Thursday, July 31, 2008

SEC Complexity Committee (CIFiR) Approves Final Report; Press Conf. Tomorrow

Earlier today the SEC Advisory Committee on Improvements to Financial Reporting (CIFiR or the ‘Pozen Committee’ for chair Robert Pozen) voted to approve publication of its final report. A press conference will take place at the SEC tomorrow, said Pozen, to recognize delivery of CIFiR’s final report to SEC Chairman Christopher Cox. Cox and Pozen will be joined at the press conference by FASB Chairman Robert Herz and PCAOB Chairman Mark Olson.
At today’s meeting, CIFiR concurred with the list of 9 changes to the report circulated to the committee in advance of the meeting, which Pozen described during the meeting. He said the changes were made in the past few days in response to issues raised by committee members and in light of eight final comment letters received. The changes were described by Pozen as largely technical in nature, and are reflected in CIFIR’s “Revised Draft Final Report v2 (Marked for Revisions to v1)” currently posted on SEC’s website.
One item on the list of 9 changes was to insert a new footnote (footnote 15, printed pg. 11, pdf pg 16) to define what CIFIR means by ‘investor preeminence” as that term is used in Recommendation 2.1, which says, in part: “Therefore, investor perspectives should be given pre-eminence15 by all parties involved in standards-setting.” Footnote 15 states: “We recognize the need for balance among all parties involved in the standard-setting process. We do not intend to suggest by this recommendation that investor input trumps all others. Instead, in cases where constituent views cannot be reconciled, we believe that all the investor perspectives should be afforded greater weight.” Pozen explained in describing the change at the meeting, “Not that it [investor perspectives] always wins, but it has greater weight.”
In addition to the list of 9 changes, one additional change was suggested during today’s meeting, by CIFiR member Ed McClammy. He suggested, and the committee agreed, to substitute the phrase “as well as” for the word “about” in the following sentence which appears in Recommendation 3.3 regarding disclosures during what is sometimes referred to as the ‘dark period’ when companies are undergoing restatements. With this change, Recommendation 3.3 now states (new words highlighted, deleted words in brackets): "The FASB or the SEC, as appropriate, should issue guidance on disclosure of financial and other reliable information during the period during which the impact of a financial reporting error is being evaluated or the restatement is being prepared, as well as the [delete: about] need for the restatement and [delete: about] the restatement itself to improve the adequacy of this disclosure based on the needs of investors.
SEC Chief Accountant Conrad Hewitt thanked Pozen and the committee, noting, “This is one reason I came to the commission.“ He added, “I had discussed with [FASB Chairman Robert] Herz before I accepted the position [of Chief Accountant], I was very concerned about complexity in the financial reporting system.” Hewitt said, “I am pleased with all the efforts everyone put into this,” and noted he had asked everyone to 'think outside the box” at CIFiR’s first meeting, and they accomplished that.
Hewitt also observed that a number of the committees’ recommendations are already underway in terms of being implemented. Pozen pointed out that CIFiR’s report has been updated to reference some of these recent developments, including SEC’s XBRL proposal issued in May, and the Interpretive Release on use of corporate websites approved for release by the SEC yesterday. Hewitt thanked Pozen “for your leadership in getting this accomplished.” Pozen thanked the committee as well as the SEC and FASB for their support, including by providing staff resources.
A clean copy of the final report will be posted on SEC’s website. A ‘compendium of recommendations” is provided in the Executive Overview on printed pages 8-18 (pdf pages 13-23) of CIFIR’s “Revised Draft Final Report v2 (Marked for Revisions to v1)

Wednesday, July 30, 2008

SEC Votes To Release Interp Guidance On Use of Corp Websites

At its open commision meeting earlier today (July 30), the SEC voted to issue guidance in an Interpretive Release on the use of company websites for disclosures to investors. As noted in SEC's press release, "The interpretive release will be effective upon its publication in the Federal Register." Further details can be found in the remarks of Corp Fin staffer Kim McManus. Other matters addressed at today's SEC meeting relate to municipal securities disclosures and investment company boards.

FASB Votes for Single Effective Date On Securitization Changes, With Earlier Disclosures

At its board meeting earlier today, FASB voted today to have a single effective date for its proposed amendments to FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and FIN 46R, Consolidation of Variable Interest Entities, which impact off-balance sheet treatment of securitizations, including mortgage and other securitizations. The effective date agreed to today would be: fiscal years beginning after Nov. 15, 2009. (Thus, for calendar year-end companies, the effective date is essentially 2010, a year later than the initial half of the ‘dual effective date’ originally proposed, which would have been 2009 - with a one year deferral for existing QSPEs to 2010.) Timing: The proposed revisions to FAS 140 and FIN 46R are expected to be released for public comment 3Q08, with a roundtable and final standard(s) expected 4Q08.
Separately, FASB agreed today to propose (in a separate proposed FASB staff position or FSP) ‘transition’ disclosures relating to the above standards. (A draft of the proposed disclosures appears in the minutes of the June 4 board meeting.) The scope of the disclosures proposal will be public companies. (Note: certain additional disclosures were also agreed to today to be provided by ‘non-transferors with a significant interest in a QSPE,” as shown on pg 4 of today’s FASB board handout.) FASB’s intent is for these disclosures to be made ‘as soon as possible, but no later than the first interim reporting period in 2009.” FASB Technical Director Russell Golden suggested the board seek comment (e.g., in the Notice to Recipients of the proposed FSP) on: “how much time do you think your company needs, what are things you need to gather, and put in place,” in order to meet the proposed disclosure requirements, and that FASB similarly “gather input from users as soon as possible.”

FASB Chairman Robert Herz noted that while he did not object to offering the single effective date in 2010, “I am kind of chagrined by what we found by some of these inquiries over last five, six months,” adding it has become “apparent to me with the benefit of hindsight, the kind of reporting that was made by a number of preparers, certain large financial institutions, did not meet the desires of the investment community.”

“You have to ask,” said Herz, “when you get poor reporting, to what extent is it based on [accounting] standards, [vs.] poor reporting [or] lack of enforcement.” He added, “My own conclusion [is it has been] a combination of both; certainly while we have acknowledged certain aspects of FAS 140 and FIN 46R could be improved... it is also clear QSPEs have been stretched beyond recognition.”

In a veiled reference to recent comments reported in the press to have been made by President George W. Bush, Herz noted some have described “other aspects of the financial markets [as] being drunk.” He added, “With the benefit of hindsight, it seems unfortunately to be true, [and] very disappointing to me.”

“I think the system can do better than that,” said Herz, adding, “it does pain me to take something that has been abused by some folks to go on for another year.” Examples of ‘abuse’ cited by Herz relate to ““things like ‘significantly limited,’ ‘entirely specified’ [terms used in FAS 140 as limits to the powers of QSPEs, which are supposed to be passive vehicles]” described by Herz as “areas where some have “gone beyond” the standard. He added, “In my view, [some are] actively managed, that should not have been QSPEs; with hindsight we know they were, in certain instances they have to be actively managed with problems in collateral and those kinds of things.”

Herz noted “banking regulators yesterday put out a proposal for comment on standardized capital guidelines, on a number of things,” and that “some of those are inevitably tied to existing accounting.” He added, “we have been dialoguing with [the banking regulators] almost constantly about these matters and the need for ... some careful thinking about implications of these changes.” Among the various banking regulators FASB has talked to, said Herz, include the Office of Federal Housing Enterprise Oversight (OFHEO). (OFHEO oversees Fannie Mae and Freddie Mac.)

Like Herz, FASB board member Tom Linsmeier also used the word ‘chagrined,’ in voting on the change in effective date today. He said at least some constituents are “holding their nose, recognizing practical realities, chagrined we can’t get it done next fiscal year.”

“The loud message I’m trying to send,” said Linsmeier, “is, if people are here to slow us down with comment letters, I’m not interested in slowing down for practical [reasons], the markets need to get better information as soon as possible.” He added, “I will not entertain much sympathy for constant comment letters just saying ‘defer, defer, defer.’”
Board member Leslie Seidman said, “I think today when we talked about the change in effective date, [we were] responsive to concerns raised about people having time to understand the provisions and to work with regulators on capital requirements to make sure those issues are dealt with in a thoughtful way.”

