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.
Showing posts with label SEC. Show all posts
Showing posts with label SEC. Show all posts
Thursday, September 8, 2011
Thursday, January 27, 2011
The SEC’s IFRS Hit List
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
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
Monday, April 5, 2010
New Thoughts on Goodwill Impairment Testing
New thoughts on goodwill impairment testing by Marie Leone of CFO.com
Over two-thirds (68%) of U.S. public companies in the United States wrote down goodwill by taking impairment charges in 2008. Total charges were $260 billion according to a report issued by financial advisory firm Duff & Phelps and the Financial Executives Research Foundation. The report examined 2008 financial statements of nearly 6,000 publicly held companies.
As 2009 results are being filed it appears that goodwill write-downs have declined., says Greg Franceschi, who heads up the global financial reporting practice for Duff & Phelps. Since the worst of the financial crisis ended, company market values have increased and accordingly there are fewer goodwill write-offs.
However a new accounting wrinkle has surfaced related to goodwill impairments. At issue is whether companies should determine the fair value of a reporting unit — and thereby the value of the related goodwill — based on either the unit's equity value or its enterprise value. (In general, enterprise value is the sum of the fair value of debt and equity.)
The question was sparked by a December speech given by Evan Sussholz, an accounting fellow in the Office of the Chief Accountant at the Securities and Exchange Commission. In his speech, Sussholz suggested that in certain situations, using an enterprise-value measurement may provide a more economically accurate picture of the reporting unit. His suggestion left preparers and auditors clamoring for a clarification, as companies have historically applied the equity-value approach to impairment testing, says PricewaterhouseCoopers partner Larry Dodyk.
In response, the Financial Accounting Standards Board and the American Institute of Certified Public Accountants have launched efforts to figure out whether additional guidance on the subject is needed. FASB's emerging issues task force is slated to start discussing potential guidance during the second half of the year, while the AICPA is currently working on completing a practice aid, which is a sort of unofficial manual that discusses best practices and concepts that auditors and preparers may want to apply.
Under U.S. GAAP, companies must perform a goodwill impairment test at least once a year to determine if the current value of an acquired reporting unit is worth more or less than its original price. The test is a two-step process in which the company must first compare the fair value of a reporting unit with its original price — the amount the company carries on its books. If the book value exceeds the fair value, then the asset is impaired and a second step is required to measure the amount of the impairment. If the book value is lower than the unit's fair value, then the asset passes the test and nothing more is required.
The confusion over whether to use equity value or enterprise value stems from the seemingly straightforward first step of the test, because the accounting rule is unclear. Sussholz said that originally, the SEC didn't believe the selection of one approach over the other would affect the test outcome. However, since taking a closer look at the practical implications, SEC staffers have acknowledged one unanticipated situation that is a potential problem: when the book value of a reporting unit measured at the equity level is negative.
Intuitively, it might seem that a negative book value would mean a reporting unit is on the verge of bankruptcy, but that may not be the case. Dodyk explains that a single reporting-unit company, for example, may have negative shareholders' equity as a result of unrecognized assets (such as intangibles) that have significant value but don't figure into the equity equation. Heavy borrowing for a leveraged buyout could also send shareholders' equity into negative territory.
Consider what happens in an equity-value impairment test when a reporting unit's book value is negative. By definition, the fair value of common equity cannot be less than zero, because the equity is essentially a call on the company's operations. That means the fair value of a reporting unit measured at the equity level would always be greater than a negative book value, and therefore always pass step one of the impairment test. That would be the case even if significant goodwill exists and the underlying operations of the reporting unit "may be deteriorating," asserted Sussholz.
On the other hand, says Franceschi, testing for impairment at the enterprise level would include the reporting unit's debt burden, providing what Sussholz claimed was a more accurate picture of the company's financial health. To be sure, his speech opened up the possibility that another testing approach may be permitted or required.
Franceschi doesn't believe the additional guidance will cause a significant increase or decrease in goodwill write-offs. But it may require companies to rethink valuation models and approaches, especially if the guidance recommends that companies use more judgment when determining a reporting unit's fair value. "For valuation issues, you can never have something that says, 'This is the way to do it, and the only way to do it,'" he says. "There may be multiple approaches one needs to consider."
Another concern with tinkering with Topic 350 is that it may spark other changes. "Once you open the rules to the goodwill impairment test, you never know where it is going to go," says Dodyk.
Over two-thirds (68%) of U.S. public companies in the United States wrote down goodwill by taking impairment charges in 2008. Total charges were $260 billion according to a report issued by financial advisory firm Duff & Phelps and the Financial Executives Research Foundation. The report examined 2008 financial statements of nearly 6,000 publicly held companies.
As 2009 results are being filed it appears that goodwill write-downs have declined., says Greg Franceschi, who heads up the global financial reporting practice for Duff & Phelps. Since the worst of the financial crisis ended, company market values have increased and accordingly there are fewer goodwill write-offs.
However a new accounting wrinkle has surfaced related to goodwill impairments. At issue is whether companies should determine the fair value of a reporting unit — and thereby the value of the related goodwill — based on either the unit's equity value or its enterprise value. (In general, enterprise value is the sum of the fair value of debt and equity.)
The question was sparked by a December speech given by Evan Sussholz, an accounting fellow in the Office of the Chief Accountant at the Securities and Exchange Commission. In his speech, Sussholz suggested that in certain situations, using an enterprise-value measurement may provide a more economically accurate picture of the reporting unit. His suggestion left preparers and auditors clamoring for a clarification, as companies have historically applied the equity-value approach to impairment testing, says PricewaterhouseCoopers partner Larry Dodyk.
In response, the Financial Accounting Standards Board and the American Institute of Certified Public Accountants have launched efforts to figure out whether additional guidance on the subject is needed. FASB's emerging issues task force is slated to start discussing potential guidance during the second half of the year, while the AICPA is currently working on completing a practice aid, which is a sort of unofficial manual that discusses best practices and concepts that auditors and preparers may want to apply.
Under U.S. GAAP, companies must perform a goodwill impairment test at least once a year to determine if the current value of an acquired reporting unit is worth more or less than its original price. The test is a two-step process in which the company must first compare the fair value of a reporting unit with its original price — the amount the company carries on its books. If the book value exceeds the fair value, then the asset is impaired and a second step is required to measure the amount of the impairment. If the book value is lower than the unit's fair value, then the asset passes the test and nothing more is required.
The confusion over whether to use equity value or enterprise value stems from the seemingly straightforward first step of the test, because the accounting rule is unclear. Sussholz said that originally, the SEC didn't believe the selection of one approach over the other would affect the test outcome. However, since taking a closer look at the practical implications, SEC staffers have acknowledged one unanticipated situation that is a potential problem: when the book value of a reporting unit measured at the equity level is negative.
Intuitively, it might seem that a negative book value would mean a reporting unit is on the verge of bankruptcy, but that may not be the case. Dodyk explains that a single reporting-unit company, for example, may have negative shareholders' equity as a result of unrecognized assets (such as intangibles) that have significant value but don't figure into the equity equation. Heavy borrowing for a leveraged buyout could also send shareholders' equity into negative territory.
Consider what happens in an equity-value impairment test when a reporting unit's book value is negative. By definition, the fair value of common equity cannot be less than zero, because the equity is essentially a call on the company's operations. That means the fair value of a reporting unit measured at the equity level would always be greater than a negative book value, and therefore always pass step one of the impairment test. That would be the case even if significant goodwill exists and the underlying operations of the reporting unit "may be deteriorating," asserted Sussholz.
On the other hand, says Franceschi, testing for impairment at the enterprise level would include the reporting unit's debt burden, providing what Sussholz claimed was a more accurate picture of the company's financial health. To be sure, his speech opened up the possibility that another testing approach may be permitted or required.
Franceschi doesn't believe the additional guidance will cause a significant increase or decrease in goodwill write-offs. But it may require companies to rethink valuation models and approaches, especially if the guidance recommends that companies use more judgment when determining a reporting unit's fair value. "For valuation issues, you can never have something that says, 'This is the way to do it, and the only way to do it,'" he says. "There may be multiple approaches one needs to consider."
Another concern with tinkering with Topic 350 is that it may spark other changes. "Once you open the rules to the goodwill impairment test, you never know where it is going to go," says Dodyk.
Wednesday, March 31, 2010
Contrary Opinions on IFRS
J. Edward Ketz is a professor at Pennsylvania State University. He wrote an interesting article recently on the U.S. approach to IFRS.
On February 24, the SEC issued its "Statement in Support of Convergence and Global Accounting Standards." Curiously, while the SEC did indeed affirm its "strong commitment" to IFRS, it may have unwittingly given voice to the concerns of dissidents. Finally!
