SEC Comment Letters--In Your Mailbox Soon?

The accounting firm Crowe Horwath has published an article Recent Trends in SEC Comment Letters--Reproduced in its entirety below.

In December 2008, the Securities and Exchange Commission (SEC) staff indicated at the American Institute of Certified Public Accountants’ (AICPA) National Conference on Current SEC and PCAOB Developments that they would be conducting targeted reviews of fair value, other-than-temporary impairment (OTTI) of securities, and other asset impairments. As a result, several recent examples of SEC staff comment letters on periodic filings (Form 10-Qs and 10-Ks) have a clear focus on these issues.

Following are some general themes present in comment letters from the SEC staff on recent filings that might be helpful for registrants to consider as they prepare periodic filings. Management should carefully review their company's accounting policies as well as related financial statement and management’s discussion and analysis (MD&A) disclosures related to these issues.

Accounting
OTTI of Securities
The SEC has:

• Asked registrants to justify why securities with fair values significantly below cost are not considered to be OTTI.
• For securities with ratings of "default" or "speculative," the SEC has asked how management determined that an adverse change in cash flows had not occurred.
• Challenged registrants on whether the losses for sales of securities after a period end should have been recognized in the prior period.
• Asked registrants to provide specific information about securities with significant unrealized losses.
• Requested information includes the specific issuer and name of each security; type of underlying collateral, credit rating, severity, and duration of the unrealized loss; and how the financial condition and near-term prospects of the issuer were considered when determining that no OTTI was present.

Securities/Other
The SEC has asked registrants to:

• Provide implied discount rates used in determining fair value of securities when using Level 3 inputs (in accordance with the guidance in Financial Accounting Standards Board Staff Position 157-3 (FSP FAS 157-3), “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” and FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”).
• Reconcile the cash flows used to determine fair value with the cash flows used to assess OTTI.
  Indicate the systems and controls used to validate prices received from third parties when valuing securities.

Goodwill and Other Intangible Assets
The SEC has commented on:

• Implied control premiums used to determine fair value of reporting units for purposes of step one of goodwill impairment tests. Assumptions used to determine fair value must be supportable and should not contradict observable data about recent transactions.
• The lack of support for a reasonable period in the context of determining market capitalization of a reporting unit.
• The lack of support for assumptions used when determining the fair value of an intangible asset – for example, when a multiperiod earnings approach has been used.

Presentation and Disclosure

Loans and the Allowance for Loan Losses
The SEC has:

• Asked registrants to consider more disaggregated disclosure about loan portfolios – for example, providing disclosures by exposure to subprime, alt A-paper, or other relatively high-risk loans.
• Commented on disclosing reasons for changes (or lack thereof) in general loan reserves considering changes in credit risk.
• Commented on presenting the basis for each risk category and the method for determining the loss factor applied to each category. It has asked companies to specifically identify how historical loss trends were adjusted based on current factors.
• Asked registrants to explain reasons for directional inconsistencies in loan-loss allowances – for example, when impaired loans increased but specifically identified reserves decreased.

Securities
The SEC has requested:

• More disclosure of reasons for transfers into and out of the Level 3 category and more robust discussion of how fair value was determined when classified as Level 3.
• Support for securities being presented as Level 2 that appear to require Level 3 classification based on other disclosures.

www.crowehorwath.com

The Economist on Politics and Accounting

Whenever The Economist writes about accounting, it is a good read. Here is a recent article.

Reforming finance: Accounting standards

Marks and sparks--Accountants draw up new rules for financial firms. The latest in our series

REWRITING laws in a hurry is never a great idea, but that is exactly what the International Accounting Standards Board (IASB), which sets rules for beancounters outside America, has been forced to do. One of the casualties of the credit crisis has been the idea of fair-value accounting—the practice of valuing financial assets, mainly securities, at market prices or the closest thing there is to them. The idea that accounting caused the crisis is specious, but Europe’s politicians, egged on by banks that took huge write-downs when market prices swooned, have nonetheless lashed out. The message has been pretty clear: make banks’ balance-sheets look better, or else. America’s rulemaker, the Financial Accounting Standards Board (FASB), has been excoriated by Congress and is back at the drawing-board too.

Unpleasant though the political mood music is, change is needed. The existing standards are a shambles, a patchwork of inherited rules riddled with escape clauses. They mix mark-to-market values with the more traditional practice of carrying assets at their cost and impairing them only when managers and auditors think fit. There are also several different ways of recognising losses. The result is that the balance-sheets of different banks are not always directly comparable.

IASB’s proposed solution, announced on July 14th, is to put all financial assets into two buckets. Loans and securities which share the characteristics of loans—in other words, assets that derive their value only from interest and repayment of principal—will be held at cost, provided banks can show they will hold them for the long term. Everything else, including equities, derivatives and more complicated securities, will be held at fair value. Companies will be allowed to start applying the new rules from the end of this year, and will be obliged to by 2012.

This is far simpler than the existing system. But according to one bank’s finance chief, defining the boundary between the two types of assets is likely to prove tricky. For example, IASB is likely to allow only the very top tranches of asset-backed securities to be classified as loans. That could reduce demand for tranches of nearly equivalent risk, as firms become less keen to hold them. Some insurance companies, meanwhile, are reported to be worried about holding all equities at market prices.

Any boundary will inevitably be somewhat arbitrary, however. The end result does look sensible: simple things will be held in more opaque loan books and fiddly things held at market prices. It is hard to judge whether the overall proportion of assets held at fair value will fall, but it seems highly likely. Anything else would result in an outright punch-up with some European governments.

It is this political tension which is the real problem now for standards-setters. Previous battles over accounting for pensions and share options were won in the face of great hostility. It would be hard to engage in such battles now. The best defence against politicking is to continue to merge international and American accounting into a single rulebook governed by an independent body. This is meant to happen over the next few years anyway, but American rulemakers have been dragging their heels. IASB’s pragmatic proposals may make consensus easier to reach.

Good Corporate Reporting Practice Examples

PWC provides a catalogue of examples of good practice in corporate reporting. The examples are accompanied by an introduction explaining why this example has been chosen as well as a detailed commentary from PWC's experts based on their corporate reporting framework.

The information is provided free of charge, but requires registration before accessing the full catalogue. Once registered, you can login each time you wish to use the good practice examples.

You can search for examples by industry, company name, country, and category or element of the corporate reporting framework. You can download and print examples in PDF format.
Access to the catalogue of good practices examples can be found in the bottom right hand corner of the page found at this link.

Can We Simplify Financial Reporting?

Last Friday, the Global Accounting Alliance (GAA) and the AICPA held the third of three roundtable discussions about simplifying financial statement disclosures. The roundtables were held in New York, London and Beijing and had the goal of determining whether financial reporting can be made simpler and more useful.

One suggestion was to design financial statements with different levels of disclosure so that users would only get what they want. For example, the first level could be general accounting policies, followed by a level around movement within accounts, then changes in estimates and assumptions and finally forward-looking statements.

