Friday, May 30, 2008

SEC Posts XBRL Rule Proposal; Liability Reform, Other Matters in Addendum Posted Today by Treasury ACAP

This afternoon, the SEC posted its proposed rule, “Interactive Data to Improve Financial Reporting.” As we reported following the SEC open meeting on May 14, the proposed rule would require XBRL reporting by public companies under a phased in approach. The comment deadline is August 1.

Separately, earlier today, the U.S. Treasury Advisory Committee on the Auditing Profession (ACAP) posted an Addendum to its Draft Report. (Thanks to ACAP member and former SEC Chief Accountant Lynn Turner for sharing this news.)

As we previously reported, ACAP posted its May 5 Draft Report for public comment, with a comment deadline of June 13. (See FEI summary of ACAP Draft Report.)

The Addendum to ACAP's report posted today adds 4 new issues relating to: (1) whether PCAOB should reconsider the form and content of the auditor’s report, (2) whether engagement partners (not just the ‘firm’) should sign audit reports, (3) whether audit firms should be required to make public a set of audited financial statements for their own firm, and (4) whether it would be appropriate to transfer to federal court jurisdiction certain claims against auditors and related issues regarding a uniform standard of care.

On this last point relating to liability reform, Bloomberg News’ Jesse Westbrook has already filed a report: “Treasury Panel May Propose Liability Reforms for Audit Industry.” Citing Adam Pritchard, a law prof at the University of Michigan Law School, Westbrook reports: “Moving the lawsuits to federal court would benefit accounting firms, because a defendant's legal damages are limited to their share of the fraud… Plaintiffs also have an easier time bringing cases in state court.” Additionally, Westbrook quotes Pritchard saying: ``There is a much higher standard for the plaintiffs to reach to be able to sue the accountants at all'' in federal courts.

Westbrook also includes this observation by Pritchard: ``If Levitt and Volcker, who are not seen as being overly business friendly, are signing on that indicates that there is a real problem that needs to be fixed.'' [Former SEC Chairman Arthur Levitt co-chairs ACAP with former SEC Chief Accountant Don Nicolaisen; former Federal Reserve Board Chairman (and former IASCF Chairman) Paul Volcker is a member of ACAP.]

FASB Releases FAS 162, FAS 163, And Conceptual Framework Docs

There’s been a flurry of activity lately at FASB in issuing two new standards in the past few weeks, plus the release of a couple of proposals for public comment on the Conceptual Framework Project. Here’s a rundown:
Final Standards
FAS 162, The Hierarchy of Generally Accepted Accounting Principles, (aka the GAAP Hierarchy). Published May 9, 2008. NOTE: The effective date is tied to finalization of related amendments to PCAOB auditing standards which were approved earlier this year by the PCAOB board and await SEC approval. See FEI summary
FAS 163, Accounting for Financial Guarantee Insurance Contracts. Published May 23, 2008. See FASB press release.
Proposals Released For Public CommentTwo documents were issued by FASB-IASB yesterday as part of its project to converge and improve the conceptual framework:
Exposure Draft: Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics and Constraints of Decision-Useful Financial Reporting Information. Joint document published by FASB and IASB on May 29, 2008. Comments due September 29.
Preliminary Views: Conceptual Framework for Financial Reporting: The Reporting Entity.Joint document published by FASB and IASB on May 29, 2008. Comments due September 29.
Although ‘conceptual framework’ may sound like lofty ivory tower stuff, don’t underestimate its impact – it is the bedrock that underlies financial reporting since it is meant to be the basis on which accounting standards are developed.

Some of the more controversial changes in the Exposure Draft (ED) containing the Qualitative Characteristics of financial reporting relate to what some view as the diminished role of ‘reliability’ vs. ‘relevance’.

Separately, issues raised in the Preliminary Views document on the Reporting Entity (note: a preliminary views document is something that provides the board’s early views and solicits comment before issuance of an Exposure Draft of a proposed concepts statement or standard) relate to, among other things, decisions on aggregation or disaggregation, as well as the role of legal status of entities in deciding what entities to include or not include in the ‘reporting entity.’

Further details on the Conceptual Framework proposals listed above are in FASB-IASB’s joint press release.

Thursday, May 29, 2008

SEC Nominees Set for June 3 Sen. Banking Hearing;SEC To Hold Fair Value RT;IASB Forms Val. WkgGroup; Uproar over IIF Recs on FV

The Senate Banking Committee has scheduled confirmation hearings on June 3 for a number of President Bush’s nominees for federal agency positions, including the nominees for the three open slots for Commissioner at the SEC. The three nominees for SEC commissioner (to fill the vacancies created by the departure of Roel Campos and Annette Nazareth, and the impending departure of Paul Atkins), are: Luis Aguilar, Elisse B. Walterand Troy Paredes. If all goes well at the Senate Banking hearing, nominees would then be subject to a confirmation vote by the full Senate.

