IFRS: Political Sharks in the Waters

Recently the G-20 has taken an initiative in pushing for global accounting standards—specifically nudging the U.S. toward converging GAAP with IFRS. They stated that this initiative is important to restoring trust in the global financial system.

Sharks are circling in the IFRS convergence water—political sharks in the form of governments that want to accept greater political control of the accounting standard-setting process.

French minister Christine Lagarde plans to lobby other G-20 finance ministers meeting in Scotland this week and France seems determined to block the European Union's adoption of a new accounting standard for financial instruments. If France’s initiative succeeds, the goal of global accounting convergence will face a serious setback.

The IASB, which set rules for Europe and much of the rest of the world, has already bent over backwards to meet French objections over a replacement for IAS39, the accounting rules for financial instruments that were much criticized during the crisis. For example, the IASB agreed to fast-track changes limiting the use of mark-to-market accounting. The IASB also controversially agreed its new rules should apply only to financial assets and not liabilities, leaving in place widely discredited rules letting banks mark their own debt to market.

The IASB's new standard is widely recognized as an improvement on IAS 39. The European Financial Reporting Advisory Group last month endorsed the new standard -- a first step toward EU ratification. Yet Paris still isn't satisfied.

Some French objections are technical. Although the new standard would mean less fair value accounting, Paris doesn't think the reduction goes far enough, particularly in relation to derivatives -- a major concern to French banks with large exposure. French and Italian members criticized IASB for its piecemeal approach to reform, even though it was done this way to address French concerns.

Paris's real objection is to the IASB itself, which it believes is too focused on investor interests and not sufficiently accountable to politicians. Never mind that the G-20 in Pittsburgh specifically endorsed the independence of standard-setters. Never mind the G-20 also endorsed efforts by the IASB to improve its accountability by establishing a monitoring board and consulting more widely with stakeholders such as regulators. Ms. Lagarde's objective is a greater role for national governments.

Ms. Lagarde stands little chance of convincing the G-20, with most governments accepting that rules must be free from political interference to carry credibility with investors. But she may have more luck with the European Commission, which is once again threatening to introduce European "carve-ins" to existing rules if the new standard isn't agreed to. Instead of tighter convergence on accounting, that would lead to accounting fragmentation.

High Profile Accounting Monitoring Board for IFRS Hints at Support for Convergence from U.S.; SEC's Schapiro is a member

Talks to harmonise standards receive boost from a high-powered international oversight body this week.

The oversight board, known as the Monitoring Board, said in a statement that it was “pleased” by the approach of both boards.

The full statement:
“The Monitoring Board welcomes the commitment of the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) to implement enhancements to provide greater transparency to the standard setting process and to increase their efforts to reach conclusions in these major projects.

The commitment of the IASB and FASB in the joint statement issued on 5 November is endorsed by the Trustees of their respective oversight bodies, the International Accounting Standards Committee Foundation and the Financial Accounting Foundation.

The Monitoring Board believes that efforts of the IASB and the FASB will result in a set of high-quality international accounting standards that are not only converged but that improve the information provided to investors.
The Monitoring Board is pleased by the responsive approach of the IASB and the FASB to address concerns regarding the potential for the IASB and the FASB to reach different conclusion on the major projects in the Memorandum of Understanding and the impact that would have on the potential for global accounting standards.”

The members of the Monitoring Board are:

Hans Hoogervorst (Chairman) Chairman Hoogervorst represents the IOSCO Technical Committee on the Monitoring Board and is the head of the Netherlands Authority for the Financial Market

The Honorable Takafumi Sato Commissioner of the JFSA

Guillermo Larraín Chairman of the IOSCO Emerging Markets Committee and the Superintendencia de Valores y Seguros of Chile

Mary Schapiro Chairman of the US SEC

Observers

Sylvie Matherat Representative of the Basel Committee on Banking Supervision

Accounting Rules Mess Up Lending Market

New accounting rules on securitizations have messed up the market for bonds backed by credit-card debt.

No new credit card securities have been issued since the beginning of October. Such securities are created when card loans are packaged into bonds and sold to investors.

The new rules (FAS 166 and 167) require banks issuing the securities to account for them as if they were on their balance sheets. Previous treatment allowed off-balance sheet treatment for the securities.

On-balance sheet treatment gives federal regulators the right to claim those assets should the institution file for bankruptcy, effectively diminishing bondholders' claim to the assets.

On-balance sheet treatment also may increase banks’ capital requirements.

