FASB, IASB Can't Agree on Financial Instruments Accounting

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

by Stephen Bouvier at Financial Director

FASB vs IASB: Split on Lease Accounting

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

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

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

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

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

No consensus for lessee accounting

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

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

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

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

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

Sticking point for lessor accounting

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

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

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

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

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

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

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

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

By Ken Tysiac at JofA

Can Companies Smooth-Talk Investors?

Investors Prove Wise at Judging Self-Serving Earnings Explanations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What have IASB and FASB convergence efforts achieved?

What have IASB and FASB convergence efforts achieved?


Paul Pacter CPA, Ph.D. served as a member of the International Accounting Standards Board (IASB) from July 2010 to December 2012. At the end of his term on the Board, he wrote the following article.

EXECUTIVE SUMMARY

In this opinion piece, former International Accounting Standards Board (IASB) member Paul Pacter describes the accomplishments of the convergence project undertaken in 2002 by the IASB and FASB. He says many standards have converged, and IFRS have been improved as a result of the process.

On a standard-by-standard basis, results of convergence have been mixed, Pacter says. Some standards have been improved. Some have not changed because the boards couldn’t agree on a converged solution. And a few—revenue recognition, leases, and financial instruments—remain under development.

According to Pacter, although progress has been made through convergence, adoption of IFRS for U.S. financial reporting is the ultimate goal. He says adoption is the best approach for any jurisdiction.

For nearly 40 years, the International Accounting Standards Board (IASB) and its predecessor, the International Accounting Standards Committee (IASC), have been working to develop a set of high-quality, understandable, and enforceable International Financial Reporting Standards (IFRS) to serve equity investors, lenders, creditors, and others in globalized capital markets. When the IASB took over from the IASC in 2001, few countries had adopted International Accounting Standards (as IFRS were then called) even for cross-border public sales of securities, let alone for domestic public companies.

That all changed—and quite dramatically—with two events. First, in 2000, the International Organization of Securities Commissions (IOSCO) endorsed IFRS for cross-border securities offerings in the world’s capital markets. Then, in 2002, the European Union made the bold decision to require IFRS for all companies listed on a regulated European stock exchange starting in 2005. Those events started a snowball rolling, to the point where today roughly 100 countries require IFRS or a national word-for-word equivalent for all or most listed companies.

Almost from the outset, a key goal of the IASB and the IFRS Foundation, under which the IASB operates, has been to bring the United States on board. In a plenary address at the World Congress of Accountants in 2002, Paul Volcker, the first chairman of the Foundation’s trustees, said: “I do not think it reasonable today, if it ever was, to take the position that U.S. GAAP should, de facto, be the standards for the entire world. Rather, the International Accounting Standards Board, whose oversight trustees I chair, is now working closely with national standard setters throughout the world to develop common solutions to the accounting challenges of the day. The aim is to find a consensus on clearly defined principles, and I am delighted that the American authorities appear sympathetic to that objective.”

In October 2002, the IASB and FASB signed a memorandum of understanding that has come to be known as the “Norwalk Agreement.” The two boards pledged to use their best efforts to (a) make their existing financial reporting standards “fully compatible as soon as is practicable” and (b) “to coordinate their future work programs to ensure that once achieved, compatibility is maintained.” “Fully compatible” was generally understood to mean that compliance with U.S. GAAP would also result in compliance with IFRS. That is, the standards would be aligned though not identical.

With the Norwalk Agreement, the boards launched a series of both short-term and longer-term convergence projects aimed at eliminating differences in the two sets of standards. The two boards agreed that where either IFRS or U.S. GAAP had the clearly preferable standard, the other board would adopt that standard. And where both boards’ standards needed improvement, the boards would work jointly on an improved standard.

The Norwalk Agreement has been updated several times since 2002, but always with the objective of two sets of standards that were converged in principle if not in words. The IFRS-U.S. GAAP convergence approach has been repeatedly endorsed by global financial leaders such as the G-20 as an important step on the path toward a single set of global accounting standards.

In November 2007 an important milestone was achieved toward use of IFRS in the United States when the SEC eliminated the requirement that a foreign issuer using IFRS must present a reconciliation of IFRS measures of profit or loss and owner’s equity to amounts that would have been reported under U.S. GAAP. In their comment letter on the SEC proposal that led to removal of the reconciliation, FASB and the Financial Accounting Foundation wrote:

Investors would be better served if all U.S. public companies used accounting standards promulgated by a single global standard setter as the basis for preparing their financial reports. This would be best accomplished by moving U.S. public companies to an improved version of International Financial Reporting Standards (IFRS).

So, where are we today after 10 years of convergence work? Some convergence projects have been completed successfully as envisioned—aligned principles even if the words differed. Others have been completed with partial success—some progress toward converged standards, but some differences remain. And some convergence projects either were discontinued or resulted in different IASB and FASB standards because, in the end, the two boards just could not agree. Some convergence projects continue to this day, including such major projects as revenue recognition, leases, and financial instruments.