She also noted a commenter had asked FASB to deal with these changes as part of international convergence (with the IASB). She indicated that while FASB would have preferred to deal with the issue as part of international convergence, “Our organization and the [IASB] have received mandates to act as quickly as possible,” to remedy matters perceived as problematic in the standards. “We are trying to achieve that mandate,” said Seidman, “and balance it with adequate time,” i.e. for companies to adapt to the changes. She noted FASB has been communicating with the IASB to aim to be ‘directionally’ consistent, and to try to narrow differences as they proceed.

Board member George Batavick noted, “The challenge is, we really have to clearly communicate exactly what we are asking for, whether in words or examples.”

The board instructed the staff to proceed to drafting a written ballot for the board to vote on releasing this proposed FSP on disclosures for public comment. There will be a 30 day comment period.

Fair 'Nuff ... and ... Now You See It ...

Today we’re going to provide some links to info on two topics: fair value accounting, and SEC’s recent settlement with a company and former exec over alleged fraud committed, in part, by use the modern day equivalent of ‘invisible ink.’
On the topic of fair value accounting – have you seen:
SEC Announces August 4 Roundtable on Performance of IFRS and U.S. GAAP During Subprime Crisis. (SEC press release July 28).

RiskMetrics Group to Hold Webcast on July 30: Proposed Accounting Changes on the Horizon--What Investors Can Expect (Risk Metrics press release July 28)

Accountants and the Crisis: Standard Setters – Troubled Waters (Peter Williams in Accountancy Age, July 25)

Keeping Tabs on the Financials – (Alexis Glick, FoxBusiness, July 25) Includes: “[Y]ou may recall, Jamie Dimon, the chairman and CEO of JPMorgan, discussed the accounting rule on his conference call last week…. he said that mark-to-market accounting is not conducive to a deal environment or would present problems/issues for him to do a deal. … Dimon is a very bright guy. He was telling the Fed, Treasury, FASB, the SEC and the FDIC, if you want me to buy or perhaps rescue another bank or broker dealer, then you better reconsider these FASB mark-to-market rules because they don’t work and they make my life miserable. What will happen? Time will tell … When bad things happen, regulators clamp down for obvious reasons but some of that clamping down in this case, could be to the detriment of the people who need the flexibility the most to stay afloat, raise capital and get deals done. A good story to keep a[n] eye on.”

Dimon to Wall Street: Don’t Blame Accounting Reg’s For Current Mess (Reuters article as published in Financial Week, July 8)

And, some of our recent blog posts: Cox, Geithner Tell Congress… (July 25); SEC Seeks Comment on Fair Value (FV) by July 23; Highlights of SEC July 9 FV Roundtable. (July 17); Fannie… Freddie.. and Accounting? (July 11); Deconstructing Fair Value (July 7); ... Uproar Over IIF Rec’s on Fair Value (May 29); Subprime, Credit Crisis Update (April 29)

Now you see it.. now you don’t…
SEC Charges Ann Arbor-Based Company and Former Executive in Accounting Fraud Scheme (SEC press release, July 22). “The SEC alleges that [the former exec] created false documentation to purportedly support the balances in the manipulated accounts and used "hidden rows" and "white font" functions in spreadsheets to conceal his false accounting entries.”
Don’t Be Fooled by Accountancy’s Invisible Ink (Adam Jones, Management Blog, July 23)

Ex-CFO Used Spreadsheets for Fraud (Stephen Taub,, July 22)

Notice to Would-be Criminals: White Font Doesn't Hide Accounting Lies (Nathan Bomey,, Everything Michigan, July 23)

What are some anti-fraud resources you can turn to on spreadsheet fraud and fraud generally?

The Committee of Sponsoring Organizations of the Treadway Commission (COSO). NOTE: COSO currently has an Exposure Draft (ED) out for public comment on “Monitoring Internal Control Systems,” comments are due Aug. 15. (See FEI summary.)

New Guidelines Aim to Reduce Fraud: Leading professional associations: “Saying you ‘don’t want fraud’ is not enough!” (Press release issued July 8 on joint guidance issued by the Institute of Internal Auditors (IIA), Association of Certified Fraud Examiners (ACFE), and American Institute of CPAs.)

European Spreadsheet Risks Interest Group (EuSPRIG)


NYU School of Continuing and Professional Education: Certificate in Forensic Accounting (website of Sam Antar, former CFO of Crazy Eddie)

WhiteCollarCrimeFighter (website edited by Peter Goldmann, member, ACFE, IIA, the High-Tech Crime Investigation Association (HTCIA) and other professional organizations.)

NOTE: Many of the major accounting firms have a forensic audit practice. There are also consulting firms like Kroll, FTI Consulting, and Navigant Consulting that offer forensic/investigative services.

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Tuesday, July 29, 2008

PCAOB Acts on Successor Firm Registration; SEC To Consider Interp Guidance On Websites