The report begins with a documentation of the SEC’s commitment to a set of high-quality accounting standards. Quite naturally, this history includes a discussion of its own report on a principles-based accounting system. The reader should recall that this previous study merely provides a list of unproven assertions about principles-based accounting, including greater comparability for investors and lowered costs of capital for corporations. Rather than providing evidence, the SEC merely enumerates these articles of faith.
At least this time around the SEC adopted a go-slow policy and hoped that the IASB would improve its IFRS in six areas. These concerns question whether IFRS is the Holy Grail it is portrayed to be primarily because of various implementation and administrative issues. Let’s turn to these issues.
First, the SEC says that IFRS must be sufficiently developed to apply the system to the U.S. reporting system. The SEC then indicates there are concerns with respect to the comprehensiveness, the auditability and enforceability, and the consistent and high-quality application of IFRS. The SEC staff notes that commentators have criticized IFRS because they allow savvy managers significant wiggle room to manipulate accounting numbers and disclosures and thwart efforts by auditors to perform high-quality audits. Indeed, some wonder whether principles-based annual reports are even capable of being audited. Another issue raised by the SEC is whether standards will be uniformly enforced around the globe—the answer is of course not. The real questions are how divergent will this enforceability be and what will be its significance.
Second, the SEC probes the independence of the IASB, especially since much of its operating funds comes from corporate donations. Do you think that maybe, just maybe, corporate donors want something in return? Whether the board is free from undue influence won’t require much research since economic theory posits that managers have huge incentives to gain control over the IASB. As an aside, many have criticized the FASB for moving at the pace of a tortoise. Do they realize that the IASB will make the FASB seem like a hare?
Third, will investors understand IFRS? The SEC staff promises to empirically assess the current knowledge of investors about the IFRS. I wouldn’t waste the resources. Except for institutional investors, the answer is they don’t understand IFRS, and they won’t have any incentives to learn until the change is imminent. More importantly, as the costs for learning IFRS are large, we probably shouldn’t worry about investors. Let them depend on the skills and independence of financial statement researchers and analysts.
Fourth, IFRS could have unknown effects in areas other than investments, the domain of the SEC. For example, financial statements are used by industry and anti-trust regulators and federal and state taxing agencies. Will an adoption of IFRS have a perverse effect on national and state policies?
Fifth, the SEC speculates about the impact of adopting IFRS on issuers, including changes to accounting information systems, implications for contracts that depend on accounting numbers, and concerns about corporate governance. My short response is that it’s about time the SEC started thinking about these issues. It is fairly clear to me that the adoption of IFRS will require many issuers to keep dual systems for several years. Annual reports are utilized for too many things to move wholly to IFRS. In turn this will add to the costs of adoption and to its complexity.
Sixth, the SEC mentions human capital readiness. Except for the Big Four and some of the largest corporations, is anybody ready for the transition? If the IASB opened up its data base and supplied users with free training materials, then maybe managers and analysts and accountants could prepare themselves for the transition—unless the banking industry or Congress decides to introduce new and worse problems for the business community.
As I survey this list, I again marvel at the rush to IFRS. The benefits do not appear to match or exceed the costs of the adoption. Nonetheless, I suppose we shall find ourselves employing IFRS within a decade. Hopefully this pause by the SEC will address some of the most glaring challenges.
Of all the issues listed, the most important is this: whether IFRS statements can be audited and what will happen in the courtroom after a firm experiences severe declines in its stock price. I predict that principles-based accounting will become rules as judges and juries fill in the details left out by the accounting profession and create accounting case law. And then where will the benefit be?
On February 24, the SEC issued its "Statement in Support of Convergence and Global Accounting Standards." Curiously, while the SEC did indeed affirm its "strong commitment" to IFRS, it may have unwittingly given voice to the concerns of dissidents. Finally!
The report begins with a documentation of the SEC’s commitment to a set of high-quality accounting standards. Quite naturally, this history includes a discussion of its own report on a principles-based accounting system. The reader should recall that this previous study merely provides a list of unproven assertions about principles-based accounting, including greater comparability for investors and lowered costs of capital for corporations. Rather than providing evidence, the SEC merely enumerates these articles of faith.
At least this time around the SEC adopted a go-slow policy and hoped that the IASB would improve its IFRS in six areas. These concerns question whether IFRS is the Holy Grail it is portrayed to be primarily because of various implementation and administrative issues. Let’s turn to these issues.
First, the SEC says that IFRS must be sufficiently developed to apply the system to the U.S. reporting system. The SEC then indicates there are concerns with respect to the comprehensiveness, the auditability and enforceability, and the consistent and high-quality application of IFRS. The SEC staff notes that commentators have criticized IFRS because they allow savvy managers significant wiggle room to manipulate accounting numbers and disclosures and thwart efforts by auditors to perform high-quality audits. Indeed, some wonder whether principles-based annual reports are even capable of being audited. Another issue raised by the SEC is whether standards will be uniformly enforced around the globe—the answer is of course not. The real questions are how divergent will this enforceability be and what will be its significance.
Second, the SEC probes the independence of the IASB, especially since much of its operating funds comes from corporate donations. Do you think that maybe, just maybe, corporate donors want something in return? Whether the board is free from undue influence won’t require much research since economic theory posits that managers have huge incentives to gain control over the IASB. As an aside, many have criticized the FASB for moving at the pace of a tortoise. Do they realize that the IASB will make the FASB seem like a hare?
Third, will investors understand IFRS? The SEC staff promises to empirically assess the current knowledge of investors about the IFRS. I wouldn’t waste the resources. Except for institutional investors, the answer is they don’t understand IFRS, and they won’t have any incentives to learn until the change is imminent. More importantly, as the costs for learning IFRS are large, we probably shouldn’t worry about investors. Let them depend on the skills and independence of financial statement researchers and analysts.
Fourth, IFRS could have unknown effects in areas other than investments, the domain of the SEC. For example, financial statements are used by industry and anti-trust regulators and federal and state taxing agencies. Will an adoption of IFRS have a perverse effect on national and state policies?
Fifth, the SEC speculates about the impact of adopting IFRS on issuers, including changes to accounting information systems, implications for contracts that depend on accounting numbers, and concerns about corporate governance. My short response is that it’s about time the SEC started thinking about these issues. It is fairly clear to me that the adoption of IFRS will require many issuers to keep dual systems for several years. Annual reports are utilized for too many things to move wholly to IFRS. In turn this will add to the costs of adoption and to its complexity.
Sixth, the SEC mentions human capital readiness. Except for the Big Four and some of the largest corporations, is anybody ready for the transition? If the IASB opened up its data base and supplied users with free training materials, then maybe managers and analysts and accountants could prepare themselves for the transition—unless the banking industry or Congress decides to introduce new and worse problems for the business community.
As I survey this list, I again marvel at the rush to IFRS. The benefits do not appear to match or exceed the costs of the adoption. Nonetheless, I suppose we shall find ourselves employing IFRS within a decade. Hopefully this pause by the SEC will address some of the most glaring challenges.
Of all the issues listed, the most important is this: whether IFRS statements can be audited and what will happen in the courtroom after a firm experiences severe declines in its stock price. I predict that principles-based accounting will become rules as judges and juries fill in the details left out by the accounting profession and create accounting case law. And then where will the benefit be?
Wednesday, March 10, 2010
KPMG Survey: IFRS Glass Half Full or Half Empty?
- Survey shows 49 percent of execs want early IFRS adoption
- Another 50 percent don't think the U.S. should adopt at all
- Majority of executives want greater clarity from SEC
However another half of American business executives (presumably the other half) are not convinced the US should adopt international accounting standards, at all.
In a survey of 2,500 executives by accounting firm KPMG LLP [KPMG.UL], 49 percent said they would like the option to adopt IFRS, which are already used in more than 100 countries, before 2015, if the U.S. does plan to formally make the switch.
KPMG completed the survey completed only two days after the SEC's announcement, found the majority would also like greater clarity on the SEC's IFRS plans.
About 59 percent of the executives polled said a potential move to IFRS in 2015 or 2016 would give their companies enough time to prepare for the change.
Only 15 percent of those polled said that it would not be enough time, and 25 percent said they would be unsure of the impact of a switch.
The questions were asked during a web seminar two days after SEC Chairman Mary Schapiro, said she would delay a final decision on US adoption until 2011, and companies would not be permitted to begin using the rules until at least 2015.
However, almost half of respondents, 49%, said they would like the ability to adopt IFRS earlier before the SEC’s 2015 timetable.
KPMG said that while some uncertainty remains, companies are not slowing their IFRS conversion activities. Only 18 percent of respondents said they will delay their IFRS plans based on the SEC’s February 24 announcement.
Thursday, March 4, 2010
"Can’t-Shoot-Straight SEC" Gets it Right on IFRS
Article from Bloomberg by David Reilly
Can’t-Shoot-Straight SEC Gets This Call Right: David Reilly
Bloomberg-- Every now and then the much-maligned Securities and Exchange Commission gets it right. That was the case this week when it adroitly tapped the brakes on a drive to require U.S. publicly traded companies to adopt international accounting rules.