At this point, it is reasonable to sit back and ask two fundamental questions about each of those convergence projects:

1. Have IFRS and U.S. GAAP been converged?

2. Even if convergence was not successfully achieved, has IFRS been improved?

The accompanying table, “Results of Convergence,” sets out my admittedly subjective views about the success of convergence and the resulting improvements to IFRS for each of the projects listed in the various agreements between the IASB and FASB. As a final thought, I would add that convergence may have been the most realistic way to initiate the use of IFRS in the United States, but such an arrangement is not sustainable in the long term. Rather, the best approach for any jurisdiction is outright adoption of IFRS. As the trustees of the IFRS Foundation said recently in the report of their 2011 Strategy Review:

As the body tasked with achieving a single set of improved and globally accepted high quality accounting standards, the IFRS Foundation must remain committed to the long-term goal of the global adoption of IFRSs as developed by the IASB, in their entirety and without modification. Convergence may be an appropriate short-term strategy for a particular jurisdiction and may facilitate adoption over a transitional period. Convergence, however, is not a substitute for adoption. Adoption mechanisms may differ among countries and may require an appropriate period of time to implement but, whatever the mechanism, it should enable and require relevant entities to state that their financial statements are in full compliance with IFRSs as issued by the IASB.

Adoption is the only way to achieve a single set of global financial reporting standards—an objective that both the IASB and FASB have publicly endorsed on many occasions.

Click here to read "Results of Convergence: A Look at the Outcome of Key Joint IASB/FASB Projects"

2012 AICPA National Conference on Current SEC and PCAOB Developments

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

Following is Ernst & Young's brief summary of their longer documnet.

 

Representatives of the SEC, the Public Company Accounting Oversight Board (PCAOB), the FASB and the IASB shared their views on various accounting, auditing, and reporting issues at the three-day AICPA National Conference on Current SEC and PCAOB Developments (Conference) in December 2012 in Washington D.C.

 

Highlights of their comments included: 

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

EY's publication, 2012 AICPA National Conference on Current SEC and PCAOB Developments, discusses the Conference in detail.

Future of IFRS

Recently the IASB published a paper on its future priorities.

In their “feedback statement”, the IASB lists input it received from the public on the future of IFRS. They organized the responses into five broad themes from the more than 240 comment letters it received. 

1. Provide a period of calm after a decade of almost continuous change in financial reporting.
2. Prioritize work on the Conceptual Framework, which would provide a consistent and practical basis for standard setting.
3. Make some targeted improvements in the needs of new adopters of IFRS.
4. Pay greater attention to the implementation and maintenance of the Standards.
5. Improve the way in which the IASB develops new standards, by conducting more rigorous cost-benefit analysis and problem definition earlier on in the standard-setting process. 

The Board also set out five priority near-term research projects. These are:

 

• Emissions Trading Schemes;
• Business Combinations under Common Control;
• Discount Rates;
• Equity Method of Accounting;
• Intangible Assets; Extractive Activities; and Research & Development Activities;
• Financial Instruments with the Characteristics of Equity;
• Foreign Currency Translation;
• Non-financial Liabilities (amendments to IAS 37); and
• Financial Reporting in High Inflationary Economies.

 

You can read the full report here.

Disclosure Overload: FASB Project Comments

A lot of recent commentary exists on the subject of disclosure overload.

 

Recently the FASB has begun to focus on this topic. "Streamlining Disclosures" has become subject of various initiatives, including a recent round-table discussions this conducted by FASB and the Center for Audit Quality.

 

FASB has also initiated a Disclosure Framework project "to improve the effectiveness of disclosures in notes to financial statements by clearly communicating the information that is most important to users of each entity’s financial statements. Although reducing the volume of notes to financial statements is not the primary focus, the Board hopes that a sharper focus on important information will result in reduced volume in most cases."

 

"Boilerplate" and non-material disclosure have been said to be "noise" that obscures the real information that readers of financial information really need.

 

FASB published an Invitation to Comment (ITC) on this topic last July 12. They asked stakeholders to comment on whether and how disclosures in the footnotes to financial statements can be made more effective. The comment period ended Nov. 16.

Some of the questions:

• Do the decision questions in this chapter and the related indicated disclosures encompass all of the information appropriate for notes to financial statements that is necessary to assess entities’ prospects for future cash flows?
• Do any of the decision questions or the related indicated disclosures identify information that is not appropriate for notes to financial statements or not necessary to assess entities’ prospects for future cash flows?

Commentors said unnecessary disclosures can prevent users from finding the information they need, obscure the real information and waste prepares' time, money, and create undesirable environmental outcomes, i.e. too much paper.  

The FASB received 83 comment letters. Some comments: 

 

• Issuers should only provide relevant disclosures
• Disclosures should have a narrower focus that "could be useful to investors"
• Concern over the risk of litigation or regulatory action because preparers omit information previously provided. 
• Avoid using the term "relevance" 
• Watch the SEC's requirements, i.e. no point to reducing GAAP disclosures if the SEC imposes more specific requirements
• "The uses of boiler plate disclosures and reliance on checklists have inundated both the public and private sector as the volume and complexity of reporting requirements have increased significantly over the years. We believe having the flexibility to apply professional judgment will substantially reduce unnecessary disclosures."
• "We believe that preparers' judgment should instead be focused on what is material to the company based on a set of flexible disclosure requirements. Enabling flexibility, based upon materiality, would result in the right balance of providing relevant information while maintaining comparability."