If you don’t want the full report you could just have Level 1 with collapsible sections, It was suggested that XBRL can help make that possible.

Quotable quotes:

• It seems (in the U.S.) we’re constantly making changes. If we could step back and look at issues on a longer-term basis, it would help.
• The profession needs to look not only at the disclosure of information, but how information is presented, because people have their own biases around how to develop financial reports
• Companies will put additional information on their own Web sites, but not in their financial statements because of legal liability concerns. There are different liability concerns for each approach.
• Even when companies include more information, it’s not always useful.
• It’s not just more information, but starting a better communication document. More does not equal better.
• Add a brief summary at the front of the financial statement to provide an overview of the bigger picture. An additional summary must be concise, candid and insightful.
• Can we change the equation from being a compliance vs. communication exercise?
• (Financial reporting) comes with a label. ‘Buyer beware,’...for the SME or small, small companies, it’s not something people will feel uncomfortable with given that they understand what’s in the package.
• Companies should be allowed to focus on what’s best for them but the fundamental building blocks should be the same.
• People confuse uniformity with consistency.
• There may be some incremental differences from day one, but eventually a system will converge.

www.globalaccountingalliance.com

FASB Issues Financial Instruments Proposals

The Financial Accounting Standards Board (FASB) this week announced it will issue an exposure draft proposing that more financial instruments (including loans held by banks and held-to-maturity securities) be recognized at fair value on the balance sheet.

The proposals don't line up perfectly with what the IASB proposed earlier in the week, so this is the newest "fasb vs iasb" scenario, and next year should be interesting as to how the two proposals converge. As per an earlier post, IASB proposals focus on whether a financial instrument has "basic loan features" or is managed on a contractual yield basis. Basic loan features meant that the instrument bears market interest and repays original principal only. To put it bluntly FASB likes fair value better than IASB. The FASB proposals will result in more financial instruments at fair value than the IASB proposals.

Changes in fair value would be recognized either in net income for trading instruments or in other comprehensive income (OCI) for non-trading instruments.

Key aspects of the proposal:

• Fair value changes on derivatives, equity securities, and hybrid instruments containing embedded derivatives requiring bifurcation under FAS 133 (i.e., those not clearly and closely related to the host contract) will be recognized in net income.
  
• For all financial instruments, interest and dividends will continue to be recognized in net income.
  
• Credit impairments and realized gains and losses arising from sales or settlement of financial instruments will be recognized in net income.
  
• The classification of financial instruments will be determined at initial recognition with no subsequent reclassification allowed.
  
• One statement of financial performance will be required, with subtotals presented for net income and OCI. However, only earnings per share for net income will be required.
  

While an exposure draft is planned to be released for public comment in the fourth quarter of 2009, it is possible that it will be issued sooner. At future meetings, the FASB plans to discuss related matters to be included in the exposure draft, including measurement of demand deposits, a credit impairment model based on expected losses, whether to allow nonpublic entities to measure certain financial instruments at amortized cost, and the proposed effective date and transition provisions for a final standard.

This proposal represents a significant change to the existing fair value accounting model and substantial debate is expected, including how the FASB's proposal will align with the International Accounting Standards Board's (IASB) recent exposure draft on financial instrument classification and measurement.

(content from PWC)

Simpler Accounting for Financial Instruments

Accounting for financial instruments will be simplified from previous methods according to the recent IAS 39 Exposure Draft.

A reduction in the number of different categories from 4 to 2 and the elimination of the messy ex guidance around embedded derivatives and some of the impairment requirements, significantly streamlines this area.

The classification is an attempt to replicate the business model in FI acconting. This means that where a loan portfolio is held to generate income from interest and principal cash flows, it will be measured on that basis and not on one that looks at fair value at a point in time.

The exposure draft draws on input from the March 2008 Discussion Paper Reducing Complexity in Reporting Financial Instruments and discussions of the Financial Crisis Advisory Group.

There are still some major issues to deal with. Amortised cost measurement will be available only for instruments with ’basic loan features’ which are managed on a ‘contractual yield basis’. The latter of these is hard to define for financial instruments that sit in the middle ground between those to be held for their entire term to generate income and those to be traded for profit in the short term; that is going to be a particular concern for those who invest surplus funds temporarily. The IASB itself has not yet concluded on this point and that it’s likely that additional guidance will be required.

There’s also the question of whether equivalent changes will be made to US GAAP. The FASB is currently reviewing the requirements of its own financial instruments standards, but is at a less advanced stage of its project than the IASB. Indications are that the FASB is in a different place to the IASB and their proposals may well require more instruments to be measured at fair value.

The IASB has indicated that if the FASB does reach different conclusions, then these will be exposed for comment to the IFRS constituency.

Old model:

Held for trading
Available for sale
Amortized cost
Held to maturity



New Model:

Seven Key Differences in Adopting IFRS

A recent article in CA magazine (Canada) discussses the Seven Key Differences that public companies will need to deal in their changeover to IFRS: Given that U.S. GAAP and Canadian GAAP are virtually identical in these areas, they will be the key areas for U.S. issuers as well.


· property, plant and equipment
· revenues
· impairment of assets
· provisions

The article also identified three other topics where practice might differ fundamentally from that mandated by IFRS and that would likely affect most public entities:


· presentation of financial statements
· related parties
· leases

Check this article out—it is a high level overview tied to examples from an actual set of IFRS financials.

Little Economic Benefit in U.S. to Adopting IFRS: MIT Study

Back a few months this blog reported that the IFRS Roadmap calling for replacement of U.S. GAAP with IFRS by 2014 is coming under increased scrutiny. We cited a paper written by academics from Wharton, MIT, and other reputable universities discussing the implications on the U.S. economy of adopting IFRS.

The last nine months have been controversial for both U.S. GAAP and IFRS. Political pressures have been brought against both the U.S. standards and IFRS as a result of controversy over fair value/mark to market accounting.

The specter of political issues haunting accounting essentially could pit the SEC and the FASB against with the International Accounting Standards Board (IASB). In announcing the roadmap a few months back, the SEC called for improvements to funding and governance of the IASB. In more recent statements, the SEC has criticized IFRS as inadequate.

The same sources now argue in another paper that there are reasons to slow down the change to IFRS.

The new paper examines the economic consequences of mandatory IFRS reporting around the world. It analyzes the effects on market liquidity, and cost of capital and market value of a company's stock compared to a company's equity book value in 26 countries using a large sample of 3,100 firms that are mandated to adopt IFRS.

Some findings at the time of adoption of IFRS:

Market liquidity increases “In our firm-year analyses, the effects range in magnitude from 3% to 6% for market liquidity relative to levels prior to IFRS adoption,”

Cost of capital decreases

Equity valuations increase

However the authors find that IFRS adopters that are cross-listed on U.S. exchanges experience lower, if any, liquidity benefits. That is because “In countries like the U.S., there may be minimal room for improvement because U.S. GAAP is already considered a high-quality accounting regime.”