In doing so, SEC Chairman Mary Schapiro embraced the dream of a global financial language, yet kept the hug loose enough that the agency can ensure such a change isn’t a foregone conclusion or happens on someone else’s timetable.
That was vital because the stakes are so high -- a decision to switch the U.S. accounting system, or not, will affect every investor as well as companies throughout the U.S.
Yet a basic question about international standards remains unanswered. Would it be foolish to adhere to a supposedly uniform, global accounting system when countries don’t consistently enforce rules and have opposing views of the purpose of financial markets themselves?
If Greece is openly admitting to fudging numbers on a national level, you can bet it and others wouldn’t hesitate to twist corporate accounting rules. And let’s not pretend the Chinese communist party is ever going to put the interests of investors over those of the politburo.
That being the case, it’s not clear any common accounting language would really offer investors the kind of comparability they’d hope for.
Until the SEC can provide investors and Congress, which is sure to weigh in at some point, with an answer to how it will deal with that fundamental flaw, the agency would be crazy to rush to switch.
No Rush
That’s why the go-slower approach advocated by the SEC on Feb. 24 was justified. The commission said it would wait until at least the middle of next year to make a decision on whether the U.S. should switch to international rules.
The agency also clarified what it wants to know or see happen before making that decision. Among other steps, it said U.S. and international rules should be more closely aligned and international standards setters should be independent and investor-oriented.
While those conditions weren’t cast in stone, they give the SEC room to further postpone a decision. And, if a switchover took place, the SEC wouldn’t require it until at least 2015.
This contrasts with the more rushed approach to international rules undertaken when Christopher Cox chaired the commission from August 2005 to January 2009.
Making Comparisons Easier
Let’s step back, though. Publicly traded U.S. companies report results according to generally accepted accounting principles set by the Connecticut-based Financial Accounting Standards Board. They are enforced by the SEC. Around the world, many countries have their own accounting regimes.
In a global market, having numerous accounting systems becomes costly for both companies and investors, who can’t easily compare companies in different countries.
A decade ago, an effort was launched to create a set of international standards. This got a huge boost when the European Union required all its publicly traded companies from 2005 to use those rules, which are set by the London-based International Accounting Standards Board.
The hope was always that the U.S. would eventually join in, and the FASB and IASB have been working to converge their standards with that goal in mind.
As it considers a next step, though, the SEC has to weigh just how independent an international body can be and whether a switchover from U.S. rules is in the best interest of U.S. investors. Not all countries share the U.S. view that markets are meant to serve investors.
The SEC’s Dilemma
And political pressure on the IASB, particularly from the EU, has grown recently. Not that politics isn’t an issue in the U.S.: Congress last year browbeat the FASB into easing mark-to- market rules so banks wouldn’t have to recognize losses quickly.
Yet political pressure is an even greater concern at the IASB, given that it is setting rules for use in more than 100 countries. Among them are widely differing views on how accounting rules should be crafted, their fundamental purpose and how they should be enforced.
This leaves the SEC with a dilemma, if it chooses to go international.
It could accept a system that offers uniformity only through United Nations-style consensus. That would mean watered- down rules that sometimes force investor interests to take a back seat to political concerns.
Or the agency will have to insist that different countries and regions may tailor international rules to their own situations. This would result in a global accounting language that has regional and national dialects.
Melding Together
So rules may be comparable, yet not effective, or not that comparable yet more robust.
If dialects become the norm, why not let the FASB and IASB continue melding their rules over a longer period of time? At some point, the rules will be so similar that a costly system switch won’t be needed.
That route has hazards, since the rulemakers may diverge, rather than converge, on key standards. It may also lead other countries to say the U.S. shouldn’t have much say in international rules. The big fear is that staying on the sidelines too long may put U.S. markets at a competitive disadvantage.
Those are risks the SEC should take. With the economy in tatters, financial regulation in flux and investors still jittery, the SEC shouldn’t foist massive change onto markets unless we know what we’re really getting into.
Until then, it makes sense for the U.S. to go it slow and alone for at least a while more.
(David Reilly is a Bloomberg News columnist. The opinions expressed are his own.)
Can’t-Shoot-Straight SEC Gets This Call Right: David Reilly
Bloomberg-- Every now and then the much-maligned Securities and Exchange Commission gets it right. That was the case this week when it adroitly tapped the brakes on a drive to require U.S. publicly traded companies to adopt international accounting rules.
In doing so, SEC Chairman Mary Schapiro embraced the dream of a global financial language, yet kept the hug loose enough that the agency can ensure such a change isn’t a foregone conclusion or happens on someone else’s timetable.
That was vital because the stakes are so high -- a decision to switch the U.S. accounting system, or not, will affect every investor as well as companies throughout the U.S.
Yet a basic question about international standards remains unanswered. Would it be foolish to adhere to a supposedly uniform, global accounting system when countries don’t consistently enforce rules and have opposing views of the purpose of financial markets themselves?
If Greece is openly admitting to fudging numbers on a national level, you can bet it and others wouldn’t hesitate to twist corporate accounting rules. And let’s not pretend the Chinese communist party is ever going to put the interests of investors over those of the politburo.
That being the case, it’s not clear any common accounting language would really offer investors the kind of comparability they’d hope for.
Until the SEC can provide investors and Congress, which is sure to weigh in at some point, with an answer to how it will deal with that fundamental flaw, the agency would be crazy to rush to switch.
No Rush
That’s why the go-slower approach advocated by the SEC on Feb. 24 was justified. The commission said it would wait until at least the middle of next year to make a decision on whether the U.S. should switch to international rules.
The agency also clarified what it wants to know or see happen before making that decision. Among other steps, it said U.S. and international rules should be more closely aligned and international standards setters should be independent and investor-oriented.
While those conditions weren’t cast in stone, they give the SEC room to further postpone a decision. And, if a switchover took place, the SEC wouldn’t require it until at least 2015.
This contrasts with the more rushed approach to international rules undertaken when Christopher Cox chaired the commission from August 2005 to January 2009.
Making Comparisons Easier
Let’s step back, though. Publicly traded U.S. companies report results according to generally accepted accounting principles set by the Connecticut-based Financial Accounting Standards Board. They are enforced by the SEC. Around the world, many countries have their own accounting regimes.
In a global market, having numerous accounting systems becomes costly for both companies and investors, who can’t easily compare companies in different countries.
A decade ago, an effort was launched to create a set of international standards. This got a huge boost when the European Union required all its publicly traded companies from 2005 to use those rules, which are set by the London-based International Accounting Standards Board.
The hope was always that the U.S. would eventually join in, and the FASB and IASB have been working to converge their standards with that goal in mind.
As it considers a next step, though, the SEC has to weigh just how independent an international body can be and whether a switchover from U.S. rules is in the best interest of U.S. investors. Not all countries share the U.S. view that markets are meant to serve investors.
The SEC’s Dilemma
And political pressure on the IASB, particularly from the EU, has grown recently. Not that politics isn’t an issue in the U.S.: Congress last year browbeat the FASB into easing mark-to- market rules so banks wouldn’t have to recognize losses quickly.
Yet political pressure is an even greater concern at the IASB, given that it is setting rules for use in more than 100 countries. Among them are widely differing views on how accounting rules should be crafted, their fundamental purpose and how they should be enforced.
This leaves the SEC with a dilemma, if it chooses to go international.
It could accept a system that offers uniformity only through United Nations-style consensus. That would mean watered- down rules that sometimes force investor interests to take a back seat to political concerns.
Or the agency will have to insist that different countries and regions may tailor international rules to their own situations. This would result in a global accounting language that has regional and national dialects.
Melding Together
So rules may be comparable, yet not effective, or not that comparable yet more robust.
If dialects become the norm, why not let the FASB and IASB continue melding their rules over a longer period of time? At some point, the rules will be so similar that a costly system switch won’t be needed.
That route has hazards, since the rulemakers may diverge, rather than converge, on key standards. It may also lead other countries to say the U.S. shouldn’t have much say in international rules. The big fear is that staying on the sidelines too long may put U.S. markets at a competitive disadvantage.
Those are risks the SEC should take. With the economy in tatters, financial regulation in flux and investors still jittery, the SEC shouldn’t foist massive change onto markets unless we know what we’re really getting into.
Until then, it makes sense for the U.S. to go it slow and alone for at least a while more.
(David Reilly is a Bloomberg News columnist. The opinions expressed are his own.)
Thursday, February 25, 2010
IFRS Roadmap Stretched
The SEC has lengthened its roadmap for adoption of IFRS by U.S. public companies by at least one year. The Commission unanimously approved on Wednesday a new timeline that suggests that 2015 is the earliest possible date for compulsory adoption of IFRS by U.S. public companies.