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

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

 

 

500 Foreign Firms Still use U.S. GAAP U.S. Regulatory Filings

Good article by Emily Chasan of the WSJ.


The Big Number: 500

That’s the approximate number of foreign firms that use U.S. accounting standards in U.S. regulatory filings.

Some foreign companies that file financial reports with U.S. securities regulators are having trouble freeing themselves from U.S. accounting standards.

Five years ago the Securities and Exchange Commission voted to let U.S.-listed foreign companies that use International Financial Reporting Standards stop having to reconcile their financial statements with U.S. Generally Accepted Accounting Principles. But about 500 companies, or roughly half of the 1,000 foreign companies listed on a U.S. exchange, still submit their filings using the U.S. standards.

Some companies still must reconcile their home country’s accounting rules with U.S. GAAP, “but that number is shrinking in favor of companies that switch” to IFRS, Craig Olinger, deputy chief accountant in the SEC’s Division of Corporation Finance, said recently at a Financial Executives International conference.

More than 100 countries currently use IFRS. European companies, which have been using those standards since 2005, are the largest group using international rules for U.S. filings. Canada, which accounts for the biggest number of foreign SEC-registered companies, should soon have more companies using international rules for their U.S. filings after switching to IFRS last year. Some of the 340 Canadian companies that file with the SEC still reconcile their results to U.S. GAAP, Mr. Olinger said.

U.S. regulators still haven’t decided whether U.S. companies should be able to report using IFRS, and the successor to SEC Chairman Mary Schapiro will play a large role in that discussion. A widely anticipated study by the SEC’s staff earlier this year didn’t make any formal recommendations on the matter. Mr. Olinger said the SEC staff stays up to speed on trends in IFRS and performs reviews of filings in international standards at the same level that it inspects those done in U.S. GAAP

Significant vs Material

Often the terms “significant” and “material” are used interchangeably. This can course a lot of confusion. The SEC once took a company to task asking why they used this explanation of a contingency:

“You disclose...that you do not expect the ultimate conclusion of any of the proceedings to which you are a party to have a “significant adverse effect” on your financial statements and you have not disclosed the contingent liabilities associated with these claims either because they cannot be “reasonably” estimated or because such disclosure could be prejudicial to the conduct of the claims. Please revise your future filings...to more clearly confirm that you believe the ultimate conclusion of any of the proceedings to which you are a party will not have a “material” adverse effect to your results of operations, cash flows, or financial position.


Why the distinction between "material" and "significant"? To help with understanding the difference between "significnant" and "material" , the following comes from a paper on the IASB 2008 Annual Improvements Process, Comment Letter Analysis:

Significant vs Material

As mentioned above...some respondents asked for further clarification of the Board’s intentions in changing material to significant.

According to paragraph 30 of the Framework:

“Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful.”

“Significant, on the other hand, is not a defined term in IFRSs but is used throughout IFRSs to denote the degree of importance or relevance, eg significant costs (IAS 16) significant increase in turnover rates (IAS 19), significant period of time (IFRS 2).”

“Some respondents questioned whether it is possible to have a material change in the number of employees that is not significant. The staff notes that it is not meaningful to say there is a ‘material’ change in the number of employees in IAS 19 since the standard does not require that number to be disclosed in the financial statements.”

Clear as mud?

Friendly Accounting at Facebook

This post is courtesy of the Accounting Onion


U. S. Senator Carl Levin recently spoke on the Senate floor, referencing the discrepancy between tax and accounting treatment of stock options in the (then upcoming) Facebook IPO:


"According to its filings, when Facebook goes public, Mr. [Mark] Zuckerberg plans to exercise options to purchase 120 million shares of stock for 6 cents a share. Mr. Zuckerberg's shares, obviously, are going to be worth a great deal more than 6 cents, a total of about $7 million; they will apparently be worth more than 600 times as much, something in the neighborhood of $5 billion.


Here's where the tax loophole comes in. Under current law, Facebook can – perfectly legally – tell investors, the public, and regulators that the stock options he received cost the company a mere 6 cents a share – that's the expense shown on the company's books. [This is wrong – see later.] But the company can also – perfectly legally – later file a tax return claiming that those same options cost the company something close to what the shares actually sell for later on – perhaps $40 a share. And the company can take a tax deduction for that far large [sic] amount. So the books show a highly profitable company – profitable, in part, because of the relatively small expense the company shows on its books for the stock options it grants to its employees. But when it comes time to pay taxes, to pay Uncle Sam, the loophole in the tax code allows the company to take a tax deduction for a far larger expense than they show on their books. …


Now, the end result is that a profitable U.S. corporation – a success story – could end up paying no taxes at all for years, even decades."
To Levin, the Facebook IPO is a dramatic illustration of an inequitable "loophole" in the tax law. As Levin and Sherrod would have it, Facebook's tax deduction for using stock options to compensate executives – as opposed to any other form of compensation – would be essentially zero (that's probably a little dramatic on my part, but the point is the same); yet, Zuckerberg's tax liability when he exercises the options could be somewhere in the area of $3 billion.