The authors note that while some argue that adopting IFRS in the U.S. would make it easier for investors to compare firms with those in other countries and decrease costs of reconciliations, this study provides “weak” evidence of any comparability benefits. “This is an area where more research will occur, but as of now there is no general agreement as to how large this type of benefit could be. The adoption of IFRS is a hot topic and it will take a few more years to get a full understanding of the long-term consequences.”

Capital-market benefits occur only in countries where firms have incentives to be transparent and where legal enforcement is strong, underscoring the central importance of firms' reporting incentives and countries' enforcement regimes for the quality of financial reporting.

Comparing mandatory and voluntary adopters, the capital market effects are most pronounced for firms that voluntarily switch to IFRS, both in the year when they switch and again later, when IFRS become mandatory. They however caution that the former result is likely due to self-selection, and that the latter result is a caution to attribute the capital-market effects for mandatory adopters solely or even primarily to the IFRS mandate.

Many adopting countries have made concurrent efforts to improve enforcement and governance regimes, which likely play into the findings. Consistent with this interpretation, the estimated liquidity improvements are smaller in magnitude when analyzed on a monthly basis, which is more likely to isolate IFRS reporting effects.

The paper is: Mandatory IFRS Reporting Around the World: Early Evidence on the Economic Consequences

SEC Comment Letters: Goodwill Impairment

In a webcast last week, the Controllers’ Leadership Roundtable discussed SEC Comment letter activity surrounding goodwill impairment charges. Below is their summary of recent activity in this area.
SEC is hitting on three main areas.

• Clear Identification of Impairment Recoverability Risks: If they are not doing so already, companies are going to need to ensure that they quantitatively disclose information about potential risks to revenue, operating results, and asset recoverability, so that investors have the ‘raw material’ required to judge the likelihood of future impairments. This includes explicitly addressing the economy, and the range of assumptions they used in evaluating its potential impact (and what changes in those assumptions would do to potential impairments).
  


• Requiring Detailed Sensitivity Analysis: Along with identifying the range of assumptions used in their calculations, companies need to also disclose the sensitivity analyses used, so that investors and users can get a better sense of how impairment might change if certain conditions (e.g. 1% decline in revenue, 50 basis point increase in the interest rate) came to pass. This provides a check both on the validity of the impairment charges, and on the validity of management’s thought processes.
  


• Managerial Judgment Process: In general, the SEC is also requiring companies to detail their impairment ‘thought process,’ including what inputs they used, and how they came to those input values. One comment letter called on firms to:
  
  In the interest of providing readers with a better insight into management’s judgments in accounting for goodwill and intangible assets, please consider disclosing the following:


• The reporting unit level at which you test goodwill for impairment and your basis for that determination;


• Sufficient information to enable a reader to understand how you apply the discounted cash flow valuation model in estimating the fair value of your reporting units and why management selected this method as being the most meaningful in preparing your goodwill impairment analyses;


• How you determine the appropriate discount rates and attrition rates to apply in your intangible asset impairment and analysis;


• A qualitative and quantitative description of the material assumptions used and a sensitivity analysis of those assumptions based upon reasonably likely changes; and


• If applicable, how the assumptions and methodologies used for valuing goodwill and intangible assets in the current year have changed since the prior year, highlighting the impact of any changes.

IFRS Lite

The IASB has released IFRS accounting standards that are a simplified, compact version of International Financial Reporting Standards.

"IFRS for SMEs" is 230 pages, compared to 2500 pages for the full version of IFRS.

SME stands for small and medium-sized entities. There is no bright line size test to determine which companies can apply the standards. Instead, the SME standards can only be applied by entities that do offer their equity or debt publicly or which hold assets as a fiduciary for others (like banks, insurance companies, securities broker/dealers, and mutual funds.)

U.S. companies are free to adopt the SME rules since the American Institute of Certified Public Accountants has recognized the IASB as an accounting standard setter.

Private companies may find IFRS for SMEs is easier to apply and accordingly more cost-effective to apply tha n U.S. GAAP.

In the European Union, where accounting standards are fragmented into a multitude of home country accounting standards, the cost savings may be most significant. One major advantage could be that lenders would have one set of standards to use to evaluate financial statements in determining credit worthiness of their customers.

Simplifications

• Eliminating topics not used by private companies--earnings per share, interim financial reporting, segment reporting.
• Simpler accounting methods--financial instruments, property, plant, and equipment, intangible assets, investment property, financial instruments, investments in joint ventures, defined-benefit plans, and others.
• Reduced disclosures

Goodwill and intangibles do not have to be tested for impairment each year. Instead, assets are valued at inception and then amortized over estimated useful life. If life cannot be estimated reliably, assets are amortized over 10 years.

Read the full IASB release here.

Worst Year Ever for Goodwill Impairments: KPMG Study

Goodwill impairments soared in 2008, doubling over 2007 levels for a surveyed group of companies.

KPMG completed the survey of approximately 1,600 public companies from January 2005 to December 2008.

Goodwill impairment charges at the companies were $340 billion in 2008, $143 billion in 2007 and $87 billion in 2006.

This result is not surprising given the current economic downturn and general financial market turmoil.

The study found that in 2008 the hardest-hit industries were banks, which accounted for about 23 percent of the total goodwill impairment charges. Materials, energy, media, and technology hardware and equipment companies were next. Other segments of the economy including pharmaceuticals and food and beverages took significant goodwill write-downs in 2008.

The largest two median goodwill impairment charge by industry were:
Banks--$411 million in 2008, from $49 million in 2007
Materials $394 million from $30 million in 2007.

Percentages of companies taking impairments by industry were:

• Semiconductor and semiconductor equipment (31 percent)


• Technology hardware and equipment (31 percent)


• Media (30 percent)


• Consumer durables and apparel (27 percent)


• Diversified financials (25 percent)

FASB Beats Up the Banks

After a full year of contemplation and consultation, the FASB eliminated qualified special purpose entities (QSPEs).

QSPEs allow banks and other financial institutions and companies to hold asset-based securities off-balance sheet. This move will not likely have a significant impact on earnings in the banking sector, but it will affect capital levels at institutions that sold mortgage and other loans into such securities.

The previously off-balance sheet assets will now show up on the balance sheet at the start of 2010 for most institutions.

While there may be minimal differences in banks' earnings, the impacts on balance sheets will be more significant, possibly requiring banks to increase reserves.

Banks were initially upset by the timing of the initial proposal, which was put off after objections from the American bankers’ Association. The FASB says ABA lobbying will not change the current implementation date.

The ABA continues to lobby for changes to FASB's mark-to-market accounting rules and other than temporary impairment rules. The banks feel that mark-to-market accounting is not the best measurement for many transactions, advocating that the current approach works for assets expected to be sold, but not for assets that are expected to be held, among other issues. Banks have claimed for years that mark-to-market rules force them to place unrealistically low values on illiquid or otherwise difficult to trade assets (known in mark-to-market accounting terms as "Level 3 Financial Instruments".)

Mark-to-market accounting is under increasingly fierce attack by bankers who are lobbying hard for U.S. Congress to suspend or repeal mark to market rules. Bankers blame the rules for the current financial crisis.