The SEC also called for more examination of IFRS and a vote in 2011 as to whether to move ahead with required adoption of IFRS.
The new timeline allows companies additional time beyond the previous 2014 deadline in the original road map, set in 2008.
The original road map also would have allowed certain U.S. companies to early adopt IFRS before 2014. The SEC said it is dropping the early adoption option.
The SEC is not excluding the possibility that companies may be permitted to choose between the use of IFRS or U.S. GAAP.
Up for consideration is whether the transition should be optional or mandatory and whether larger companies might transition forst, followed by mid-cap companies, etc.
Issues the SEC will be addressing:
The SEC also called for more examination of IFRS and a vote in 2011 as to whether to move ahead with required adoption of IFRS.
The new timeline allows companies additional time beyond the previous 2014 deadline in the original road map, set in 2008.
The original road map also would have allowed certain U.S. companies to early adopt IFRS before 2014. The SEC said it is dropping the early adoption option.
The SEC is not excluding the possibility that companies may be permitted to choose between the use of IFRS or U.S. GAAP.
Up for consideration is whether the transition should be optional or mandatory and whether larger companies might transition forst, followed by mid-cap companies, etc.
Issues the SEC will be addressing:
- Whether IFRS is sufficiently developed and consistent in application for use as the single set of accounting standards in the U.S. reporting system.
- Ensuring that accounting standards are set by an independent standard setter and for the benefit of investors.
- Investor understanding and education regarding IFRS and how it differs from U.S. GAAP.
Understanding whether U.S. laws or regulations, outside of the securities laws and regulatory reporting, would be affected by a change in accounting standards. - Understanding the impact on companies both large and small, including changes to accounting systems, changes to contractual arrangements, corporate governance considerations and litigation contingencies.
Determining whether the people who prepare and audit financial statements are sufficiently prepared, through education and experience, to convert to IFRS.
SEC Chief Accountant James Kroeker said he could foresee FASB continuing to have a substantive role moving forward on IFRS, even post-transition.
Thursday, January 14, 2010
Why IFRS Adoption will Slow Down in the U.S.
Recent political battles in Europe over IFRS may have slowed the timeline on progress of adoption of an IFRS road map in the U.S.
Reports suggest that the International Accounting Standards Board is in turmoil over the independence of standard-setters among other issues. With the U.S. watching on the sidelines, conflicting signals are being sent and questions are being asked about what the rush is toward adoption of IFRS in the U.S.—if the IASB, which sets IFRS standards, can’t agree on things, why would the U.S. buy in?
Politics won’t go away if and when the U.S. buys in to IFRS. The U.S. will not submit to the whims of accounting standards controlled by Europe, especially with the French government recently refusing to adopt certain IFRS standards affecting financial institutions. That is why the SEC has called for certainty about governance and funding before it sets a firm adoption date for IFRS.
In a recent article, Alfred M. King, vice chairman of Marshall & Stevens, a financial valuation and consulting practice cited six IFRS myths—a bit too late for Canadians, who are on track to adopt in 2011, and Australia and Europe, who have already adopted.
What follows below is Mr. King's article.
SIX IFRS MYTHS
No. 1: IFRS will improve U.S. accounting. I have yet to see any proof that financial reporting by U.S. companies will be improved if we substitute IFRS for GAAP. However one slices it, accounting is an artificial construct. That GAAP and IFRS are different is self-evident. That IFRS is superior to GAAP is an assertion, not a proven hypothesis. The principal argument of proponents is that IFRS is "principles-based" while GAAP is "rules-based."
Who says principles are better than rules? If IFRS is so superior, shouldn't it produce better economic outcomes? Few people would support the thesis that the U.S. economy somehow suffers in comparison to countries that use IFRS - our capital markets are larger and stronger.
If IFRS is superior, economic data do not make that case. That leads us to principles versus rules.
No. 2: IFRS is principles-based while GAAP is rules-based. Why do we have rules-based accounting in the U.S.? Because auditors want certainty against the threat of lawsuits. The proponents of IFRS have not asserted that the legal system in our country will be modified to prohibit class-action lawsuits against accounting firms. Until or unless the legal system changes, auditors need the protection they get when they follow accounting "rules."
Further, every observer with deep IFRS experience says the same thing: Whenever an IFRS accounting issue arises, the usual response is, "What does GAAP say?" In other words, IFRS itself defers to GAAP as being intellectually superior.
No. 3: To be competitive, U.S. companies must adopt IFRS. This assertion sounds good, but it's only a sound bite. There is not a shred of evidence either that accounting under GAAP is a hindrance or that there would be any positive change in economic performance were IFRS to become the dominant accounting system in the U.S. The track record of the countries in the EU, however, does suggest a high probability of economic decline.
IFRS usage worldwide might make the task of security analysts easier, but within both GAAP and IFRS there are still significant differences among companies in the same industry. That adoption of IFRS will suddenly make accounting differences disappear flies in the face of experience over the last 75 years.
No. 4: To be a good international citizen we cannot continue to be the only country with GAAP. Hogwash. This could easily be turned upside down by an assertion that IFRS users would be better citizens were they to adopt GAAP. After all, the U.S. accounts for a substantial portion of global GDP. Perhaps the economic health of many European firms is worsened by IFRS. Indeed, they might be better off with a more robust accounting system, i.e., GAAP.
No. 5: We are going to do it sooner or later, so why not start now? This sounds like the used-car salesman who says, "If you don't buy this beauty (wreck?) today, you'll be left behind tomorrow."
Implicit in this concept is that convergence will happen because of some innate superiority in IFRS. The real issue is that proponents fear a public debate with knowledgeable opponents of this bad idea. Advocates say that the faster the U.S. gets on board, the sooner we will see the "benefits" of IFRS. But what are those benefits?
No. 6: The upfront costs of conversion or convergence will be more than offset by future savings. That there would be substantial cost in converting to IFRS is a given. To companies, that cost would represent cash outlays to auditors and consultants. No wonder the major firms support IFRS. They see tons of revenue awaiting them.
The costs to companies are real and tangible. The future savings are speculative and opaque. Will companies spend less time on internal controls and financial reporting if IFRS replaces GAAP? If that is the case, let IFRS proponents prove the case. Not assert it - prove it.
Much more likely is that the cost to companies of developing and disseminating financial information under IFRS will be about the same as it is today, once the initial conversion costs are past. So where will these savings come from? Maybe, like the current health care debate, the Congressional Budget Office could "score" a conversion to IFRS. Skepticism abounds that the Obama administration's estimate of cost savings from its health care proposals will ever come to pass. Will Medicare really be reduced by $400 or $500 billion?
It is possible that IFRS can generate savings. But where the savings will come from, and whether anyone other than consultants and accounting firms will actually gain, appear to be well-kept secrets.
KING'S CONCLUSIONS--Mr. King's conclusions are set out below.
There appears to be a rush to judgment to dump GAAP and embrace IFRS. But once we see who benefits from such a change, the case for IFRS becomes much weaker.
It is up to IFRS supporters to lay out a detailed explanation of all the costs and to quantify all the benefits. Hiding behind generalizations such as we must be good corporate world citizens or principles are better than rules does not provide rigorous support to offset the known costs that switching to IFRS would entail.
Reports suggest that the International Accounting Standards Board is in turmoil over the independence of standard-setters among other issues. With the U.S. watching on the sidelines, conflicting signals are being sent and questions are being asked about what the rush is toward adoption of IFRS in the U.S.—if the IASB, which sets IFRS standards, can’t agree on things, why would the U.S. buy in?
Politics won’t go away if and when the U.S. buys in to IFRS. The U.S. will not submit to the whims of accounting standards controlled by Europe, especially with the French government recently refusing to adopt certain IFRS standards affecting financial institutions. That is why the SEC has called for certainty about governance and funding before it sets a firm adoption date for IFRS.
In a recent article, Alfred M. King, vice chairman of Marshall & Stevens, a financial valuation and consulting practice cited six IFRS myths—a bit too late for Canadians, who are on track to adopt in 2011, and Australia and Europe, who have already adopted.
What follows below is Mr. King's article.
SIX IFRS MYTHS
No. 1: IFRS will improve U.S. accounting. I have yet to see any proof that financial reporting by U.S. companies will be improved if we substitute IFRS for GAAP. However one slices it, accounting is an artificial construct. That GAAP and IFRS are different is self-evident. That IFRS is superior to GAAP is an assertion, not a proven hypothesis. The principal argument of proponents is that IFRS is "principles-based" while GAAP is "rules-based."
Who says principles are better than rules? If IFRS is so superior, shouldn't it produce better economic outcomes? Few people would support the thesis that the U.S. economy somehow suffers in comparison to countries that use IFRS - our capital markets are larger and stronger.
If IFRS is superior, economic data do not make that case. That leads us to principles versus rules.