The strong implication of Levin's narrative is that the extra amount of expenses would have wiped out every dollar of Facebook's reported net income that it had ever 'earned.' On top of that, there could be other outstanding options held by Zuckerberg and other employees extending way down the organization, which are going to have the same effect on future reported net income.


Which brings me to my second question: For all practical purposes, could Zuckerberg be taking Facebook public at this point in time with no history of profitability, perhaps negative shareholders' equity, and perhaps no hopes for earnings for some for years to come?


My inclination is to say "no," but I can only speculate. So, I will answer that question with another question: Since the FASB's rules understate the economic cost of options granted to employees, did the FASB provide a perverse incentive to Facebook to grant more options (or at terms overly favorable) to employees than it should have?


If one accepts the maxim that "what gets mismeasured gets mismanaged," then the answer to that question should be "YES." The stock option problem lies not with the tax rules that eventually recognize the full cost of the options to shareholders, but with the financial reporting rules that allowed Facebook to grant options without recording their full cost.


Surely, the senators can see that different accounting rules would have wrought different compensation policies from Facebook. Senator Levin would not have had a story to tell and Mark Zuckerberg would be a few billion dollars poorer.


Footnote: It is my distinct pleasure to provide Senator Levin (and his staff) with yet another accounting lesson. The amount of expense to be reported by Facebook is not, as the senator claims, the exercise price of the options (i.e., 6 cents per share). Assuming that the options were issued without any intrinsic value, then their "grant-date present value" (i.e., the amount upon which periodic option expense is measured) could end up being more or less than 6 cents per share. Although this technical correction to Senator Levin's story it doesn't fundamentally change the message, it once again reveals a lack of understanding that makes one question if Senator Levin has an adequate grasp on the issues.

IFRS Update

Comprehensive IFRS Update, courtesy of AICPA

SEC decision on IFRS is at least a few months away
The Securities and Exchange Commission staff will need a few more months to produce a final report on International Financial Reporting Standards, SEC Chief Accountant James Kroeker said Dec. 5 at the AICPA National Conference on Current SEC and PCAOB Developments in Washington. SEC members are not expected to make a determination on the use of IFRS for reporting by U.S. public companies until the staff's work is complete.

 Comment letters support IFRS, call for more convergence work: The Securities and Exchange Commission said comment letters in response to a staff paper called "Exploring a Possible Method of Incorporation," issued in May, expressed support for global accounting standards. But commenters also wanted the International Accounting Standards Board and the Financial Accounting Standards Board to make more progress on joint standards-setting projects before International Financial Reporting Standards are adopted as the U.S. standard.

 AICPA advises IASB to complete work on conceptual framework
Richard Paul, chairman of the AICPA's Financial Reporting Executive Committee, advised the International Accounting Standards Board in a letter to complete its work on a conceptual framework, including a presentation and disclosure framework. This framework will guide the board as it continues to develop International Financial Reporting Standards. The letter was sent in response to a request for feedback when the IASB issued its Agenda Consultation 2011 in July.

FASB, IASB reach tentative decisions on aspects of lease accounting
The Financial Accounting Standards Board and the International Accounting Standards Board announced progress in their ongoing, high-profile convergence project on leases. Although an exposure draft hasn't been released, the boards reached tentative decisions regarding cancelable leases, and revenue recognition and disclosure for lessors with leases of investment property. They also reached an agreement on how to require banks to book losses on loans earlier than they do now. The boards will release the revised joint proposal on impairment in 2012, with the standard likely to be effective in 2015.

FASB, IASB issue new disclosure requirements on offsetting
The Financial Accounting Standards Board and the International Accounting Standards Board issued on Dec. 16 common disclosure requirements on the effect or potential effect of offsetting arrangements on a company’s financial position. The new rules will require companies to disclose gross amounts subject to rights of set-off, amounts set off in accordance with the accounting standards followed, and the related net credit exposure, according to the IASB.

Key accounting-policy decisions are mired in uncertainty
Details about whether and how International Financial Reporting Standards will be incorporated into the U.S. financial reporting system remain unclear, as Securities and Exchange Commission officials say they are still a few months away from deciding. The SEC has floated a "condorsement" approach, although the AICPA has urged the agency to give companies the option to adopt IFRS as issued by International Accounting Standards Board. Meanwhile, leaders of the Financial Accounting Standards Board and the IASB say the current convergence project model is likely to end when the priority projects are completed.

Revised FASB proposal could change revenue-recognition timing
The timing of revenue recognition for certain companies could be affected by revised accounting proposals from the Financial Accounting Standards Board and the International Accounting Standards Board. The new rules also would bring other changes, such as increased disclosure requirements. AICPA members can download an updated Revenue Recognition Accounting Brief from AICPA.org.