The Federal Deposit Insurance Corp. plans to discuss the issue at a board meeting Thursday and may make a ruling that clears up the confusion. The rule takes effect on the date companies begin their 2010 fiscal years.

From the start of the year until October, issuers had sold an average of about $3.5 billion worth of credit-card deals each month.

Under the old accounting standard, card issuers -- such as Citigroup, Bank of America, American Express, Capital One, J.P. Morgan Chase, and Discover packaged up pools of credit-card loans and sold them to investors.

Citigroup' said on Friday that the result should be an addition of about $154 billion to its assets, based on Sept. 30 figures.

If the Federal Deposit Insurance Corp does not change the rules regarding how it treats debt from these securities when a bank collapses, rating agencies may downgrade the securitized debt. The debt may not be rated triple-A securities.

The new debt could potentially be rated no higher than Citigroup's own ratings. That would likely lift the bank's borrowing costs when funding new credit card loans or other debt.

Until the accounting rule was changed, these securities didn't have to be included on the banks' balance sheets, so they weren't subject to the same accounting standards and disclosures required for on-balance-sheet items.

Critics of the old treatment argued this rule allowed companies to hide risky assets in these off-balance-sheet items. The new rule will force card issuers to bring off-the-book credit-card loans onto their balance sheets and set aside additional reserves to account for potential losses in these securities.

No new credit-card-backed bonds have emerged in the market since Bank of America issued a $300 million deal on Oct. 2.

Year-to-date issuance of securities made up of credit-card loans has fallen 41% to $32.3 billion from $55.2 billion a year ago, according to a Deutsche Bank note published Nov. 5.

The FDIC could issue guidelines Thursday on the accounting-rule change, which will include the grandfathering of existing credit-card securities so as to minimize the disruption caused to the issuance of such deals.

SEC Hints at U.S. IFRS Adoption

Following a joint meeting of the IASB and the FASB last week, SEC chairman Mary Schapiro provided a hint on U.S intentions on convergence with IFRS.

Schapiro read a 40-word statement last week that included the words "I am greatly encouraged by the commitment of the IASB and the FASB to provide greater transparency to the standard setting process and their convergence efforts. I believe that these efforts will result in improved financial information provided to investors."

Schapiro and the Obama administration have given conflicting signals in the past as to what direction the SEC would take in light of the financial crisis. She has been quiet on the subject of IFRS convergence since taking over as SEC Chairman last in January. Schapiro has now provided a degree of direction for companies looking to decide whether to ramp up their IFRS adoption efforts. The SEC have said that they will decide in 2011 whether U.S. companies will switch from U.S. GAAP to IFRS. The SEC had previously hinted at what the convergence timeline would be.

The IFRS road map would have the largest companies reporting under IFRS in 2014, with all public companies following by 2016. The SEC has sought feedback and received over 200 comment letters. The comments have not had an overall theme and 200 is a small number considering the number of potential stakeholders, which include public companies, investors such as pension funds mutual fund issuers, auditors, educators, and others.

Some U.S.-based companies, such as Microsoft have ramped up their convergence efforts and companies like United Technologies have made a decision to switch to IFRS ahead of the SEC's decision. These companies have significant operations in countries that have already converged, such as the EU. Ultimately they will save on accounting and audit costs by converging.

The SEC has previously indicated that there are a number of significant issues to be resolved including working out convergence paths for differences between IFRS and U.S. GAAP on critical issues and funding and governance.

SEC Calls for Less Words, More Substance in Financial Reporting

The SEC has called for corporations to stop providing thousands of pages of mind numbing needless boiler plate information in financial reports.

In recent speeches the SEC seemed to admit to some culpability in the excessive disclosures by stating that it is looking at its rules to determine whether companies are being asked to provide the right information.

The SEC complained about companies that provide laundry lists of risks they may face in dense lengthy reports containing impenetrable legalistic language.

One staffer said that quality of analysis is not measured by the length.

The SEC has pushed for plain language reporting for years. Litigation-shy companies have not been able to simplify reporting in the way the SEC desires.

In 2008, the SEC adopted rules for mutual funds to make their prospectuses easier for investors to read, understand and access.

The agency has also convened panels to make MD&A more accessible to unsophisticated investors.

SEC Chief Accountant says SEC will Clarify IFRS Roadmap by end of Fall

Last Friday, October 30, SEC Chief Accountant James Kroeker announced that the SEC remains committed to its IFRS road map.

