SEC Comment Letter from Hell -- Segments

Always thought this was one of the worst comments to receive from the SEC, questioning segment reporting. This was a comment by the SEC to Verizon. See the comment below, and Verizon's full (20 page!) response letter here. The SEC was not quite done with them  and Verizon had to respond to a follow-up letter here and (ouch) a third time here.

Note 14. Segment Information

You disclose that you have operations in two reportable segments, Wireless and Wireline. We note on page 8 that you organize your Wireline service and product offerings by the primary customers targeted. In addition we note the remarks in your earnings calls of the impact on operating results of the FIOS platform. To help us understand how you applied the guidance in FASB ASC 280 in identifying your operating segments, please provide us with the following information:

● Provide your organization chart which identifies the positions, roles, or functions that report directly to your chief operating decision maker (“CODM”) and senior management team;

● Tell us the title and describe the role of your CODM and each of the individuals who report to the CODM;

● Identify for us each of the operating segments you have determined in accordance with FASB ASC 280;

● Identify and describe the role of each of your segment managers;

● Tell us how often the CODM meets with his/her direct reports, the financial information the CODM reviews to prepare for those meetings, the financial information discussed in those meetings, and who attends those meetings;

● Describe the information regularly provided to the CODM and tell us how frequently it is prepared;

● Describe the information regularly provided to the Board of Directors and tell us how frequently it is prepared;

● Describe the information about Wireline’s product and service offerings that are provided to the CODM, tell us whether there are managers accountable for the product and service offerings, and if so, tell us who they are accountable to;

● Explain how budgets are prepared, who approves the budget at each step of the process, the level of detail discussed at each step, and the level at which the CODM makes changes to the budget;

● Describe the level of detail communicated to the CODM when actual results differ from budgets and who is involved in meetings with the CODM to discuss budget-to-actual variances; and,

● Describe the basis for determining the compensation of the individuals that report to the CODM.

FASB, IASB Can't Agree on Financial Instruments Accounting

YOU MIGHT have long suspected it, but now it's official: the IASB and the US Financial Accounting Standards Board have failed to develop a common financial instruments accounting standard. We have no convergence.

The reality about the lack of a single asset impairment model emerged during a 23 January IASB meeting. It leaves preparers playing piggy in the middle between the competing IFRS and US GAAP models.

Speaking at the meeting, Hans Hoogervorst, chairman of the IASB, said the two boards would meet later this year "once the two models are completely clear". Regulators, he explained, have the option of imposing "additional disclosures" in order to bridge the gap.

Hoogervorst, a former Dutch securities regulator and finance minister, added: "But we cannot let the preparers pay the price for the two boards not getting completely converged."

On 20 February there was worse to come. On the parallel effort to finalise the board's approach to classification and measurement, Hoogervorst was forced to concede: "What can we say? A lot of work has been done for nothing, it seems."

IASB member Patrick Finnegan was equally blunt in his assessment: "I would just observe the same thing. I joined this board with a full expectation that there were great aspirations for global convergence in three or four major areas. ... It is a terrible disappointment, in my opinion, for global investors.

"I'm not quite sure what more we can do if the two boards continue to work the problem ... but the FASB has decided not to continue with the current IFRS 9 proposed work plan that we developed, and unfortunately that's the way it is."

The board also voted to fix a new effective date for IFRS 9, Financial Instruments, of 1 January 2018. IASB members were reluctant to delay the standard, or make further changes to it, pending decisions on the linked insurance contracts literature.

Later that same meeting, staff reported that the FASB will almost certainly reject two central features of the IFRS 9 classification and measurement approach - the business model and the contractual cash flow assessments for amortised cost.

So how did it come to this? The IASB embarked on its project to replace IAS 39 in early 2009. It is possible to distill any number of motivations and drivers for the project: to respond to the financial crisis; to reduce complexity; to address the too-much too-late criticism of the IAS 39 incurred-loss impairment model.

The project began under the chairmanship of Sir David Tweedie, and glancing back at an official IASB project summary document from 2009, a fully-fledged classification and measurement, impairment and hedging model was supposed to be in place by the final quarter of 2010.

As is now plain to see, the board failed. In 2009, it issued the first completed phase of IFRS 9, which dealt with the classification and measurement of financial assets. It followed this in 2010 with a further module addressing financial liabilities and the fair value option.