No. 2: IFRS is principles-based while GAAP is rules-based. Why do we have rules-based accounting in the U.S.? Because auditors want certainty against the threat of lawsuits. The proponents of IFRS have not asserted that the legal system in our country will be modified to prohibit class-action lawsuits against accounting firms. Until or unless the legal system changes, auditors need the protection they get when they follow accounting "rules."
Further, every observer with deep IFRS experience says the same thing: Whenever an IFRS accounting issue arises, the usual response is, "What does GAAP say?" In other words, IFRS itself defers to GAAP as being intellectually superior.
No. 3: To be competitive, U.S. companies must adopt IFRS. This assertion sounds good, but it's only a sound bite. There is not a shred of evidence either that accounting under GAAP is a hindrance or that there would be any positive change in economic performance were IFRS to become the dominant accounting system in the U.S. The track record of the countries in the EU, however, does suggest a high probability of economic decline.
IFRS usage worldwide might make the task of security analysts easier, but within both GAAP and IFRS there are still significant differences among companies in the same industry. That adoption of IFRS will suddenly make accounting differences disappear flies in the face of experience over the last 75 years.
No. 4: To be a good international citizen we cannot continue to be the only country with GAAP. Hogwash. This could easily be turned upside down by an assertion that IFRS users would be better citizens were they to adopt GAAP. After all, the U.S. accounts for a substantial portion of global GDP. Perhaps the economic health of many European firms is worsened by IFRS. Indeed, they might be better off with a more robust accounting system, i.e., GAAP.
No. 5: We are going to do it sooner or later, so why not start now? This sounds like the used-car salesman who says, "If you don't buy this beauty (wreck?) today, you'll be left behind tomorrow."
Implicit in this concept is that convergence will happen because of some innate superiority in IFRS. The real issue is that proponents fear a public debate with knowledgeable opponents of this bad idea. Advocates say that the faster the U.S. gets on board, the sooner we will see the "benefits" of IFRS. But what are those benefits?
No. 6: The upfront costs of conversion or convergence will be more than offset by future savings. That there would be substantial cost in converting to IFRS is a given. To companies, that cost would represent cash outlays to auditors and consultants. No wonder the major firms support IFRS. They see tons of revenue awaiting them.
The costs to companies are real and tangible. The future savings are speculative and opaque. Will companies spend less time on internal controls and financial reporting if IFRS replaces GAAP? If that is the case, let IFRS proponents prove the case. Not assert it - prove it.
Much more likely is that the cost to companies of developing and disseminating financial information under IFRS will be about the same as it is today, once the initial conversion costs are past. So where will these savings come from? Maybe, like the current health care debate, the Congressional Budget Office could "score" a conversion to IFRS. Skepticism abounds that the Obama administration's estimate of cost savings from its health care proposals will ever come to pass. Will Medicare really be reduced by $400 or $500 billion?
It is possible that IFRS can generate savings. But where the savings will come from, and whether anyone other than consultants and accounting firms will actually gain, appear to be well-kept secrets.
KING'S CONCLUSIONS--Mr. King's conclusions are set out below.
There appears to be a rush to judgment to dump GAAP and embrace IFRS. But once we see who benefits from such a change, the case for IFRS becomes much weaker.
It is up to IFRS supporters to lay out a detailed explanation of all the costs and to quantify all the benefits. Hiding behind generalizations such as we must be good corporate world citizens or principles are better than rules does not provide rigorous support to offset the known costs that switching to IFRS would entail.
Wednesday, January 13, 2010
SEC and Goodwill Impairment
In the current economic environment, the SEC continues to ask issuers to support their assertions around goodwill impairment. SEC staff comments often arise when a company’s revenues significantly decline or when market capitalization significantly declines below book value, since such declines may indicate impairments in intangible assets and goodwill.
SEC staff also request additional disclosures about goodwill impairments. SEC staff have indicated that in future they will request even more disclosures about how the conditions that caused impairment will affect a company’s business in the future.
Documentation of support for impairment test results is important as SEC staff includes valuation experts who may request and review a company’s goodwill valuation reports.
The staff has also been asking for more robust and comprehensive disclosures about goodwill impairments, including the following:
SEC staff also request additional disclosures about goodwill impairments. SEC staff have indicated that in future they will request even more disclosures about how the conditions that caused impairment will affect a company’s business in the future.
Documentation of support for impairment test results is important as SEC staff includes valuation experts who may request and review a company’s goodwill valuation reports.
The staff has also been asking for more robust and comprehensive disclosures about goodwill impairments, including the following:
- Policies for impairment testing
- Organization of reporting units
- Goodwill allocated to the reporting units
- Description of the steps performed to review goodwill for recoverability
- Nature of the valuation techniques used, including descriptions of the significant estimates and assumptions used to determine the fair value of the reporting units
- Results of the most recently completed impairment tests.
Examples of SEC Comments
Goodwill Impairment Testing — We see that goodwill comprises approximately [XX%] of your assets at [year-end]. We also note that revenues and net income continued to decline in the first quarter of 2009 due to decreases in volume, a slowdown in the economy, declining demand from the [XXX] and [YYY] markets and increased competition from imports. Please tell us how you considered these factors in determining whether goodwill was impaired at [year-end]. In addition, tell us whether these items are indicators of potential impairment that would require you to perform a goodwill impairment analysis subsequent to [year-end].
Goodwill Impairment Testing — We note that you recognized a goodwill impairment charge during the year. . . . In the interest of providing investors with a better insight into management’s judgments in accounting for goodwill impairments, please revise future filings to provide the following disclosures as part of your critical accounting policy:
- The reporting unit level at which you test goodwill for impairment and your basis for that determination;
- Sufficient information to enable an investor to understand how you estimate the fair value of your reporting units and why management selected that method as being the most meaningful in preparing your goodwill impairment analyses;
- A . . . description of the material assumptions used;
- If applicable, how the assumptions and methodologies used for valuing goodwill in the current year have changed since the prior year, highlighting the impact of any changes; and
- If or how you consider your market capitalization relative to your net book value in evaluating goodwill for impairment.
Goodwill Impairment Testing — We note there was a significant decline in your market capitalization during the third quarter. . . . It appears this is a triggering event that could require you to reassess your goodwill for impairment. Please tell us what consideration you gave to reassessing the recoverability of your goodwill in the third quarter. If you did not perform impairment tests, please explain why. To the extent that impairment tests were performed tell us how you determined that no impairment existed including in your response what impact the current economic environment had on your cash flow assumptions.
Long-Lived-Asset Impairment Testing — Please revise to describe the impaired long-lived assets or asset groups, the facts and circumstances leading to the impairments and the segment in which impaired long-lived assets or asset groups are reported.
Wayne Carnall, chief accountant in the SEC’s Division of Corporation Finance, recently observed that even though “registrants have provided voluminous disclosures regarding goodwill impairments within the critical accounting policy section of [MD&A], it is not always clear how the information is meaningful to investors.” The disclosures have often focused on the noncash nature of the goodwill impairment but have not addressed the business and economic conditions that gave rise to the charge. We understand that the SEC staff will be asking for more disclosures in MD&A about what the conditions that resulted in impairments mean to the registrant’s business as well as for more forward-looking information about the risk of future impairments, such as:
- Percentage by which the fair value of the reporting unit exceeds its carrying value as of the most recent step 1 test
- Goodwill allocated to the reporting unit
- Assumptions that drive the estimated fair value and a discussion of the uncertainty associated with the key assumptions
- Discussion of any potential events, circumstances, or both, that could have a negative effect on the estimated fair value
- Carnall also stated that the SEC staff “is considering providing . . . guidance in the near-term to provide registrants with a better understanding of its expectations in this area.”
Control Premium and Goodwill Impairment
Robert Fox, a professional accounting fellow in the SEC’s Office of the Chief Accountant, recently raised several points about goodwill impairment. For example, he remarked that the market capitalization of a registrant may not fully reflect the aggregate fair values of all the registrant’s reporting units. Mr. Fox pointed to ASC 350-20-35-22 and 35-23 (formerly paragraph 23 of Statement 142), noting that “an entity might derive ‘substantial value’ from the ability to obtain control.” Accordingly, this control premium may cause the fair value of all the registrant’s reporting units to exceed the registrant’s market capitalization. He also indicated that while it would be “prudent” for an entity to reconcile the aggregate fair value of its reporting units to its market capitalization, the entity should also consider other factors when assessing goodwill for impairment.
Tuesday, December 8, 2009
AICPA SEC Conference: No Deadline for IFRS Adoption Yet
Those waiting for clarity from the SEC regarding its road map for adopting International Financial Reporting Standards in the U.S. are still waiting following a speech by the agency’s chief accountant Monday.
In an October speech, Chief Accountant James Kroeker said the Commission would provide greater clarity on the future of its proposed road map by Dec. 21. In his speech Monday at an AICPA conference in Washington, he gave few additional details, but added, “You can expect to hear more from us in the short term.”