Kroeker said he does not know the exact date the SEC will finalize its plan some time this fall. The information was provided as an answer to a question following Kroeker’s speech at an AICPA/International Accounting Standards Committee Foundation conference in New York.

The road map provides seven milestones and a tentative timeline. The timeline depends on resolution of several issues around the milestones.

According to Kroeker, comment letters have shown that most stakeholders support adoption of IFRS but that there are major concerns around convergence with U.S. GAAP.

Under the road map proposal, the SEC would decide in 2011 whether to require the use of IFRS. The 2011 decision point aligns with the G20 calls for accounting standard setters “to achieve a single set of high quality, global accounting standards within the context of their independent standard setting process, and complete their convergence project by June 2011.”

Key accounting issues to be resolved include joint projects on financial instruments, financial statement presentation, leases, liabilities and equity distinctions and revenue recognition, consolidations, derecognition and post-employment benefits.

Kroeker prioritizes the list with his top three being financial instruments, revenue recognition and consolidation.

About financial instruments/fair value accounting, Kroeker also said “I believe it would be a serious mistake to take our focus off of investor needs for unbiased, transparent information in order to design what some have suggested are accounting standards that attempt to rectify the banking crisis.”.

On the debate over fair value vs. historical cost valuation of financial instruments, per Kroeker: “it’s my personal view that it’s time to move beyond the debate over whether just fair value is relevant or cost is relevant. … It’s time to acknowledge that in some cases both sets of information are important and then how to portray that.”

With information from Journal of Accountancy

Opposition to IFRS among U.S. CFOs

While recent surveys have shown support for IFRS among financial executives, a recent Grant Thornton survey Forty percent of U.S. CFOs and senior comptrollers do not believe U.S. companies should be required to useIFRS.

Thirty-nine percent of the 846 senior financial executives surveyed said that U.S. companies should start using IFRS in three to five years, and only 7 percent believe that U.S. companies should be required to start using IFRS immediately.

When asked about their own companies’ actual IFRS usage, 90 percent of the senior executives surveyed reported that their companies do not prepare financial statements according to IFRS. Only 15 percent of the senior execs at public companies said they use IFRS and only 8 percent from private companies said they do.

Thirty-nine percent said they are familiar with the Financial Accounting Standards Board’s project on financial statement presentation. The majority of those that say they are familiar with the project say it is either “beneficial, but the benefits to the users of our financial statements would not justify the costs of implementing the proposed format” (49 percent) or that it “would not be beneficial to the users of our financial statements” (30 percent).

When asked if there should be different recognition and measurement principles for public entities and nonpublic entities, 51 percent of the senior financial executives said yes (including 39 percent from public companies and 56 percent from private companies), while 41 percent said no (including 54 percent from public companies and 37 percent from private companies).

Asked whether nonpublic entities should be allowed to use simpler recognition and measurement principles when preparing financial statements, 60 percent of the senior financial executives said yes (including 42 percent from public companies and 66 percent from private companies), and 34 percent said no (including 51 percent from public companies and 29 percent from private companies).

When asked if nonpublic entities in the U.S. should be allowed to use IFRS for SMEs, or small and midsized enterprises, when preparing financial statements, 52 percent said yes and 20 percent said no.

New IFRS Fair Value Standard will be released In November

International Accounting Standards Board chairman, Sir David Tweedie, said thath the IASB will release a new fair value accounting rule by November.

In an address to a meeting of European Finance Ministers, which have in the past been critical of the IASB’s response to the financial crisis, Tweedie has sought to ease concerns by announcing that he is on track to deliver a new fair value standard by the end of this year.

“I gave a commitment to deliver on this timetable. We will publish the new standard in November,” he said.

Fair value accounting came under fire from banks and governments in the European Union and the U.S. after the financial crisis.

Tweedie said he will not require loan books to be held at fair value which has now become a potential sticking point between the IASB and the FASB.

FASB's proposal will see all assets measured at fair value. The IASB's mixed measurement model would see banks' loan books valued on an amortized cost basis.

The two standard setters are trying to converge US and international accounting rules, in the hope that the US will eventually adopt the new rules. But the fair value standard has now emerged as a significant obstacle, highlighted by Tweedie who said he simply did have the time to co-ordinate efforts with FASB in the revision of fair value, in the wake of the financial crisis.

“As I said in June, given the urgency of the fundamental issues surrounding IAS 39, none of us can afford the potential protracted back-and-forth resulting from piecemeal changes in international and US standards that would undermine the comprehensive and desperately needed reform that is under way,” he said.