Recently the FASB issued changes to accounting rules that would allow looser mark to market accounting. The changes has sparked opposition to the changes from consumer and investor groups that who are advancing their previously expressed arguments that the rules give management (banks?) too much freedom in valuing assets in distressed or illiquid markets.

Opposition comes from such places as the Consumer Federation of America, the CFA Institute and the FASB's Investors Technical Advisory Committee. The opposition may also have an impact on proposed changes to financial institutions' regulatory capital levels, which the banks claim are needed to ease the existing credit crunch and to avoid future credit messes like we have had in the past year.

Contrary Views on Liability Measurement

GAAP introduced in FAS 157 and elsewhere supports a view that an entity’s own credit risk is a determinant in measuring fair value of a a liability.

Some financial statement preparers don’t like the idea that a reduction in an entity’s credit rating would create a gain. How does this work? If a company’s credit rating dropped, the likelihood that it would repay its liabilities decreases, resulting in an entry such as:

Dr Liability
Cr Gain

If later the company’s credit rating was raised, then a loss would result:

Dr Loss
Cr Liability

If an entity’s credit rating increased above the rating when the liability was set up, the liability would be carried at an amount in excess of the amount that was required to be repaid, resulting in a gain if early repayment occurred.

In June, the FASB sought comments proposed FSP Measuring Liabilities under FASB Statement
No. 157 (FSP 157-f).

The Government Relations Committee (GRC) of the Association of financial Professionals sent a comment letter to FASB to voice its concerns with the guidance.

The GRC generally supports the FASB in its efforts to issue timely guidance on fair value measurement. However the GRC takes the position that the FASB’s current model for measuring liabilities is significantly flawed for the following reasons:

1. The inability to actually realize the fair value at the reporting date should be considered.


2. The fair value calculation of a liability should not exceed the contractual value of the debt a company actually owes.


3. Gains arising from a company’s own credit impairments should not be allowed.


4. Any restrictions on a debt should be taken into consideration in subsequent measurement.

Check out the AFP's site: http://www.afponline.org/

Accounting for Greenhouse Gases

Journal of Accountancy recently published a comprehensive article on accounting for greenhouse gases. Their summary is provided below.

EXECUTIVE SUMMARY

Concerns over the environmental, economic and health risks posed by greenhouse gas emissions have become a frequent topic of discussion. Recent events and initiatives suggest that climate change ranks high on the U.S. political agenda.

Cap-and-trade programs have emerged globally as the most prevalent market mechanism used by countries to limit greenhouse gas emissions. In such programs, a government sets a targeted level of emissions for companies for a specified time period and uses “allowances” to assign a monetary value to pollution. Companies that emit less than their target may have excess allowances, whereas those that exceed their targets can acquire additional allowances. Companies generally can sell or purchase allowances directly with other companies, through a broker, or on an exchange.

Users of financial statements require expanded and transparent disclosure of the financial results related to pollution emissions. However, attempts by FASB and the IASB to provide definitive accounting guidance have been unsuccessful, leading to diversity in global accounting practices.

FASB and the IASB are working jointly to examine the accounting issues related to cap and- trade programs and other market-based mechanisms designed to limit emissions. A final standard is anticipated in 2010.

See the full article here.

FASB Succumbed to Political Pressure: High Powered Investment Committee

An advisory panel of investors has accused the US accounting standard setter of losing its independence after it succumbed to political pressure over mark-to-market accounting changes in a fiery letter.

The group said the Financial Accounting Standards Board should have fought off pressure from politicians and lobbyists who sought special treatment for banks with toxic assets on their books.

The panel, the Investors Technical Advisory Committee was set up by FASB to act as a barometer for investors on accounting rules.

The group said the governance structure of the Financial Accounting Standards Board has been "insufficient" in fighting off pressure from special interests and politicians seeking more flexibility for banks with toxic assets on their books, and asked that the FASB board be restored to seven members from its current five.

The panel, called the Investors Technical Advisory Committee (ITAC), was set up by FASB to give investors' perspectives on accounting rules.

Its members include 13 investment professionals from suchorganizations as the Council of Institutional Investors and the CFA Centre for Financial Market Integrity; a former regulator; and analysts from Moody's, Standard & Poor's, Goldman Sachs & Co, J.P. Morgan Securities and CALPERS, the California Public Employees' Retirement System.

The said it had "grave concerns about what we believe to be a substantial erosion in the independence of the accounting standard setting process."

The group questioned whether "weaknesses" in FASB's structure and governance would undermine the quality of accounting rules issued by the board in the future.

The Committee said in the letter that it believes that poor transparency in accounting is partly responsible for the lack of investor confidence during the financial crisis and that FASB's inability "to assert its independence in the face of onslaught" was "exacerbating" the current problems.

"Many investors responded negatively to the reduced quality of information, as reflected in their investment decisions, but that response cannot compensate for the loss of information and, perhaps more importantly, the loss of trust and confidence in financial reporting and accounting standard setting," the group wrote.

To help FASB better fend off political attacks, the advisory panel urged the Financial Accounting Foundation to reverse changes made to its governance structure last year. It asked that the five-member board be restored to seven members, with the two additional members coming from investor groups.

The group also said because of "very public threats and intimidation" by Congress against FASB's chairman, another of the recent changes -- giving the chairman sole authority over what accounting projects end up on the board's agenda -- should be reversed.

In February 2008, the foundation downsized FASB and increased the chairman's power, saying the changes would help U.S. and international accounting standards converge. But plans to have U.S. companies switch to International Financial Reporting Standards as soon as 2014 are now being reevaluated by the U.S. Securities and Exchange Commission.

The investor advisory panel said in its letter that while FASB's governance issues were troubling, the situation "appears to be if anything even more dire outside the U.S." as the London-based International Accounting Standards Board has also faced threats from regulators and politicians abroad.

From Accountancy Age and Reuters

IFRS vs. U.S. GAAP

The firm Audit Integrity has reported that a recent report shows that IFRS has no noticeable advantage over U.S. GAAP. Also, U.S. GAAP filers have more metrics and greater depth of reporting, and U.S. corporations file more frequently and in a more timely manner than do European corporations. In addition, the report noted that some governance data such as executive compensation and board composition, are reported in much less detail in Europe than in the U.S.

One of their questions: Does IFRS provide better financial reporting and financial statement data than U.S. GAAP?

The Report’s answer:

A. Depth of Metric Coverage – Overall, U.S. corporations report more detailed financial data. Governance data such as executive compensation and Board composition are reported at a much lower level in Europe.

Several individual metrics were reported on with differing frequencies. In general, U.S. companies reported on more metrics, but certain metrics (e.g., Pension metrics) were reported with greater frequency in Europe.

B. Differences Continue post IFRS – In looking at average metric values, a small number of metrics had notable differences. Along with expectations for differences in financial reporting between IFRS and GAAP, this would lead to concerns in comparing financial statements using different standards.

The study of accounting-related fraud in Western Europe has found substantial differences in the approach taken to IFRS by different countries and companies.

