Accounting Principles

IFRS Update

2012-01-05T10:17:00.000-07:00

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.

Top 1% Pays 37% of All U.S. Income Taxes

2011-11-01T09:22:00.000-06:00

This is not specifically an accounting issue. But with recent attention to the 1% vs 99% media frenzy, it is worth examining some facts around who pays how much tax in the U.S.

Really interesting that the top 1/10 of 1% payc about 15% of all U.S. federal taxes. That is a total of 138,000 people.

This is an article from SmartPros.

The income earned by the top 1% of Americans has declined for the second year in a row while their average tax rate has increased, according to a new Tax Foundation study. The average federal tax rate for those reporting at least $343,927 in income has increased from 22.5% in 2007 to 24.0% in 2009, while the average income for the top 1% has declined from $1.4 million to $1 million over the same period.

The Tax Foundation's analysis is based on new data from the Internal Revenue Service on individual income taxes, reporting on calendar year 2009. The amount of individual income tax paid steeply declined by $166 billion, twice the decline from 2007 to 2008. Nationally, average effective income tax rates were at their lowest levels since the IRS began tracking them in 1986. The average tax rate for returns with a positive liability went from 12.2% in 2008 to 11.1% in 2009.

"During a time of economic downturn, we expect to see significant changes in both total income reported and the share of taxes paid by those with the highest incomes," said Logan. "Unlike middle-income wage-earners whose incomes and tax liabilities are fairly steady, high-income people tend to realize significant capital gains that fluctuate wildly with the economy, causing their income tax liabilities to fluctuate as well."

In 2009, the top 1% of tax returns earned 16.9% of adjusted gross income and paid 36.7% of all federal individual income taxes. In 2008 those figures were 20.0% and 38.0%, respectively. Each year from 2005 to 2007, the top 1 percent's constantly growing share of income earned and taxes paid set a record. The 2008 reversal of this trend continued in 2009.

The study also takes a look at the very highest earners, the top 0.1 percent of tax returns, which the IRS only began singling out in recent years. In 2009, those 138,000 tax returns accounted for nearly 7.8% of adjusted gross income earned (down from almost 10% in 2008), and they paid around 17% of the nation's federal individual income taxes (down from 18.5% percent in 2008).

"The very highest income group—the top one-tenth of one percent—actually has a lower average effective income tax rate than the rest of the top 1 percent of returns because these extremely high-income returns are more likely to have income from capital gains and dividends, which are typically taxed at lower rates," said Logan. "It's worth pointing out that in the case of capital gains and dividends, however, income derived from these sources has already been taxed once by the corporate income tax, which is not included in the current study, meaning the average effective tax rate numbers can be somewhat misleading."

CFOs Like New Goodwill Impairment Shortcut

2011-10-31T10:56:00.003-06:00

CFOs seem likely to make heavy use of FASB’s new “qualitative” option for impairment testing.

Article by David M. Katz of CFO.com

Offered the chance to enable their company to avoid the currently complex calculations of goodwill-impairment testing, corporate finance executives will seize the opportunity in droves, a soon-to-be-released survey suggests.

Last summer Duff & Phelps and the Financial Executives Research Foundation, the parent organization of Financial Executives International, asked a group of CFOs, controllers, treasurers, and other corporate finance executives if their company would take advantage of a proposed Financial Accounting Standards Board shortcut. Under the FASB plan, companies could bypass the current two-step quantitative goodwill-testing process by making — and passing — a “qualitative” assessment of their impairments.

The two hundred FEI members who responded did so resoundingly in the affirmative. Sixty-nine percent of those working for private companies and 81% at public companies expect their employers to take advantage of the option for some or all of their reporting units.

They will now get their chance: on September 15, FASB stated a final version of its rule that companies will no longer be required to calculate the fair value of their reporting units if they judge, based on a qualitative assessment, that it’s more likely than not that their fair values are more than their book values. (Goodwill impairment occurs when the fair value of goodwill in a company’s reporting unit drops below the unit’s book value, also known as its “carrying amount.”)

The new option will be effective for annual and interim goodwill-impairment tests performed for fiscal years starting after December 15, and early adoption is permitted.

Previous FASB guidance required a company to test for goodwill impairment at least once a year using a two-step process. In step one, the entity had to figure out the fair value of a reporting unit and compare the fair value with the unit’s carrying amount. If the fair value were less than the carrying amount, then the company had to perform a second step to gauge the amount of the impairment loss, if there any.

In the new guidance, FASB says a company choosing to make a qualitative assessment must base it on “such events and circumstances” as macroeconomic conditions, industry and market conditions, raw materials and labor costs, and “overall financial performance such as negative or declining cash flows.”