Earlier today (July 29), the PCAOB voted to adopt final rules and a corresponding form (“Form 4”) to facilitate transferring the registration status from predecessor to successor audit firms in the event of a merger or other change in the registered firm’s legal form. Separately, as detailed further below, the SEC is scheduled to consider tomorrow whether to issue interpretive guidance on use of corporate websites.
PCAOB Adopt Rules and Related Form 4 to Ease Successor Firm RegistrationIn a press release issued following today’s meeting, PCAOB Chairman Mark Olson said, "Today’s action will allow for registered firms -- in appropriate and well defined circumstances – to provide audit services without a break in their PCAOB registration status when there has been some change in their legal form. The rules would provide flexibility that is important given the serious implications of a firm operating without registration.” Note: if a successor audit firm does not meet the circumstances specified in the PCAOB rules for use of Form 4, it can still apply for status as a registered audit firm by using the normal Form 1 application process and paying related application fees.
Further details on the results of the PCAOB meeting follow, based on my listening to the webcast of the meeting.
PCAOB staff said the final rules presented today and related Form 4 are substantively as originally proposed. One matter noted in the 5 comment letters they received related to the proposed filing deadline; staff noted they decided to retain as originally proposed, the requirement that a Form 4 must be filed by the successor firm within 14 days of a triggering event. Staff noted there is a provision for a late filing of a Form 4, but continuance of registration status for a late filed form (as opposed to a timely filed Form 4 that meets all other criteria) is not automatic.
Criteria for use of Form 4There are two categories of circumstances in which audit firms can use Form 4 to succeed to registered status of the predecessor firm without any break in its registered status: (1) change in legal form of organization (e.g. changing from a private corporation to a limited liability partnership); and (2) acquisitions or combinations involving registered firms – in which the previously registered firm ceases to exist as a registered firm. Additional criteria also apply, including that (1) a majority of equity owners of the predecessor firm are part of the successor firm, (2) the successor firm makes certain required affirmations (e.g. regarding the authority of the PCAOB and intent to cooperate with the PCAOB, and responsibility for matters of the predecessor firm with respect to the PCAOB), and (3) in the case of an unregistered firm seeking to obtain the registration status of a firm it is merging with or acquiring, that the unregistered firm be able to assert it did not: (a) have employees under disciplinary proceedings, (b) issue any audit reports for issuers (public companies) without being registered, or (c) operate without a license (i.e. where such license to provide accounting or audit services is required by a state, agency, board, or other authority).
PCAOB staff noted one change made in the final rule based on comments on the proposed rule was an attempt to narrow scope of a requirement for which the successor firm affirms responsibility for the predecessor firm. Commenters said the proposed requirement implied the successor firm would take on continuing obligations of the predecessor firm in civil or criminal proceedings. Staff said the new language in Item 4.2 of Form 4 attempts to narrow the scope of this affirmation by relating it more directly to assuming responsibility over matters of the predecessor firm relating to the Board (i.e., PCAOB).
Form 4 not likely to lead to ‘gaming’ the system; Registration status not a ‘commodity’Board member Dan Goelzer noted, “When we talked about this at the proposal stage, there was some concern about firms gaming the system and avoiding full registration by using Form 4.” He asked, “What would happen if an unregistered firm, with an extensive state disciplinary history, decided it would be a good idea to have one of their partners, perhaps someone who didn’t personally have a disciplinary history, form a new firm, and then register that firm, and then have the old partners move into that firm? Would that be an end-run around our system? Or how would these rules effect that situation?”
Michael Stevenson, Deputy General Counsel, said, “I actually think - going through the Form 4 process - if someone were of a mind to game the system, that’s not how they would do it.” In the circumstances described by Goelzer, Stevenson noted, the firm would only receive temporary registration since they would have to answer in Form 4 that they had individuals with disciplinary histories. He explained “the permanence of the registration would depend on [PCAOB] Board action.”
Goelzer also asked for clarification of the requirement that, for the successor firm’s registration to succeed that of the predecessor firm, the predecessor firm ‘no longer exist as a public accounting firm.’ For example, he asked, “If partners with a public company audit practice leave an existing registered firm, [go] elsewhere, and want to take the registration along, but the old firm will continue to practice accounting, say private company audits, and perhaps a tax practice, would that be a bar to use of Form 4?”
Stevenson replied that while the rule does not preclude that type of situation from happening - and noted that situation could be ‘perfectly appropriate’ (i.e. from a business point of view) – the particular circumstance described by Goelzer would preclude use of Form 4. “The reason for that,” said Stevenson, “is the registration status should not be treated as - and isn’t - a commodity to be transferred from one firm to another.” Stevenson continued, “As long as the registered firm continues to exist as a public accounting firm… that registration status can’t go anywhere else.” He noted the PCAOB intentionally requires that the predecessor firm ‘cease to exist as a public accounting firm’ vs. ‘cease to exist’ so as “not to needlessly rule out that an entity legally formed … couldn’t be used for something else, a different kind of business couldn’t’ be housed there, without having to shut it down altogether.”
Goelzer followed up, “If the old entity survived, it would have to go into some totally unrelated business, something not connected to accounting, in order for Form 4 to be available?” Stevenson agreed.
Foreign audit firmsGoelzer noted that with respect to foreign firms, “Often in their registration applications, they withhold some of the information that we normally require, based on an assertion that to provide it would conflict with their home country law.” He asked, “Would that have any impact on a firms’ ability to use Form 4?”
Stevenson replied, “I wouldn’t think so, maybe in a rare, unusual case.” He noted, “A non-US [audit] firm can use Form 4 and still assert a legal conflict with respect to the item that requires that they affirm their consent to cooperate with the Board [PCAOB] and enforce that consent with associated persons, which is an item that occasionally firms in the Form 1 context assert a legal conflict with respect to, and that’s allowed in Form 4.” He added, “If there is something in Form 4 that a firm thinks it is precluded by its local law from providing other than that, then I think it just can’t use Form 4, but I would add that, based on our experience in reviewing the kinds of conflicts that firms assert in the Form 1 context, there isn’t anything in Form 4 that I would expect to raise that problem; [it is] very straight forward, very high level information, so we wouldn’t anticipate that that would be a problem in the usual case.”
NOTE: This discussion did not pertain to substantive cooperation of foreign audit firms per se, but to the fact that under the current regime (Form 1) and under the proposed Form 4, foreign audit firms sometimes state they are precluded by local (also called ‘home country’) law from being able to ‘affirm’ certain matters (including as relates to ‘cooperation’) on which their affirmation is required on their registration forms with the PCAOB. Further background on this issue can be found in the PCAOB’s “Frequently Asked Questions Regarding Issues Relating to Non-U.S. Accounting Firms.”
Inspection aspects, Next stepsBoard member Charlie Niemeier noted he supported the rule because “It provides an easy mechanism to qualify for uninterrupted registration,” and that “the proposal appropriately describes situations in which a new firm should not be treated as succeeding to another firms’ registration.” He added, “I am comforted to know we will be inspecting the firms, whether it’s through Form 4 or Form 1 that they are registered with us, and if they don’t live up to the applicable standards then we will address it in that context.”
As is the case for all final rules of the PCAOB (as set forth in the Sarbanes-Oxley Act), the final rule will now be filed with the SEC. The SEC posts final PCAOB rules with a Notice and Comment period, and then determines whether to approve the PCAOB final rule (and in this case associated Form 4). The PCAOB states in its press release the final rule and Form 4 will become effective 60 days after SEC approval.
SEC to Consider Interpretive Guidance on Use of Corporate WebsitesIn other regulatory news, the SEC is slated to consider at an open commission meeting tomorrow (July 30), “whether to publish an interpretive release to provide guidance regarding the use of company web sites.” Other matters on the agenda for tomorrow’s open commission meeting relate to municipal securities disclosures and investment company boards.
SEC’s Advisory Committee on Improvements to Financial Reporting (CIFIR) – which is holding its final meeting (by teleconference) this Thursday, included a related recommendation on use of corporate websites in its deliberations. CIFIR will consider its Revised Draft Final Report at its meeting this week, and will vote on whether to issue it as a Final Report to the SEC.

Monday, July 28, 2008

Roadmap to a Roadmap - SEC's IFRS Roadmap - UPDATED

[UPDATE 8PM EDT: Even later today, SEC posted a press release announcing the title of the August 4 roundtable as: "Roundtable on Performance of IFRS and U.S. GAAP During Subprime Crisis." It appears the description of the roundtable has evolved since the earlier descriptions in today's SEC News Digest (cited in the 5pm update below) and related Sunshine Act Notice from earlier this afternoon. Specifically, the scope of the Aug. 4 roundtable as described in the press release appears broader (by addressing U.S. GAAP as well as IFRS) and perhaps in some ways narrower (since the press release does not explicitly state the roundtable will include an "open discussion on International Financial Reporting Standards (IFRS)" and an "update on IFRS developments" as described in the earlier documents; although I would venture to guess its 'more likely than not' the SEC will use this platform as an opportunity to provide an update on their development of the 'IFRS roadmap' discussed further below.] [UPDATE 5PM EDT: This afternoon, the SEC announced (in today's SEC News Digest - thank you Securities Mosaic for highlighting this development to subscribers): that it will hold a Roundtable on International Financial Reporting Standards (IFRS) on Aug. 4 at 1pm.]
SEC Chief Accountant Conrad Hewitt, in an interview published today in, written by Liz Gold, Associate Editor, AccountingToday, said a proposal relating to the SEC’s International Financial Reporting Standards (IFRS) roadmap will be out “sometime before September 21.”
What could the September 21 date signify, I wondered? Is it related to the fact that the annual World Standard-Setters meeting will take place Sept. 11-12? Or that Sept. 21 is the International Day of Peace? Actually, I figured out it’s probably a backstop date as the last official day of summer, given that Hewitt told WebCPA’s Gold: “the commission planned on doing something this summer, in terms of a proposal and release and some kind of action by the commission on a roadmap-type approach,” and SEC Chairman Christopher Cox said in a June 12 speech that, “whether, and under what circumstances, U.S. issuers should be allowed to prepare their financial statements using IFRS…” is “…a vitally important topic the Commission is scheduled to take up in the form of a proposed rulemaking later this summer.”
While Sept. 21 may be a backstop, how soon could the SEC act? According to Jeff Minton, Chief Counsel in the Office of Chief Accountant, also interviewed in the WebCPA article, the SEC staff has been working on developing a recommendation relating to the IFRS roadmap since February, but, “until the total current four commissioners vote on it, then nothing has been issued yet.” Minton’s reference to ‘four commissioners’ is particularly interesting in that it could signal the SEC may act to release the proposal any time now, since they currently have four commissioners in place; with Elisse Walter having been sworn in on July 11, the commissioner count currently stands at four. The SEC awaits the swearing-in of 2 more new commissioners: Luis Aguilar and Troy Paredes, and Commissioner Paul Atkins, who stayed beyond the official end of his term in June pending arrival of the new commissioners, is reportedly leaving the SEC at the end of this month (as reported by Neil Roland July 9 in Investment News).
A concise description of the IFRS roadmap was given in this speech by SEC Corp Fin Director John White at FEI’s June 5 IFRS conference: “It is likely that this roadmap would formally propose a schedule and appropriate milestones for continuing the progress that the U.S. is making to more fully accept IFRS in this country, not just from foreign companies but also from U.S. companies.” White added, “I truly believe that the endpoint will be U.S. issuers using IFRS and that it is time to move in this direction.”
Similarly, Hewitt is quoted in WebCPA today noting that by 2011, over 150 counties are likely to be using IFRS, adding, “so something tells me that after 2011 the U.S. probably needs to mandatorily switch to IFRS, whether it be 2014 or whenever, to give the U.S. companies time.” He also indicated the roadmap involve various issues, and would extend beyond ‘current commission action.’ (Note, in that regard, the IFRS roadmap would be similar to the earlier ‘roadmap’ which addressed the question of foreign private issuers (FPIs) being allowed to file in IFRS in the U.S. without having to reconcile to US GAAP, a decision process initiated under then-Chairman William Donaldson and then-Chief Accountant Don Nicolaisen in 2005, and completed last fall, with the SEC’s decision to drop the reconciliation requirement for FPIs. Read more about these issues, including SEC’s consideration of a possible phase-in period, and possible consideration of offering optional adoption of IFRS prior to any mandatory date, in the WebCPA article.
IFRS resources: If you missed FEI’s June 5 IFRS conference, learn the latest about the status of convergence efforts at our annual Current Financial Reporting Issues (CFRI) Conference Nov.17-18 in NYC – speakers include the chairmen of the SEC, FASB and IASB. For even more detail on IFRS, sign up for the one day conference immediately following CFRI, “IFRS: Strategies for Adopting a Single Set of Standards,” Nov. 19 in NYC, sponsored by Deloitte. These conferences are described under “networking events” on Also, check out the Corporate Roundtable on International Financial Reporting (CRIFR), launched in June.
Separately, one of the points noted by Hewitt in the WebCPA article in determining readiness of the U.S. for a switch to IFRS would be: “are the universities in the U.S. teaching IFRS? Is it on the CPA exam?” The American Accounting Association (AAA), the professional association of accounting professors in the U.S., is holding a number of sessions relating to IFRS at its upcoming annual meeting and CPE sessions in early August, and provides links to related resources (see AAA links).
SEC ‘Complexity Committee’ Posts Agenda, Revised Draft Final Report
In other SEC news, the “Revised Draft Final Report” of SEC’s ‘complexity’ committee, the SEC Advisory Committee on Improvements to Financial Reporting (CIFIR - chaired by Robert Pozen), was posted today in advance of CIFIR’s final meeting slated for this Thursday (7/31), along with the agenda for the meeting.
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Friday, July 25, 2008