However, during a question and answer session, Kroeker addressed issuers’ concerns over whether they should invest in making changes to their systems. “It’s something that I think you can all expect we’re taking very seriously,” said Kroeker. “If, for example, there was a determination about a date, I don’t think you’re going to wake up in the morning and realize that date means you suddenly have to convert tomorrow to IFRS.”
Kroeker emphasized that the effect on investors would take precedence over other concerns in the SEC’s decision process. “I believe the fundamental focus of our evaluation of implementing a single set of high quality standards must be on the impact to investors,” Kroeker said. “I believe that implementing a set of global accounting standards for U.S. issuers can and must be done only in a manner that is beneficial to U.S. capital markets and consistent with the SEC’s mission of protecting investors.”
While acknowledging that there was no clear consensus on how to conduct the transition, Kroeker highlighted “widespread and strong support” from investors and issuers for U.S. publicly-held companies to migrate to a single set of global accounting standards.
He went on to outline SEC considerations that had similarities to milestones laid out in the SEC’s proposed road map including:
In an October speech, Chief Accountant James Kroeker said the Commission would provide greater clarity on the future of its proposed road map by Dec. 21. In his speech Monday at an AICPA conference in Washington, he gave few additional details, but added, “You can expect to hear more from us in the short term.”
However, during a question and answer session, Kroeker addressed issuers’ concerns over whether they should invest in making changes to their systems. “It’s something that I think you can all expect we’re taking very seriously,” said Kroeker. “If, for example, there was a determination about a date, I don’t think you’re going to wake up in the morning and realize that date means you suddenly have to convert tomorrow to IFRS.”
Kroeker emphasized that the effect on investors would take precedence over other concerns in the SEC’s decision process. “I believe the fundamental focus of our evaluation of implementing a single set of high quality standards must be on the impact to investors,” Kroeker said. “I believe that implementing a set of global accounting standards for U.S. issuers can and must be done only in a manner that is beneficial to U.S. capital markets and consistent with the SEC’s mission of protecting investors.”
While acknowledging that there was no clear consensus on how to conduct the transition, Kroeker highlighted “widespread and strong support” from investors and issuers for U.S. publicly-held companies to migrate to a single set of global accounting standards.
He went on to outline SEC considerations that had similarities to milestones laid out in the SEC’s proposed road map including:
- Carefully and fully assess U.S. investors’ understanding of and perspectives on IFRS;
- The development and application of IFRS, particularly for its use as a single set of standards within the U.S. capital markets;
- The impact on the U.S. regulatory environment;
- Preparer considerations including changes to accounting systems, changes to contractual agreements, corporate governance considerations and litigation contingencies;
- Human capital readiness; and
- The role of the FASB in achieving the goal of a single set of global standards.
He emphasized the fundamental nature of changes currently being made to both IASB and U.S. GAAP under the boards’ Memorandum of Understanding (MoU) which identifies major projects due to be completed jointly by June 2011. “If revenue recognition is going to be changing and the platform in the U.S. and the platform under IFRS is changing, I don’t know how an entity would go about putting a system in place to adopt IFRS.”
But he seemed to indicate that the Commission does not plan to wait until after FASB and IASB complete their MoU projects before providing more clarity on its intentions. “That doesn’t mean people don’t need or want a greater level of clarity; I said earlier you can expect to hear more from us in the short term.”
But Kroeker said that regardless of future action by the SEC he believes it is important for “FASB to continue to work closely with the IASB to raise the quality of financial reporting standards in the U.S. and around the globe.”
Original article by Matthew G. Lamoreaux,
Tuesday, November 17, 2009
Accountants to Politicians, Bankers: Hands Off Accounting Standards
Leaders of the American Institute of CPAs and the Center for Audit Quality told legilators that bankers should not regulate accounting.
The accounting and auditing organizations are worried about proposed legislation setting up a systemic risk regulator for the financial sector. The legislation proposes creation of an oversight council that would have the ability to change accounting standards in the event of a crisis—replacing the FASB as SEC’s acconting standard-setter.
The Centre for Audit Quality states that standards are for the benefit of investors so that they can get the information that they need so that they can make valid investment decisions, and that the SEC acts as an investor advocate and is the right oversight party for helping the FASB maintain independent standard setting. Having financial and banking regulators be part of that process with veto power over accounting and auditing standards is not a good model. Particularly in this time of financial crisis, it is a bit ironic that we would be talking about watering down the process that’s designed to protect investors.”
AICPA president and CEO Barry Melancon noted that banking regulators already have the ability to adjust capital requirements and the SEC can suspend accounting rules when needed, as the SEC has the ability to suspend accounting rules, even without a crisis situation. Accountants fear a circumvention of the rule of due process in the accounting standard-setting process.
The legislation would go against SEC chair Mary Schapiro’s recent warning against interfering with the independence of the accounting standard-setting process, which seh referred to as “race for the bottom”.
The accounting and auditing organizations are worried about proposed legislation setting up a systemic risk regulator for the financial sector. The legislation proposes creation of an oversight council that would have the ability to change accounting standards in the event of a crisis—replacing the FASB as SEC’s acconting standard-setter.
The Centre for Audit Quality states that standards are for the benefit of investors so that they can get the information that they need so that they can make valid investment decisions, and that the SEC acts as an investor advocate and is the right oversight party for helping the FASB maintain independent standard setting. Having financial and banking regulators be part of that process with veto power over accounting and auditing standards is not a good model. Particularly in this time of financial crisis, it is a bit ironic that we would be talking about watering down the process that’s designed to protect investors.”
AICPA president and CEO Barry Melancon noted that banking regulators already have the ability to adjust capital requirements and the SEC can suspend accounting rules when needed, as the SEC has the ability to suspend accounting rules, even without a crisis situation. Accountants fear a circumvention of the rule of due process in the accounting standard-setting process.
The legislation would go against SEC chair Mary Schapiro’s recent warning against interfering with the independence of the accounting standard-setting process, which seh referred to as “race for the bottom”.
Thursday, November 12, 2009
High Profile Accounting Monitoring Board for IFRS Hints at Support for Convergence from U.S.; SEC's Schapiro is a member
Talks to harmonise standards receive boost from a high-powered international oversight body this week.
The oversight board, known as the Monitoring Board, said in a statement that it was “pleased” by the approach of both boards.
The full statement:
“The Monitoring Board welcomes the commitment of the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) to implement enhancements to provide greater transparency to the standard setting process and to increase their efforts to reach conclusions in these major projects.
The commitment of the IASB and FASB in the joint statement issued on 5 November is endorsed by the Trustees of their respective oversight bodies, the International Accounting Standards Committee Foundation and the Financial Accounting Foundation.
The Monitoring Board believes that efforts of the IASB and the FASB will result in a set of high-quality international accounting standards that are not only converged but that improve the information provided to investors.
The Monitoring Board is pleased by the responsive approach of the IASB and the FASB to address concerns regarding the potential for the IASB and the FASB to reach different conclusion on the major projects in the Memorandum of Understanding and the impact that would have on the potential for global accounting standards.”
The members of the Monitoring Board are:
Hans Hoogervorst (Chairman) Chairman Hoogervorst represents the IOSCO Technical Committee on the Monitoring Board and is the head of the Netherlands Authority for the Financial Market
The Honorable Takafumi Sato Commissioner of the JFSA
Guillermo LarraÃn Chairman of the IOSCO Emerging Markets Committee and the Superintendencia de Valores y Seguros of Chile
Mary Schapiro Chairman of the US SEC
Observers
Sylvie Matherat Representative of the Basel Committee on Banking Supervision
The oversight board, known as the Monitoring Board, said in a statement that it was “pleased” by the approach of both boards.
The full statement:
“The Monitoring Board welcomes the commitment of the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) to implement enhancements to provide greater transparency to the standard setting process and to increase their efforts to reach conclusions in these major projects.
The commitment of the IASB and FASB in the joint statement issued on 5 November is endorsed by the Trustees of their respective oversight bodies, the International Accounting Standards Committee Foundation and the Financial Accounting Foundation.
The Monitoring Board believes that efforts of the IASB and the FASB will result in a set of high-quality international accounting standards that are not only converged but that improve the information provided to investors.
The Monitoring Board is pleased by the responsive approach of the IASB and the FASB to address concerns regarding the potential for the IASB and the FASB to reach different conclusion on the major projects in the Memorandum of Understanding and the impact that would have on the potential for global accounting standards.”