In its 2013 iteration, the standard has acquired a new hedging model. This approach to hedging is something of a marmite experience. On the one hand, its supporters claim it will make hedge accounting available in more situations; its critics point to its complexity.

Also in 2013, the board put out proposals to add a new category - fair value through OCI [other comprehensive income] - to IFRS 9. Redeliberation of those proposals is now complete and the IASB has confirmed it will include the FVOCI category alongside fair value and amortised cost.

Since 2009, the standard has also featured a presentational option that allows entities to book gains and losses on fair value holdings of equity investments in OCI. And impairment? Well, the board published its first proposals in November 2009 and followed this with a so-called supplementary document in January 2011. The 2011 document marked the high-water mark of the convergence drive with the FASB.

From that point onwards, what was supposed to be a convergence effort degenerated into a religious war. If the pre-crisis years had been marked out by the clash of fair value and amortised cost, the new battle lines were between 12-months initial loan loss allowance and the FASB's preference for full lifetime expected losses on initial recognition.

And it was here that the convergence effort truly floundered. But as insurmountable though the technical challenges of two competing financial instruments models might appear, there is a much bigger issue: politics.

In recent weeks, the European Parliament has shown an increased willingness to challenge the IASB, even going so far as to propose linking funding for the IASB's activities to specific outcomes.

Separately, the G20 nations have urged the two boards to come up with a single financial instruments model. At some point in time, Hoogervorst is going to have a very awkward conversation with his political masters.

by Stephen Bouvier at Financial Director

Experts Say Use Non-GAAP Measures Carefully

Normalized adjusted EBITDA less capex. Adjusted consolidated segment operating income. Adjusted EBITDA (as adjusted). Even enthusiasts of non-GAAP metrics have to admit that such measures often sound just a wee bit ridiculous.

Non-GAAP metrics, those not addressed in U.S. generally accepted accounting principles, are as controversial as ever. A small number of such measures, like EBITDA and free cash flow, have gained widespread acceptance in the investor community. But regulators often give companies flak for the way they use non-GAAP measures in public filings, press releases and other communications consumed by investors and analysts.

Groupon, the perpetrator of “adjusted consolidated segment operating income” (ASCOI), took heat from the Securities & Exchange Commission in 2012 because the metric excluded online marketing expenses, a critical part of the firm’s business model, from company performance. Groupon eventually dropped the metric from its initial public offering filing, but it absorbed further criticism for its post-IPO use of other non-GAAP measures.

Black Box, a telecommunications company, got some bad press in January 2013, when it included the metric “adjusted EBITDA (as adjusted)” in its quarterly earnings release. The metric subtracted from net income ordinary expenses such as a $2.7 million loss on a joint venture, creating EBITDA (as adjusted), then further excluded stock-based compensation expenses to create the final, rather silly-sounding redundancy. Black Box said the measure demonstrated its ability to service its debt. Others thought it made the company look like well, a black box.

A common opinion is simply that non-GAAP metrics are misleading to shareholders. “They may be perfectly understandable to accountants who know what that company is doing but confusing to others,” says Michele Amato, partner at accounting firm Friedman LLP. Indeed, the SEC has long subjected companies that use non-GAAP metrics to heightened scrutiny, and the chairman of the commission’s new accounting-fraud task force has vowed to keep up the pressure.

But companies that use these black-sheep metrics argue that they often depict financial performance more accurately than GAAP measures and afford investors a window to how management sees things.

Public companies are allowed to disclose non-GAAP metrics in their SEC filings, press releases and earnings calls, subject to certain rules. Under Regulation G, mandated by the Sarbanes-Oxley Act, use of a non-GAAP financial measure must be accompanied by the most directly comparable GAAP measure and a reconciliation of the two metrics.

Everything in Moderation

For her part, Amato says there’s a place for non-GAAP metrics:

 “A very significant variance between GAAP and non-GAAP metrics that management uses as a baseline for internal financial analysis might be of some use,” 

There is nothing wrong with using a non-GAAP metric to provide an additional perspective about something very germane to the company’s performance, like its valuation, credit standing or working-capital management, that can’t be communicated well through GAAP metrics alone, says Robert Rostan, CFO and principal at financial training firm Training the Street.

Original article by Marielle Segarra ad CFO.com

Is the Smartest MD&A the One With the Most Jargon?