Amendments aim to clarify transition guidance for IFRS 10
InAudit.com (12/23)

IASB pushes mandatory effective date for IFRS 9 to 2015
InAudit.com (12/23)

How the switch to IFRS could affect M&A

The convergence of International Financial Reporting Standards and U.S. generally accepted accounting principles will have implications for the treatment of mergers and acquisitions, writes Brian Reed, CPA/CVA. For example, GAAP and IFRS take different approaches to measuring the fair value of business combinations, and in many cases, revenue is recognized sooner under IFRS. In general, IFRS offers fewer rules and less guidance.

IFRS allows banks to inflate profits, report says
Banks are using complex financial products to bolster profits under International Financial Reporting Standards, according to a report by the Adam Smith Institute that calls for changes. In particular, banks are able to recognize expectations of future income as current profits under IFRS.

IFRS rule led to misdiagnosis of financial crisis, U.K. group says
Flaws in the IAS 39 International Financial Reporting Standards rule kept U.K. and Irish banks from booking potential bad loans during the 2008 financial crisis, leading to losses totaling $236 billion, according to a report by a pension fund lobby group. The accounting rule led to misdiagnosis of the root problem as one of liquidity, rather than solvency, the report said.

Commission: U.K. local authorities handled switch to IFRS well
U.K. local authorities handled the transition to International Financial Reporting Standards well in 2010, the Audit Commission found. However, some filed late accounts because of the change, with 18 of the 457 local bodies without auditors' opinions by Oct. 31, compared with seven in 2010-11.

Ireland eyes new deadline for U.S. multinationals to use IFRS
U.S. companies operating in Ireland reportedly will have another five years before being required to prepare a second set of statements under either International Financial Reporting Standards or Irish generally accepted accounting principles, in addition to U.S. GAAP. A proposed law would allow U.S. companies to continue using U.S. GAAP until 2020. The measure is intended to encourage foreign businesses to invest in Ireland.

Official: Russia's public companies will switch to IFRS by 2013
Bloomberg (12/13)
 CPA Exam to be given in South America under AICPA deal with Brazil
Accounting Today (12/9)

Discover the IFRS Certificate Program from the AICPA
The AICPA's IFRS Certificate Program is a comprehensive curriculum of online training, research tools and practice aids designed to help CPAs understand, implement and apply International Financial Reporting Standards. Courses cover revenue recognition, leases, impairment, intangible assets, inventories, EPS and more.

Fix for IFRS XBRL Taxonomy Exposed

Both the U.S. GAAP and IFRS XBRL taxonomies have been revised and exposed for comment.

For those not familiar with XBRL, it is an open-source HTML-like language for tagging financial statements. Proponents claim that XBRL makes it easier for investors and analysts to compare financial results across companies and industries. XBRL is now mandated by the SEC for public companies to use in their financial filings. XBRL tags let users of financial statements electronically search for, assemble, and process data so the information can be accessed and analyzed by investors, analysts, journalists and regulators.

The 2012 U.S. GAAP Financial Reporting Taxonomy is expected to be finalized and published in early 2012. The proposed 2012 U.S. GAAP taxonomy and instructions on how to submit comments are available on FASB’s XBRL page.

As for the IFRS taxonomy, the IFRS Foundation has revised it taxonomy in response to regulators and preparers who wanted more extensions (additional sub-accounts) to the full IFRS XBRL taxonomy.

The IFRS XBRL taxonomy is used to help those filing IFRS financial statements electronically to tag the information with identification tags, also known as “concepts.” Currently, the IFRS taxonomy includes all of the core concepts included in IFRS as issued by the IASB. However, preparers often need to provide more detailed financial information than is reflected by the core IFRS concepts.

To ensure that those creating and using electronic filings do not need to create their own extensions to the IFRS taxonomy, the IFRS Foundation has created an “extension taxonomy” by analyzing and drawing from common practice. For instance, although IFRS requires the disclosure of an analysis of expenses, IFRS does not include a prescriptive listing of all of the possible categories of expenses. The common-practice taxonomy includes concepts for the most commonly used types of expenses, such as “sales and marketing.”

The interim taxonomy released on Thursday completes the first part of a project to address this issue, by providing about 350 extensions for the most common concepts used in the financial statements.

The common practice concepts are in line with IFRS requirements and will help to alleviate the burden on preparers and to increase the comparability between financial statements in accordance with IFRS that are electronically submitted.

The Beginning of the End of a Single Set of High-quality, Global Accounting Standards

A year and a half ago, the G-20 leaders called on international accounting standard setters to redouble their efforts to achieve a single set of high-quality, global accounting standards through their independent standard-setting processes and complete their convergence project by June 2011.

Before we even have a converged set of global accounting standards, the EU has hammered a nail into its coffin. If the EU can decide to opt in or out of a given part of IFRS standards then the door is open to home-country versions of IFRS similar to those that have existed for years.

The European Union has refused to adopt a new accounting rule that could ease fallout from the euro zone's sovereign debt crisis on banks.