Batavick to Remain on FASB board until Replacement Announced
In other pending appointment news, (although not subject to Senate confirmation) the FASB announced last week that current board member George Batavick “will extend his present term on the [FASB] as the Board conducts its search for a candidate to fill the open seat.” With three FASB board members scheduled to depart June 30 (Michael Crooch, Donald Young and Batavick) - and under the FAF's new constitution calling for a reduction in the size of the FASB board from the current seven to a new total of five board members - FASB needs to hire one new board member to complete its board as of June 30. Batavick, former comptroller of Texaco, previously had announced he intends to retire from the FASB at the end of his first term, which expires June 30.

SEC To Hold Fair Value RT in July; Cox Promotes Steps to Enhance IASB as SEC Moves Toward IFRS
In an article entitled, “Cox to Press Global Rules,” Kara Scannell and David Gauthier-Villars reported in the Wall Street Journal yesterday that, “The SEC will hold a roundtable discussion on fair-value accounting in July.” Their source is SEC Chairman Christopher Cox, and they contrinue: “Mr. Cox, who was elected chairman of the IOSCO committee in charge of research on Tuesday, said the U.S. watchdog wouldn't recommend abandoning the concept altogether. ‘

Nothing that stark,’ he said.” IOSCO is the International Organization of Securities Commissions, of which the SEC is a member.

Scannell and Gauthier-Villars also reported, based on an interview with Cox preceding his participation in the 2008 IOSCO Annual Conference taking place this week in Paris, that Cox “is expected to call for creation of a body to oversee the setting of international accounting standards, a step that could hasten the ability of domestic companies to choose international standards over traditional U.S. accounting.” They add: “Such a move could smooth the way for the SEC to allow U.S. companies to comply with International Financial Reporting Standards.”

On the subject of the status of the SEC’s IFRS roadmap for potentially allowing U.S. companies to report in IFRS, Jack Ciesielski reported earlier this week in his AAOweblog on some related developments, including the SEC’s signing of protocols to expand the sharing of information with other regulators on the application of IFRS. Ciesielski also noted our upcoming June 5 conference – “The World is Moving to IFRS – Are You?” at which he will be a speaker, is currently sold out.

If you would like to be placed on a waiting list (and be informed of future programs on IFRS) you can sign up at The conference is hosted by Financial Executives International (FEI) and is exclusively sponsored by BNA Tax and Accounting.
The move reported in the WSJ to enhance the IASB’s governance follows on previous announcements beginning last fall by a group of international securities regulators, including the SEC, which we previously reported here. Meanwhile, the IASCF (which oversees the IASB) is moving ahead with its Constitutional Review, as reported most recently by the IASB here.

Reaction to the SEC Chairman’s comments yesterday at IOSCO and to the widening expansion of IFRS was reported by James Langton in his article, “Adoption of IFRS Would Give World a Common Language for Financial Reports,” published yesterday in Investment Executive, a Canadian publication.

”In his keynote address to a meeting of global securities regulators today,” reported Langton, “Cox… suggested that international financial reporting standards could become a sort of lingua franca for the financial world…. However, in the debate that followed his remarks, it became clear that the world is far from unanimous on the form this new language should take, and the range of dialects it should permit.” Additionally, Langton reported that at least one panelist on an IOSCO panel yesterday challenged the perception that all investors are a monolith, specifically regarding IFRS.

“John Glen, group financial director at Air Liquide, an industrial gas firm based in Paris, cautioned against sacrificing relevance in financial reporting for the sake of comparability at all costs, suggesting that most investors don't necessarily need global comparability, particularly when the price is less meaningful financial information. He stressed that the original intention for IFRS was a common set of principles that could be interpreted with some latitude, not a narrowly-defined set of principles that are virtually rules.” Additionally, “Glen pointed out that while investors are often referred to as if they were a single body, not all investors share the same interests. He stressed that professional investors are often the focus of these sorts of discussions, and retail investors may not have the same priorities.”

IASB Forms Valuation Working Group; Uproar over IIF Rec's on Fair Value
Jennifer Hughes of the Financial Times recently reported in an article entitled, “IASB to Tackle Securities Valuations,” that the IASB is in the process of forming a working group on valuation.
“Invitations have been sent out to senior bankers and regulators to form a new group to tackle the problems of valuing securities in illiquid markets – an issue central to the credit crunch and banks’ complaints about the write-downs they have been forced to report… Invitees to the IASB’s working group include senior accounting executives from some of the biggest banks and insurers together with representatives from securities regulators, sector analysts, ratings agencies and the Big Four audit firms.”

According to Hughes, “The first of a series of meetings” of the IASB’s valuation working group “is due to be held in London on June 13 and will discuss the scope of the project.” She added the meetings “will take place behind closed doors,” which “has already upset some accounting observers.”

Hughes mentioned in the above article, and expands in another article today, “'Alice in Wonderland' in Need of a Clarity Tweak,” that the Institute of International Finance (IIF) recently published a paper “propos[ing] a relaxation of the [valuation] rules when markets seize up and asked for some more flexibility in the way various holdings are classified.” (See our previous coverage of IIF paper here.)