“Plain English Works” in MD&A Statements

Those who prepare MDAs don’t have to prove how smart they are by using financial jargon, suggests the SEC’s ex-corporate finance director.

Excessive financial jargon in documents filed with the Securities and Exchange Commission often clouds intended messages, said speakers at an American Institute of Certified Public Accountants conference this week.

The sentiment particularly applies to the Management’s Discussion and Analysis (MD&A) section of quarterly and annual reports and other registration statements, where companies generally discuss their business, uncertainties, and market trends.

“Everyone likes to prove they’re the smartest person in the room because they understand the jargon,” said Brian Lane, partner in the Washington, D.C., office of Gibson Dunn & Crutcher and former SEC director of the division of corporate finance. “Plain English works.”

The best MD&As have “more tables and less jargon,” Lane opined. Tables, he noted, are easier to understand than mounds of text. In the text, companies often include too many comparisons going back several years, which is often unnecessary and even confusing, he said. It’s better to show simple comparisons between this year and last year in both the text and tables, and include information on other years just in tables.

Making sure MD&As are as readable and informative as possible may ward off or lessen the impact of SEC inquiries, Lane added. One key to doing that: in all areas of focus within the section, answer the question “why?” he said.

Actually, having more tables in financial reports is a widening theme. The Financial Accounting Standards Board made a push in that direction this past summer, requesting comments on a proposal calling for nonfinancial companies to disclose expected cash-flow obligations in a table segregated by time of expected maturity.

For one, Katherine Gill-Charest, controller and chief accounting officer at Viacom, should be prepared if the proposal is approved. She already is including more than the usual amount of detailed information in the company’s MD&A statements. To facilitate that, she holds “working meetings” with members of Viacom’s disclosure committee a couple of times a year, instead of having just one formal meeting at reporting time to head off any questions that might arise from the SEC. She also meets with the CFOs of Viacom’s divisions to be aware of pertinent issues in preparing MD&As.

For example, the SEC repeatedly has asked for information on how Viacom plans to fund its $10 billion share-repurchase program. Other questions come when an SEC official hears of a trend during an earnings call that is not included in the MD&A.

Lane supported that use of a firm’s disclosure committee. A good item to discuss with that committee, for example, is “cash runway,” a measure of how long a company’s cash on hand will last, he said. A hoard of $300 million in cash is not actually that much if the company is burning through it at $90 million a quarter.
Knowing what questions the SEC may have raised with competitors is important, too.

 “If I know a peer of mine has gotten reviewed, we will always take a look at the SEC’s comments,” said Gill-Charest, noting that she treats any correspondence between a competitor and the SEC as if it were her own document.

That made sense to Lane:

“You do need to see what competitors and peers are disclosing, because the SEC is going to look at you in that same lens,” he said.

One area where some companies could ease up is their heavy use of forward-looking disclosure statements.

“Projections are not required in [the] MD&A,” said Lane. “You [just] have to talk about known uncertainties and how they could impact the future.”

By Kathy Hoffelder  at CFO.com

FASB vs IASB: Split on Lease Accounting

The US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) failed to reach a consensus for new lease accounting guidance Wednesday but vowed to continue working together in pursuit of consistency.

During two days of meetings at FASB’s headquarters in Norwalk, Conn., the boards failed to reach common answers on key areas of lessee and lessor accounting. In particular, the IASB favored a single approach for lessees for recognition of all leases, while FASB voted for a dual-recognition approach for lessees, depending on the type of lease.

The boards issued a joint statement saying they had agreed on areas such as lease term and short-term leases. The boards also pledged to continue working together on the standard.

“While differences remain, most notably in their preferred approaches to expense recognition, the boards are committed to working together to minimize these differences and to creating greater transparency around lease transactions for the benefit of investors worldwide,” the boards said.

The boards are attempting to create a converged standard that would eliminate a hidden liability for lessees by bringing leases onto corporate balance sheets. But they have struggled to agree on how to do it.

No consensus for lessee accounting

IASB members this week expressed a preference for lessees to account for all leases as the purchase of a right-of-use asset on a financed basis. In this “Type A” approach, a lessee would recognize amortization of the right-of-use asset separately from the interest on the lease liability for all leases.

FASB members preferred a dual-recognition approach for lessees that would use a Type A interest-and-amortization method for leases classified as capital leases under existing guidance, and a “Type B” single, straight-line lease expense for operating leases.