“In our discussions with the FASB aiming to reach a common global approach, we will emphasise our position in favour of a mixed measurement model over one that requires full fair value measurement on the balance sheet… I remain optimistic that we can overcome our current differences.”

Deloitte Survey: Financial Execs want SEC to Move on IFRS

Financial executives are showing support for decisive SEC action in approving on the proposed IFRS roadmap.

The Deloitte survey, with over 150 financial executives participating, was conducted in September 2009.

Highlights of the survey results include:

• 70% of respondents indicated approval for the SEC’s proposed roadmap
• 51% responded that the SEC should approve the proposed roadmap, but consider pushing back the mandatory deadline a year
• 19% responded that the SEC should approve its proposed roadmap “as is.”
• 45% of respondents selected “delay in the finalization of the SEC’s roadmap” in characterizing the reason why their companies’ IFRS assessment plans may have been delayed
• 9% of respondents identified “economic challenges or constraints” as the reason for delaying an IFRS assessment.
• 34% of survey participants indicated IFRS adoption would make the U.S. more competitive in the global marketplace
• 38% responded that IFRS adoption would not

Survey Results

Dell Settles with SEC

Dell Inc. said last week that it will improve its accounting and corporate governance rules as part of a settlement tied to an SEC investigation.

Dell will also pay $1.75 million in legal fees, according to a settlement filed with the Securities and Exchange Commission.

The SEC investigation into Dell's accounting was made public in 2006. Various shareholder groups have filed lawsuits against Dell for misrepresention of its financial results while insiders profited from selling their own shares at prices that were inflated by the overstated results.

Dell restated results for 2003 through 2007 after an internal audit found it overstated sales by $359 million and profit by $92 million during those years. The SEC continues its probe.

Under the settlement filed with the SEC, Dell agreed to make sure at least 60 percent of its board members are from outside the company. Dell also said it would train board members and give directors unrestricted access to Dell's employees.

Dell had already implemented some changes as the lawsuit moved through the courts. Under the settlement the changes must be extended and enforced for four years.

Among them:

• an accounting code of conduct
• enhanced ethics, compliance and insider-trading training
• creation of a global team of accountants to focus on revenue recognition issues
• provision to let employees make anonymous complaints about auditing or internal controls.

G-20: Converge Global Accounting Standards by 2011

Leaders at the recent G-20 summit called for a single set of high quality, fully converged global accounting standards June 2011.

This follows up on previous statements by the G-20 calling for a single set of global accounting standards and other accounting changes at summits held last November and April.

In the Bush administration, Chairman Christopher Cox advocated published an IFRS road map in the United States.

Following Mary Schapiro’s appointment as CES Chair, the SEC appeared to revisit and scale back the IFRS issue.

G-20 leaders also called on the International Accounting Standards Board (IASB) to “further enhance the involvement of various stakeholders.” Although the G-20 provided no specifics on how the IASB should enhance stakeholder involvement, the IASB’s parent organization, the IASC Foundation, is currently reviewing its constitution to include expanding the IASB’s liaison with other organizations such as regulatory agencies and other stakeholders..

SEC Reconfirms Thrust to Adopt IFRS

U.S. Securities and Exchange Commission will refocus on their IFRS roadmap.

The SEC's new chief accountant, Jim Kroeker, said in remarks to a New York State Society of CPAs conference in New York "Turning back to the roadmap will be an important priority for us this fall."

The roadmap would have U.S. companies adopting IFRS and filing financial results under IFRS by 2014, with the option for early adoption.

Kroeker said that in the 200 or so comment letters the SEC has received on the proposal, it was "resoundingly clear" that people agree there should be a single set of global high-quality accounting standards.

The comment letters identified, major differences in how different groups wanted to accomplish the goal of one standard.

Kroeker said the SEC staff, as "an important next step," would work on how to put into place various milestones to reach that goal.

Kroeker noted tha t convergence efforts to conform both sets of rules have been going on over the past few years. Recently the IASB and the FASB have accelerated certain convergence projects.

Kroeker implored standard-setters to avoid "a race to the bottom," where in a rush to converge the rules, accounting standard setters are urged to adopt the least controversial version of the rules, rather than the one that would best represent economic reality.

Kroeker said "A race to the bottom is an absolute concern I have," . "If we engage in a race to the bottom ultimately there will be no winner in that race."

IFRS Adoption Strategy

IFRS adoption is a complex multi-year process. It will absorb corporate resources—much like SOX implementation did for U.S. public companies. Muti-year programs should begin with a well mapped out strategy.