Hughes noted that Goldman Sachs, a member of the IIF, rejected the proposal and may leave the IIF over it. “Goldman Sachs spiced up the accounting world last week when it dealt a blow to some of its biggest rivals by terming their proposals "Alice in Wonderland" accounting,” she reported. “Suddenly, an ongoing struggle over seemingly arcane financial reporting involved a spat among the top names in the industry as Goldman threatened to walk out of the Institute of International Finance, a global industry body.”

The IIF issued a statement yesterday in response to the controversy about its paper. As we noted previously, the IIF recommendations call for “multiple and coordinated policy responses” and recommends reforms to various industry practices, not only accounting and valuation, including: risk management, credit underwriting, liquidity risk management and conduits, valuation, ratings, incentives and compensation.

However, to see the crux of the issue on IIF’s call for a potential relaxation or increased flexibility of mark-to-market or fair valuation rules in light of the liquidity crunch, see especially paragraphs 74-76 of the IIF report, in which the IIF notes:

“A critical subset of issues revolves around whether mark-to-market exacerbates the overall degree of risk aversion in the marketplace and thereby contributes in a procyclical manner to the continuation and possible worsening of market stress…. In circumstances where doubts about products and underlying credit quality undermine valuations inducing extensive margin calls, there is the danger of a precipitous and destructive downward spiral, which reinforces the procyclical impact… the Committee believes that broad thinking is needed on how to address such consequences, whether through means to switch to modified valuation techniques in thin markets, or ways to implement some form of “circuit breaker” in the process that could cut short damaging feedback effects while remaining consistent with the basics of fair-value accounting. And, while there is no desire to move away from the fundamentals of fair-value accounting, the Committee feels that it is nonetheless essential to consider promptly whether there are viable sound proposals that could limit the destabilizing downward spiral of forced liquidations, writedowns and higher risk and liquidity premia. The Committee is developing specific proposals for consideration in a timely fashion.”

Personally, I think the recommendation to consider whether ‘circuit breakers’ (or modified valuation procedures) are needed to stem downward spirals in fair valuation (driven in part, as noted by the IIF and others, by margin calls and selloffs of securities experiencing price deterioration which drives further writedowns) in markets that lack liquidity is worthy of consideration in light of the current market turmoil - similar to the development of ‘circuit breakers’ in response to the 1987 stock market ‘crash.’ (For different points of view, see also the Washington Post article from Oct. 30, 1997: “Stock Traders Criticize Market ‘Circuit Breakers.’)

If you are interested in the topic of fair value in illiquid markets, check out FASB’s upcoming webcast scheduled for June 2: “The Crisis in the Credit Markets: Causes, Reporting Issues, and Responses." And, see links to our previous coverage of the subprime crisis and accounting issues here.

Tuesday, May 20, 2008

SEC CIFiR, Treasury ACAP 30 Day Comment Period on Recommendations

SEC’s ‘Complexity’ Committee – the SEC Advisory Committee on Improvements to Financial Reporting (CIFiR or the Pozen Committee for chair Robert Pozen) posted a Notice/Request for Comment seeking comment on its updated recommendations (updated from their Feb. 14 Progress Report). Here are links to the four subcommittee reports dated May 2:
Subcommittee 1: substantive complexity Subcommitee 2: standards-setting Subcommittee 3: audit process and complianceand,Subcommittee 4: delivering financial information. We previously reported one major change to CIFiR’s recommendations relates to the professional judgment framework. Today, we posted this summary of selected portions of CIFiR’s May 2 meeting, particularly commentary of panelists on the role of non-authoritative guidance.

The comment period on CIFiR’s May 2nd subcommittee reports ends 30 days after the Notice is published in the Federal Register.. UPDATE: The comment period on CIFiR’s May 2nd subcommittee reports ends June 23, per the Federal Register Notice published on May 22.

Separately, the U.S. Treasury Department’s Advisory Committee on the Auditing Profession (ACAP) posted a Notice/Request for Comment in the Federal Register last week requesting public comment on the recommendations contained in ACAP's May 5 Draft Report. Here is our summary of ACAP’s recommendations. There is a 30 day comment period on the ACAP recommendations, ending June 13.

I will be out the remainder of this week and will likely not post for a few days; in appreciation to our blog readers, here’s a link to a tune I’ve been listening to lately - The Riddle (video) (lyrics) by Five for Fighting/John Ondrasik - which you may enjoy on your weekend pursuits. If you received this blog post from 'a friend' sign up here to receive the blog real-time.

Friday, May 16, 2008

White House Tells Agencies: No Proposed Rules After June 1; No Final After Nov. 1, Will This Impact SEC's IFRS Roadmap, XBRL?