But there may still be a chance for convergence on this issue. FASB Chairman Russell Golden asked the FASB staff to work with the IASB staff to conduct research that would help the boards understand the effects of a possible exception that would permit preparers not to apply the proposed standard’s requirements to leases of small, nonspecialized assets.

The IASB voted for the so-called small-ticket exception, while FASB voted against it. Golden asked for the staff research in hopes that a better understanding of the exception could lead to convergence, which could cause the boards to agree on a preferred method of expense recognition.

FASB member Tom Linsmeier said he would be more inclined to consider the Type A-only approach for lessees if the boards abandon the small-ticket exception.

Sticking point for lessor accounting

On lessor accounting, meanwhile, the boards agreed to keep standards similar to current guidance but couldn’t agree on one important detail. They agreed that lessors should classify their leases as Type A or Type B based on whether the lease is effectively a financing or a sale rather than an operating lease.

But the IASB preferred to make that determination by assessing whether the lessor transfers substantially all the risks and rewards incidental to ownership of the underlying asset.

FASB preferred to make the leases guidance consistent with the requirements for a sale in the soon-to-be-issued revenue recognition standard. FASB’s approach would preclude recognition of selling profit and revenue at lease commencement for any Type A lease that does not transfer control of the underlying asset to the lessee.

The core principle of the new revenue recognition standard will be that revenue should be recognized to depict a transfer of promised goods or services to the customer.

Despite the disagreement on lessor accounting, some IASB members said they could accept the FASB approach, with IASB Chairman Hans Hoogervorst holding a “swing vote” that Golden suggested could move the lessor accounting decision to a converged answer in the future.

Before the boards parted, Golden thanked IASB members and said the boards ought to work together on the definition of a lease, disclosures, and other aspects of the leases proposal.

“We will continue to work together to improve accounting in this area, to continue to meet our objective,” Golden said, “and I hope to continue to minimize any differences.”

The boards have been working since 2006 to come to agreement on a leases standard. Their second exposure draft on the topic, issued in 2013, caused many preparers and some investors to question the benefits of the information—and the costs—the proposal would have generated.

By Ken Tysiac at JofA

Cleaning Up OCI

Accounting ‘Dumping Ground’ Headed For Clean Up

International accounting rulemakers may focus on cleaning up rules for “other comprehensive income,” a category in a company’s earnings statement that can obscure the true profit and loss picture, the chairman of the International Accounting Standards Board said this week.

The board may restart its efforts to improve financial statement presentation guidance in this area and bring more “discipline” to the way companies decide what is classified as profit and loss or other comprehensive income, IASB Chairman Hans Hoogervorst said in a speech in Tokyo.

More than 100 countries use International Financial Reporting Standards, which are set by the IASB. The U.S. does not use them for domestic companies, but allows foreign companies to file their results with U.S. regulators under these standards. U.S. multinational companies often have to use these standards for foreign subsidiaries.

Other comprehensive income, which includes items initially excluded from net income in a particular accounting period, has gotten a reputation as a sort of dumping ground where companies are allowed store information that would be too damaging to earnings.

For example, he said passing employee benefit expenses through other comprehensive income, rather than earnings, has dis-incentivized companies from dealing with large liabilities head-on.

“In the last decade, some big American car manufacturers and airline companies were brought to their knees by employee benefits that had been building up over the years,” Mr. Hoogervorst explained. Such liabilities may not have been taken as seriously because they were in other comprehensive income, he said.

The other comprehensive income figure is crucial because it can distort common valuation techniques used by investors, such as the price-to-earnings ratio. If the profit and loss statement and earnings are the primary indicators of a company’s performance, they need “to be robust and tinker-free,” Mr. Hoogervorst said.

Mr. Hoogervorst said he’d been approached by Japanese accounting stakeholders about improving and clarifying other rules, as well as differences of opinion from other countries, such as Canada.

In an interview with CFO Journal, Dr. Nigel Sleigh-Johnson, head of financial reporting for the Institute of Chartered Accountants of England and Wales said Thursday, “At the moment there is no clear and consistent basis for,” other comprehensive income.

Accounting rulemakers should try to make it easier for companies to decide what items need to be recognized in profit and what has to go into other comprehensive income, he said.