The International Accounting Standards Board (IASB), following up on pressure from policymakers at the height of the financial crisis, has eased its "fair value" or mark-to-market rule that was known as IAS 39.

The first completed part of the new IFRS 9 standard allows banks to price some government debt held on their books at cost rather than at current depressed prices.

This avoids the "cliff effect" of many banks needing to recognize large losses and top up regulatory capital buffers.

IFRS 9 would allow European banks to exclude some of the broader markets effects of the current financial crisis in Europe.

Under IFRS 9 impairments will still exist, but would be more timely.

The EU has stated that it wants to see how two other elements of IFRS 9 will be finalized before making up his mind on the complete rule.

Latest IFRS Readiness Survey from AICPA

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

Some of the results:

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


• Many CPAs have begun to develop greater expertise


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


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


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


• 78% of CPAs already have some knowledge of IFRS


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


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


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


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


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


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


• 32% have begun actively preparing for adoption.


• 18% are planning to adopt IFRS.


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


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


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

Giving a Rodent's Posterior about IFRS

I love the way that the author introduces this article:

Anyone Who Gives a Rat’s Behind About IFRS Needs to Mark July 7 on Their Calendars
By CALEB NEWQUIST

Cause there’s gonna be a roundtable.

The Securities and Exchange Commission staff announced today that it will sponsor a roundtable in July to discuss benefits or challenges in potentially incorporating International Financial Reporting Standards (IFRS) into the financial reporting system for U.S. issuers.

The July 7 event will feature three panels representing investors, smaller public companies, and regulators. The panel discussions will focus on topics such as investor understanding of IFRS and the impact on smaller public companies and on the regulatory environment of incorporating IFRS.

“We must carefully consider and deliberate whether incorporating IFRS into our financial reporting system is in the best interest of U.S. investors and markets,” said SEC Chief Accountant James Kroeker. “This roundtable will provide an excellent opportunity for investors, preparers, and regulators to provide the SEC staff with valuable information that will help the Commission in its ongoing consideration of incorporating IFRS.”

See you there. If you manage to recover from your July 4th meat sweats, that is.

IFRS Convergence Projects Delayed

The heads of FASB and IASB announced they will take “a few additional months” beyond their June target date to complete priority joint convergence projects on revenue recognition, leases, financial instruments and insurance. This is a reasonable development, and expected by most observers. The original convergence deadlines were optimistic and some thought that inferior standards would result if the projects were rushed. A few quotes below.

David Tweedie, Chairman of the IASB
Leslie Seidman, Chairman of the FASB

David Tweedie: “...if you were listed in the United States using IFRSs you had to reconcile to US GAAP, that showed where the differences were, and what we did was try to look through our standards and if FASB had a better standard, we should take it and vice versa. That was going to take forever so in 2006, the Memorandum of Understanding (MoU) was instituted and that set out a different policy, namely that we should look at certain standards, and for each of these standards, if it was complex or out of date there was no point in trying to converge them otherwise we would just get a complex out-of-date converged standard when what we should really do is write a better one.” “...we have completed most of that program and it’s been a great success, the two sets of standards are much closer together and frankly IFRSs are much better quality than they would have been otherwise.”

Seidman: “We would never let a target date take priority over thorough and robust due process...so let me clarify any misunderstanding about the June 2011 date. It was always intended to be a target, not a deadline, and we always said that achieving the target was subject to the nature and extent of the feedback that we got on each of the exposure documents. At this point on each of the exposure documents we have received significant and very constructive feedback and we are in the process of working through those issues. The quality of the standards remains of the utmost importance. Every board member wants to issue high quality standards that we think are going to withstand the test of time.”

Tweedie: “We have been working on these now for some five years so this is hardly a rush job and what we have done, and I think this is a big change in standard-setting over the past couple of years, is we have gone out deliberately to get high quality in put in addition to that required by our due process. This extensive outreach is something that hadn’t been done to the extent that it is now. We get constant input, and we test these ideas as we finalize the standards.”

Tweedie: “...we would never release a standard before it is ready and ultimately it must be a high quality standard or you just can’t issue it.”

Seidman: “After evaluating the issues yet to be addressed we jointly concluded that, without extending the work out indefinitely, we all could benefit from a few more months to develop these standards, some of which really go to the core issues of many companies.”

Tweedie: “So as Leslie was saying there, we have decided to extend the timetable for a few additional months to enable us to check whether our conclusions will last the test of time. We are also mindful of the G20 target, we have been reminded of that many times over the last few years, and we intend to try to finish this convergence program by end of 2011. The June target has helped us to get there but at the same time it is clear that we need a little more time to check the conclusions, and to ensure that the standards are of the highest quality.”

Seidman: “Let me mention one other thing, we have yet to decide on the effective dates for these standards but we do want to reassure people that we will allow ample time for them to understand the requirements and to plan for an effective transition to the new standards once those decisions are made.”

A U.S. Viewpoint on Lease Accounting

Following is a summary of a comment letter submitted on lease acconting, as previously published in the Journal of Accountancy.