In the article, ”White House Sets June 1 Deadline for Agency Proposals,” (article courtesy of Nasdaq) Martin Vaughan of Dow Jones Newswires reported yesterday that White House Chief of Staff Josh Bolten sent a memo to all federal agencies on May 9 requiring: “all rules to be finalized before the administration leaves office should be proposed by June 1, and final rules should be issued by November 1.” Additionally, according to Vaughan, the memo stated those deadlines apply in all but ‘extraordinary circumstances.’

Additional background was provided by Ralph Lindeman of BNA yesterday in his article: “White House Instructs Agencies to Defer Proposals After May, Final Rules After Nov. 1.” Referencing the Office of Management and Budget’s (OMB’s) Office of Information and Regulatory Affairs (OIRA), Lindeman reported: “Bolten's memo reflects the views of Susan Dudley, OIRA's current administrator, who has spoken publicly and written about the need to stop the midnight regulation phenomenon at federal agencies and departments.”

"Like Cinderella leaving the ball, many of Clinton's 7,000 presidential appointees hurried to issue last-minute 'midnight' regulations before they turned back into ordinary citizens at noon on January 20th," Dudley wrote in the Spring 2001 issue of Regulation, published by the libertarian Cato Institute,” notes Lindeman.

"Some of these new regulations may have been developed carefully over many years, and only just now emerged from the procedural pipeline. But others were hurried into effect without the usual checks and balances, perhaps to avoid scrutiny by the incoming Bush administration,” continued Dudley in 2001, as cited by Lindeman.

Will the White House decree impact the timing of SEC’s anticipated IFRS roadmap, in which the SEC will lay out its plan for considering permitting – or requiring – U.S. public companies to file with the SEC under IFRS instead of U.S. GAAP? Or is a ‘roadmap’ different from a rule ‘proposal’? What about rule proposals that may emanate from any such ‘roadmap’? Will they be subject to the June 1 proposal, Nov. 1 final deadlines noted above? Or – will they fall under the ‘extraordinary circumstances’ exclusion?

It will be interesting to see if this drives the SEC to publish its IFRS roadmap by June 1. Find out the latest at FEI’s Global Financial Reporting Conference on June 5 in NYC: “The World Is Moving To IFRS – Are You?” Hear direct from keynote speaker John White, Director of the Division of Corporation Finance, the status of SEC’s IFRS roadmap/rulemaking, followed by panels of experts from the FASB, IASB, leading audit firms and companies. We are nearing a sell-out at the conference venue, The Coleman Center, sign up now by visiting BNA Tax & Accounting is the exclusive sponsor of the conference.

Separately, we reported earlier this week the SEC voted to release a proposed rule mandating XBRL for the 500 largest public companies that file in U.S. GAAP for fiscal years ending on or after 12.15.08, with smaller co’s and companies filing in IFRS phased in over the next two years.
Will the White House memo impact SEC’s ability to issue a final XBRL rule this year? Citing David Blaszkowsky, Director of SEC’s Office of Interactive Data, BNA’s Stephen Joyce reports today, “SEC Official Says XBRL Rule May Be Final By Fall as Users Cite Benefits of Proposal.”

“Speaking with reporters during a conference call,” reported BNA’s Joyce, “Blaszkowsky said SEC will, by May 25, finalize and publish the proposed rule, and begin a 60-day comment period on the proposal. The rule "could be" made final by the fall, he said.”

Former Nasdaq official Al Berkeley said XBRL will be "the answer to a data junkie's dreams," reported Joyce.

Dow Chemical's Patsy Ramsey, noted Joyce, said: "Ramsey told reporters her firm was a voluntary early adopter of the XBRL tagging format and while there likely will be an initial expense for companies to comply with the XBRL standard, her firm's experience demonstrated 'the cost need not be significant.' And while there is a cost with adopting the standard, companies may benefit from enhanced accuracy in their financial reporting efforts, Ramsey said."

BNA's Joyce also noted AICPA's Amy Pawlicki said the AICPA has been "busily preparing for such a proposal,” and “has conducted Internet-based educational programs, for instance, to help prepare AICPA members for XBRL adoption.”

In related news, Cynthia Fornelli, Executive Director of the Center for Audit Quality (CAQ) issued a statement following the SEC’s vote to issue its XBRL rule proposal: “The CAQ supports the objectives of enhanced electronic financial reporting to provide better, faster, cheaper and more consistent financial information to support more informed business and investing decisions.

However, it is imperative that the Commission seeks input during the three-year phase in period from preparers about their experiences and the related costs, and from investors about their experiences and the related benefits. These insights would allow the SEC to make a more informed decision about whether broadly mandating XBRL is likely to generate benefits in excess of costs.”

XBRL-US published a report earlier this week entitled, "SEC Rule Change Proposal - Impact on Stakeholders and Readiness of the Market," which states in part: "For preparers, today and in the short-term, a rule change will result in incremental cost and effort beyond what companies currently expend on their financial reporting process."