Gary Roland, a managing director at Duff & Phelps, says he is surprised that a higher percentage of private-company finance executives didn’t say their company would take advantage of the shortcut. After all, FASB first came up with the idea in response to a push from private companies to provide them with a simpler, cheaper testing process.

Nevertheless, Roland had expected a strong positive response from companies across the board. “There’s no surprise that certain entities would want to take advantage of this because they weren’t happy with the fees,” he says.

The survey, however, recorded just the hopes of finance executives and is only a partial reflection of how many companies will actually take advantage of the shortcut, according to the valuation consultant. “It still could be a difficult proposition,” depending upon how narrowly companies passed impairment tests in prior years and how stringent auditors are in allowing companies to take the shortcut, he adds.

Big Shot Investors Say No to IFRS

2011-10-17T17:30:00.003-06:00

By Emily Chasan of WSJ

When SEC Chairman Mary Schapiro said in June that investors aren’t clamoring for International Financial Reporting Standards, she may have been understating things… a bit. Now, some of the biggest U.S. investor groups are letting the SEC know in no uncertain terms that it should postpone its decision on IFRS and even stop the convergence process between U.S. GAAP and IFRS.

In comment letters to the SEC this week, some big investors and analyst groups had some scathing words about IFRS, claiming, among other things, that the International Accounting Standards Board isn’t independent enough from political interference to set accounting rules for the United States.

Capital Research and Management Co, which manages over $1 trillion, wrote that U.S. GAAP was “clearer, more effective and more advanced” than IFRS in providing the information it needs to make investments. CRMC Chairman Paul Haaga wrote in the letter:

While we support the idea of a consistent set of high quality accounting standards for companies worldwide, unfortunately we do not believe IASB has been effective in achieving this objective. Moreover, IASB’s ability to achieve this objective has been gravely diminished by political influence.

CRMC, which is the investment advisor to the American Funds mutual funds, said it doesn’t expect to benefit from the more comparable reporting IFRS is supposed to provide because the standard is applied so inconsistently around the world, and urged the SEC to retain U.S. GAAP. It also said the convergence process between U.S. accounting rule makers isn’t working and should be stopped.

Investors, analysts, and others, who use financial statement, are the purported beneficiaries of a switch to IFRS, as a single set of accounting rules should make it easier to compare publicly-traded companies around the world. Many CFOs are on record saying they would bear the cost of an IFRS switch if they think investors would benefit.

But even the CFA Institute, which represents over 100,000 portfolio managers, investment analysts and advisors throughout the world expressed doubts, saying it would be “premature” for the SEC to inject IFRS into the U.S. financial system. The CFA Institute said its continued support for IFRS is not unconditional, and that the International Accounting Standards Board needs to ensure its independence and more consistent application of its rules before U.S. companies are required to use them.

After abandoning an earlier plan that would have had U.S. companies using IFRS as soon as 2014, the SEC has said it would make a decision this year about whether companies in the U.S. should move toward the international standard, which is used in more than 100 other countries around the globe.

Top Ten Most Influential Accountants

2011-10-03T17:22:00.000-06:00

A Top Ten list from a list of 100 of the most influential accountants in the U.S., as compiled by Accounting Today.

1. Barry Melancon, President and CEO, American Institute of CPAs
2. Mary Schapiro, Chair, Securities and Exchange Commission
3. Leslie Seidman, Chair, Financial Accounting Standards Board
4. Douglas Shulman, Commissioner, Internal Revenue Service
5. James Doty, Chair, Public Company Accounting Oversight Board
6. James Kroeker, Chief accountant, Securities and Exchange Commission
7. James Metzler, Vice President of small firm interests, American Institute of CPAs
8. Hans Hoogervorst, Chair, International Accounting Standards Board
9. Mark Koziel, Vice President of firm services & global alliances, American Institute of CPAs
10. Gary Boomer, CEO, Boomer Consulting
See if you made the list of 100 by looking here.

Fix for IFRS XBRL Taxonomy Exposed

2011-09-08T05:18:00.001-06:00

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.

CFOs Exit Restating Companies, Study Finds

2011-09-07T05:00:00.000-06:00

But they overwhelmingly tend to resign rather than get fired, companies report.
Good article by David M. Katz, of CFO.com

Restatements of financial reports usually convey bad news about a company to the stock market, and CFOs, as chief stewards of financial reports, tend to like nothing less than bearing such tidings. In fact, when companies restate, their finance chiefs show a pronounced tendency to leave, new research confirms. Usually, however, it's their own decision to walk — or at least that's what the companies are reporting.