The members of the Monitoring Board are:
Hans Hoogervorst (Chairman) Chairman Hoogervorst represents the IOSCO Technical Committee on the Monitoring Board and is the head of the Netherlands Authority for the Financial Market
The Honorable Takafumi Sato Commissioner of the JFSA
Guillermo LarraÃn Chairman of the IOSCO Emerging Markets Committee and the Superintendencia de Valores y Seguros of Chile
Mary Schapiro Chairman of the US SEC
Observers
Sylvie Matherat Representative of the Basel Committee on Banking Supervision
Monday, November 9, 2009
SEC Hints at U.S. IFRS Adoption
Following a joint meeting of the IASB and the FASB last week, SEC chairman Mary Schapiro provided a hint on U.S intentions on convergence with IFRS.
Schapiro read a 40-word statement last week that included the words "I am greatly encouraged by the commitment of the IASB and the FASB to provide greater transparency to the standard setting process and their convergence efforts. I believe that these efforts will result in improved financial information provided to investors."
Schapiro and the Obama administration have given conflicting signals in the past as to what direction the SEC would take in light of the financial crisis. She has been quiet on the subject of IFRS convergence since taking over as SEC Chairman last in January. Schapiro has now provided a degree of direction for companies looking to decide whether to ramp up their IFRS adoption efforts. The SEC have said that they will decide in 2011 whether U.S. companies will switch from U.S. GAAP to IFRS. The SEC had previously hinted at what the convergence timeline would be.
The IFRS road map would have the largest companies reporting under IFRS in 2014, with all public companies following by 2016. The SEC has sought feedback and received over 200 comment letters. The comments have not had an overall theme and 200 is a small number considering the number of potential stakeholders, which include public companies, investors such as pension funds mutual fund issuers, auditors, educators, and others.
Some U.S.-based companies, such as Microsoft have ramped up their convergence efforts and companies like United Technologies have made a decision to switch to IFRS ahead of the SEC's decision. These companies have significant operations in countries that have already converged, such as the EU. Ultimately they will save on accounting and audit costs by converging.
The SEC has previously indicated that there are a number of significant issues to be resolved including working out convergence paths for differences between IFRS and U.S. GAAP on critical issues and funding and governance.
Schapiro read a 40-word statement last week that included the words "I am greatly encouraged by the commitment of the IASB and the FASB to provide greater transparency to the standard setting process and their convergence efforts. I believe that these efforts will result in improved financial information provided to investors."
Schapiro and the Obama administration have given conflicting signals in the past as to what direction the SEC would take in light of the financial crisis. She has been quiet on the subject of IFRS convergence since taking over as SEC Chairman last in January. Schapiro has now provided a degree of direction for companies looking to decide whether to ramp up their IFRS adoption efforts. The SEC have said that they will decide in 2011 whether U.S. companies will switch from U.S. GAAP to IFRS. The SEC had previously hinted at what the convergence timeline would be.
The IFRS road map would have the largest companies reporting under IFRS in 2014, with all public companies following by 2016. The SEC has sought feedback and received over 200 comment letters. The comments have not had an overall theme and 200 is a small number considering the number of potential stakeholders, which include public companies, investors such as pension funds mutual fund issuers, auditors, educators, and others.
Some U.S.-based companies, such as Microsoft have ramped up their convergence efforts and companies like United Technologies have made a decision to switch to IFRS ahead of the SEC's decision. These companies have significant operations in countries that have already converged, such as the EU. Ultimately they will save on accounting and audit costs by converging.
The SEC has previously indicated that there are a number of significant issues to be resolved including working out convergence paths for differences between IFRS and U.S. GAAP on critical issues and funding and governance.
Thursday, November 5, 2009
SEC Calls for Less Words, More Substance in Financial Reporting
The SEC has called for corporations to stop providing thousands of pages of mind numbing needless boiler plate information in financial reports.
In recent speeches the SEC seemed to admit to some culpability in the excessive disclosures by stating that it is looking at its rules to determine whether companies are being asked to provide the right information.
The SEC complained about companies that provide laundry lists of risks they may face in dense lengthy reports containing impenetrable legalistic language.
One staffer said that quality of analysis is not measured by the length.
The SEC has pushed for plain language reporting for years. Litigation-shy companies have not been able to simplify reporting in the way the SEC desires.
In 2008, the SEC adopted rules for mutual funds to make their prospectuses easier for investors to read, understand and access.
The agency has also convened panels to make MD&A more accessible to unsophisticated investors.
In recent speeches the SEC seemed to admit to some culpability in the excessive disclosures by stating that it is looking at its rules to determine whether companies are being asked to provide the right information.
The SEC complained about companies that provide laundry lists of risks they may face in dense lengthy reports containing impenetrable legalistic language.
One staffer said that quality of analysis is not measured by the length.
The SEC has pushed for plain language reporting for years. Litigation-shy companies have not been able to simplify reporting in the way the SEC desires.
In 2008, the SEC adopted rules for mutual funds to make their prospectuses easier for investors to read, understand and access.
The agency has also convened panels to make MD&A more accessible to unsophisticated investors.
Monday, November 2, 2009
SEC Chief Accountant says SEC will Clarify IFRS Roadmap by end of Fall
Last Friday, October 30, SEC Chief Accountant James Kroeker announced that the SEC remains committed to its IFRS road map.
Kroeker said he does not know the exact date the SEC will finalize its plan some time this fall. The information was provided as an answer to a question following Kroeker’s speech at an AICPA/International Accounting Standards Committee Foundation conference in New York.
The road map provides seven milestones and a tentative timeline. The timeline depends on resolution of several issues around the milestones.
According to Kroeker, comment letters have shown that most stakeholders support adoption of IFRS but that there are major concerns around convergence with U.S. GAAP.
Under the road map proposal, the SEC would decide in 2011 whether to require the use of IFRS. The 2011 decision point aligns with the G20 calls for accounting standard setters “to achieve a single set of high quality, global accounting standards within the context of their independent standard setting process, and complete their convergence project by June 2011.”
Key accounting issues to be resolved include joint projects on financial instruments, financial statement presentation, leases, liabilities and equity distinctions and revenue recognition, consolidations, derecognition and post-employment benefits.
Kroeker prioritizes the list with his top three being financial instruments, revenue recognition and consolidation.
About financial instruments/fair value accounting, Kroeker also said “I believe it would be a serious mistake to take our focus off of investor needs for unbiased, transparent information in order to design what some have suggested are accounting standards that attempt to rectify the banking crisis.”.
On the debate over fair value vs. historical cost valuation of financial instruments, per Kroeker: “it’s my personal view that it’s time to move beyond the debate over whether just fair value is relevant or cost is relevant. … It’s time to acknowledge that in some cases both sets of information are important and then how to portray that.”
With information from Journal of Accountancy
Kroeker said he does not know the exact date the SEC will finalize its plan some time this fall. The information was provided as an answer to a question following Kroeker’s speech at an AICPA/International Accounting Standards Committee Foundation conference in New York.
The road map provides seven milestones and a tentative timeline. The timeline depends on resolution of several issues around the milestones.
According to Kroeker, comment letters have shown that most stakeholders support adoption of IFRS but that there are major concerns around convergence with U.S. GAAP.
Under the road map proposal, the SEC would decide in 2011 whether to require the use of IFRS. The 2011 decision point aligns with the G20 calls for accounting standard setters “to achieve a single set of high quality, global accounting standards within the context of their independent standard setting process, and complete their convergence project by June 2011.”
Key accounting issues to be resolved include joint projects on financial instruments, financial statement presentation, leases, liabilities and equity distinctions and revenue recognition, consolidations, derecognition and post-employment benefits.
Kroeker prioritizes the list with his top three being financial instruments, revenue recognition and consolidation.
About financial instruments/fair value accounting, Kroeker also said “I believe it would be a serious mistake to take our focus off of investor needs for unbiased, transparent information in order to design what some have suggested are accounting standards that attempt to rectify the banking crisis.”.
On the debate over fair value vs. historical cost valuation of financial instruments, per Kroeker: “it’s my personal view that it’s time to move beyond the debate over whether just fair value is relevant or cost is relevant. … It’s time to acknowledge that in some cases both sets of information are important and then how to portray that.”
With information from Journal of Accountancy
Thursday, October 8, 2009
Deloitte Survey: Financial Execs want SEC to Move on IFRS
Financial executives are showing support for decisive SEC action in approving on the proposed IFRS roadmap.
The Deloitte survey, with over 150 financial executives participating, was conducted in September 2009.
Highlights of the survey results include:
The Deloitte survey, with over 150 financial executives participating, was conducted in September 2009.
Highlights of the survey results include:
- 70% of respondents indicated approval for the SEC’s proposed roadmap
- 51% responded that the SEC should approve the proposed roadmap, but consider pushing back the mandatory deadline a year
- 19% responded that the SEC should approve its proposed roadmap “as is.”
- 45% of respondents selected “delay in the finalization of the SEC’s roadmap” in characterizing the reason why their companies’ IFRS assessment plans may have been delayed
- 9% of respondents identified “economic challenges or constraints” as the reason for delaying an IFRS assessment.