Separately, as reported by webCPA yesterday, a Grant Thornton survey published May 14 showed “CFOs Lack Experience with Upcoming Standards.” Webcpa noted: “Nearly 75 percent of CFOs and senior comptrollers have no experience using International Financial Reporting Standards, while 55 percent are unfamiliar with the Extensible Business Reporting Language, according to a new survey by Grant Thornton."

Issues relating to potentially converging the two XBRL frameworks (sets of data tags) - i.e. the US GAAP taxonomy developed by XBRL-US and the IFRS XBRL taxonomy developed by the IASCF's XBRL team, will also be among issues to be addressed as the world moves increasingly to use of IFRS and XBRL. (Additional information is also available from XBRL-International.)

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Wednesday, May 14, 2008

SEC Votes To Release Proposed Rule That Would Mandate XBRL; Largest Co's First, Smaller Co's and Foreign Filers Phased In

Earlier today, the SEC voted to release for public comment a proposed rule regarding requirements for public companies to file certain data with the SEC using data tags in eXtensible Business Reporting Language (XBRL).

Bill Sinnett, Director of Research, Financial Executives Research Foundation and I listened to the SEC webcast of the open commission meeting, and following is a summary of key points:

The SEC’s XBRL proposal calls for a phased-in approach, with the largest 500 companies in the U.S. (specifically, those that file in U.S. GAAP and have a worldwide public float of over $5 billion) being required to provide financial statements in XBRL for fiscal periods ending on or after December 15, 2008. In that first year, the SEC would permit footnotes to be provided in blocked tags. Thereafter, the detail within each footnote would have to be individually tagged. Smaller U.S. companies and companies filing in IFRS would be phased in during the following two years. The SEC noted that it will monitor initial adoption by the largest companies to determine if any change to the remaining phase-in schedule is necessary for the smaller and foreign filers.

The filing deadline for XBRL data would be the same as that for the related SEC filings currently (annual reports, interim reports, registration statements, transition reports). However, an additional 30 day ‘grace period’ would be provided for the initial XBRL filing of the financial statements, and a similar grace period would be provided for the initial filing of the detailed footnotes required in the second year. Companies that fail to file their XBRL information on time

The SEC did not specify during today’s webcast if the information would be ‘furnished’ vs. ‘filed,’ but SEC staff said the same liability- limited liability – would be applied as under the current XBRL voluntary filer program. SEC staff said the XBRL disclosures would be provided as additional exhibits to annual and quarterly reports, transition reports, and registration statements.

There was no discussion on the webcast as far as the auditors' role relating to XBRL information.
Companies also would be required to post this information on their websites. SEC staff added that the XBRL submissions “would not replace ASCII and HTML data.”

The required tagged disclosures would include companies’ primary financial statements, notes, and financial statement schedules. Initially, companies would tag notes and schedules as blocks of text, and a year later, they would provide tags for the details within the notes and schedules.
Reference should be made to the rule proposal when published.

We understand there will be a 60 day comment period on the proposed rule.

A number of FEI member companies, including from FEI’s Committee on Finance and Information Technology (CFIT), and Committee on Corporate Reporting (CCR), were among the 76 voluntary filer companies, the SEC thanked the voluntary filers today for providing important information.

Links to material posted by the SEC (we will update this as more links are added):
SEC Press Release announcing vote to release rule proposal for public commentSEC Chairman Christopher Cox Opening Statement at May 14 open meetingDescription of proposed rule provided in Statement of James Lopez, Legal Branch Chief, Divison of Corporation Finance

Tuesday, May 13, 2008

SEC To Take Up XBRL Rulemaking Tomorrow

The SEC is slated to consider at an open commission meeting tomorrow (May 14) potential rulemaking relating to requirements for public companies to tag certain information filed with the SEC using data tags in eXtensible Business Reporting Language, or XBRL.

According to the agenda, "The Commission will consider whether to propose amendments to provide for corporate financial statement information to be filed with the Commission in interactive data format, and a near- and long-term schedule therefor."

U.S. GAAP Taxonomies Delivered to SEC by XBRL-US; Preparer's Guide, Case Studies Available
In related news, the U.S. GAAP taxonomies (dictionary of data tags) were completed by XBRL-US and delivered to the SEC on April 28.
avid Blaszkowsky, director of the SEC's Office of Interactive Disclosure, stated, (as noted in this XBRL-US press release,) "This delivery ensures that the tools are in place for public companies to create interactive data-formatted financials with ease and efficiency."
An "XBRL Preparer's Guide" and Case Studies are available from XBRL-US, as noted in the XBRL-US April, 2008 newsletter.

Cox Says XBRL Is At 'Inflection Point:' Most Difficult Challenges Are Behavioral
In videotaped remarks at the XBRL-International Conference last week, SEC Chairman Christopher Cox said, "As most of you already know, the SEC will be discussing a rule later this month that would set a firm schedule for using interactive data in public company filings in the United States. The fact that we are taking this step reflects the confidence we've gained from our own voluntary filing program, and also the significant learning we've gained from many of you who are attending this conference." "With a complete set of data tags for U.S. generally accepted accounting principles now in hand, we in the United States are ready to "go live" with interactive data. The preparer's guide is there, the software and vendor communities are there, and even the viewers and investor tools are there. Everything is in place," said Cox.