In setting their strategies, future IFRS adopters would be wise to leverage experiences of adopters in Europe, Australia and Canada. But also and more importantly at the planning stage, another source of leverage in the process may be leveraging the resources and experience of internal audit and SOX management. Journal of Accountancy had a recent article on this.

Some of the main points:

Based on the current SEC road map, your company will need to evaluate how to perform U.S. GAAP/IFRS parallel accounting over a multiyear period.

In creating a parallel accounting environment, your internal control and operational audit staff may need to consider the ramifications of modifying your company’s systems and processes.

Internal control and operational audit staff are in a great position to assist your company in evaluating impact areas with the IFRS conversion. Their financial and accounting backgrounds, combined with the knowledge of the underlying processes and systems, will provide in-depth knowledge for conversion planning.

It is critical for internal control and operational audit staff to get involved early to help guide the company in the planning and to ensure that their portion of the overall conversion cost estimate is included.

Strategic IFRS Planning Questions for ICFR (SOX) Management

• How many resources should be assigned to the IFRS conversion project team?
• Do the personnel have adequate accounting training to understand the differences between U.S. GAAP and IFRS?
• Can the current SOX 404 process and systems documentation assist the company in estimating change impacts?
• Does the company have sufficient resources/flexibility to handle the increased controls testing?
• What can ICFR staff do to assist with mitigating the risks of change management in this significant conversion process?
• Is there IT knowledge within the department to assist in identifying risks that may arise for system modifications for the parallel accounting period?
  
  

Best Financial Jokes of 2009

From the National Post. Not many true accounting jokes.

Timothy Geithner was out jogging without his guards. All of a sudden a man with a ski mask jumped out from behind some bushes with a gun.The masked man said “Give me all your money!”Unwilling to do so, Geithner said, “You can’t do this, I’m the US Federal Treasury Secretary!”The man then replied,... “Oh, never mind then. Give me MY money!”

Bank of America-Merrill Lynch has adjusted its investment portfolio: 50% cash and 50% canned goods

Well, the wait is over. The Obamas have chosen a new White House dog. It is a Portuguese water dog named Bo. Very cute dog. Their first choice was a wheaten terrier, but it was arrested for tax evasion. - Jimmy Fallon

Barack Obama’s daughters are very smart. They told him they will take the same responsibility for the dog that he is taking for the economy. That way, if the dog leaves a mess in the White House, it’ll be cleaned up by future generations. - Jay Leno

Banks want to return $68 billion in bailout money to the government. They were upset at all the hidden fees

I have an uncle down at Wall Street. He used to have a corner on the market. Now he has a market on the corner.

General Motors claims its new electric car the Chevrolet Volt can get up to 230 mpg in city driving. Unfortunately, in order to do so the car must first be plugged into the back of a city bus.

Lego reported a 60% rise in profits for the first six months of 2009 as it said parents were turning to its building blocks during a recession, both as toys for their children and as a basis for new homes after losing their old ones to foreclosure.

The courts allowed the bankruptcy proceedings for Chrysler to go forward. The bankruptcy was approved after the judge told Chrysler to sit in a room for a few minutes while the judge went to talk to his manager.

Barack Obama, who has a reputation for being a hands-on president, said he will not get involved in the day-to-day operations of the auto company. Obama may not take the wheel of GM, but he plans to be an annoying, backseat driver.

Resolving to surprise her husband, an investment banker’s wife pops by his office. She finds him in an unorthodox position, with his secretary sitting in his lap. Without hesitation, he starts dictating, “…and in conclusion, gentlemen, credit crunch or no credit crunch, I cannot continue to operate this office with just one chair!”

How many stockbrokers does it take to change a light bulb?Two. One to take out the bulb and drop it, and the other to try and sell it before it crashes (knowing that it’s already burned out).

Stockbroker: What is a million years like to you?God: Like one second.Stockbroker: What is a million dollars like to you?God: Like one penny.Stockbroker: Can I have a penny?God: Just a second ...

Pfizer is offering free drugs including Viagra for those who recently lost their jobs. Good to see the private sector and not just government providing a “stimulus package.”

Organizers of the “Buick Open” have assured the press that there are no hard feelings towards GM for their decision to end sponsorship, and that from now on the event will simply be referred to as the “Toyota is BIGGER than GM Open”.