Cox, Geithner Tell Congress...

Accounting issues were among topics addressed to and by SEC Chairman Christopher Cox and New York Fed President Timothy Geithner at the House Financial Services hearing yesterday (July 24) on Systemic Risk and the Financial Markets. Cox indicated ‘real-time’ guidance is coming on fair value accounting in inactive markets, and Geithner said he expects additional recommendations of a working group on over-the-counter (OTC) derivatives infrastructure soon. Congressman Paul Kanjorski noted he has requested that GAO conduct a study of Structured Finance Products.
On a broader level, Cox and Geithner discussed their views of the role the SEC and Fed should play, including the recent Memorandum of Understanding (MOU) on cooperation signed by the two agencies, and noted where they believed additional legislation was warranted, regarding oversight and regulation of commercial and investment banks. (Links to written testimony: Cox and Geithner) We focus today on the accounting issues discussed at the hearing, including interplay of accounting and capital requirements. For a general more general summary of the hearing, see “SEC’s Cox Says Investment Banks Play a Unique Role,” by AP’s Marcy Gordon, carried on

Guidance on Fair Value Coming
Congressman Barney Frank, chair of the House Financial Services committee, noted there can be a “conflict between actions that protect investors, and systemic stability,” adding, “there are times those two could pull in different directions.” He cited mark-to-market accounting as an example of this conflict.

[Note: for simplicity the terms mark-to-market (MTM) and fair value (FV) are often used interchangeably, although the FASB standard - FAS 157, Fair Value Measurement - includes other measures besides market value. However market value is the most prominent and considered the most relevant input (level 1 in the 3 level hierarchy) for determining fair value in the standard.]

“Clearly investors are entitled to know what is the real value they are buying into,” continued Frank. However, he noted, “It is also the case that … mark-to-market could have procyclical effects, “ adding, “our interest [in] informing investors on mark-to-market could have negative consequences.”

“No one is suggesting back off mark-to-market,” said Frank, but referring to Cox’ testimony, noted “[Chairman] Cox’ suggestion, how to combine investor protection... [with] some flexibility in consequences [as to] how much capital has to be raised,” (i.e., to meet bank regulatory requirements for capital) is an important consideration.

N.Y. Fed President Geithner responded, “I don’t know how we get a better balance between accounting regimes that now apply, particularly to institutions that exist at the core of the system,” and capital requirements. He continued, “What you want is a system where you have a level of cushion in terms of capital reserves, liquidity, … [so] when things change, those cushions are stabilizing rather than destabilizing. If the cushions are too thin you risk amplifying the crisis.”

“If you look at incentives we create through [the] capital and accounting regime,” said Geithner, “the basic issue of procyclicality [is] very complicated.” He added, “Very thoughtful people spend a lifetime advocating benefits of both those regimes, we live somewhere in the middle.”

SEC Chairman Cox noted the SEC hosted a roundtable on FV accounting on July 9, at which “we heard from a wide variety of participants… the general consensus was FV has been a help to investors in these difficult circumstances, they want more not less… it has not been the cause of volatility in the markets or other problems we’ve seen in the current market turmoil.” He added, “There are in Europe existential questions about [whether to use] FV or not,” but “I don’t think we’re having that debate in the U.S.”

“The real question is,” said Cox, “at the margin,” [i.e. in inactive markets], “[using a] model trying to generate price, [when you have an] asset throwing off cash.. do you have to value at zero?” Importantly, Cox noted, “We are hoping to provide answers in real time in the form of guidance.”

[Note: this sounds to me like the SEC may issue guidance sooner than later in the form of a staff questions & answers (Q&A) document or a staff accounting bulletin (SAB). Additionally, as previously reported, at the close of SEC’s July 9 FV roundtable, Cox said staff of the SEC, FASB and PCAOB would consider next steps in developing further guidance on FV.]

[In related news, although not mentioned at the hearing, the IASB’s Expert Advisory Panel on valuing instruments in inactive markets noted in a summary posted on July 24 that it plans to discuss a draft document on July 31 and post it for public comment thereafter. The draft document will contain (1) a summary of the issues encountered in the credit crisis; (2) IAS 39’s requirements re: those issues; and (3) a summary of how the panelists have dealt with the issues in practice, focusing on the processes and approaches used when measuring the fair value of financial instruments when there is no longer an active market. The IASB adds (hat tip to BNA’s Daily Report for Executives for flagging this point): “Due to the urgency of completing this work in a timely manner, we will ask interested parties to provide comments to us fairly quickly.”]

Changes to Securitization, Off-Balance Sheet Accounting Discussed With Bernanke, Cox Says
One Congressman asked if the SEC and Fed are “studying implications of FASB fast tracking elimination of Qualified Special Purpose Entities (QSPEs), which allow for securitization in the marketplace.”

“Are you studying effects of this rulemaking on the marketplace,” asked the Congressman, who added, “after all, in my opinion, the Federal Reserve, but more importantly Treasury … stepped in [to support] Fannie Mae and Freddie Mac because of a Lehman Brothers report that explained the risks going forward on [upcoming amendments to the] FASB rule, [in which Lehman Brothers noted the] possibility they may need to raise $75 billion in capital.”

Cox responded, “I think it’s wrong to say this is being fast tracked, the likely scenario [is, there will be] a period for public comment.”

Referring to the FASB, the Congressman replied, “They’ve said they want it done [by the] end of [the] year.”