However, he added, "Interactive data has reached an inflection point. The technology is mature — it's a decade old. Many of the most profound features, such as toggling between languages as I described, aren't cutting edge. Today, the most difficult challenges we face are no longer technological, but behavioral.Our main focus now must be on getting investors and other users to be aware of XBRL and what it can do for them."FEI Committees' Views

Three FEI committees commented on the SEC Advisory Committee on Improvements to Financial Reporting (CIFiR's) XBRL-related proposals, and the other CIFiR recommendations, in comment letters filed on CIFiR's Progress Report. See the letters filed by FEI's Committee on Finance and Information Technology, the letter filed by FEI's Committee on Small and Mid-Sized Public Companies (the two separate letters are attached here), and the letter filed by FEI's Committee on Corporate Reporting here

Friday, May 9, 2008

FASB Update; FEI Comment Letter Filed; New Articles on Fair Value

Below are highlights from this week's FASB board meeting. Noted further below is a comment letter filed by FEI's Committee on Benefits Finance and Committee on Corporate Reporting on FASB's proposed FSP 132(R)-a, Employers’ Disclosures about Pensions and Other Postretirement Benefits. We also provide links to some recent publications from FASB and the AICPA Journal of Accountancy (JofA) on the topic of fair value reporting.

FASB Finalizing FSP on Share-Based Payments as Participating Securities
At its May 7 board meeting, FASB redeliberated certain decisions and agreed to move to a ballot draft to finalize FSP EITF 03-6-a, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.”

Staff noted that comments were received from constituents following decisions reached at the board’s March 5 meeting, in which commenters stated that share-based payment awards not expected to vest should not be considered participating securities and, as a result, should not be included in the calculation of earnings per share (EPS) under the two-class method. To address these comments, the board agreed to new wording shown under “issue 1 – staff recommendation’ on page 27 of the board handout.

Additionally, the board agreed that the final FSP should be issued with a current effective date, for example, effective for the first fiscal year after the final FSP is posted to the FASB website. There was some discussion about whether to tie the effective date to the anticipated proposed EPS Convergence Standard to minimize the number of retrospective applications of new EPS standards, but the board agreed with the staff’s recommendation (shown as “View C” in the board handout) to have the earliest effective date possible (as of the beginning of the first fiscal year after issuance of the FSP).

FASB Discusses Definition of Liabilities in Conceptual Framework (CF)
Also at the May 7 board meeting, FASB discussed the definition of liabilities in its joint conceptual framework (CF) project with the IASB, and agreed that “the existence of a present economic obligation distinguishes a liability from merely a business risk.” (The term ‘merely’ was added to the staff’s recommended wording in the board handout.)

Generally, the board agreed to retain the term ‘stand-ready obligation’ (although some members asked if another term like 'performance obligation' could be used) and agreed it can be applied to noncontractual situations. The board also generally agreed with the staff’s recommendation (shown in paragraph 13 in the board handout) that two things denote when a present obligation exists: (a) the capability of cash outflows (one board member suggested inserting ‘net’ cash outflows) and (b) a mechanism to enforce the economic obligation. However, some board members noted they were not comfortable with the principle when applied to examples they were shown. The board also engaged in a lengthy discussion about conditional and unconditional obligations and enforceability, and the need for clear communication in the conceptual framework on these points.

FEI Responds To FASB Proposal On Pension, Post-Retirement Benefit Disclosures

Earlier this week, a joint comment letter was filed by FEI’s Committee on Benefits Finance (CBF) and Committee on Corporate Reporting (CCR) on Proposed FASB Staff Position (FSP) No. 132(R)-a, Employers’ Disclosures about Pensions and Other Postretirement Benefits. The letter, co-signed by Elliott Friedman, CBF chair, and Arnold Hanish, CCR chair, stated support for FASB’s objective to improve disclosures, but noted, “we are not aware of a demand from either the investment community or other financial statement users for the expanded disclosures required by the [proposed] FSP.” Additionally, the FEI letter noted certain practical and conceptual issues with the proposed FSP that should be addressed if FASB decides to finalize the FSP. Read the comment letter for full details. Fair Value Reporting Discussed in New FASB Publication, AICPA JofA Article

FASB also posted a new article on May 7, “Understanding the Issues: Some Facts About Fair Value.” The publication was authored by FASB Chairman Robert Herz and FASB Director Linda A. MacDonald.

