Wednesday, December 19, 2012

2012 AICPA National Conference on Current SEC and PCAOB Developments

The AICPA Conference summaries are always a source of information that will keep companies out of trouble in financial reporting.

Following is Ernst & Young's brief summary of their longer documnet.
Representatives of the SEC, the Public Company Accounting Oversight Board (PCAOB), the FASB and the IASB shared their views on various accounting, auditing, and reporting issues at the three-day AICPA National Conference on Current SEC and PCAOB Developments (Conference) in December 2012 in Washington D.C.
Highlights of their comments included: 
  • The SEC is continuing to evaluate whether further analysis relative to whether and, if so, when and how to incorporate IFRS into the US financial reporting system is necessary. SEC officials advised stakeholders to “stay tuned.” Various SEC and FASB speakers discussed the importance of the US setting its own accounting standards while continuing to work with the IASB to improve comparability and narrow differences in the standards.
  • Various speakers commended the outreach performed by the FASB and IASB and their progress on the convergence projects. Several speakers focused on the need for coordination when developing implementation guidance (e.g., on revenue recognition). Speakers from the FASB stressed the need for timely interpretive guidance to help during implementation and post-implementation.
  • SEC and PCAOB officials stressed the importance of audit quality to the capital markets and the relevance of inspection findings, particularly findings pertaining to internal control over financial reporting (ICFR). Some inspection findings could have implications for preparers in their own evaluations of ICFR. PCAOB officials also said they are considering feedback on mandatory audit firm rotation while taking other steps to improve auditor independence, objectivity and professional skepticism.
  • The SEC staff discussed year-end financial statement considerations and the staff’s areas of focus in its reviews of filings, including revenue recognition disclosures, the valuation of deferred tax assets and observations related to the new fair value disclosures.
  • Various panelists commented on the need to evaluate disclosure requirements, particularly the dividing line between the footnotes to the financial statements and the rest of the financial reporting package (e.g., MD&A). SEC Acting Chief Accountant Paul Beswick said he plans to host a roundtable in 2013 to better understand these concerns.
EY's publication, 2012 AICPA National Conference on Current SEC and PCAOB Developments, discusses the Conference in detail.

Tuesday, December 18, 2012

Future of IFRS

Recently the IASB published a paper on its future priorities.

In their “feedback statement”, the IASB lists input it received from the public on the future of IFRS. They organized the responses into five broad themes from the more than 240 comment letters it received. 
  1. Provide a period of calm after a decade of almost continuous change in financial reporting.
  2. Prioritize work on the Conceptual Framework, which would provide a consistent and practical basis for standard setting.
  3. Make some targeted improvements in the needs of new adopters of IFRS.
  4. Pay greater attention to the implementation and maintenance of the Standards.
  5. Improve the way in which the IASB develops new standards, by conducting more rigorous cost-benefit analysis and problem definition earlier on in the standard-setting process. 
The Board also set out five priority near-term research projects. These are:
• Emissions Trading Schemes;
• Business Combinations under Common Control;
• Discount Rates;
• Equity Method of Accounting;
• Intangible Assets; Extractive Activities; and Research & Development Activities;
• Financial Instruments with the Characteristics of Equity;
• Foreign Currency Translation;
• Non-financial Liabilities (amendments to IAS 37); and
• Financial Reporting in High Inflationary Economies.
You can read the full report here.

Monday, December 17, 2012

Disclosure Overload: FASB Project Comments

A lot of recent commentary exists on the subject of disclosure overload.
Recently the FASB has begun to focus on this topic. "Streamlining Disclosures" has become subject of various initiatives, including a recent round-table discussions this conducted by FASB and the Center for Audit Quality.
FASB has also initiated a Disclosure Framework project "to improve the effectiveness of disclosures in notes to financial statements by clearly communicating the information that is most important to users of each entity’s financial statements. Although reducing the volume of notes to financial statements is not the primary focus, the Board hopes that a sharper focus on important information will result in reduced volume in most cases."
"Boilerplate" and non-material disclosure have been said to be "noise" that obscures the real information that readers of financial information really need.
FASB published an Invitation to Comment (ITC) on this topic last July 12. They asked stakeholders to comment on whether and how disclosures in the footnotes to financial statements can be made more effective. The comment period ended Nov. 16.

Some of the questions:
  • Do the decision questions in this chapter and the related indicated disclosures encompass all of the information appropriate for notes to financial statements that is necessary to assess entities’ prospects for future cash flows?
  • Do any of the decision questions or the related indicated disclosures identify information that is not appropriate for notes to financial statements or not necessary to assess entities’ prospects for future cash flows?
Commentors said unnecessary disclosures can prevent users from finding the information they need, obscure the real information and waste prepares' time, money, and create undesirable environmental outcomes, i.e. too much paper.  
The FASB received 83 comment letters. Some comments: 
  • Issuers should only provide relevant disclosures
  • Disclosures should have a narrower focus that "could be useful to investors"
  • Concern over the risk of litigation or regulatory action because preparers omit information previously provided. 
  • Avoid using the term "relevance" 
  • Watch the SEC's requirements, i.e. no point to reducing GAAP disclosures if the SEC imposes more specific requirements
  • "The uses of boiler plate disclosures and reliance on checklists have inundated both the public and private sector as the volume and complexity of reporting requirements have increased significantly over the years. We believe having the flexibility to apply professional judgment will substantially reduce unnecessary disclosures."
  • "We believe that preparers' judgment should instead be focused on what is material to the company based on a set of flexible disclosure requirements. Enabling flexibility, based upon materiality, would result in the right balance of providing relevant information while maintaining comparability."

  • "Disclosure overload and complexity are the two aspects of financial reporting that financial statement users and preparers, large or small, agree on: There is too much of both."

This will be interesting to watch over the next few years. Don't expect a quick reduction in disclosures for this year's 10-Ks!