Cox said, regarding the effective dates for the changes described by the Congressman (particularly FASB’s plan to eliminate QSPEs as a vehicle to obtain sale treatment or off-balance sheet treatment for securitizations of mortgage-backed and other securities), “we’re talking years into the future.” UPDATE: See our separate blog post today (July 25), “FASB To Reconsider Timing on Proposed Changes to Securitization Rules.”

“The answer to your question, is yes, we are not just studying it, we have discussed this extensively with FASB, the Federal Reserve Bank of New York, and just yesterday with [Fed] Chairman Bernanke,” said Cox. “We are very focused on this and understand precisely the environment we are operating in on this, [we] understand the importance of reforming accounting, something the President’s Working Group asked FASB to do.” On the other hand, continued Cox, they don’t want to create unnecessary [burdens/challenges] (Note: I didn’t hear the exact word Cox used after ‘unnecessary’ but it seemed like it would have been ‘burdens’ or ‘challenges’).

Geithner agreed, saying the full range of dynamics of the credit market crisis need to be thought through, including implications of changes in accounting rules on the capital regime. He added he “appreciates Chris [Cox’ efforts] to bring more broadly to [attention of] the Fed and others those implications.”

Kanjorski Asks GAO to Study Structured Finance Products; Bachus Asks About CDS
As noted above, Congressman Paul Kanjorski said in his opening statement that he has asked the U.S. Government Accountability Office (GAO) to conduct a study on structured financial products, including credit default swaps and collateralized debt obligations.

“This study will examine the nature of these instruments and the degree of transparency and market regulation surrounding them,” said Kanjorski. “From this study, we should obtain a clearer picture of how to improve regulation in this sector of our financial system.”

Congressman Spencer Bachus, Ranking Member on the House Financial Services Committee noted the total volume of one such instrument, Credit Default Swaps (CDS), is currently “roughly twice the size of the stock market.”
Bachus acknowledged the Fed has worked with market participants to centralize clearing, automate trading and settlement mechanisms for CDS, but asked (as detailed further in his opening statement), “how [did] we arriv[e] at a system in which the issuers of credit default swaps are allowed to provide guarantees that so far exceed their capital reserves that there is virtually no possibility they can pay in the event of defaults of the underlying obligations?” He asked about the role of the SEC in supervising investment banks, and added, “why [did] our regulators … allo[w] credit default swaps to remain essentially unregulated while they became intertwined in transactions throughout our economy?” leading to a situation in which “almost every primary dealer is considered ‘too big or interconnected to fail’.”
“If we accept this premise — that every primary dealer is “too big to fail”,” said Bachus, “then we also have to conclude that our financial markets are no longer capable of self regulation and that government must exercise greater control, both as a regulator and as a lender — if not a buyer — of last resort. As I indicated at our first hearing on this subject two weeks ago, that is a conclusion that I am not prepared to accept.” Bachus asked Geithner: “How can we contain the risk of default of CDS and still maintain use of CDS as a valuable risk management tool?”

Geithner responded that CDS “bring very important benefits we want to maintain, but [also present] challenges.” Two critical things, said Geithner, are that dealers need to carefully manage their exposures, and there needs to be a centralized trade processing infrastructure to support and automate what is currently a ‘bilateral’ or dealer-to-dealer market.

Referencing the OTC Derivatives Market Infrastructure convened by the Fed, Geithner said, “You will see in the public domain in the next couple weeks another set of [recommendations/objectives] from those dealers.”

Where will you be a year from now?

One Congressman asked Cox and Geithner, “Where are you guys going to be a year from now?”

Cox replied, “[That’s a] fascinating question.” He added, “I hope at least the market environment in which I am operating at that time will be a positive one and a strong one.”

Geithner, asked specifically by the Congressman “Will you be at the Fed,” responded, “Life is uncertain, but I certainly expect to be.”

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FASB To Reconsider Timing On Proposed Changes To Securitization Rules

FASB announced in its weekly Action Alert yesterday (July 24) that at next week's FASB board meeting, it will “reconsider the effective date and transition provisions” for its upcoming proposals to amend the securitization standards (FIN 46R and FAS 140). Additionally, FASB will “consider transitional disclosures and the timing of both projects.”

Earlier today (July 25), Congressman Spencer Bachus, Ranking Member on the House Financial Services Committee, posted a press release noting he sent a letter to the chairmen of the SEC and FASB earlier this week, asking them to “extend the deadline for changes” to FASB’s upcoming revisions to FIN 46R and FAS 140 on securitizations “to allow for a full opportunity for all stakeholders to evaluate and comment on all policy alternatives and their consequences.”
Bachus’ July 22 letter to SEC and FASB notes, “While expeditious regulatory action has been beneficial in many areas, I am concerned that your current timeline to amend FASB Statement 140… and [FIN]46R… by the end of 2008 may have serious unintended consequences. Changes to securitization accounting could have a dramatic impact on the economy, the capital markets, and consumers seeking credit.” Bachus then asks that the effective date for the revisions to FASB’s securitization rules be no sooner than Jan. 1, 2010. “In the interim,” says Bachus, “the SEC and FASB should work with market participants to develop temporary solutions to improve market transparency and disclosures.” [In related news, see also our separate blog post today: “Cox, Geithner Tell Congress…” about yesterday’s House Financial Services hearing on Systemic Risk and the Financial Markets; accounting was one of the topics mentioned at the hearing.]

A joint letter was also recently sent to FASB by the American Securitization Forum (ASF) and the Securities Industry and Financial Markets Association (SIFMA) (see ASF-SIFMA July 16 letter) asking FASB to further delay the effective date of its proposed changes to the securitization rules beyond year–end 2008.

NOTE: FASB had already tentatively decided to give even more time for some of the proposed changes to the securization rules, such as those impacting existing QSPEs; ASF-SIFMA and Bachus are recommending more time for the proposed changes in their entirely.

Thursday, July 24, 2008

FASB Scopes Out Lessors From Leasing Project; Moves Toward Proposal on Disc Op's

The FASB board voted at its meeting yesterday (July 23) to scope out lessor accounting and focus on lessee accounting, in its current joint project on leasing with the IASB. This decision was made to help with timing of a final standard on leasing, by focusing on the area that has received the most concern, off-balance sheet accounting by lessees. Additionally the board believes some aspects of lessor accounting will hinge on decisions reached in other current projects, including Revenue Recognition. Board members noted, however, they and the staff should continue to monitor potential asymmetries in lessor and lessee accounting.

Additionally, FASB agreed that the current IAS 17 (Leases) finance lease model (with some modifications as determined in this project) should be applied to all leases, including those currently classified as operating leases.

The impact of adopting the IAS 17 model, as described in FASB’s board handout: “This would require the lessee to recognize (1) an asset representing the right of use of the leased item for the lease term and (2) an obligation for the present value of the rentals for that term.”

Additional matters discussed related to options to extend or terminate a lease and contingent rentals.

FASB board members were in favor of a single model for leasing, based on the “best estimate” of “expected lease payments” – taking into account options to terminate or extend a lease and other matters; however they were not in favor of requiring a probability-based approach to making this determination, and appeared to lean away from using terms suggested by staff like “reasonably certain,” since such terms are sometimes implemented (e.g. by auditors) with certain percentage of likelihood thresholds or bright lines.

However, it remains to be seen if IASB (at its meeting today) will agree with a non-probability based definition of “expected lease payments” given contingent liabilities in general (under IAS 37, Provisions, Contingent Liabilities and Contingent Assets) are probability-weighted.
The board instructed the staff to obtain additional feedback from the joint working group on leasing as it moves toward issuing its preliminary views in a Discussion Document, expected 4Q08.

Discontinued Operations Proposal Coming
Separately, FASB discussed its upcoming amendments of various standards relating to the definition of, and disclosures relating to, discontinued operations. The board agreed to amend the proposed definition of discontinued operations to include ‘businesses (as defined in Statement 141(R)) that meet the criteria to be classified as held for sale on acquisition’. FASB is now proceeding to a preballot draft of an FSP on this project; other matters discussed can be found in the board handout.

Additional details from yesterday’s FASB meeting can be found in this FEI summary. (summary can be downloaded by FEI members; see info on FEI membership.)

