Thursday, September 8, 2011

Fix for IFRS XBRL Taxonomy Exposed

Both the U.S. GAAP and IFRS XBRL taxonomies have been revised and exposed for comment.

For those not familiar with XBRL, it is an open-source HTML-like language for tagging financial statements. Proponents claim that XBRL makes it easier for investors and analysts to compare financial results across companies and industries. XBRL is now mandated by the SEC for public companies to use in their financial filings. XBRL tags let users of financial statements electronically search for, assemble, and process data so the information can be accessed and analyzed by investors, analysts, journalists and regulators.

The 2012 U.S. GAAP Financial Reporting Taxonomy is expected to be finalized and published in early 2012. The proposed 2012 U.S. GAAP taxonomy and instructions on how to submit comments are available on FASB’s XBRL page.

As for the IFRS taxonomy, the IFRS Foundation has revised it taxonomy in response to regulators and preparers who wanted more extensions (additional sub-accounts) to the full IFRS XBRL taxonomy.

The IFRS XBRL taxonomy is used to help those filing IFRS financial statements electronically to tag the information with identification tags, also known as “concepts.” Currently, the IFRS taxonomy includes all of the core concepts included in IFRS as issued by the IASB. However, preparers often need to provide more detailed financial information than is reflected by the core IFRS concepts.

To ensure that those creating and using electronic filings do not need to create their own extensions to the IFRS taxonomy, the IFRS Foundation has created an “extension taxonomy” by analyzing and drawing from common practice. For instance, although IFRS requires the disclosure of an analysis of expenses, IFRS does not include a prescriptive listing of all of the possible categories of expenses. The common-practice taxonomy includes concepts for the most commonly used types of expenses, such as “sales and marketing.”

The interim taxonomy released on Thursday completes the first part of a project to address this issue, by providing about 350 extensions for the most common concepts used in the financial statements.

The common practice concepts are in line with IFRS requirements and will help to alleviate the burden on preparers and to increase the comparability between financial statements in accordance with IFRS that are electronically submitted.

Wednesday, September 7, 2011

CFOs Exit Restating Companies, Study Finds

But they overwhelmingly tend to resign rather than get fired, companies report.

Good article by David M. Katz, of

Restatements of financial reports usually convey bad news about a company to the stock market, and CFOs, as chief stewards of financial reports, tend to like nothing less than bearing such tidings. In fact, when companies restate, their finance chiefs show a pronounced tendency to leave, new research confirms. Usually, however, it's their own decision to walk — or at least that's what the companies are reporting.

From 2005 to 2009, companies in general had a 14.88% to 19.47% chance of having a CFO departure in a given year, according to Audit Analytics, a data-research firm. But the situation changed dramatically for companies that filed a restatement. In such cases, the probability of a finance chief leaving in the period beginning three months before and ending nine months after a restatement rose to a range of 19.06% to 28.99%.

The finance chiefs mostly resigned, rather than receiving pink slips. Overall, the companies studied had a resignation rate of between 14.45% and 18.57%, while the restated companies experienced a rate from 18.06% to 27.68%. (The researchers looked at a total of 48,200 10-K filers that also filed an audit opinion over the five-year period.)

Companies rarely report that they have dismissed a CFO regardless of the reason, according to the Audit Analytics report, CFO and Auditor Departures Occurring Near the Issuance of a Restatement. Overall, companies experienced a dismissal rate ranging from 0.40% to 0.99% over the five-year period. If the companies filed a restatement, the chance of a finance chief's dismissal jumped to between 1.00% and 1.30% — a very large difference, but involving very low numbers.

"What a CFO can take out of this [study] is that the chance of getting fired and having it shot out as an 8-K disclosure really doesn't increase near the occurrence of a restatement," says Donald Whalen, the firm's director of research.

But are all those finance chiefs actually leaving on their own? While Whalen says that such information generally can't be gleaned from financial statements, he grants that CFOs threatened with dismissal might negotiate with their employer to have the move reported as a resignation. The "You can't fire me, I quit" scenario may also exist in some cases.