From 2005 to 2009, companies in general had a 14.88% to 19.47% chance of having a CFO departure in a given year, according to Audit Analytics, a data-research firm. But the situation changed dramatically for companies that filed a restatement. In such cases, the probability of a finance chief leaving in the period beginning three months before and ending nine months after a restatement rose to a range of 19.06% to 28.99%.

The finance chiefs mostly resigned, rather than receiving pink slips. Overall, the companies studied had a resignation rate of between 14.45% and 18.57%, while the restated companies experienced a rate from 18.06% to 27.68%. (The researchers looked at a total of 48,200 10-K filers that also filed an audit opinion over the five-year period.)

Companies rarely report that they have dismissed a CFO regardless of the reason, according to the Audit Analytics report, CFO and Auditor Departures Occurring Near the Issuance of a Restatement. Overall, companies experienced a dismissal rate ranging from 0.40% to 0.99% over the five-year period. If the companies filed a restatement, the chance of a finance chief's dismissal jumped to between 1.00% and 1.30% — a very large difference, but involving very low numbers.

"What a CFO can take out of this [study] is that the chance of getting fired and having it shot out as an 8-K disclosure really doesn't increase near the occurrence of a restatement," says Donald Whalen, the firm's director of research.

But are all those finance chiefs actually leaving on their own? While Whalen says that such information generally can't be gleaned from financial statements, he grants that CFOs threatened with dismissal might negotiate with their employer to have the move reported as a resignation. The "You can't fire me, I quit" scenario may also exist in some cases.

A company, however, has an interest in not reporting turmoil in its senior ranks. To report a resignation rather than a dismissal is usually preferable, says Whalen, because "at least it shows a better relationship than companies that come right out and say, 'Hey, we kicked this guy out.'"

CFOs might also want to take pains to avoid certain types of restatements rather than others. Restatements involving revenue recognition tend to have an especially malign effect on share prices, while those involving corporate cash flow rarely make a dent, according to Whalen.

As is the case with CFOs, companies and their auditors tend to sever relations more frequently during a restatement, according to the Audit Analytics report. For all the companies studied, the departure rate varied from 10.19% to 15.69% during the five-year period. But among those filing restatements, the departure rate rose to between 20.79% and 25.75%.

Impairment Bucket List

2011-09-06T14:45:00.001-06:00

No, it’s not a list of cool impairments that an accountant might calculate in his lifetime, if he or she had the time and luck.

Accounting standard-setters are working on a new method of categorizing impaired financial instruments.

The recent credit crisis has advanced a need for revision of the current model as large financial institutions did not agree with existing standards. Large banks, for example, claim that the existing standards result in a “pro-cyclical” result. That means that when times were good, they accounting rules made things look better, faster. And when times were bad, things looked bas faster. Or went to hell faster, as we saw in 2009/03. The rules also impact other sectors.

Credit Crisis Effects
In 2008, banks were following a system of incurred loss reporting, meaning assets were marked down, or impaired, only once their value had demonstrably fallen. Critics said this caused catastrophic shortcomings in financial early warning systems, meaning banks were unable to build up reserves for expected losses and were woefully unprepared when asset values suddenly went into freefall.

The IASB has developed a more forward-looking set of rules for calculating impairment.

“Three-Bucket Solution”

One approach, and the major one being advocated now, is called the three-bucket approach.

One pre-IFRS problem was earnings management, when banks would set aside provisions with little justification, only to release them in lean years to plump up earnings. Critics said this made it hard for investors to get a handle on banks' true financial positions; from these concerns was born incurred loss reporting.

After the credit crisis, the accounting problem was how to permit the judgment essential for expected loss provisioning without paving the way for a potential return to earnings management.

The three-bucket approach aims to break down assets according to impairments, keeping a tighter rein on provisioning and giving analysts a clearer picture of financial health.

Into bucket one goes 'healthy' assets, those for which banks expect a reasonable return and need only make minimal provisions. Bucket two is reserved for assets with some level of impairment, but which are not completely useless, while bucket three is for assets that are undeniably 'bad'.

Throughout its life, the asset can move between buckets according to macro- and micro-economic triggers, hopefully allowing banks to make exactly the right provision at exactly the right time.

An example might be a bundle of mortgages. The bank grants the mortgages, and works out on the basis of historical data that it is likely to take an 80% return on them. It therefore makes provision for the 20% loss and the mortgage bundle sits in bucket one until a trigger makes re-evaluation necessary.

This trigger could be a macro-economic event such as falling oil prices, a contracting economy or rising unemployment. From this, the bank might deduce that a greater proportion of mortgage holders will struggle to pay and shift the asset bundle into bucket two, requiring higher provisions to be made.