Additional points of view on this topic are provided in the "In My Opinion" section in the May 2008 edition of the AICPA's Journal of Accountancy. The article, “The Role of Fair Value Accounting in the Subprime Meltdown,” includes views from attorney Michael Young of Willkie, Farr and Gallagher, University of Colorado Professor Paul B.W. Miller, and Eugene H. Flegm, retired director of accounting, assistant comptroller-chief ­accountant, and Auditor General of General Motors Corp. Young's commentary "Both Sides Make Good Points" takes somewhat of a middle-ground view between Miller and Flegm, much as his earlier commentary to us in our Q&A with Michael Young on this subject.

Tuesday, May 6, 2008

Atkins Leaving SEC; PCAOB and IRS Seek Nominees for SAG, IRSAC; FEI Studies Released on Compensation, Technology

Four items in the news today:

Commissioner Atkins Announces Intent to Leave SEC
Late yesterday (May 5), the SEC issued a press release stating that Commissioner Paul S. Atkins has announced his intent to leave the SEC at the end of his term in 2008. He stated he will stay with the Commission until his successor is named. Atkins’ departure will bring the total number of vacancies on the commission to three; President George W. Bush has formally nominated Luis A. Aguilar and Elisse B. Walter to fill the open positions previously held by Democrats Roel Campos and Annette Nazareth who departed the commission last year and earlier this year, respectively. Further background on Aguilar and Walter is here; their nominations are pending confirmation hearings by the Senate Banking Committee and confirmation by the full Senate.

PCAOB Seeks Nominations to SAG
Also yesterday (May 5), the PCAOB announced it is seeking nominations to its Standing Advisory Group (SAG). A number of FEI members, including CCR members, have served and continue to serve on the SAG. As noted on the SAG information page, “The SAG currently includes 36 highly qualified persons representing the auditing profession, public companies, investors, and others,” and meets in person approximately three times per year to advise the PCAOB on the establishment of auditing and related professional practice standards.” The PCAOB is currently seeking nominees for the 2009-2010 two-year term. The PCAOB’s nomination deadline is June 19.

IRS Seeks Nominations to IRS Advisory Committee
The Internal Revenue Service (IRS) announced on May 1 that it “seeks applications for its broad-based private-sector advisory panel, the Internal Revenue Service Advisory Council (IRSAC), which provides important feedback and recommendations regarding tax administration. The 30-member panel is a diverse slice of the tax professional community including tax attorneys, certified public accountants, enrolled agents, enrolled actuaries, appraisers, other tax practitioners, as well as business representatives.” As noted in this Fact Sheet, IRSAC is a Federal Advisory Committee, originally formed as the Commissioner’s Advisory Group (CAG), renamed as IRSAC in 1998. Applications are being accepted until June 16 for three openings; the three year term begin January 2009. Additional info here.

Two More FEI Studies Issued: Compensation and Technology
Two new studies on financial executives’ compensation and technology issues for financial executives were released on May 5, 2008 by the Financial Executives Research Foundation (FERF), the research affiliate of Financial Executives International (FEI). The findings were unveiled this week at FEI's 2008 Summit Conference in Phoenix, Arizona. Further details are in this FEI summary. We reported last week on FEI's seventh survey of the costs and benefits of internal control reporting under Sarbanes-Oxley Section 404.

Monday, May 5, 2008

Treasury Advisory Committee on Audit Profession To Publish Draft Report For 30 Day Comment Period

At its meeting earlier today (May 5), the U.S. Treasury Department's Advisory Committee on the Auditing Profession (ACAP), co-chaired by Don Nicolaisen and Arthur Levitt, voted to publish their 153 page Draft Report for a 30 day comment period. (Separately, they have posted a one-page list of "Issues for observation or further discussion" for which the committee has not yet made formal recommendations.) Based on today’s webcast, it appeared there may be some minor modifications to ACAP’s draft report before it is formally posted for public comment, to incorporate some minor changes based on discussion at today's meeting, and some additional comments of committee members. The next ACAP meeting will be June 3.

UPDATE MAY 6: Here is a summary of the recommendations in ACAP's Draft Report.

FBI, IRS, USAO, SEC Subprime Investigations Ongoing; Accounting Update: Roper, Bellaire Weigh In on Principles vs. Rules in WSJ

A slew of federal and state agencies continue to examine whether fraud was a component of the subprime mortgage debacle and related losses on loans and investments in mortgage-backed securities and related derivatives.

The investigation into potential fraud is focusing on at least three fronts, as described in the article “Wall Street, Lenders Face Subprime Scrutiny” by Amir Efrati in today’s Wall Street Journal:

  • “whether officials made misrepresentations in securities filings about a company’s financial posiion and the quality of its mortgage loans, including failing to disclose a rising number of loan defaults, or engaged in questionable accounting to hide losses.”
  • “whether companies doctored information about borrowers, such as credit histories, before making loans and selling those loans to banks or Wall Street firms, which packaged them into securities and sold them to investors.”
  • “whether brokers at Wall Street firms lied to investors, orally or otherwise, by stating that their investments in vehicles known as collateralized-debt obligations were backed by, for example, corporate debt rather than assets such as subprime-mortgage loans.”
Efrati describes a task force of federal, state and local agencies being led by prosecutors from the U.S. Attorney’s Office in the Eastern District of New York, and that the task force held its first formal meeting on Friday with representatives from the FBI, U.S. Secret Service, and others. He notes additional investigations are being pursued by the U.S. attorney’s office in Manhattan, the New York State Attorney General’s Office, and the SEC.