The U.S. Financial Accounting Standards Board has also been working to clarify rules for other comprehensive income in the past few years and make the rules more transparent to investors.  The board issued new guidance on how companies should present the figures in 2011 and updated accounting standards on items reclassified out of accumulated other comprehensive income last February.

 Article by Emily Chasan, at the Wall Street Journal

Can Companies Smooth-Talk Investors?

Investors Prove Wise at Judging Self-Serving Earnings Explanations

Investors have proven to be sophisticated enough to dismiss implausible explanations from companies of their quarterly earnings results, according to a new study.

For example, a utility company might attribute their lower earnings to “warm weather and higher propane products costs,” while an insurance company might explain a good quarter by touting its “continued efforts on cost containment and operational efficiencies.” Self-serving attributions such as these, which typically blame outside factors for negative developments and claim that their own internal initiatives led to positive results, are a traditional part of corporate earnings reports and press releases. But that doesn’t mean investors generally believe them.

According to a new study in The Accounting Review, a journal of the American Accounting Association, market response to self-serving attributions depends in large part on two key tests of plausibility—how badly the company’s industry peers are doing and what the study calls “commonality,” the extent to which market or industry forces drive a company’s earnings.

The difference proved to be dramatic when those two key tests were applied to the 94 companies in the study, which was conducted by Michael D. Kimbrough of the University of Maryland and Isabel Yanyan Wang of Michigan State University. Firms with average positive earnings surprises who made the highest-plausibility attributions had three-day above-market returns of 4.77 percent on average, whereas those that offered the lowest-plausibility reasons actually averaged a slight decline of 0.79 percent. Meanwhile, among firms with average negative surprises, those with the lowest-plausibility attributions sustained average declines of 5.11 percent, while those with the highest-probability excuses had declines of only 1.42 percent.

“Firms which provide defensive attributions to explain earnings disappointments experience less severe market penalties when 1) more of the their industry peers also release bad news, and 2) their earnings share higher commonality with industry- and market-level earnings,” said the paper. “On the other hand, firms that provide enhancing attributions to explain good earnings news reap greater market rewards when 1) more of their industry peers release bad news, and 2) their earnings shares lower commonality with industry- and market-level earnings.”

 “Collectively, our results suggest that investors neither completely ignore seemingly self-serving attributions nor accept them at face value, but use industry- and firm-specific information to assess their plausibility,” the professors added. “Further analyses reveal that investors’ use of industry peer performance and earnings commonality information appears justified because investors’ perceptions are consistent with the association between the plausibility measures and the ex post actual persistence of earnings surprises.”

In sum, “investors are somewhat sophisticated when interpreting these narrative disclosures,” Kimbrough and Wang wrote:

“Our findings ought to be of value to both investors and corporate leaders,” said Wang in a statement. “Hopefully it will disabuse those executives who are counting on the naiveté of investors to let them get away with empty words or phony excuses in their public communications. For investors, it provides standards they will need to meet to keep up with the investment community at large.”

“The tools needed to apply those standards are certainly available to institutional investors, even though determining commonality is probably beyond the reach of individual stock-pickers,” said Kimbrough. “Still, even they should have the means to stack up the claims of a given company against its industry peers, which can go a long way in assessing the plausibility of the firm's performance narrative.”

The study's findings are based on an analysis of press releases and earnings reports of 94 randomly chosen firms, a roughly equal mix of small, medium and large, over a seven-year period. Sufficient data was obtained for a total of 1,790 firm quarters, 1,023 of which featured self-serving attributions and 767 of which did not. The self-serving classification was assigned to quarters when companies attributed their success in meeting or beating consensus forecasts to internal factors, such as management strategies or introduction of new products, or blamed a negative earnings surprise on external factors, such as bad weather or rising costs or regulatory actions. Firm-years in the self-serving category featured at least one such attribution and an average of three to four in a given earnings press release.

The authors found a significant relationship between the plausibility of self-serving attributions, as determined by industry performance and commonality, and the market-adjusted cumulative return of firms' stocks in the three days centered on earnings announcements. In reaching that conclusion, they controlled for an array of factors likely to affect the market’s response to earnings announcements, including the size of companies, the volatility of their stock, and their book-to-market ratio.