Audit Integrity has been assessing and rating European companies and rating them based upon their perceived level of accounting and governance risk.

Audit Integrity reports that that the riskiest countries in Western Europe, from an accounting and governance standpoint are Greece and the Netherlands. Luxembourg, Austria and Switzerland have the best ratings. Large cap European banks were criticized for aggressive accounting and bad governance.

The study uses phrases like “lack of transparency” and “corporations...hiding losses.”

Audit Integrity also compared IFRS with U.S. GAAP. They wanted to know if IFRS is an acceptable alternative to U.S. GAAP.

The study found that IFRS has significantly improved the consistency of financial reporting in Europe. But they found discrepancies in applying IFRS in various countries. Such discrepancies were not limited to the European Commission’s “carve out” exceptions to IFRS. The exceptions relate to IFRS adoption rates, financial reporting frequency and timeliness of filings. Timeliness of financial statement filing varied widely by country and was significantly slower in Europe than in the U.S.”

Read the full report here.

Flaws in FASB’s Proposed Fair Value Proposal

The Association of Financial Professionals (AFP) Government Investor Relations Task Force has sent a comment letter to the FASB on the proposed FASB Staff Position titled “Measuring Liabilities under FASB Statement No. 157” (FSP FAS 157-f).

While AFP supports the FASB in its efforts to issue timely guidance on fair value measurement, AFP’s view is that the FASB’s model for measuring liabilities in this FSP is significantly flawed because:

1. The inability to actually realize the fair value at the reporting date should be considered;
2. The fair value calculation of a liability should not exceed the contractual value of the debt a company actually owes;
3. Gains arising from a company’s own credit impairments should not be allowed; and
4. Any restrictions on a debt should be taken into consideration in subsequent measurement.

AFP says that the FSP assumes that the company has the ability to take advantage of market pricing (e.g., as a result of changes in interest rates) and repurchase its own debt in the open market, which in most cases it does not. The market performance of a company’s debt trading as an asset is not directly correlated to the economic value of the liability associated with its issued debt. A company is only liable for the stated value of the debt upon maturity or early retirement – nothing more or less. Thus, why would a company hypothetically report a fair value measurement above or below the face amount of the debt if the company does not have the ability to actually realize that pricing at the reporting date?

Read the full comment letter here.

Push Down Accounting

Push down accounting is a method of accounting in which the financial statements of a subsidiary are presented to reflect the costs incurred by the parent company in buying the subsidiary instead of the subsidiary's historical costs. The purchase costs of the parent company are shown in the subsidiary's statements.

Push-down accounting works like this:

Company A buys Company B and borrows to make the acquisition.

Company A pays more than Company B’s book value for the following:

$1,000 Property, plant and equipment and definite lived intangibles
$ 500 Goodwill

Instead of making the entry for the fair market value increments (i.e. excluding book value) to Company A’s books for the purchase, which (simplified) would be--

Dr PP&E $1,000
Dr Goodwill $ 500
Cr Debt $1,500

--Company A makes the above entry in Company B’s legal entity books, instead of its own books.

The entry being made in Company B’s books makes no difference to the consolidated financial statements.

The entry above is generally attributable to the subsidiary, Company B, but was originally, and still likely legally, the parent's entry. U.S. GAAP requires push down accounting.

The Securities and Exchange Commission (SEC) has issued a bulletin stating that debt should be pushed down if "(1) Company B is to assume the debt of Company A either presently or in a planned transaction in the future; (2) the proceeds of a debt or equity offering of Company B will be used to retire all or a part of Company A's debt; or (3) Company B guarantees or pledges its assets as collateral for Company A's debt." "Push Down" Basis of Accounting for Parent Company Debt Related to Subsidiary Acquisition, SEC Staff Accounting Bulletin No. 73 (Dec. 30, 1987).

In situations where a corporation has incurred debt in connection with its acquisition of stock of another corporation and these criteria are not met or where the SEC rules are not applicable to the transaction, push down of debt, while not required, is still an acceptable accounting method.

Some corporations have, as an accounting practice, simply placed Company A's interest expense on B’s books. This is generally not acceptable for tax purposes, although could be acceptable in some circumstances. The rules and related jurisprudence are complex.

One common reason for push down accounting is more for management accounting purposes, since Company B would take deductions from income for depreciation, amortization on the fair market value increments and for interest expense.

Push down accounting may not be acceptable under IFRS on transition. So if a company has pushed down fair market value increments into subsidiaries, because the IFRS 1 business combination exemption is available only for business combinations in which the reporting entity is the acquirer, if the reporting entity is itself a subsidiary and its balance sheet reflects the effects of push down accounting from prior acquisitions, those amounts may have to be reversed upon adoption of IFRS. However, a previous revaluation done for purposes of push down accounting can be used as deemed cost in the case of property, plant and equipment, investment property, and certain intangible assets.

More on this topic later.

New Lease Rules May Ground Some Airlines

According to an article in Accountancy Age, new lease accounting standards could result in a world of hurt for the balance sheets of airlines.

Old lease accounting rules allowed companies to keep lease liabilities off their balance sheets, with the only impact of the leases being on companies’ income statements. New rules are intended to bring leases on to balance sheets. The airline industry are major lessees of aircraft to the tune of billions of potential liabilities.

Southwest Airlines, for example at December 31, 2008 operated 92 leased aircraft, of which 82 were operating leases, or approximately 15 percent of their fleet. Those operating leases are likely to end up being affected by the new rules, adding additional assets and liabilities to balance sheets. Southwest’s leased aircraft are generally older models. Delta Airlines has about 25 percent of its fleet under operating leases, with total payments of over $12 billion remaining on the leases.

Debt rating agencies, institutional investors and some analysts already adjust operating leases on to balance sheets of the companies that they are valuing. However those adjustments don’t show up on published financial statements. The new liabilities may come as a shock to some investors. Some companies may appear to have weak balance sheets.

The lease industry offers companies the choice of operating or capital lease treatment with the terms and payments on the leases often being only minimally different under the two alternatives.

Accountancy Age reports that in May, the Finance & Leasing Association met with other groups in London to discuss the issue, criticizing the new proposal as ‘an excessively burdensome approach for accounting for leases’.

The leasing industry has expressed its views to the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB). They are concerned that the proposed new standards represent an excessive burdensome on companies and that the new rules may prevent companies from financing assets.

At a recent conference, a representative of the leasing industry said that the proposed changes could have wide-reaching consequences for companies, affecting balance sheets and income statements, but even more of a concern is complexity of the new accounting rules, with small and medium-sized businesses being particularly hard hit.

The IASB is seeking feedback on the proposals with the deadline for comments being July 17 . A final standard is expected by 2011.

Politics and Accounting

This article, from an anti globalization rabble-rouser, does contain some interesting stuff.

The Obama administration’s good offices have encouraged the big banks to launch a multi-front offensive to block any measures that would limit their profit-making, and to weaken already existing regulations.