Tuesday, July 22, 2008

Treasury Adv. Comm. on Audit Prof'n Issues 2nd Draft Report for Comment; Deputy Chief Acc't Zoe-Vonna Palmrose Leaving SEC

Earlier today, the U.S. Treasury Advisory Committee on the Auditing Profession (ACAP), co-chaired by former SEC chairman Arthur Levitt, Jr. and former SEC chief accountant Don Nicolaisen, voted to publish for public comment its Second Draft Report for a 30 day comment period. The Second Draft Report contains revisions made to the original Draft Report and Addendum, based on testimony received at ACAP meetings and comment letters received.

[NOTE: FEI’s Committee on Corporate Reporting (CCR) was among those who filed a comment letter on the original draft report.]

One matter not yet reflected in the Second Draft Report, said Bob Glauber, chair of ACAP’s subcommittee on Firm Structure and Finance, is a statement on litigation reform. Glauber noted that his subcommittee was unable to reach a consensus on that issue, and they will add to the draft report “a fair and balanced statement of the various views on litigation reform.”
Separately, ACAP co-chair Don Nicolaisen noted at the end of the meeting that one of the observers on ACAP, SEC Deputy Chief Chief Accountant Zoe-Vonna Palmrose, is leaving the SEC at the end of this month to return to academia. Prior to joining the SEC in 2006, Palmrose taught at USC.

We will post further details from today’s Treasury ACAP meeting in a summary on FEI’s website.

Monday, July 21, 2008

Monitoring Group, Enlargement of IASB Board Formally Proposed By IASCF Today

Earlier today, the International Accounting Standards Committee Foundation (IASCF), which oversees the International Accounting Standards Board (IASB), published for public comment a Discussion Document entitled: “Review of the Constitution: Public Accountability and the Composition of the IASB - Proposals for Change.” The comment deadline is Sept. 20.

In a world that is rapidly moving toward convergence of accounting standards around International Financial Reporting Standards (IFRS) published by the IASB - including the expected issuance by the U.S. Securities and Exchange Commission (SEC) of a ‘roadmap’ to consider permitting – or requiring – U.S. companies to file with the SEC in IFRS instead of U.S. Generally Accepted Accounting Principles (U.S. GAAP), (see SEC Chairman Christopher Cox’ May 28 speech at IOSCO’s annual conference, and SEC Division of Corp Fin Director John White’s June 5 speech at an FEI conference) - the IASCF’s Discussion Document contains two proposals that have been fast tracked, with a proposed effective date of Jan. 1, 2009. The proposals contained in IASCF’s Discussion Document released today would:

Establish a formal link between the IASCF and a new Monitoring Group. The Monitoring Group would be autonomous, and would be comprised of “public authorities generally charged with the adoption or recognition of financial reporting standards and international organisations with a mandate that includes facilitating the development and effective functioning of capital markets.”Specifically, when first formed, the Monitoring Group is proposed to include: the responsible member of the European Commission, the managing director of the IMF, the chair of the International Organization of Securities Commissions (IOSCO) Emerging Markets Committee, the chair of the IOSCO Technical Committee, (with certain exceptions if that person is from a geographic region already represented), the commissioner of the Japan Financial Services Agency, the chairman of the SEC, and the president of the World Bank. The Monitoring Group would be responsible for approving the selection of IASCF Trustees, and can recommend Trustees. Additionally, The IASCF Trustees would report to the Monitoring Group regularly “to enable [the Monitoring Group] to address whether and how the [IASCF] Trustees are fulfilling the requirements set out in the Constitution.” The items which IASCF is responsible for according to the constitution include: appointing members of the IASB, overseeing its funding, supporting the ‘use and rigorous application’ of IASB’s standards, and overseeing IASB’s: strategy, “including consideration, but not determination, of the IASB’s agenda,” operating procedures, consultative arrangements, and due process (including associated with feedback statements and impact assessments).

Expand the membership of the IASB from its current size of 14 members, to a total of 16 members, and specify a geographic breakdown for those members. Previously, there were no specific geographic requirements for board members of the IASB (although there are existing geographic requirements for the IASCF Trustees). The geographic distribution proposed for the IASB board (updated from earlier draft proposals presented at constitutional roundtables) would include: four members from the Asia/Oceania region; four members from Europe, four members from North America, one member from Africa; one member from South America; and two members appointed from any area, subject to maintaining overall geographical balance

As noted in IASCF’s press release issued today, in addition to the proposals contained in the Discussion Document released today, on which comments are due Sept. 20, the IASCF will seek input on additional proposals relating to their constitution later this year (and the expected proposed effective date on those additional proposals is currently expected to be Jan. 1, 2010.)

IASCF begins search for new board members, trustees, SAC members
Separately, the IASCF recently reported on the results of other matters deliberated by the IASCF Trustees at their meeting earlier this month in Washington, DC. Among those matters was to approve commencement of a search assisted by executive recruitment firm Spencer Stewart to begin to identify nominees to fill vacancies for IASB board members which will arise in 2009, 2010 and 2011. (A minimum of 8 such vacancies are expected to arise.) Also, the IASCF is commencing a search for three new IASCF trustees who have served their second term or are otherwise not renewing for a second term, including one trustee from North America.

Additionally, the IASCF Trustees agreed to change the membership structure of the IASB’s Standards Advisory Council (SAC) [similar in function to FASB’s Financial Accounting Standards Advisory Committee or FASAC]. Under the new structure approved by the IASCF Trustees, members of the SAC would serve primarily as representatives of organizations. The IASCF notes this change may be further considered during the second part of their constitutional review later this year. The IASCF states they will begin seeking candidates for the SAC soon, since the terms of all SAC members expire this year.

Want to learn more about IFRS?
Would you like to learn more about the move to International Financial Reporting Standards (IFRS)? Sign up for FEI's Current Financial Reporting Issues (CFRI) conference taking place Nov. 17-18 in NYC - featured speakers include SEC Chairman Christopher Cox, IASB Chairman Sir David Tweedie, and FASB Chairman Robert Herz. CFRI is the premier place to get the latest info on hot topics in financial reporting. For even more detail on IFRS, check out our Nov. 19 conference in NYC sponsored by Deloitte: IFRS: Strategies for Adopting A Single Set of Standards.

Friday, July 18, 2008

It's the Governance, Guv

Three articles on governance in the current (July-August) issue of Financial Executive Magazine (if you are not an FEI member, you can create an online login account (free) to read the articles):

Governance Key to Avoiding Compensation Suits, by Edward Labaton, Senior Partner, and Michael Stocker, Associate, Labaton Sucharow LLP.

Audit Committees’ Enhanced Role, Responsibilities and Focus, by R. Trent Gazzaway, National Managing Partner of Corporate Governance, Grant Thornton LLP.

How Technology Enhances Governance Compliance, by Michael R. Knighton, Vice President, Corporate Workflow Tools and Bijal Sheth, Vice President, Strategic Marketing, in the Tax and Accounting business at Thomson Reuters.

Financial Executive Magazine, the flagship publication of FEI, recently won two awards. The July-August issue of the magazine was the last one published under then-Editor-in-Chief Jeffrey Marshall; as noted here, Marshall retired June 30, and Executive Editor Ellen M. Heffes has been promoted to Editor-in-Chief. FEI welcomes Marian Raab, J.D. as Managing Editor of the magazine; Raab joins FEI from American Banker.

Thursday, July 17, 2008

SEC Seeks Comment on Fair Value Accounting By July 23; Additional Highlights From July 9 FV RT

A ‘Request for Comment’ was included in SEC's 'Notice of Roundtable Discussion” posted July 3 (Fed Reg, July 9) in advance of their July 9 Roundtable on Fair Value Accounting. This was briefly referenced by Chief Accountant Conrad Hewitt and Deputy Chief Accountant Jim Kroeker at the roundtable. It is not uncommon for SEC to include a request for comment in conjunction with a roundtable or advisory committee meeting, to solicit wider input. Comments, due July 23, are being posted on SEC’s website.