David Letterman’s Top Ten Questions Bernie Madoff Asked Today in Prison
10. Has it been 150 years yet?
9. Who do I have to swindle to get a freshly-pressed jumpsuit?
8. Which way to the penthouse cell? 7. Because of my business dealings with the Latin Kings, can you keep me away from the Crips?
6. What mixes better in a toilet, sangria or daiquiris?
5. Will I get special treatment if I help the guards hide money from the IRS?
4. I’d like the truffle-crusted halibut.
3. Did I mention that it was an April Fools’ prank that just got out of control?
2. Will someone TiVo “America’s Got Talent” for me for the next 149 years?
1. Is it ok if I decline a conjugal request from my wife?

"Anybody ever been in prison? Bernie Madoff, the nasty, awful swindler, he's going to be there for 150 years. You know what he did? He hired a prison consultant. I think it's Martha Stewart." - David Letterman

Survey Says IFRS Still Alive in U.S.

A recent survey by Deloitte of over 245 financial executives from July 2009 indicates "green shoots" in what otherwise might have thought to have been an IFRS planning process that was slowing down or dead ending. In the wake of the financial crisis, other surveys indicated tha t resources allocated to IFRS were being cut back. Many thought that companies would be scaling back their activity around IFRS planning. The survey indicates that the overall thrust behind IFRS preparation in the U.S. may still be strong.

Survey highlights

89% of respondents indicated their companies
• viewed IFRS conversion to be highly or somewhat likely to become mandatory in the U.S.

Fifty-nine percent (59%) viewed mandatory conversion in the U.S. as highly likely.

Over two-thirds (67%) of respondents indicated
• that their company had designated a person or team to focus on IFRS or monitor IFRS developments

Eighty percent (80%) of respondent companies
• are positioning themselves to address IFRS: 40% are performing or have performed a high-level IFRS assessment, while 40% plan to perform an assessment.


When it comes to seeking outside assistance with planning activities, such as assessments, some respondents indicated that their companies are accessing help from either their external auditor or another outside professional services firm.

The survey indicates that approximately sixty percent (60%) of companies who performed or are performing a high-level IFRS assessment sought or are seeking external assistance.

However, a significant number of respondents (around 40%) are taking on the task themselves. Given the economic climate and the pressure on cost-reduction, the go-it-alone strategy may not be surprising.

For post-assessment plans, many survey respondents are looking at cross-functional approaches that include not only accounting, but also tax, technology/systems, and training personnel/human resources.

The SEC will likely be discussing its proposed roadmap in the fourth quarter.

Another SEC Fraud Bust

SEC Charges Terex Corporation with Accounting Fraud

The Securities and Exchange Commission (SEC) charged Terex Corporation, a Westport, Connecticut-based heavy equipment manufacturer, with accounting fraud for making material misstatements in its own financial reports to investors, as well as aiding and abetting a fraudulent accounting scheme at United Rentals, Inc. (URI), another Connecticut-based public company.

The SEC's complaint alleges that Terex aided and abetted the fraudulent accounting by URI for two year-end transactions that were undertaken to allow URI to meet its earnings forecasts. These fraudulent transactions also allowed Terex to prematurely recognize revenue from its sales to URI.

The fraud occurred through URI's sales of used equipment to a financing company and its lease-back of that equipment for a short period. As part of the scheme, Terex agreed to sell the equipment at the end of the lease period and guarantee the financing company against any losses. URI separately guaranteed Terex against losses it might incur under the guarantee it had extended to the financing company.

Without admitting or denying the SEC's charges, Terex agreed to settle the Commission's action by consenting to be permanently enjoined from violating the antifraud, reporting, books and records and internal control provisions of the federal securities laws and by paying an $8 million penalty.

More on GE Accounting Fraud Allegations--Smooth Flying on Jet Engines

The SEC recently settled allegations of fraudulent accounting with GE. More details:

GE was worried that volatility in its revenues would wreck its plans to meet earnings expectations. The SEC alleged that GE engaged in complex hedge accounting manipulations to smooth earnings, and in a scheme to further smooth profits in its aircraft engine business.

The earnings smoothing was done by hiding losses from interest-rate derivatives, improper accounting for hedging transactions, and a messy scheme to smooth profits in its aircraft engine business.

The SEC did not charge GE with deliberately breaking rules on the hedging and aircraft engine transactions.

The SEC’s lawsuit referred to internal e-mails in which a GE accountant said "we've got to fix this" about the "extraordinarily big deal" of possibly losing the right to use legitimate accounting to allows companies to ignore losses in the fair value of derivative assets.