What kind of companies are likely to issue suspect attributions? Preliminary evidence suggests, in the words of the study, “Firms which provide less plausible attributions are larger and have higher likelihood of insider trading around earnings announcements, higher analyst following, higher institutional ownership, higher return volatility, and lower book-to-market ratio. These findings imply that managers with insider trading incentives and those facing greater capital market scrutiny are more likely to offer seemingly self-serving attributions even if they lack plausibility, consistent with the ‘opportunistic behavior’ view of capital markets.”

This view, according to the paper, finds “that capital-market scrutiny combined with the linking of manager compensation with stock prices creates pressure for managers to prop up prices by biasing financial reporting. To the extent capital-market pressure is greater for firms with higher analyst following and/or institutional ownership, the ‘opportunistic behavior’ argument suggests that greater analyst following and/or institutional ownership may increase managers’ tendency to provide implausible attributions to either mitigate market reactions to negative earnings surprises or to increase market rewards to positive surprises.”

Still, given the hazards of implausible attributions, as revealed by the new study, why would managers make them? It’s a matter of what they believe, Wang and Kimbrough wrote. “If managers believe there is a chance that investors might be persuaded by their implausible seemingly self-serving attributions, they are more likely to offer them even if ex post it turns out that investors can see through them.”

This article is by Michael Cohn in Accounting Today. The study, “Are Seemingly Self-Serving Attributions in Earnings Press Releases Plausible? Empirical Evidence,” appears in the March/April issue of The Accounting Review, published six times a year by the American Accounting Association.

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.

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.

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!

 

 

Latest IFRS Readiness Survey from AICPA

The AICPA recently published a survey of U.S. CPAs on the subject of readiness for IFRS.

Some of the results:

• Majority of CPAs in the United States have some knowledge of IFRS


• Many CPAs have begun to develop greater expertise


• Significant movement in the readiness of U.S. CPAs for introduction of IFRS in the U.S. over the three years since 2008


• Slight reversal in readiness gains as CPAs await progress in the convergence of U.S. and international standards and a clear timeline from the SEC.


• 76% of CPAs working in public companies are delaying preparations to adopt IFRS until the SEC issues a decision, which is an inrease of 13 percent from 63% who were delaying six months ago.


• 78% of CPAs already have some knowledge of IFRS


• 53% support an SEC mandate requiring use of IFRS in the U.S.


• 23% think IFRS should be offered as a financial reporting option for public companies.


• Large majorities were unsure whether the proposed new standards and accompanying guidance in these areas would be improvements over existing standards.


• Only 16% of respondents said that they had heard of the “condorsement” model proposal.


• 50% of CPAs working for foreign-owned public companies and 39% in foreign-owned private companies have already adopted IFRS or are ready to adopt.


• 48% of CPAs working for U.S. public companies foresee a need for advanced or expert level knowledge of IFRS


• 32% have begun actively preparing for adoption.


• 18% are planning to adopt IFRS.


• 30% said the pace of change for IASB-FASB convergence is too fast; 36% said the pace is appropriate; 28% are unsure; 6% think the pace of change is too slow.


• 51% believe a 2015-16 adoption date would allow enough time for implementation; 17% said that would not be enough time, and 32% are unsure.


• 53% said they are aware of the standard for SMEs; 30% said they would consider adopting it or would advise their clients to consider adopting it, but most would only consider this if IFRS were required for public companies.
  
  

Accounting World Does not Need Convergece with U.S.: Major UK Regulator

A major UK regulator said that US attempts to adopt international accounting rules could result in unnecessary complexity.

Adair Turner, chairman of the Financial Services Authority, Regulator of all providers of financial services in the UK, said that the International Accounting Standards Board (IASB) risks adding complexity to its fair value accounting rule, if it continues converging with US standards.

“It is not so much that they are in danger of compromising (international standards), it is that, in the process of trying to reconcile them, they make it more complex,” he said.

He went on to say the world didn’t need the US to adopt international standards.

“We have had a capitalist system without full convergence in the past, it can be a complete pain in the neck… it hasn’t stopped the system working,” he said.

Turner’s comments add to growing concern surrounding the convergence project. In July the Fédération des Experts Comptables Européens said there were “diminishing returns”, from further convergence. Two months later Nigel Sleigh-Johnson, head of financial reporting at the ICAEW, said the process needed to be kept under “close review”. More recently, Stephen Haddrill, chief executive at the Financial Reporting Council, said the process should not be about “translating American standards into an international shape”.