The AICPA’s Financial Reporting Executive Committee (FinREC) commented on FASB’s Proposed Accounting Standards Update, Leases. The exposure draft was developed jointly with the International Accounting Standards Board (IASB). FinREC said it supports the boards’ overall objective to develop a single approach to lease accounting and to require assets and liabilities arising under leases to be recognized in lessees’ statements of financial position. However, FinREC believes there are fundamental application issues not addressed by the ED, and revisions that need to be made to various aspects of the boards’ proposal, including those related to the right-of-use approach to lessee accounting.

The FASB proposal would result in a single “right-of-use” approach applied consistently to lease accounting for lessees and lessors. Among other changes, the approach would result in the liability for payments under all lease contracts within the scope of the standard and the right to use the underlying asset being included on the lessee’s balance sheet. The standard setters say the changes would improve the information available to investors and other financial statement users about the economics surrounding lease contracts.

Unlike FASB’s discussion paper, Leases: Preliminary Views, published in March 2009, which focused primarily on lessee accounting, the ED, Leases, would result in changes on both sides of a lease transaction. A lessor would apply either a performance obligation approach or a derecognition approach. “The majority of FinREC members do not support the boards’ hybrid (lease classification) approach to lessor accounting—instead they support the derecognition approach as the single lessor accounting model,” FinREC said in its comment letter.

The proposal includes simplified accounting for short-term leases—leases having a maximum term of 12 months or less. The simplified accounting would allow lessees to ignore the effects of interest on the recorded assets and liabilities and allow the lessee to record the liability for lease payments at the undiscounted amount for lease payments. The simplified accounting would allow the lessor not to recognize assets or liabilities arising from a short-term lease, nor derecognize any portion of the underlying asset.

In its comment letter, FinREC said, “We do not support the boards’ approach to accounting for lease renewal options and contingent rents. We believe that the lease term should be defined as the lessee’s (lessor’s) best estimate of the lease term. We believe contingent rents and expected payments under residual value guarantees should be included in the measurement of assets and liabilities based on management’s best estimate of payments to be made (received) under the lease.”

Joint Proposals Push Toward IFRS/GAAP Convergence in Issues Affecting Banks

FASB and the IASB announced moves toward convergence of IFRS and GAAP through joint proposals on offsetting transactions and impairment of financial assets.

The two main changes are 1) an exposure draft released last week on a common approach to offsetting financial assets and financial liabilities. This would end a major difference between IFRS and U.S. GAAP. 2) A supplementary document with a new impairment model for financial assets like loans managed in an open portfolio. The proposal would replace the incurred loss model with a more forward-looking expected loss model--a response to complaints in the financial crisis.

The issue with offsetting is that companies can, in some instances, report IFRS balance sheet figures that are 100 percent greater than their U.S. GAAP numbers. This is confusing to the global capital markets and the proposals would eliminate the difference.

U.S. GAAP would only net in more limited circumstances, with note disclosure of other netting arrangements in footnotes.

Offsetting/netting is required when company presents in net amounts on their balance sheet. As it stands now, financial assets and financial liabilities may show up on a balance sheet as one net amount, or as two gross amounts, depending on whether the balance sheet is in IFRS or U.S. GAAP.

The above netting arrangements cause the largest difference between balance sheets using IFRS and U.S. GAAP. Derivative assets and related liabilities are the most common area where this occurs. Balance sheets of financial institutions generally have the largest derivative positions.

The new proposed rules apply only when the right of setoff is enforceable at all times, including in default and bankruptcy, and the ability to exercise this right is unconditional—i.e. offsetting only occurs after a future event. A company must intend to settle net, i.e. with a single payment, or simultaneously. If all of these requirements are met, offsetting is mandatory. This would also change industry conventions.

The Exposure Draft is Offsetting Financial Assets and Financial Liabilities [FASB Proposed Accounting Standards Update, Balance Sheet (Topic 210): Offsetting]. Comments are due April 28.

On Impairment, changes introduce an expected loss model that is more forward-looking in accounting for credit losses, and is said to better reflect the economics of lending decisions. IFRS and U.S. GAAP currently account for credit losses using an incurred loss model, which requires evidence of a loss (known as a trigger event) before loans can be written down.

“The FASB and IASB are seeking comment on the changes, i.e. whether they agree conceptually and whether the changes can be practically applied.

Some advocate that a more forward-looking approach to loan losses would have made loan provisions show up earlier than before, and may have held off or mitigated the credit crisis by giving earlier warnings about the health of financial institutions.

Comments on the document Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities, are due April 1.

If you need a nap, the IASB is hosting a webcast on the impairment of financial assets proposal on Friday, Feb. 4, with sessions timed for Europe and the U.S. Also “FASB in Focus” has overviews on the new rules netting on FASB’s website and another FASB in Focus on the impairment model.

FASB Reversal a Major Step Toward International Convergence

The FASB has made a major compromise in the area of impairment of financial instruments. Full details will be released later, but this is a major concession to U.S. and European banks. It is also a major step toward convergence of U.S. accounting rules with IFRS and the end to what what previously called a "religious war" over fair value accounting. As well, political influence over accounting may be resolved by the compromise.