Last February, for example, financial firms and banking organizations launched a multi-million-dollar lobbying drive to change mark-to-market accounting rules that forced banks to report losses or write-downs totaling $175 billion in 2008. Mark-to-market essentially requires banks to value their assets according to prevailing market prices. The banks have balked at this standard, demanding instead the right to assign their own values to their bad debts, using "internal models."

With the aid of $286,000 in campaign donations to the 33 members of a key House subcommittee, the Fair Value Coalition, the lobby group set up by the banks, succeeded in getting the industry rule-making body, the Financial Accounting Standards Board, or FASB, to give the banks immense latitude in suspending mark-to-market rules.

The Wall Street Journal on June 3 published an investigative report detailing the banks’ use of campaign fund monies to get their way. The Journal reported that the banking coalition spent a total of $27.6 million in the first quarter of 2009 on its lobbying effort.

It focused its drive on a House Financial Services subcommittee chaired by Rep. Paul Kanjorski, a Pennsylvania Democrat. Kanjorski received $18,500 from Fair Value Coalition members in the first quarter. Over the past two years, Kanjorski has received $704,000 in contributions from banking and insurance companies, the third-highest among members of Congress.

Barney Frank of Massachusetts, the Democratic chairman of the Financial Services Committee, received $8,500 from the coalition.

Kanjorski and other recipients of the bankers’ largess from both parties grilled the head of FASB, Robert Herz, at a committee hearing on March 12, demanding that he expedite a review of mark-to-market rules and threatening him with a bill to broaden government oversight of his board if he failed to comply.

Herz got the message, and on April 12, in advance of the stress test results and early enough to enable the banks to pad their first-quarter financial reports, FASB announced the changes demanded by the lawmakers.

According to the Journal, the American Bankers Association was the biggest contributor to the campaign funds of committee members in the weeks before the March 12 hearing. The newspaper quotes ABA President Edward Yingling as boasting, "We worked that hearing. We told people that the hearing should be used to talk about the big problems with ‘mark to market,’ and you had 20 straight members of Congress, one after another, turn to FASB and say, ‘Fix it.’"

The Journal notes: "The change helped turn around investor sentiment on banks.... Wells Fargo & Co. said the change increased its capital by $4.4 billion in the first quarter. Citigroup Inc. said the change added $413 million to first-quarter earnings." The newspaper cites a tax and accounting analyst, who estimates that the accounting changes will increase bank earnings in the second quarter by an average of 7 percent.

The Journal quotes Lynn Turner, the former chief accountant of the Securities and Exchange Commission and a former FASB member, as saying "he doesn’t think the banking industry will be satisfied until mark to market accounting is dismantled completely. ‘Despite efforts by FASB to give ground to the banks, enough is never enough, he says."

IFRS News Roundup

This summary of IFRS news comes from the AICPA. You can subscribe to their daily news feed on their site.


FASB chairman unhappy with direction in rule-reform efforts Financial Accounting Standards Board Chairman Bob Herz said last month that reform efforts for accounting rules are being done in a piecemeal fashion to appease politicians. The end result, Herz said, will be rules that are hastily implemented but not necessarily the best fix for the system. "We desire to get to a common good answer with the IASB and we will make best efforts to do so, but some of the directions we are currently headed in are not to the liking of our board," he said. Reuters

FCAG members see threats to international accounting standards External pressures on the FASB and IASB could result in "tragedy," according to at least three members of a joint board the two groups formed last year. The members of the Financial Crisis Advisory Group said such pressures could threaten "the very existence of international accounting standards." FCAG Co-Chairman Harvey Goldschmid and FCAG members Nelson Carvalho and Michel Prada raised their concerns at a meeting last month. AccountingWEB (5/24) , WebCPA (5/26)

Official: U.S. takes risk by not adopting IFRS The U.S. will be "the outlier" unless it adopts International Financial Reporting Standards within five years, according to International Accounting Standards Board member John Smith. "Those countries already adopting and committing themselves to IFRS will not accept a situation where the United States remains outside the system indefinitely, yet has a seat at the table," he said. For IFRS daily updates, training and other resources, visit www.ifrs.com. CFO.com

Gerhard Mueller: Accounting education must support IFRS IFRS and U.S. GAAP will converge over the next five to 10 years with a few minimal differences to accommodate "U.S. domestic quirks," said Gerhard G. Mueller, a longtime proponent of international accounting. One of the greatest challenges confronting convergence is accounting education in the U.S. fully integrating IFRS into textbooks and the curricula, he said. JournalofAccountancy.com (5/8)

Fund managers pressure IASB on accounting rules update Investors and fund managers want the International Accounting Standards Board to speed up its reform efforts aimed at eliminating fundamental problems with International Financial Reporting Standards. Many blame the rules for helping fuel problems in the banking sector. "It is time to wrap a cold towel around our heads. The end result has got to be an accounting system that looks after everyone and does not flatter profit and to take provisions when they are first apparent," said Andy Brough at Schroders. Telegraph (London) (5/17)

Mixed reviews greet revenue-recognition proposal More than half of the senior finance executives responding to a survey indicated they support a proposal of contract-based standards for revenue recognition, but some questioned how the rules would work in practice. The Financial Accounting Standards Board and the International Accounting Standards Board proposed a revenue-recognition model for use in Generally Accepted Accounting Principles and International Financial Reporting Standards. FASB will accept comment letters until June 19. WebCPA (5/28)

Analysis: New IASB standards on fair value offer consistency AccountingWEB (5/29)

IASB responds to financial crisis with fair-value proposal The International Accounting Standards Board is attempting to alleviate political pressure by proposing guidelines for fair-value accounting standards. "This exposure draft is an important milestone in our response to the global financial crisis," said IASB Chairman Sir David Tweedie. "It proposes clear and consistent guidance for the measurement of fair value and also addresses valuation issues arising in markets that have become inactive." WebCPA (5/29)

CPAs add IFRS knowledge but want SEC to allow more time for adoption CPAs gained familiarity with International Financial Reporting Standards over the past several months, according to an AICPA survey. When asked whether they think the Securities and Exchange Commission's proposed timeline should be changed, 47% said it should be delayed. Twenty-two percent supported the proposed timeline, and 6% want it to be accelerated. The remainder were unsure. Read the AICPA news release. JournalofAccountancy.com (5/14)

"All market participants" need IFRS training The first and most obvious question to ask about IFRS training is just who needs it. According to Remi Forgeas, CPA, the answer is "all market participants." That doesn't just mean CPAs, chief financial officers, accounting departments and auditors, he argues, noting that IFRS training is essential for a broad spectrum of people who will need to interact with IFRS as a part of their responsibilities. CPA Insider (5/26)

EU might ignore IASB, enact its own IFRS, council warns The Financial Reporting Council said in its annual report that the International Financial Reporting Standards, as written by the International Accounting Standards Board, are at risk from interference by European Union politicians. "We continue to have significant concerns that the EU might adopt its own version of IFRS, rather than the standards as published by the IASB," the council said. Accountancy Age (London) (5/27)

Tweedie: Global Politics and Economics will Force U.S. to Adopt IFRS in a Year—by 2011

The SEC IFRS Roadmap provides for the U.S. to adopt IFRS by 2014. Recently, doubt has been cast on that date by many U.S. issuers. However David Tweedie, chair of the IASB says the U.S. may be forced to adopt IFRS to adopt by 2011 because of political and economic pressure.

