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
Monday, November 2, 2009
Wednesday, October 28, 2009
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.
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.
Wednesday, October 21, 2009
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.”
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.”
Thursday, October 8, 2009
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:
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
Monday, October 5, 2009
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:
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.
Monday, September 28, 2009
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..
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..
Friday, September 18, 2009
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."
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."
Wednesday, September 16, 2009
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
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?
Tuesday, September 15, 2009
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
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
Monday, September 14, 2009
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.
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.
Wednesday, September 2, 2009
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.
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.
Thursday, August 27, 2009
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.
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.
Wednesday, August 26, 2009
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.
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.
Tuesday, August 25, 2009
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:
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:
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 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.
Wednesday, August 5, 2009
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:
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.
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.
Tuesday, August 4, 2009
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.
Tuesday, July 28, 2009
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.
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.
Tuesday, July 21, 2009
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.
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.
Monday, July 20, 2009
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:
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.
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