For the mortgages to jump to bucket three, they must be demonstrably impaired, for example when the inhabitants of a town hit by unemployment begin defaulting on their mortgages. This is essentially an incurred loss model and would result in very high or 100% provisioning for the de-valued assets.

Unfinished business
Like all theoretical models, there is much uncertainty to be hammered out. What constitutes a bucket-moving trigger? When an asset is impaired, who decides whether the impairment is expected – therefore already provided for – or unexpected, meaning more cash should be set aside? How will auditors examine such a complicated model and will it really prevent earnings management if banks are determined to do it?

A number of question exist, and will need to be ironed out prior to implementation.

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

2011-07-14T14:59:00.001-06:00

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

2011-06-23T15:08:00.002-06:00

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

2011-04-21T08:28:00.003-06:00

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.

XBRL and IFRS Mess

2011-04-18T04:24:00.000-06:00

As a result of a series of missteps and lack of coordination, companies that file financial statements in the United States following IFRS may be getting a break on their first XBRL filing.

The SEC have acknowledged that it would be impossible for foreign private issuers, filing with the SEC following IFRS, to file in XBRL, because the SEC has yet to approve the XBRL taxonomy that IFRS filers should follow. Foreign private issuers (“FPI”) filing quarterly “voluntary” 10-Q filings are the first group of the third and final wave of companies coming under SEC rules to file in the XBRL for the first time.

For example a calendar year FPI in this group files its 30 June 2011 Form 10-Q on its Monday 10 August 2011 due date. The company would have until Tuesday 8 September 2011 to file its first XBRL exhibit under Form 10-Q/A. No grace period would be available for its 30 September 2011 Form 10-Q. For a FPI not filing voluntarily on domestic forms, its annual report on Form 20-F or Form 40-F for its year ended on or after 15 June 2011 will be the first SEC report required to include XBRL data. So a calendar year filer in this group would file its annual financial statements in XBRL format by its filing deadline in 2012.

To provide financial statements in XBRL according to SEC's rules, companies must follow a taxonomy approved by the SEC. A taxonomy is a list of computer-readable tags in XBRL that allows companies to tag the thousands of bits of financial data that are included in financial statements and footnote disclosures. On March 25, the IFRS Foundation finalized a 2011 IFRS taxonomy that would be followed by IFRS issuers to file in XBRL. The SEC has not yet approved that taxonomy, and hasn't said when it expects to do so. An SEC spokesman said the IFRS Foundation is still working on the taxonomy. Previously taxonomies took about five weeks for SEC approval.

The SEC has relaxed its rules for filings stating: “We are of the view that foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB are not required to submit to the Commission and post on their corporate websites, if any, Interactive Data Files until the Commission specifies on its website a taxonomy for use by such foreign private issuers in preparing their Interactive Data Files,” Cross and Kroeker wrote. The letter gives no indication, however, of when the SEC expects to approve the IFRS taxonomy and therefore how that might impact the date for XBRL filing requirements.

IFRS Convergence Projects Delayed

2011-04-15T08:54:00.002-06:00

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

2011-03-21T09:46:00.002-06:00

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.”

Learning IFRS

2011-03-10T10:00:00.003-07:00

The AICPA is developing an IFRS Certificate Program. They have a number of self-study courses on IFRS in general, comparisons to U.S.GAAP, and individual topics like inventories, intangibles, impairment, EPS, etc. You can find information about the self-study courses here.

We ordered one of their self-study courses a while back. I didn't complete the course myself, but I have had good reviews from those who did.

Seven Accounting Changes That Will Affect Your 2010 Annual Report

2011-03-08T11:31:00.004-07:00

The following is by Jim Brendel and was originally published in SmartPros.

There are a number of new rules that will have accounting and reporting implications for 2010 year end annual reports. They vary from changing the timing of financial results to adding to overall reporting expense.

Two new Financial Accounting Standards Board updates will have major impacts on accounting for sales contracts that contain multiple deliverables. What’s a multiple deliverable? Say your company sells dishwashers and also provides the installation. Under the old rules, you had to demonstrate objective evidence of “fair value” for each undelivered item in order to recognize revenue for the delivered item. If you could not establish the fair value of the installation, revenue recognition for the dishwasher could be delayed, even though the customer had paid for it.

Under the new revenue recognition rule – ASU 2009-13 – companies don’t need the “objective” proof of each service or good, they can estimate the selling price of the installation and warranty. So in our example, the vendor - say it’s Sears or Appliance Factory - can recognize the revenue of the dishwasher – alone - at the point of sale without waiting a few weeks for the installation guys to do their thing. Then they can recognize the estimated value of the installation after it is complete.