This new FASB approach is similar to the International Accounting Standards Board’s model in IFRS 9. FASB has agreed that at least some assets should qualify for cost accounting, whereas banks were forced to use a fair value model for all loans under the new rules. Existing rules forced fair value on portions of banks’ loan portfolios.

The FASB’s original proposal was opposed by the banking industry as being pro-cyclical (making problems worse as business cycles worsened). Banks say that proposed the fair value approach is a danger to the survival of marginal financial institutions that could have their capital called by bank regulators because the rules have and would continue to force banks to take large and inappropriate write-downs on temporary market declines. They also lobbied that the rules would hurt lending and unfairly reduce banks' book value. They argued that banks would not make loans if the value of the loan could be written down immediately due to temporary market fluctuations.

Supporters of the FASB fair-value proposals say it would have improved transparency and unmasked potential weaknesses at banks. Proponents of fair value accounting, including the CFA Institute, argue it is what is needed to make the financial statements of banks reflect their true financial positions and operations more clearly to investors.

FASB said that financial statement users, including preparers, auditors and others would prefer to have loans held for collection recorded on the balance sheet at amortized cost, but with a more robust impairment test.

The FASB will go back to users for input toward an impairment model for loans. The original proposal required a fully fair value-based approach that the banks have lobbied against for years. The new approach would recognize a portion of the estimated loan losses over time unless greater losses are expected in the foreseeable future, in which case that larger floor amount would be recognized currently. Some loans, including loans traded actively by banks instead of held to collect payments will be valued at market prices.

The changes are partly the result of a fierce lobbying campaign by the American Bankers’ Association and others and seen as a major victory for the banking industry. However it was not solely the banks in opposition to the proposals. The FASB reported an overwhelmingly negative reaction to its proposal from companies and investors, who wrote more than more than 2,800 comment letters.

Best of 2010: Accounting

After creating an ambitious agenda for the year, the standard-setters had to play hurry up and wait.

Article by Marie Leone and David M. Katz, CFO.com US

In the realm of accounting, no one moved more rapidly this year than the Financial Accounting Standards Board and the International Accounting Standards Board. The two standard-setting bodies set forth an aggressive agenda that called for a dozen or so new rules to be issued by 2011.

Their aim was to complete their now eight-year-old convergence project and emerge with a single set of global accounting standards. But the effort was ambushed by reality — the global financial crisis and subsequent global recession; heated debates over controversial rulemaking decisions; the early retirement of FASB chairman Robert Herz; and the announced departure of IASB chairman Sir David Tweedie, slated for June 2011. (On December 23, the trustees of the Financial Accounting Foundation announced that Leslie F. Seidman, acting FASB chairman since Herz's retirement, had been named chairman of FASB, effectively immediately.)

Accordingly, the rulemakers slowed down the convergence process in the latter part of 2010, vowing to issue only four newly melded standards at any one time. Still, they hope to finish a number of convergence projects by the end of 2011. That will be a prickly task, since those projects have shaken some fundamental tenets of business. They will, for instance, eliminate the concept of operating leases, rework revenue-recognition rules, do away with last-in-first-out inventory accounting, and expand the reach of fair-value accounting.

Meanwhile, the process of adopting private-company accounting standards ("little GAAP") in the United States began in 2010, and could eventually become the purview of a second standard-setting board. The debate concerning final decisions about little GAAP should come to a head in 2011 — just in time for the Securities and Exchange Commission's decision on whether or not U.S. publicly traded companies should abandon U.S. generally accepted accounting principles in favor of international standards.

"Taking the 'Ease' Out of 'Lease'?"
By doing away with operating leases, new accounting rules could bring billions of dollars back onto balance sheets.
"Shorter Agenda for Convergence"
FASB and the IASB have selected five priority projects to focus on – and hopefully push out by next year.
"One Step Closer to Little GAAP"
A blue-ribbon panel on private-company accounting standards recommends a separate GAAP for private companies.
"Technical Difficulties"
As the pace of accounting-rule changes intensifies, can IT systems keep up?
"A Relentless Pursuit of Global Rules"
Tom Jones, director of Pace University's international accounting center, looks forward to a world without local GAAPs.
"Debunking IFRS Myths"
Experts expose seven misconceptions about international financial reporting standards.
"After Eight Years at FASB, Herz Looks Back"
In an exclusive interview, Robert Herz talks about his legacy as chairman of the Financial Accounting Standards Board.
"One Size Gives Fits to All"
Financial executives say that proposed changes to revenue-recognition rules ignore real-world realities.
"Revenue Rules Could Cause Software Snags"
How much will ERP systems have to be tweaked to comply with FASB's new revenue-recognition rules?
"Without Hoopla, Fair-Value Rule Is Readied"
Among the ripple effects of the global credit crisis is the rewrite of the controversial fair-value accounting rule once known as FAS 157. The revised standard could be in place by the end of the year.