- 34% of survey participants indicated IFRS adoption would make the U.S. more competitive in the global marketplace
- 38% responded that IFRS adoption would not
Monday, October 5, 2009
Dell Settles with SEC
Dell Inc. said last week that it will improve its accounting and corporate governance rules as part of a settlement tied to an SEC investigation.
Dell will also pay $1.75 million in legal fees, according to a settlement filed with the Securities and Exchange Commission.
The SEC investigation into Dell's accounting was made public in 2006. Various shareholder groups have filed lawsuits against Dell for misrepresention of its financial results while insiders profited from selling their own shares at prices that were inflated by the overstated results.
Dell restated results for 2003 through 2007 after an internal audit found it overstated sales by $359 million and profit by $92 million during those years. The SEC continues its probe.
Under the settlement filed with the SEC, Dell agreed to make sure at least 60 percent of its board members are from outside the company. Dell also said it would train board members and give directors unrestricted access to Dell's employees.
Dell had already implemented some changes as the lawsuit moved through the courts. Under the settlement the changes must be extended and enforced for four years.
Among them:
Dell will also pay $1.75 million in legal fees, according to a settlement filed with the Securities and Exchange Commission.
The SEC investigation into Dell's accounting was made public in 2006. Various shareholder groups have filed lawsuits against Dell for misrepresention of its financial results while insiders profited from selling their own shares at prices that were inflated by the overstated results.
Dell restated results for 2003 through 2007 after an internal audit found it overstated sales by $359 million and profit by $92 million during those years. The SEC continues its probe.
Under the settlement filed with the SEC, Dell agreed to make sure at least 60 percent of its board members are from outside the company. Dell also said it would train board members and give directors unrestricted access to Dell's employees.
Dell had already implemented some changes as the lawsuit moved through the courts. Under the settlement the changes must be extended and enforced for four years.
Among them:
- an accounting code of conduct
- enhanced ethics, compliance and insider-trading training
- creation of a global team of accountants to focus on revenue recognition issues
- provision to let employees make anonymous complaints about auditing or internal controls.
Friday, September 18, 2009
SEC Reconfirms Thrust to Adopt IFRS
U.S. Securities and Exchange Commission will refocus on their IFRS roadmap.
The SEC's new chief accountant, Jim Kroeker, said in remarks to a New York State Society of CPAs conference in New York "Turning back to the roadmap will be an important priority for us this fall."
The roadmap would have U.S. companies adopting IFRS and filing financial results under IFRS by 2014, with the option for early adoption.
Kroeker said that in the 200 or so comment letters the SEC has received on the proposal, it was "resoundingly clear" that people agree there should be a single set of global high-quality accounting standards.
The comment letters identified, major differences in how different groups wanted to accomplish the goal of one standard.
Kroeker said the SEC staff, as "an important next step," would work on how to put into place various milestones to reach that goal.
Kroeker noted tha t convergence efforts to conform both sets of rules have been going on over the past few years. Recently the IASB and the FASB have accelerated certain convergence projects.
Kroeker implored standard-setters to avoid "a race to the bottom," where in a rush to converge the rules, accounting standard setters are urged to adopt the least controversial version of the rules, rather than the one that would best represent economic reality.
Kroeker said "A race to the bottom is an absolute concern I have," . "If we engage in a race to the bottom ultimately there will be no winner in that race."
The SEC's new chief accountant, Jim Kroeker, said in remarks to a New York State Society of CPAs conference in New York "Turning back to the roadmap will be an important priority for us this fall."
The roadmap would have U.S. companies adopting IFRS and filing financial results under IFRS by 2014, with the option for early adoption.
Kroeker said that in the 200 or so comment letters the SEC has received on the proposal, it was "resoundingly clear" that people agree there should be a single set of global high-quality accounting standards.
The comment letters identified, major differences in how different groups wanted to accomplish the goal of one standard.
Kroeker said the SEC staff, as "an important next step," would work on how to put into place various milestones to reach that goal.
Kroeker noted tha t convergence efforts to conform both sets of rules have been going on over the past few years. Recently the IASB and the FASB have accelerated certain convergence projects.
Kroeker implored standard-setters to avoid "a race to the bottom," where in a rush to converge the rules, accounting standard setters are urged to adopt the least controversial version of the rules, rather than the one that would best represent economic reality.
Kroeker said "A race to the bottom is an absolute concern I have," . "If we engage in a race to the bottom ultimately there will be no winner in that race."
Wednesday, September 2, 2009
Another SEC Fraud Bust
SEC Charges Terex Corporation with Accounting Fraud
The Securities and Exchange Commission (SEC) charged Terex Corporation, a Westport, Connecticut-based heavy equipment manufacturer, with accounting fraud for making material misstatements in its own financial reports to investors, as well as aiding and abetting a fraudulent accounting scheme at United Rentals, Inc. (URI), another Connecticut-based public company.
The SEC's complaint alleges that Terex aided and abetted the fraudulent accounting by URI for two year-end transactions that were undertaken to allow URI to meet its earnings forecasts. These fraudulent transactions also allowed Terex to prematurely recognize revenue from its sales to URI.
The fraud occurred through URI's sales of used equipment to a financing company and its lease-back of that equipment for a short period. As part of the scheme, Terex agreed to sell the equipment at the end of the lease period and guarantee the financing company against any losses. URI separately guaranteed Terex against losses it might incur under the guarantee it had extended to the financing company.
Without admitting or denying the SEC's charges, Terex agreed to settle the Commission's action by consenting to be permanently enjoined from violating the antifraud, reporting, books and records and internal control provisions of the federal securities laws and by paying an $8 million penalty.
The Securities and Exchange Commission (SEC) charged Terex Corporation, a Westport, Connecticut-based heavy equipment manufacturer, with accounting fraud for making material misstatements in its own financial reports to investors, as well as aiding and abetting a fraudulent accounting scheme at United Rentals, Inc. (URI), another Connecticut-based public company.
The SEC's complaint alleges that Terex aided and abetted the fraudulent accounting by URI for two year-end transactions that were undertaken to allow URI to meet its earnings forecasts. These fraudulent transactions also allowed Terex to prematurely recognize revenue from its sales to URI.
The fraud occurred through URI's sales of used equipment to a financing company and its lease-back of that equipment for a short period. As part of the scheme, Terex agreed to sell the equipment at the end of the lease period and guarantee the financing company against any losses. URI separately guaranteed Terex against losses it might incur under the guarantee it had extended to the financing company.
Without admitting or denying the SEC's charges, Terex agreed to settle the Commission's action by consenting to be permanently enjoined from violating the antifraud, reporting, books and records and internal control provisions of the federal securities laws and by paying an $8 million penalty.
Thursday, August 27, 2009
More on GE Accounting Fraud Allegations--Smooth Flying on Jet Engines
The SEC recently settled allegations of fraudulent accounting with GE. More details:
GE was worried that volatility in its revenues would wreck its plans to meet earnings expectations. The SEC alleged that GE engaged in complex hedge accounting manipulations to smooth earnings, and in a scheme to further smooth profits in its aircraft engine business.
The earnings smoothing was done by hiding losses from interest-rate derivatives, improper accounting for hedging transactions, and a messy scheme to smooth profits in its aircraft engine business.
The SEC did not charge GE with deliberately breaking rules on the hedging and aircraft engine transactions.
The SEC’s lawsuit referred to internal e-mails in which a GE accountant said "we've got to fix this" about the "extraordinarily big deal" of possibly losing the right to use legitimate accounting to allows companies to ignore losses in the fair value of derivative assets.
GE had bet on interest rates by writing more derivatives contracts than it needed to hedge its floating rate debt exposure. The SEC claims that GE retroactively changed how it accounted for derivatives, but the plan was rejected by KPMG, its external auditors. The Sec claims that GE then altered the plan and then went ahead with the retroactive change anyway. This allowed GE to avoid reporting a $200 million loss.
GE was worried that volatility in its revenues would wreck its plans to meet earnings expectations. The SEC alleged that GE engaged in complex hedge accounting manipulations to smooth earnings, and in a scheme to further smooth profits in its aircraft engine business.
The earnings smoothing was done by hiding losses from interest-rate derivatives, improper accounting for hedging transactions, and a messy scheme to smooth profits in its aircraft engine business.
The SEC did not charge GE with deliberately breaking rules on the hedging and aircraft engine transactions.
The SEC’s lawsuit referred to internal e-mails in which a GE accountant said "we've got to fix this" about the "extraordinarily big deal" of possibly losing the right to use legitimate accounting to allows companies to ignore losses in the fair value of derivative assets.
GE had bet on interest rates by writing more derivatives contracts than it needed to hedge its floating rate debt exposure. The SEC claims that GE retroactively changed how it accounted for derivatives, but the plan was rejected by KPMG, its external auditors. The Sec claims that GE then altered the plan and then went ahead with the retroactive change anyway. This allowed GE to avoid reporting a $200 million loss.
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