The second major revenue recognition change for 2010 reporting , ASU 2009-14, covers software enabled devices. This has also been referred to as the iPhone rule because of the large effect that it has on Apple Computers’ revenues. Although the iPhone is a piece of hardware, it depends on embedded software for its intended use. Under the old rules, this embedded software caused iPhone sales to be governed by the software revenue recognition rules, which are much more stringent than the rules related to other goods and services. As a result, Apple had to recognize all of the revenue from the sale of an iPhone over two years because it provides software updates over that period. ASU 2009-14 says that the software revenue recognition rules no longer apply to these types of software enabled devices, so they are now governed by ASU 2009-13, like other goods and services. The result of the change? Apple reported a record quarter when it elected to adopt this rule early for its first fiscal quarter 2010. Both of these new standards are effective for fiscal years beginning after June 15, 2010, but can be adopted earlier.

Five Other Changes for 2010 Reporting

Fair value disclosures. Companies will be required to provide additional disclosures about items measured at fair value in the financial statements for their 2010 financial statements. In particular, significant transfers in and out of Level 1 (quoted market price) and Level 2 (valuation based on observable markets) must be disclosed separately, along with the reasons for the changes.

Fair value items classified as Level 3 (valuations based on internal information) will require additional disclosure of purchases and sales during the year. The FASB recently decided not to exempt private companies from these requirements. Investors have said that these new disclosures will give them better insight into the quality of reported earnings, but companies can expect to spend additional time gathering and summarizing all of this information.

Consolidation of variable interest entities. Several changes to the consolidation rules for variable interest entities, also known as special purpose entities, came into effect in 2010. The new rules require a qualitative, rather than a quantitative, analysis to determine the primary beneficiary of a variable interest entity, such as a corporation formed to hold real estate and lease it to an operating company. The primary beneficiary is the company that has the power to direct the activities and obligation to absorb the losses of the variable interest entity, which it will consolidate even though it may own less than a majority of the voting interests.

XBRL. eXtensible Business Reporting Language is a data-tagging technology that standardizes the way that financial statement items are identified, and has been frequently referred to as the next generation of EDGAR. The SEC has required the largest public companies (over $5 billion in market cap) to file financial statements with XBRL tagging since June 2009.

In June 2010, the remaining large public companies (over $700 million in market cap) were first required to provide XBRL tagging in their financial statements. Starting in June 2011, all of the remaining U.S. public companies must file financial information using XBRL.

Companies will likely require outside assistance to match their accounting records with the standard XBRL classifications, and should consider an early start on this project. It can easily cost a small public company from $30,000 to $50,000 to implement.

Non-GAAP financial disclosures. Recent SEC staff interpretations allow more latitude for companies who provide non-GAAP financial disclosures, such as EBITDA, in SEC filings, as well as additional guidance in making those disclosures. These interpretations reduced the constraints on the exclusion of recurring items from the non-GAAP measure, and let companies know that management does not have to use the measure in operating the business in order to disclose it. The new interpretations can be found here. The effect of this change is mainly to provide more flexibility to companies in how they report non-GAAP measures of performance and won’t necessarily add or subtract from earnings statements.

Loss contingencies disclosures. A FASB proposal that would require more disclosures about loss contingencies, such as litigation, has been sent back for more deliberation after concerns were raised that the level of disclosure would put public companies at a disadvantage in the courtroom. However, the SEC is questioning whether companies are adequately complying with the current rule, which requires disclosure of an estimate of the possible loss or range of loss. The SEC believes that in too many cases, no disclosure is made until the case is settled because companies assert that they are not able to make accurate estimates of the potential loss. Companies should expect additional scrutiny of their disclosures in 2010 annual reports.

Developments to Watch in 2011

Short-term borrowing disclosures. In response to concerns about companies window-dressing their balance sheets by paying down lines of credit before year- end, the SEC has proposed rules that would require additional disclosures, such as fluctuating borrowing during the year and a qualitative discussion of the business reasons for the debt. These rules are expected to be finalized in the first quarter of 2011. However, the SEC has reminded companies that they expect to see a thorough discussion of liquidity and capital resources in the management’s discussion and analysis under the existing requirements.

Dodd-Frank Act. The Dodd-Frank Act is considered to be the most extensive overhaul of the U.S. financial system since the 1930s and will require the SEC to write over 100 rules and conduct numerous studies. You can follow the progress of these rules on the SEC's website.

Of particular interest to public companies are the requirements for companies to establish policies to claw back incentive compensation paid to executives in the event of a financial statement restatement and to provide disclosures regarding the ratio of CEO compensation to median employee compensation.