GE had bet on interest rates by writing more derivatives contracts than it needed to hedge its floating rate debt exposure. The SEC claims that GE retroactively changed how it accounted for derivatives, but the plan was rejected by KPMG, its external auditors. The Sec claims that GE then altered the plan and then went ahead with the retroactive change anyway. This allowed GE to avoid reporting a $200 million loss.

More on GE Fraud--Locomotives on a Bridge

Additional information of GE's settlement with the SEC over bad accounting.

SEC says that in 2002 and 2003 GE booked locomotive sales before the end of their December 31 fiscal year even though they had not delivered the equipment until the next year. They arranged bridge financing in which finance companies purchased the locomotives and then resold them to GE's customers in the next quarter. This violates the “risks and rewards” guidance in revenue recognition accounting standards as the risks and rewards of ownership of the locomotives remained with GE and did not transfer to its ultimate customers.

GE promised at least one customer that it would reimburse about $4 million of tax hits that would arise using the financial intermediary. In 2002, 131 of the 191 locomotives GE originally said it sold were not actually sold. This overstated revenues and profits by more than 39%. In 2003, using the same manipulation, GE overstated revenues and profits by over 16%.

As part of the locomotive manipulation, GE asked that the financial intermediaries avoid explicitly stating in their invoices that GE was paying for the costs of storage and insurance for fear of negatively impacting GE’s revenue recognition in the quarter.

American Bankers' Association Criticizes FASB, IASB over mark to Market Changes

The American bankers Association (“ABA”) has written to Robert Herz, Chairman of the FASB and Sir David Tweedie Chairman of IASB, about their concerns around the process being taken on the FASB and IASB projects relating to financial instruments.

The ABA has lobbied against mark to market accounting for years and their response is no surprise.

The ABA says that the changes that the FASB and IASB are considering represent the most significant accounting changes the ABA has ever experienced. The ABA encourages the FASB and IASB to make such changes only "with utmost caution and the appropriate level of due process to correspond with the magnitude of the changes."

The ABA agrees that a certain amount of change is urgently needed, but that the FASB and IASB direction may cause significant disruption, with both preparers and users of financial statements.

They state that rule-makers must be very careful in this effort to ensure that any changes:
1) represent solid and meaningful change that is valuable and understandable to financial statement users;
2) focus on the business models used by entities that prepare the financial statements, and
3) can be implemented and maintained at a reasonable cost.

Other points made:

• The rapid paces at which both organizations are working, as well as the paths being taken, are causing some to question whether there is due process in evaluating these important issues.
• Some bankers also question whether such efforts are driven by a search for simplicity, transparency, and accuracy or by an appetite to expand fair value accounting, no matter the implications.
• A major concern is that the current directions in which the FASB and IASB are moving appear to be similarly requiring more mark to market accounting (MTM) within the financial statements, more capital for many existing banking activities, and more operational challenges to comply with these rules for banks of all sizes.
• The cost of accounting compliance puts continued participation in certain market activities at risk for some smaller institutions.
• Concern over the current divergence between the FASB and IASB proposed models and time frames for completion. The IASB plans to finalize its accounting standard in 2009, and the FASB's completion date will be subsequent to that date. In such case, the FASB will have only one of two choices: (1) to follow the IASB model – which will not provide U.S. companies with appropriate due process for providing input, or (2) a lack of international convergence – which should be avoided.

ABA says that the IASB appears to be solving the accounting puzzle on a piecemeal basis, which may result in pre-determining the outcome for subsequent parts of the puzzle that may not fit.

ABA feels that it is extremely important that new standards be developed jointly by the FASB and IASB, with proper due process and open consultation with a wide range of constituents that ensures a holistic review.

ABA's points for consideration when making substantial changes to the accounting model:

• Serious consideration must be give to field testing proposals prior to implementation, and sufficient transition time must be provided.
• Regulatory accounting rules should be consistent with GAAP.
• Accounting changes must meet a “costs vs. benefits” test.
  

Trains that Ran Ahead of Time: GE Takes Big Reputation Hit and pays SEC Fines

General Electric broke accounting rules to meet or beat earnings expectations
SEC claims they intentionally defrauded investors

GE has paid $250-million in fines and legal costs to settle a claim by the SEC that they intentionally defrauded investors.

The SEC fined GE $50-milion and lawyers and accountants advising General Electric on the fraud settlement earned $200-million on “external legal and accounting expenses” from the case.

The SEC slammed GE for almost ten years of earnings manipulation through accounting practices. GE consistently beat analyst consensus estimates by a few cents a share in nearly every quarter.