Separately, Lynnley Browning reports in “Government Intensifies Mortgage Investigation,” in today's New York Times that an FBI-IRS led task force formed in January is stepping up its examination of the mortgage crisis and related write-downs and losses. Browning notes this task force includes federal prosecutors from five states.

Accounting Update
On the topic of accounting for subprime, see also: “Rule Clouds American Capital – Revaluing of Loans is Likely to Force Big Write-Downs,” by Peter Eavis in today’s WSJ. Referring to FAS 157, Fair Value Measurement, Eavis says: “The new accounting rule, with its emphasis on sale prices, could force American Capital to write down the value of its loans so those values are more in line with values posted by its peers.” He adds, “These valuation gaps aren’t small.”

See also our summary of last week’s FASB board meeting: “FASB Moves Closer To Proposing Guidance On Credit Derivatives, Hedging.”

Principles vs. Rules and FINRA
Another article of interest in today’s WSJ is an article by Jaime Levy Pessin highlighting a ‘debate’ on the topic of principles vs. rules – with particular emphasis on the Financial Industry Regulatory Authority (FINRA) – including the views of Consumer Federation of America’s Barbara Roper (Roper is also a member of the PCAOB's Standing Advisory Group or SAG), and Financial Services Institute Inc.’s David Bellaire. The article is entitled: “Is It All in the Details? Broad principles vs. nitpicky rules: a debate over the best way to get securities brokers to behave.”

Friday, May 2, 2008

Pozen Committee Updates Rec's: Instead of Specifying Professional Judgment Framework, May Ask SEC To Articulate Policy

A modified view on an earlier recommendation in the Pozen Committee's (more formally, the SEC Advisory Committee on Improvements to Financial Reporting or CIFiR, chaired by Robert Pozen) Feb. 14 progress report outlining a professional judgment framework for accounting decisions will be presented at CIFiR's meeting today in Chicago.

Recommendation That SEC Articulate Policy For Evaluating Judgment
Specifically, the May 2nd report of the audit process and compliance subcommitee (aka “Subcommittee III”), after considering comments received and panel feedback on the suggested professional judgment framework in its Feb 14 report, states:

“Subcommittee III believes that some changes are necessary … to meet the goals established in that Progress Report without the risks that the subcommittee has been concerned about from the beginning, such as the risk that the developed proposal devolve into a checklist based approach to making judgments and the risk that the proposed framework could be used as a shield to protect unreasonable judgments.”

“The primary change that Subcommittee III believes should be made is to refocus the developed proposal away from a recommendation for a framework,” and instead, “have the SEC formally articulate in a statement of policy how the SEC evaluates judgments, including the factors that it uses as part of its evaluation. Therefore, Subcommittee III believes the developed proposal should be changed to formally propose such as statement of policy to be issued.”

The above modified recommendation is subject to discussion by the full CIFiR committee at its meeting today, and further consideration by the subcommittee after more feedback. We previously reported on some feedback on CIFiR’s initial recommendation for a professional judgment framework here, here and here, and in our Q&A with Michael Young of Willkie Farr & Gallagher.

The subcommittee also recommends modifying their recommendations by removing any reference to ‘safe harbor.”

Additionally, the subcommittee recommends removing the word “professional” from the term “professional judgment,” because: “there could be a misunderstanding that the term professional implies that one must have a professional certification in order to make or evaluate a professional judgment.”

All Four Subcommittees To Present Updated Reports Today

All four subcommittees will present modified recommendations and some new recommendations for discussion by the full CIFiR committee today. The reports of the other three subcommittees are: substantive complexity (Subcommittee I), standards-setting (Subcommittee II), and delivering financial information. (Subcommittee IV).

Testimony on CIFiR Rec’s on Substantive Complexity, Standard-SettingPrior to presentation of the updated subcommittee reports, CIFiR will take testimony from two panels commenting on the recommendations pertaining to substantive complexity and standards-setting. (Panels were convened earlier this year to provide feedback on recommendations of the other two subcommittees.)

Among the eight panelists listed on the agenda for today’s CIFiR meeting are former SEC chief accountant Lynn Turner, Citigroup’s Linda Bergen, Council of Institutional Investors’ Jeff Mahoney, BDO Seidman’s Ben Neuhausen, KPMG’s Mark Bielstein, MFS Investment’s Kevin Conn, American Express’ Brooke Richards, and Financial Reporting Advisors’ John Stewart. The first panel just wrapped up, the second panel begins 11 am Central time (noon EDT).

Check back to our blog for followup reporting on today’s Pozen committee meeting. To receive our blog by email, sign up here.