Convergence. While the SEC continues its consideration of whether to adopt international accounting standards (IFRS), the FASB and its international counterpart, the IASB, have their own work plan to complete 11 major projects in 2011 to converge US GAAP and IFRS. Although the effective dates of these standards have not been determined, this level of standard setting activity in such a short time is unprecedented. The two projects that are getting most of the attention are a proposal to replace all industry-specific revenue recognition guidance with one comprehensive standard, and a proposal that would require all lease obligations to be recorded on the balance sheet.

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

2011-02-03T09:36:00.004-07:00

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.

Leases--Comments on IASB FASB Exposure Draft

2011-01-28T11:27:00.004-07:00

Following is a summary of recent comments received by the IASB and FASB on the Leases Exposure Draft, courtesy of PWC

Scope exclusions
While there was general agreement that most arrangements accounted for as leases today should be governed by the standard, many have encouraged the boards to revisit the proposals on short-term leases and leases of intangibles.

Lessee accounting
Many respondents supported the right-of-use model for lessees, at least with respect to the balance sheet implications for simple leases. However, many disagreed with the measurement provisions for more complex leases. In addition, many expressed concern about the “deemed financing” premise and resultant accelerated expense recognition pattern in the ED.

Lessor accounting
Views on lessor accounting are more diverse. The ED proposes a “hybrid” model under which certain leases are accounted for under a performance obligation approach while others would be required to use a derecognition approach. Many believe that the case has not yet been made that the proposed hybrid model for lessor accounting represents a significant enough improvement from the current model to warrant a change. Some believe that a hybrid model is necessary to deal with different business models (e.g., financing models vs. contracts to use) while others believe a hybrid model is not consistent with concepts in the revenue recognition exposure draft and that only a derecognition approach is warranted.

Extension options
Almost all respondents disagreed with the definition of lease term as the longest possible term “more-likely-than-not” to occur. They believe this may result in recognition of amounts for extension periods that do not meet the definition of a liability. They also believe this approach would be highly subjective in application, result in significant volatility and be subject to manipulation in practice. While most respondents believe that some extension options should be included, there were differing views regarding the threshold at which respondents believe they should be recognized.

Contingent payments
The ED requires that contingent payments generally be included in the amounts recorded using a “probability-weighted” approach. Most respondents were critical of a probability-weighted approach and believe a “best estimate” approach is more appropriate. Some respondents also believe that certain types of contingencies (usage, performance, or index-based) should be treated differently—although there were differing views as to which types should be included and why.

Profit and loss recognition pattern
The ED includes an inherent financing element in the right-of-use model. This model results in a recognition pattern for the lessee that changes the expense recognition pattern of operating leases from rental expense to a combination of amortization and interest expense. It will also typically result in the acceleration of expenses compared to today's operating lease accounting and the timing of cash payments. Many respondents questioned the usefulness of this model.

Purchase options
The ED proposes that purchase options should be accounted for only when exercised. Many respondents believe they should be considered as part of the lease model.

Multiple-element contracts, executory costs and service arrangements
The ED includes guidance for distinguishing a lease from an in-substance sale/purchase and from a service contract. It also includes guidance for identifying the service components of an arrangement that contains a lease. Many respondents (both lessee and lessor) had concerns about accounting for an embedded lease in a multiple-element arrangement in which the vendor can replace the underlying asset or there is no specific asset identified in the contract. Multiple-element contracts that include a lease and a service arrangement represent a significant concern to many, especially for real estate leases. Many respondents believe the standard should specifically exclude service and executory costs from lease payments rather than try to link to the definition of a distinct service under the revenue recognition exposure draft. Many respondents have also raised concerns about the potential volume of “embedded leases” which now could have a significant accounting impact on multiple-element arrangements.

Reassessment
The ED provides for reassessment of significant assumptions if facts and circumstances indicate there would be a significant change in the amounts from a previous reporting period. Many respondents raised concerns about the operationality and cost/benefit of this approach. These respondents indicated that an annual reassessment may be appropriate while others suggested a “trigger-based” reassessment.

Transition
The ED provides for a “simplified retrospective” approach and does not allow for early adoption. While many respondents supported this approach for cost/benefit reasons, others observed that it creates an artificial and nonrecurring expense pattern. Many respondents also asked for more guidance on transition issues in general (e.g., use of hindsight) and for specific issues (e.g., sale leasebacks, leveraged leases and build-to-suit leases).

Disclosure
Most respondents supported the overall disclosure objectives, but believe that preparers should be allowed to exercise judgment in determining the volume of disclosures and financial statement presentation.