The SEC stated that “high-level GE accounting executives or other finance personnel approved accounting that was not in compliance with Generally Accepted Accounting Principles.

"GE bent the accounting rules beyond the breaking point," said Robert Khuzami, Director of the SEC's Division of Enforcement. "Overly aggressive accounting can distort a company's true financial condition and mislead investors."

David P. Bergers, Director of the SEC's Boston Regional Office, added, "Every accounting decision at a company should be driven by a desire to get it right, not to achieve a particular business objective. GE misapplied the accounting rules to cast its financial results in a better light."

There is always a risk that companies that take pride in consistently being slightly above market or analyst predications are not unlike Bernie Madoff’s fraudulently consistent positive returns on his portfolio over a long periods. GE has been in that slightly better than expected position for years and the SEC, to its credit, hit them hard for diddling with the quarterly earnings amounts.

Some of the years in question were presided over by Jack Welch, some by Jeffrey Immelt. The reputation of those leaders and GE takes a serious setback with the SEC’s actions.

The SEC found the accounting irregularities through a risk-based investigation of GE’s accounting. Their first clue was wrong hedge accounting, and the case developed from there to full blown fraud investigation.

The SEC plowed through millions of emails. Some of the smoking guns found by the SEC included the following statements:

• “How do we intend to deal with the SEC “one strike and you’re out” position? Doesn’t this mean that potentially we can no longer qualify for cash flow hedging??? Urgent that you find disclosures of others who have had cash flow failures. Isn’t this an extraordinarily big deal?”
• “I just went back to the SEC speech on this point, and don’t see any flexibility whatsoever. We’ve got to fix this.”
• “this was the one to go with until today . . . but when the initial quantification got finished today, it showed a $(200MM) or bigger hit would have to be considered”
• “[auditors] . . . looking into this, and might struggle to agree with this”
• a senior accountant in GE’s corporate accounting group sent a powerpoint describing GE’s outside auditor’s view that, if GE’s practice of recognizing margin on spare parts pursuant to RAM “Was Observed and Challenged [it is] . . .Virtually Assured We Would Lose.”
• A document stated that...“accounting justification [was] crumbling” based on expected GAAP changes
• A powerpoint presentation by a GE accountant implied that a change could be accomplished without having to make a disclosure. “$1 billion unexplained balance in GE’s [deferred charge balance] could draw the attention of the SEC and would not survive.”

The alleged misstatements:

• improper application of the accounting standards to GE's commercial paper funding program to avoid unfavorable disclosures--estimated approximately $200 million pre-tax charge to earnings
• sales of locomotives that had not yet occurred to accelerate more than $370 million in revenue
• improper accounting for sales of commercial aircraft engines spare parts increasing earnings by $585 million.

GE neither admitted nor denied the allegations and said it had co-operated with the SEC and revised its financial statements. Civil suits may still be launched against some individuals.

The SEC’s complaint does not implicate either Welch or Immelt, or GE’s CFO.

Recently Immelt has ended earnings guidance for analysts. GE had an unexpected earnings miss in April last year, sending its stock into a pre-financial meltdown slump from a 2007 high of over $40 to about $26, before the intraday meltdown low of under $6.

FASB, IASB Support Moving to Direct Method For Cash Flow

As the FASB and IASB consider their proposed overhaul of financial statement presentation, one of the
significant changes would be the utilization of the direct method
rather than the indirect method for calculating cash flows.

The requirement to use the direct method is part of the proposed
changes that the two boards introduced in Discussion Paper (DP) No.
1630-100, Preliminary Views on Financial Statement Presentation.

The boards are planning to discuss the proposal in the near future, as
part of a broader discussion on financial statement presentation. In
this paper, the boards are advocating greater use of the direct method
of calculating operating cash flows.

Under the direct method, companies would present separately the main
categories of their operating cash receipts, such as cash collected
from customers, and operating cash payments, such as cash paid to
suppliers to acquire inventory. This approach is also known as the
income statement method because it requires companies to compute the
net cash provided by operating activities by adjusting each item in
the income statement.

Currently, most companies use what is known as the indirect method, by
reconciling profit or loss or net income to net operating cash flows.

Both U.S. GAAP and IFRS permit both the direct and indirect methods of
presenting operating cash flows. However, in DP No. 1630–100, the
boards said a major deficiency of the indirect method is that it
derives the net cash flow from operating activities without separately
presenting any of the operating cash receipts and payments.

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.