Tweedie spoke to Hofstra University students during a KPMG webcast on the status of IFRS convergence, playing u down the "IASB vs FASB" / "FASB vs IASB" fight.

Tweedie said: “Regardless of when the United States decides [to converge], you have Canada moving, Korea, India and Japan — and they all want us to finish in 2011, so this not just a U.S. thing,” said Tweedie. “They’re going to finish. Brazil goes in 2010.” He also said that this year Chile and last year Israel had completed convergence, while Mexico and Argentina will have completed convergence by 2012. China completed in 2007. Altogether 117 countries are currently using the system. “There’s one big economy missing … and that’s this one,” he quipped, “In 2011, we’ll be pretty close.” ...the U.S. will finish convergence by mid-2011”.

As far as the FASB/IASB funding and political dominance fights, Tweedie said that “All it needs is a partnership between the two.”

SEC to Hold Public Seminar on XBRL

SEC to Hold Public Seminar on New Interactive Data Reporting Requirements

The Securities and Exchange Commission will conduct a public seminar on June 10 from noon to 3 p.m. ET to help companies and preparers comply with new rules that require financial reports to be filed using interactive data (XBRL).

The Commission staff will present information about the technology requirements for complying with the rules and will also provide an overview of the tools and information provided by the Commission to assist with compliance. The seminar will also cover frequently asked questions about the rules and technology requirements.

In adopting the final rule, the Commission noted that interactive data has the potential to increase the speed, accuracy, and usability of financial disclosure and eventually reduce costs.
This event will be held in the auditorium at the SEC's headquarters at 100 F Street, N.E., in Washington, D.C. The seminar will be open to the public with seating on a first-come, first-served basis. The seminar also will be webcast via the SEC Web site.

To ensure the seminar is responsive to the needs of companies and preparers, the Commission staff is seeking suggested questions and topics to be discussed at the seminar. Interested parties should email their questions to Ask-OID@sec.gov and include in the subject line "Public Education Seminar."

For additional information about the seminar, contact Ask-OID@sec.gov

More Trouble in IFRS Paradise: More Political Woes

IASB Governance: The Next Accounting Battlefield

Another great blog by Joey Borson at the Controller's Executive Board

As the International Accounting Standards Board (IASB) matures as one of the world's two major accounting standard-setters, its governance structure must evolve to oversee its new jurisdictions, and to satisfy new or more demanding stakeholders. This has become a point of controversy, with a European Commissioner recently condemning the IASB's current governance structure as too insular and ineffective.

In the next several years, expect reforms to the Board's oversight committee, and changes in its funding structure. However, the IASB walks a delicate line-it must ensure independence while maintaining oversight over accounting standards-and the risk of a "carve out" of its authority by politicians remains a real possibility.

Board Governance: Structure and FundingIASB governance has long been a major concern; in their Roadmap for IFRS adoption in the United States, the SEC flagged IASB governance as one of their five main pre-conditions for adoption. This has been echoed by US stakeholders more generally - a third of all Roadmap commentators expressing concern with the current board governance practices. There are three main issues.

1. Board Membership: Currently, the IASB is overseen by a 22 member IASC Foundation, which is primarily responsible for appointing board members. There is a geographic representation requirement, with six members from Asia/Oceana, six from Europe, six from North America, and four who are "floating." The main concern here is a loss of influence neither U.S. nor European firms (and governments) have quite adjusted to having only a quarter of Board seats. In addition, there have been consistent complaints that the Boards will be too academic and that there will be inadequate investor representation on the committees.

2. Funding: Unlike the FASB, which is funded by mandatory levies on market participants, the IASB is still mainly funded by voluntary contributions from individual companies or accounting firms (in 2008, each of the Big Four contributed $2 million). Critics are concerned that stakeholders who pay the bills will have undue influence, and that voluntary payments, which can always be stopped, will prevent the Board from ever becoming truly independent.

3. Country-Specific Oversight: The IASB recently created a new oversight body, the Monitoring Board, which appoints the IASC Foundation members. This is staffed by representatives from the SEC, European Commission, Financial Services Agency of Japan, and the IOSCO. It was designed to give individual country's the final say over accounting policies, although it remains unclear what de facto oversight it will have, and in any event, will almost certainly be far weaker than the relationship between the SEC and FASB.

4. The IASB has been sensitive to these concerns; it is working to move towards mandatory, broad-based contributions, and has given lip-service towards broadening the functional background of board members, although it has yet to institute specific requirements. The Monitoring Board was also created in response to specific complaints. In addition, as the IASB tries to ensure sure US adoption of IFRS, it will make more concessions regarding governance improvement.

However, there will always be some tension. As an international body, the IASB has a much broader set of stakeholders than a purely domestic standard-setter, and the issues of representation and influence will not go away. This will be especially true when standard-setters try to use specific representation quotas, which are always vulnerable to changes in the underlying character of the IASB's constituency. In addition, the board structure is, by definition, a compromise among different countries and investors, and some stakeholders will inevitably be dissatisfied.

"Politicization" In Accounting:Though not strictly a governance issue, the IASB is also in a delicate position over how its standards are enforced. Technically, it does not formally set accounting standards for particular jurisdictions, instead, those countries will endorse the IASB standards they prefer for countries within their jurisdictions. Normally, countries automatically endorse all IASB rules-but in some cases, political authorities become more involved, and pick and choose particular standards.

Most famously, this happened when the European Commission carved out certain aspects of IAS 39 in 2004, but there are other examples where a version of IFRS has been adopted, though not "as written by the IASB." This is not unique to the IASB; earlier this year the US Congress strongly called upon the FASB to change fair value rules-and threatened to change the rules themselves if necessary. However, the fact that countries can "pick and choose" from IFRS has been a persistent, and genuine, complaint-especially for an organization that strives to create a single, global standard.

As a result, the IASB has had to toe a fine line-it needs its standards to be created in an independent nature, but it also needs to be at least cognizant of the desires of major political leaders. Otherwise, it risks writing excellent technical standards-that countries opt out of. This introduces a messy element to accounting standard-setting, and though not strictly speaking an issue of governance, it is a major factor on the minds of those responsible for governing the Board.

Next Steps: The next governance reforms the IASB will take are reasonably clear:

Funding: As a condition of the SEC Roadmap, we can almost certainly expect some form of independent, mandatory funding for the IASB. This will probably be a levy on public companies, similar to what occurs in the United States with the FASB.

Oversight Board Composition: It's unclear what impact the Monitoring Board will have, but it will properly play only a pro forma role in oversight. In addition, it remains unclear whether the IASB will institute some form of mandatory investor representative, either on the IASC Foundation or on the IASB itself. We can expect slight changes here, but probably no fundamental shifts in governance.