The SEC’s IFRS Hit List

2011-01-27T06:30:00.002-07:00

Companies that will be filing IFRS financial statements for the first time in 2011 (hello to all 377 Canadian Foreign Private Issuers!) will potentially have their 2011 statements subject to review by the SEC. Following are the SEC’s top ten IFRS issues, from a speech made at the 2010 AICPA National Conference on Current SEC and PCAOB Developments:

1. Financial instruments – IAS 39, 32 and IFRS 7
2. Impairment of assets – IAS 36
3. Financial statement presentation -- IAS 1 & 7
4. Operating segments – IFRS 8
5. Revenue -- IAS 18
6. Income taxes – IAS 12
7. Property, plant and equipment – IAS 16
8. Employee benefits – IAS 19
9. Provisions, contingent liabilities – IAS 37
10. Consolidated financial statements -- IAS 27

FASB Reversal a Major Step Toward International Convergence

2011-01-26T09:03:00.005-07:00

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.

Top 50 Most Powerful Accountants

2011-01-13T16:55:00.001-07:00

Check it out. Acountancy Age lists the Financial Power List 2011: accounting intelligence

Best of 2010: Accounting

2011-01-05T14:28:00.004-07:00

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.

Pension Pain

2010-12-01T10:31:00.001-07:00

When the Wall Street Journal talks about accounting it is usually worth reading, so here is their take on the impact of a proposed change to accounting for pensions under IFRS.

Efforts to make pension accounting more transparent could cause corporate profits to become more volatile if gains and losses from pension assets are mingled with results from companies' business operations.

The agency for international accounting standards [the IASB] is expected to take up a proposal next year that would require companies with defined-benefit pensions to report annual changes in the value of their pension assets as part in their income statements. Under current procedures, returns on pension investments and gains and losses in pension-plan assets are accounted for in small increments over several years to keep them from skewing companies' earnings.

The change would provide a more immediate snapshot of companies' pension-plan performance. But U.S. companies, aside from Honeywell International Inc. (HON), have so far been reluctant to voluntarily change their pension accounting. Observers warn that investors could be subjected to bouncier stock prices if earnings become significantly less reliable with the addition of unpredictable gains and losses from pensions.

"If we've learned nothing else over the last three years, it's that the market isn't always rational," said Alan Glickstein, senior consultant for Towers Watson, an employee benefits consultancy. "It's not necessarily a good thing if [the accounting change] just increases earnings volatility."

If the International Accounting Standards Board--the nongovernmental agency for accounting rules used by companies outside the U.S.--adopts the change for pension accounting, observers predict the Financial Accounting Standards Board will follow suit for the sake of consistency and amend the Generally Accepted Accounting Principles used by U.S. companies.

"To the degree that a company wants to make sure that their financials are reflective of their operations, it would make sense to go through a change like this. It would add transparency to the numbers," said Daniel Holland, an analyst for research firm Morningstar Inc.

More than 340 companies in the Standard & Poor's 500 Index have defined-benefit pensions that guarantee employees pension incomes when they retire. To meet these obligations, the companies have set aside a combined $1.22 trillion that is invested in stocks, bonds and other types of investments.

Smoothing out annual gains and losses from defined-benefit pensions has come under increasing scrutiny as regulators dismantle other accounting practices used for decades to wall off pension costs and liabilities from companies' balance sheets and their profit statements.

"The pension volatility has always been there. It's just not measured today. The accounting doesn't require that it be highlighted," said David Larsen, managing director for corporate finance consulting at Duff & Phelps Corp., a financial services and investment banking advisory firm.

Honeywell is the largest U.S. company to begin using market-to-market accounting for its pension. The move is intended to put the brakes on escalating costs for Honeywell's pension. Falling interest rates on bonds used to determine companies' future pension obligations have driven up annual pension costs for all companies with defined-benefit plans. But Honeywell's expenses have been exacerbated by a decision it made in the late 1990s to use a six-year schedule for amortizing pension gains and losses on pension assets and a three-year schedule for smoothing out returns from pension investments. Most companies amortize gains and losses over 10 years or 12 years and account for investment returns over five years.

Honeywell's shorter time frame helped the company lower its pension expenses when asset values soared. But when pension-fund performance tanked in 2008, Honeywell's pension headwinds were magnified in its earnings.

Without the option of switching back to a longer amortization schedule, Honeywell will stop deferring gains and losses. The aerospace and building-systems manufacturer will recognize $5.5 billion in prior asset losses in its 2010 income statement. Going forward, Honeywell will report gains and losses in their entirety during the year they occur.

The change will increase the company's pension costs for this year to $1.61 billion, compared with $791 million under the six-year schedule. But its pension expenses are expected to plunge to $200 million in 2011.

"It takes all that old stuff and puts it behind them," said Howard Silverblatt, an analyst with Standard & Poor's investment services unit.

Once the slate is wiped clean, Honeywell aims to limit its pension expenses to about $200 million a year. Moreover, the company will attempt hold down pension-related volatility in its earnings by making pension asset values and returns more predictable than in the past.