We previously reported that SEC Chairman Christopher Cox concluded the July 9 roundtable by saying: “We heard from investors today fair value can be extremely useful,” but “some … institutions and some public companies have told us [of] significant challenges… and when fair value is unreliable, it can result in unintended consequences.” He stated, “The Commission and staff will meet with FASB and PCAOB to consider next steps, making certain Fair Value accounting truly serves the interest of investors and all users of financial statements.”

As promised, we have posted additional Highlights from SEC’s Fair Value Roundtable. If you’re an FEI member, you’ll be able to read our 13 page summary; if not, here’s some highlights from our highlights:

Investors want fair value [FV] information
Kurt Schacht, Managing Director of CFA Institute’s Centre for Market Integrity cited results from a survey of its analyst members, noting over three quarters support fair value. [NOTE:

One result not cited, was that 55 percent of their respondents answered “Yes” to the question: “Are fair value requirements aggravating the global credit crisis.] Schacht urged there be no ‘moratorium’ on FV measurement, saying any such moratorium, “particularly in the context of the current credit crisis, would be a disaster in our view.” He rejected arguments of procyclicality, saying, “We have seen FV described as ‘gas on the fire,’ …‘madness’ … that it somehow perpetuates the cycle of breached capital ratios and covenants. To that we say: nonsense, we think there are lots of things that caused the crisis, fraud[ulent] underwriting, credit rating reform issues…. the list of causes goes on, [but] what is not on that list, in our view, is accounting policy.” Schacht said although FV is “not perfect by any stretch, particularly with regard for implementation around illiquid instruments,” more FV information is needed, and disclosures need to be improved.

Jane B. Adams, Managing Director, Maverick Capital (previously a Deputy Chief Accountant at the SEC and project manager at the FASB and AICPA), said “Investors are best served if all financial instruments are marked to fair value each period through profit and loss.” She added, “The present debate in the press is not about fair value, rather it is about suspending accounting for impairment.” Separately, she noted, “We invest at Maverick with imperfect information we have on real tangible book value based on fair value of … positions.”

Russell Mallet, a partner with PwC, said, “The credit crisis has fueled debate on a variety of issues including FV accounting,” but noted, “while others may not agree, we believe for now FV is the best available method to reflect market conditions.”

Wes Williams, Executive-In-Charge of Crowe Chizek and Company’s Assurance Professional Practice group, said, “Financial reporting data must be relevant, and relevance is measured by availability of timely and accurate information to assist users in their decision making.” He added, “FV is most relevant accounting measure for financial instruments, period.”

Hal Schroeder, Director of Relative Value Arbitrage at Carlson Capital and a member of FASB’s Emerging Issues Task Force (EITF), said, “It’s been 15 years since I was a partner at Ernst & Young, so I’m far enough away and removed from accounting to not get too balled up in a lot of the details.” He said, “Hopefully I can give you perspective from an investor, I oversee a team of investors who over a year will trade over $50 billion of stocks, at the heart of what we do is analysis of financial statements, so FV accounting is extremely important to us.”

Matt Schroeder, Managing Director and Global Head of Accounting Policy at Goldman Sachs, said, “For us, FV is the oxygen of the firm, we live by it, it’s part of our fabric, we follow daily discipline of marking to market at our firm.” He added that FV accounting “allows us to make economic decisions whether to buy or sell without regard to triggering a gain or loss, [without having to ask] is it going to taint my portfolio, it allows us to be free from those constraints.”

Difficulty in fair valuing in illiquid markets
Gary Kabureck, chief accounting officer, Xerox Corporation, (and a member of FEI’s Committee on Corporate Reporting (CCR)) said: “I believe FV accounting is more important today than ever and FASB is absolutely correct in their focus. That said, and while FV measures clearly do belong in more places than in the past; I am concerned that perhaps we have gone too far in trying to apply FV in too many places where at least arguably it doesn’t belong or produces an arguably misleading result.”

Joe Price, CFO Bank of America (BofA), said, “At Bank of America, our core business is banking, [and] banks have a clear longer term interest… We also have a securities business, with a capital profile different from the banking business.” He added, “the FV model must be consistent with the business.” Price said, “We believe a mixed attribute model has a place in accounting. Those business models with high velocity, FV is not only appropriate, but an integral part of the control system.” He acknowledged there are “difficulties in application of FV,” and that “additional guidance on measurement in distressed markets would be helpful.”

Charlie Holm, chief accountant, bank supervision, Federal Reserve Board (FRB), said, “As a bank supervisor, we recognize there are both positive and negative aspects related to FV accounting.”

He continued, “For actively traded positions such as bank trading accounts, FV accounting provides the most relevant information and promotes strong risk management for these positions.” And, he noted, “the FRB has long supported footnote disclosures of FV information for all financial assets and liabilities, which can provide useful information …” [Note: so far, this regulator’s comments would seem to substantiate the claim made in ITAC’s May 23 letter to FASB on fair value, which stated: “The ITAC has been gratified that not only financial reporting standard-setters and investors, but regulators of financial institutions across the spectrum have endorsed fair value measurement for financial instruments.” We discussed some of the claims in ITAC’s letter previously here, but didn’t get to address this particular point, although it struck me that ITAC’s claim may not have been consistent with comment letters previously filed by banking regulators with FASB. Read on:] Holm added, “Notwithstanding conceptual benefits, for many years the FRB has raised supervisory concerns about broadening the FV accounting framework. Some of our concerns include the extent to which FV can be reliably measured for illiquid instruments, and we have particular concerns whether smaller institutions are ready for a broad FV framework.” He added, “Before significantly expanding FV, we need to evaluate whether [FV] is the most appropriate presentation for liquid assets and liabilities that will be held for the long term.”

Leonard (“Lee”) Cotton, Vice Chairman, Centerline Capital Group, and a former president of the Commercial Mortgage Securities Association, said, “Fair market value is a good idea with liquid assets, it is not such a good idea with illiquid assets.”

Matt Schroeder of Goldman Sachs said, “Is it harder [to measure FV] in illiquid markets, yes, you’ve got to look for more information, it requires you to be proactive.” He said firms need to seek out and put together a body of evidence to support the value they put on their instruments.

James Tisch, CEO of Loew’s Corporation, said, “We are not dealing with the New York Stock Exchange here, where securities trade every day in voluminous size.” Rather, firms are sometimes faced with valuing “securities where maybe there are three different holders… chances are it doesn’t trade for months or even years at a time.” He described an example in which his company received a very low quote for valuation purposes for something they would have actually been willing to pay much more to buy. “I promise you there were no transactions taking place at that price, the dealer would not have sold at that price.” Tisch emphasized, “What I am trying to express, for a lot of the fixed income market, there is no market,” and he noted the level of precision implied for the financial statements is “totally unrealistic.” “While I am not advocating marking to model,” said Tisch, ”I am also saying using market price for our portfolio is marking to fantasy.”

Joe Price, CFO of BofA added, “there are not only pressures from outside quotes, pricing services, there are pressures around what’s the appropriate price internally too.” He gave as an example, “you reassign a portfolio to a new trader, he wants to mark it down as low as possible [when it is transferred into his portfolio], he gets compensated on that too.” He said there are instances with ‘lowball’ bids, and situations particularly in leveraged lending and complex structured instruments where some deals “aren’t moving… there aren’t good quotes out there.”

He said “there’s no shortage of opinions how to value those types of instruments; your search became what is the most observable component,” and that it was “quite challenging for collateralized debt option securities,” in which searching for price inputs would go down to individual QSIPs” or individual underlying securities.

Not Necessarily Whether To FV, But How to FV, and Whose FV?
SEC Commissioner Paul Atkins said the question for the roundtable was “Not necessarily whether FV accounting is good or bad, we’ve had it for a long time, got to do it for investors sakes,” but “the real question is, what is FV?” He added, “From [my] prior experience at accounting firms and law firms, I would have to question the competence of accountants in the field, or ulterior motives of dealers providing values; [for] many securities there is no market, and you get a value out of the blue from an investment bank which may or may not be [the] correct value, that is the rub of the whole issue here that has to be explored.”