Political Relationships: Like it or not, accounting is now becoming increasingly politicized, and we can expect the IASB (and the FASB) to be more cognizant of the demands of politicians. They have shown admirable spine in withstanding some of the more outlandish requests, but they will probably have to make minor concessions along the way, as the cost of generally maintaining their standard-setting authority. This may create complications, and will certainly lead to less "pure" standards, but will probably be a reality, at least until the economic crisis ends and accounting receives less public attention.
Controllers Executive Board

IFRS Roadmap--AICPA Analysis of Comment Letters

Where Will the SEC Take the IFRS Roadmap?
An AICPA Analysis of Comment Letters on the SEC's Proposal

This is an article by the American Institute of Certified Public Accountants

During the past several years, the move toward a single set of high quality, globally accepted accounting standards has gained momentum. For example, in 2005 the European Union began requiring companies incorporated in its member states whose securities are listed on an EU-regulated stock exchange to prepare their consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). In 2007, the U.S. Securities and Exchange Commission (SEC) agreed to accept from foreign private issuers financial statements prepared in accordance with IFRS without reconciliation to U.S. Generally Accepted Accounting Principles (GAAP). In September 2008, the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) updated and reaffirmed their “Memorandum of Understanding” to converge all major accounting standards (such as revenue recognition and leasing) by 2011 in light of a possible move to IFRS.

Most recently, the SEC released for public comment a proposed roadmap for adoption of IFRS by public companies in the U.S. Comment letters were due April 20, 2009 (extended from February 19, 2009). While many expressed support for the goal of high-quality globally accepted accounting standards, the request for comments produced numerous critics of the SEC's proposed roadmap. Commentators had serious concerns about the cost of adoption, the benefits of adoption compared to convergence, and whether IFRS were in fact as good as or better than U.S. GAAP.

The following analysis of the comment letters the SEC received represents the issues the SEC will grapple with as it considers the proposed roadmap and whether (or how) to transition U.S. public companies to IFRS from U.S. GAAP.

Cost
By far the two most common criticisms of the roadmap were the cost of adoption and the belief that a more measured convergence process was the best option. The current financial crisis was often cited as a deterrent to mandating adoption soon. Several commentators mentioned that in this economy, it is not the time to increase the cost of doing business and a concern that benefits of adoption do not outweigh costs.

Convergence over Adoption
Probably the clearest consensus among those opposed to the roadmap was the belief that continued convergence was a better option than adoption, mostly because fuller convergence between both sets of standards would be less complex and less costly than IFRS adoption. Also, a number of companies agreed that the objectives of the proposed roadmap could be more cost-effectively achieved by continued convergence. If a decision is made in the future ultimately to adopt IFRS, many argue that the transition will be much easier and less costly after allowing more time for convergence.

Even those supportive of adoption urged the SEC to slow down. Under the roadmap calendar-year, large accelerated filers would be required to start filing financial statements using IFRS for the year ended December 31, 2014. Such a timetable would require these companies to start accumulating IFRS data beginning in 2012 because of the need for two years of historical comparative financial statements. The SEC said it would not make a final decision mandating IFRS until 2011. Consequently, the timeline as proposed in the roadmap does not allow sufficient time for conversion.

Consistency Not Guaranteed
Many respondents acknowledged the desirability of eventually establishing a single set of high-quality global accounting standards. However, some question whether IFRS would necessarily allow for easy comparisons of financial statements due to variations of IFRS and the reliance on professional judgment when using the principles-based standards. IFRS proponents cite comparability of financial statements among public companies as one of the chief arguments in favor of adoption.

Other criticisms were concerned that principles-based IFRS would yield a wider variety of results than the more rules-based U.S. GAAP. This diminishes the benefit of comparability. Over time, some believe this situation will force IFRS to become more rules-based.

In addition, while improvement in global comparability will be a benefit to multinational corporations, companies with primarily domestic operations will not recognize the same benefit.

Specific Concerns by Specific Industries
IFRS are less voluminous than U.S. GAAP in part because they contain little industry-specific guidance. Many commentators had certain concerns about how IFRS would impact their particular industry. For example, specific concerns were raised about provisions of IAS 41 - Agriculture, guidance for regulated industries, and the need for completion of the joint IASB/FASB project on accounting for insurance contracts. Companies that use LIFO (last in-first out inventory accounting method) were very concerned about the elimination of LIFO that would be required on a move to IFRS. Acceleration of income taxes would be substantial for many companies on such a move.

IASB Funding
Other critics were concerned about the uncertainty surrounding funding for the IASB. Many believe that the IASB needs to have a more reliable and consistent funding method so it would be impervious to political or corporate pressure. Many said that until these uncertainties are appropriately addressed, a decision to adopt IFRS should be delayed.

What about Private Companies?
Since the SEC regulates only public companies, comments also pointed to concern that the SEC was not recognizing that most companies in the U.S. are not SEC registrants (issuers). Some in the academic community raised the issue of information overload for accounting students. Using IFRS for public companies and U.S. GAAP for private companies means that students will need to learn two different sets of standards.

Importance of SEC Setting a Specific Date
The proposed roadmap states that in 2011 the SEC will consider mandating phased-in adoption starting in 2014 based on the achievement of several milestones, including convergence of accounting standards and accelerated filers' use of IFRS. A number of respondents stressed the importance of the SEC setting a date certain for adoption and definitive deadlines, and sticking to them. Without a stated date for adoption or at least a commitment to adoption, companies do not appear willing to make a significant investment toward conversion.

Support for the Roadmap
There certainly was support in the comment letters for the roadmap, particularly from the largest U.S. accounting firms, foreign-based constituents and some large multinationals.

The American Institute of Certified Public Accountants (AICPA) also expressed its support not only of a single set of comprehensive accounting standards to be used by public companies everywhere in the world, but also its belief that the standards issued by the IASB are best positioned to become those global standards. The AICPA recommended changes to the roadmap, including expansion of the early adoption option to smaller companies, the need for changes in the financial regulatory environment in the U.S., setting a date certain for adoption and improvement in funding mechanisms for the IASB.

While in the minority, some U.S. registrants generally supported the roadmap and mandatory adoption in the near term. These organizations noted the benefits of global comparability, increased transparency, decreased cost of global financial reporting and the belief that converged standards would fall short of the benefits accruing from use of one global set of accounting standards.

Investors
Views from investor groups will be especially important to the SEC in evaluating its roadmap. Responses from investor groups were mixed. Comments ranged from favoring IFRS adoption with investor-friendly milestones to support for a more evolutionary approach of continued convergence to serious concerns that roadmap milestones are inadequate and fail to provide assurance that use of IFRS by U.S. issuers will not reduce the quality of financial reporting. There were relatively few comment letters from investor organizations.

Where to Go from Here
Release of the proposed roadmap in November 2008 was followed by expressions of concern about IFRS adoption from SEC Chairwoman Mary Schapiro in her confirmation hearings in January 2009. Many are wondering about the future of IFRS in the United States. The Commission will review the comment letters from the various stakeholders and plan a course of action. Most would probably agree that future direction from the Commission is eagerly awaited.