Lord Turner’s concerns centre on the boards’ divergent approaches to fair value. The rule forces companies to value assets at market price and was blamed for exaggerating the effects of the downturn.

In the months following the downturn, both boards, under pressure from world governments, sought to revise their fair value standards. FASB’s approach would result in all assets valued at fair value. The IASB exempted banks’ loan books.

The issue has proved a sticking point in negotiations.

Within the IASB there is little appetite for steering away from convergence. US adoption is a key reason driving other nations to adopt international standards. Walking away from convergence might also embolden Europe, especially German and France, which have attracted criticism for politicizing accounting standards. Haddrill said the IASB was “walking a tightrope” but had made progress addressing inter­national concerns. “Because of the politicization of differences in view in the continent, people are failing to see just how far the IASB has moved towards recognizing some of the concerns that Europe has had, whilst at the same time preserving the principles of fair value.”

“The IASB is again facing that inherit trade off between what are the divergent, and in a sense, incompatible demands.”

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.
  

The End of GAAP: Next Year?

The SEC suggests that some companies could forgo GAAP by the end of 2009, and that all companies may have to do the same by 2016
By Sarah Johnson and Marie Leone, CFO.com USAugust 27, 2008

The Securities and Exchange Commission has raised the possibility that some U.S. publicly traded companies will be able to use international financial reporting standards next year.

On Wednesday, the SEC commissioners proposed a timetable for transitioning all public companies from U.S. generally accepted accounting standards to IFRS within eight years, with the allowance for some companies to begin using the global rules earlier. If this so-called roadmap is approved, the SEC estimates that 110 companies would be eligible to use IFRS at the end of fiscal years ending after December 15, 2009, depending on their size and industry.

The roadmap further calls for the SEC to make a decision in 2011 regarding whether to require all of its registrants to use IFRS. The commissioners would base their decision on the progress made on, among other things, funding the International Accounting Standards Committee Foundation (which governs the International Accounting Standards Board), IFRS data tagging, and accounting education.

Before the commissioners voted unanimously to release the proposal for a 60-day comment period, SEC chairman Christopher Cox said IFRS has the potential to become a "uniter of the world's capital markets and investors everywhere." Nearly 100 countries have required or allowed their companies to prepare their financial statements using IFRS, he added.
The widespread use of the global standards and the fact that the majority of U.S. investors own foreign companies' securities "make it plain that if we do nothing and simply let these trends develop with each passing year, comparability and transparency will decrease for U.S. investors and issuers," Cox said.

David Tweedie, chairman of the International Accounting Standards Board commented: "The result of our work will be an improved set of IFRSs to assist investors throughout the world, he added.

Accounting firms, large companies, and academics have told the SEC that only a firm deadline could motivate people to get up to speed on IFRS in the United States.

These dates don't surprise D.J. Gannon, a partner at Deloitte & Touche, who said the deadlines are reasonable for U.S. companies to meet. "It is a sigh of relief in a sense because this expectation has been building since the [SEC's] concept release came out last year.... It will allow people to move forward with an actual plan," Gannon told CFO.com.

In response, large U.S. multinationals and the large accounting firms estimate that it would take U.S.-domiciled companies two to three years to make the switch to IFRS, with smaller businesses needing more time. Several multinationals have told the SEC that allowing IFRS in the U.S. would bring them efficiency and cost savings since their foreign subsidiaries are already using the global standards.

The SEC's roadmap would allow companies in about 30 industries to use IFRS early but would require them to either provide an audited GAAP reconciliation report or three years' worth of unaudited reconciliation reports. Only the top 20 companies in each industry would be eligible, based on market capitalization and whether the largest of their foreign counterparts also use IFRS.

SEC Proposed Timeline for Moving Companies to IFRS
End of 2009
Limited group of large companies given the option to use IFRS. SEC
estimates 110 U.S. companies will be able to take advantage of
the offer.
2011
SEC evaluates the progress of achieving proposed milestones,
and makes a decision about whether to mandate adoption of
IFRS. If IFRS is mandated, the commission will develop a staged
roll out, starting with the largest public companies first.
2014
Year the first wave of companies will be mandated to report
financial results using international accounting standards, if IFRS requirements are adopted in 2011.
2016
Year that all public companies, big and small, will be mandated
to report financial results using international accounting
standards, if IFRS requirements are adopted in 2011
Source: The Securities and Exchange Commission