"I can see investors having this fear that every fourth quarter there's going to be this wild swing," Chairman and Chief Executive David Cote said during a Nov. 16 conference call with analysts. "More likely than not, that is not going to happen."

In the coming years, Honeywell plans to shift more of its pension funds from equities to fixed-income investments. That will lower annual returns to 6.5% from 9%, but will lessen Honeywell's exposure to sudden swings in stock values and returns that would contribute to earnings volatility.

If mark-to-market pension accounting becomes the standard, other companies will likely change their investment mix as well, creating a profound shift in the allocation of pension funds the next decade.

"I would expect it to take a while, but pension assets would shift to less volatile securities," Morningstar's Holland said.

-By Bob Tita, Dow Jones Newswires;

Fair Value Fight between FASB, IASB heats Up with Volcker Comments

2010-11-22T11:02:00.001-07:00

The FASB vs IASB fight has heated up substantially following comments by Paul Volcker, an advisor to Barack Obama and former chairman of the US. Federal Reserve Board, and former Chairman of the Trustees of the IFRS Foundation. The FASB wants to expand the use of fair-value accounting to all financial assets, including loans and deposits. This concept is opposed byUS bankers and also somewhat by the IASB, which prefers a milder version of fair value accounting. The battle that is shaping up between opposing forces could determine how much capital banks are required to maintain, and accordingly would determine to some extent how much leverage a bank could utilize.

The FASB proposal could result in the largest U.S. banks writing down the value of their loan portfolios.

Volcker said that treatment of financial instruments has not been resolved because of political pressure. Volcker also said “When you have global corporations operating around the world, and analysts looking at them from around the world, you want one accounting standard.”

The two accounting bodies have worked diligently toward convergence of the two different sets of accounting rules for the past five years. Disagreements are most significant around fair value rules for financial instruments, including derivatives, and rules governing what companies have to consolidate on their balance sheets. Many issues are close to being resolved.

The FASB likes a version of fair value accounting that forces loans and bank deposits to be marked to market values as is already done for banks trading books. Theis would not necessarily affect earnings, since some fair-value adjustments can be recorded in other comprehensive income which goes directly to equity.

The IASB prefers an approach that allows financial assets to stay on the books at original cost if the assets are held to maturity, i.e. for the long term. The IASB says it has no plans to re- open discussion of fair-value accounting, however the FASB and the IASB may eventually move to a middle ground.

Volcker prefers the IASB approach on valuing financial instruments. “You can’t have everything at fair value,” Volcker, said--“I’m not in favor of fair valuing bank loans because we don’t know their fair value anyway. It’s not consistent with the basic business model of commercial banks.”

In a similar episode, a few months earlier, IASB bowed to European Union demands to relax its fair-value rules, letting banks move some assets to a different part of the balance sheet so they wouldn’t have to be marked to market values.

Goldman Sachs Group Inc., the most profitable U.S. securities firm, has said that banks hide losses on loans used to generate investment-banking fees. In a Sept. 1 letter to FASB, Goldman Sachs described how banks lend at below-market rates to win equity and debt-underwriting deals, a practice known as “lend to play.” Goldman Sachs executives have argued that the firm’s practice of marking assets to market value helped it prepare for the credit contraction earlier than rivals.

Looking for Work? Try FASB or IASB

2010-10-12T09:40:00.001-06:00

If you are an accounant with a converged accounting skillset, perhaps there are a couple of jobs youu might be interected in. Both Robert Herz, and Sir David Tweedie, respectively the chairman of the U.A. Financial Accounting Standards Board (FASB) and the head of the International Accounting Standards Board (IASB) are due to retire shortly. Despite the departures of Sir David and Mr Herz, big accounting firms and their clients still expect convergence of standards to top the agenda of their successors.

Both men have had to deal with controversial issues in financial reporting. In particular, fair value accounting for financial assets: and liabilities is a particularly cumbersome issue. In fact, the two men and their accounting bodies have butted heads over this issue, with both business people and politicialns sticking their oars in to the dispute. Recently, the FASB has taken a more principles-based approach, calling for most measurements to be at fair value. IASB has taken a two-category approach, saying that loans and loan-like equivalents held to maturity may be marked at amortised cost, whereas frequently traded instruments should be marked to market. Comments to date are leaning more toward the IASB approach, with “Big Four” accounting firms and many companies on the IASB’s side. Conjecture is that Herz’s replacement may be a pragmatic consensus-builder rather that the principles-based stalwart that herz was.

At IASB, meanwhile, the skills of a politician or diplomat may be required as the EU politicians have in some cases refused to agree to the IASB's proposed standards.