A company, however, has an interest in not reporting turmoil in its senior ranks. To report a resignation rather than a dismissal is usually preferable, says Whalen, because "at least it shows a better relationship than companies that come right out and say, 'Hey, we kicked this guy out.'"

CFOs might also want to take pains to avoid certain types of restatements rather than others. Restatements involving revenue recognition tend to have an especially malign effect on share prices, while those involving corporate cash flow rarely make a dent, according to Whalen.

As is the case with CFOs, companies and their auditors tend to sever relations more frequently during a restatement, according to the Audit Analytics report. For all the companies studied, the departure rate varied from 10.19% to 15.69% during the five-year period. But among those filing restatements, the departure rate rose to between 20.79% and 25.75%.

Tuesday, September 6, 2011

Impairment Bucket List

No, it’s not a list of cool impairments that an accountant might calculate in his lifetime, if he or she had the time and luck.

Accounting standard-setters are working on a new method of categorizing impaired financial instruments.

The recent credit crisis has advanced a need for revision of the current model as large financial institutions did not agree with existing standards. Large banks, for example, claim that the existing standards result in a “pro-cyclical” result. That means that when times were good, they accounting rules made things look better, faster. And when times were bad, things looked bas faster. Or went to hell faster, as we saw in 2009/03. The rules also impact other sectors.

Credit Crisis Effects
In 2008, banks were following a system of incurred loss reporting, meaning assets were marked down, or impaired, only once their value had demonstrably fallen. Critics said this caused catastrophic shortcomings in financial early warning systems, meaning banks were unable to build up reserves for expected losses and were woefully unprepared when asset values suddenly went into freefall.

The IASB has developed a more forward-looking set of rules for calculating impairment.

“Three-Bucket Solution”

One approach, and the major one being advocated now, is called the three-bucket approach.

One pre-IFRS problem was earnings management, when banks would set aside provisions with little justification, only to release them in lean years to plump up earnings. Critics said this made it hard for investors to get a handle on banks' true financial positions; from these concerns was born incurred loss reporting.

After the credit crisis, the accounting problem was how to permit the judgment essential for expected loss provisioning without paving the way for a potential return to earnings management.

The three-bucket approach aims to break down assets according to impairments, keeping a tighter rein on provisioning and giving analysts a clearer picture of financial health.

Into bucket one goes 'healthy' assets, those for which banks expect a reasonable return and need only make minimal provisions. Bucket two is reserved for assets with some level of impairment, but which are not completely useless, while bucket three is for assets that are undeniably 'bad'.

Throughout its life, the asset can move between buckets according to macro- and micro-economic triggers, hopefully allowing banks to make exactly the right provision at exactly the right time.

An example might be a bundle of mortgages. The bank grants the mortgages, and works out on the basis of historical data that it is likely to take an 80% return on them. It therefore makes provision for the 20% loss and the mortgage bundle sits in bucket one until a trigger makes re-evaluation necessary.

This trigger could be a macro-economic event such as falling oil prices, a contracting economy or rising unemployment. From this, the bank might deduce that a greater proportion of mortgage holders will struggle to pay and shift the asset bundle into bucket two, requiring higher provisions to be made.

For the mortgages to jump to bucket three, they must be demonstrably impaired, for example when the inhabitants of a town hit by unemployment begin defaulting on their mortgages. This is essentially an incurred loss model and would result in very high or 100% provisioning for the de-valued assets.

Unfinished business
Like all theoretical models, there is much uncertainty to be hammered out. What constitutes a bucket-moving trigger? When an asset is impaired, who decides whether the impairment is expected – therefore already provided for – or unexpected, meaning more cash should be set aside? How will auditors examine such a complicated model and will it really prevent earnings management if banks are determined to do it?

A number of question exist, and will need to be ironed out prior to implementation.