accounting Standards Board. The two standard-setting bodies set forth an aggressive agenda that called for a dozen or so new rules to be issued by 2011.

Their aim was to complete their now eight-year-old convergence project and emerge with a single set of global accounting standards. But the effort was ambushed by reality — the global financial crisis and subsequent global recession; heated debates over controversial rulemaking decisions; the early retirement of FASB chairman Robert Herz; and the announced departure of IASB chairman Sir David Tweedie, slated for June 2011. (On December 23, the trustees of the Financial Accounting Foundation announced that Leslie F. Seidman, acting FASB chairman since Herz's retirement, had been named chairman of FASB, effectively immediately.)

Accordingly, the rulemakers slowed down the convergence process in the latter part of 2010, vowing to issue only four newly melded standards at any one time. Still, they hope to finish a number of convergence projects by the end of 2011. That will be a prickly task, since those projects have shaken some fundamental tenets of business. They will, for instance, eliminate the concept of operating leases, rework revenue-recognition rules, do away with last-in-first-out inventory accounting, and expand the reach of fair-value accounting.

Meanwhile, the process of adopting private-company accounting standards ("little GAAP") in the United States began in 2010, and could eventually become the purview of a second standard-setting board. The debate concerning final decisions about little GAAP should come to a head in 2011 — just in time for the Securities and Exchange Commission's decision on whether or not U.S. publicly traded companies should abandon U.S. generally accepted accounting principles in favor of international standards.

"Taking the 'Ease' Out of 'Lease'?"
By doing away with operating leases, new accounting rules could bring billions of dollars back onto balance sheets.
"Shorter Agenda for Convergence"

FASB and the IASB have selected five priority projects to focus on – and hopefully push out by next year.
"One Step Closer to Little GAAP"

A blue-ribbon panel on private-company accounting standards recommends a separate GAAP for private companies.
"Technical Difficulties"

As the pace of accounting-rule changes intensifies, can IT systems keep up?
"A Relentless Pursuit of Global Rules"

Tom Jones, director of Pace University's international accounting center, looks forward to a world without local GAAPs.
"Debunking IFRS Myths"

Experts expose seven misconceptions about international financial reporting standards.
"After Eight Years at FASB, Herz Looks Back"

In an exclusive interview, Robert Herz talks about his legacy as chairman of the Financial Accounting Standards Board.
"One Size Gives Fits to All"

Financial executives say that proposed changes to revenue-recognition rules ignore real-world realities.
"Revenue Rules Could Cause Software Snags"

How much will ERP systems have to be tweaked to comply with FASB's new revenue-recognition rules?
"Without Hoopla, Fair-Value Rule Is Readied"

Among the ripple effects of the global credit crisis is the rewrite of the controversial fair-value accounting rule once known as FAS 157. The revised standard could be in place by the end of the year.