FASB board member Tom Linsmeier, an observer at the meeting, responded, “FAS 157 states you need to use FV that would be an exchange price in an orderly market.” He added, “It is not acceptable under 157, if you read it, to just accept a price you know is not right, for FV… [FAS] 157 suggests, if a price thrown out by a dealer [is] not a representative price, you need to make adjustments or move to a model-based measure using inputs or cash flows, which is more work [for the issuer].”

Atkins noted there is a “reality where issuers are trying to deal with excessive conservatism from the accounting profession.”

Gary Kabureck, chief accounting officer of Xerox noted, “The fact that you have to look at hypothetical transactions that you won’t do is an intellectual challenge for a lot of people.” He added, “The issue is less one of should you have an alternative to FV, as opposed to, whose FV?” He noted the fundamental premise in FAS 157 is the exit price notion, “you’re supposed to look from the eyes of an outsider,” but in certain market conditions, you may need to consider more of an entry price or internal estimates, and less input from outside sources. Referring to FAS 157’s 3 level hierarchy, he noted, “There is a debate out there: is a good level 3 estimate better than a bad level 2,” adding, “the paradigm where 157 works is in an active market, but what happens when market is inactive or dysfunctional?”

Liabilities and fair value
PCAOB Chairman Mark Olson (formerly a member of the Federal Reserve Board of Governors), an observer at the roundtable, asked about fair valuing liabilities, saying, “Not from a PCAOB standpoint, but a broader public policy role, if the fundamental economic purpose of the banking industry is as a financial intermediary, the question in my mind, on the liability side, is if you mark debt to market; core deposits would carry a premium; I’m wondering if there is an extent
to which mark to market in that environment obfuscates the fundamental role of banks as

Academic Kathy Petroni said many find it counterintuitive to mark liabilities to market, although she did not. She said it would be preferable to have symmetry, but some of the assets are not FV’d; if they were, the decline in FV of those assets would offset the rise in FV of liabilities.
Wayne Carnall, chief accountant in the SEC's Divison of Corporation Finance, asked FRB’s Charlie Holm, “Do you think this is confusing to investors?”

FRB’s Holm responded, “I have to explain this to other bank supervisors, I do think it is confusing, it presents issues for bank supervisors, can have effect of increasing reported income and equity at time an institution is [having trouble].” He added, “we instruct regulated banking organizations to back out the effects when determining their regulatory capital.”

Loew’s Tisch said fair valuing liabilities “destroys the nature of the income statement, makes it unusable for investors.” He added, “I don’t understand how a company can monetize a decline in value of [their] debt; no doubt the company would have to pay that debt back upon maturity; in a philosophical sense, [FV’ing liabilities] may make sense, but to me, it undermines income statements and has no practical use.”

BofA CFO Joe Price said, “inability to monetize this ‘gain’ [on FV’ing liabilities] is very troubling, we personally have not availed ourselves of [FV’ing liabilities] for that reason.” He added, We are strongly opposed to FV measurement for noncontractual liabilities, most notably litigation.”

“Other Than Temporary” Impairment Due to Interest Rate Fluctuations
Loew’s CEO James Tisch called for further guidance on impairment under FAS 115, noting issuance of EITF 03-01, The Meaning of Other-Than-Temporary Impairment, and a related EITF pronouncement had created a “de facto standard” in which “securities with any level of interest rate impairment are either impaired with a charge taken through the income statement, or in effect are deemed to be held to maturity.”

Combined with the effects of statutory accounting in the insurance environment, Tisch said, this creates a “hobbesian choice: impair today and reduce statutory capital to retain trading flexibility, or state an intention to hold and be forced to expect to retain the security until maturity.” He added, “neither decision is reasonable, and neither in my opinion is within the original intent of FAS 115.”

Separately, IASB board member Jim Leisenring, an observer at the roundtable, said to Tisch, “some parts of the world do exactly what you say would be disastrous, they do in fact FV insurance liabilities, and many jurisdictions around the world have asked IASB to get on with .. [that] accounting, so the mismatch goes away.” He added, “There is a proposal out for comment at the present time from the IASB that says insurance liabilities should be at FV.”

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Wednesday, July 16, 2008

FASB Removes 140 Exception; Moves on Pension Disclosures, Rev Rec

At today’s (July 16) FASB board meeting, the board:

- Voted to remove the practicability exception for measuring fair value in FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Pat Donoghue, project leader on the FAS 140 amendment project, said she expects to provide the board with a pre-ballot draft of the amendments next week, and a draft of updates to related Q&As shortly thereafter. [Note: as previously reported, related amendments are being made to FIN 46R, Consolidation of Variable Interest Entities.]

- Agreed there should be somewhat more granularity – at least from a qualitative standpoint - in disclosing subcategories of plan assets in the proposed amendment (proposed FSP) to FAS 132R on “Disclosures About Postretirement Benefit Plan Assets,” but differed in how much specificity to provide in the standard. Board Member Tom Linsmeier noted that if FASB were to delineate more specific subcategories, it would be a “drastically different approach” than in the proposed FSP. One alternative posited by FASB staff was whether companies should have to “look through” into the holdings of mutual funds or alternative investment funds (e.g. hedge funds), but the board appeared to reject that requirement. A question of whether additional disclosure of concentrations should be required was also discussed; Board Member Larry Smith gave some examples of how such requirements could be written, but observed, “If you want to see more, pull the 5500,” adding, “Let’s not forget how long the pension footnote is in financial statements today.” To move the project along, the board directed the staff to draft two separate examples of tables with different types of categories and different qualitative disclosures to show there is not necessarily “one way” to break down further detail in the tables, but that both ways could meet a common objective or principle. After looking at the tables, the staff will then try to express what that common principle is. Additionally, although not formally deliberated today, the staff indicated they are considering recommending a delayed effective date on the standard, (to fiscal years ending after 12/15/09) and would bring that recommendation to the board at a future meeting as well as proposed fair value disclosures for pension and postretirement benefit plans).

- Agreed that staff should proceed in drafting a Discussion Document (DD) for the Revenue Recognition (Rev Rec) project – a joint project with the IASB - and that the comment period on the DD should be a minimum of 4 months. Initially launched as a joint “conceptual framework project,” the project has been fast-tracked in the sense that the boards now aim to issue a general revenue recognition “standard” by June 2011, as noted on pdf page 2 of FASB’s board handout. The standard as currently envisioned, focusing on a ‘customer consideration’ approach, would replace IAS 18, Revenue, IAS 11, Construction Contracts, and “much of the revenue recognition literature in the U.S.” As further described in FASB’s board handout, the new standard is likely to bring about “significant change[s]” to current practice. Examples provided in para. 18 of the handout note such areas would include accounting for multiple element contracts and software revenue recognition. FASB Chairman Robert Herz noted the proposal would “change radically” the treatment of deferred costs. He also noted it would be a significant change to existing “practice of accelerating portions of revenue to match upfront costs,” as used for construction contracts and certain other practices. There was a great deal of discussion in the meeting as to whether only items with “contracts” were in the scope of the standard, as well as whether only contracts with “customers” or contracts with “counterparties” – such as financial instruments, were included. Additionally there were questions on whether the scope applied only to contracts for “goods and services” or to “rights” – and if “services” included “rights." It appeared these issues would be clarified in drafting, potentially with specific comment requested in the DD, although it is possible some of these questions may be put to a vote by the board before the DD is issued.

We have posted further details on today's FASB board meeting in FEI summaries here (pension/postretirement disclosures) and here (FAS 140 and Rev Rec). The detailed summaries can be downloaded by FEI members only (one of the perks of membership!) find out more about joining FEI.

Tuesday, July 15, 2008

FASB To Take Up FAS 140, More; IASB Standard on IFRS For Private Entities Expected 1Q09

At its board meeting tomorrow (July 16), FASB is scheduled to take up revenue recognition, amendments to FAS 140 on transfers of assets, and disclosure of pension and other postretirement plan assets. Separately, IASB recently posted updated information on its IFRS for Private Entities project (formerly: IFRS for SMEs), noting a final standard is expected 1Q09.

Further details on these FASB and IASB developments, and information about FEI’s upcoming Private Company Forum, are below.

Rev Rec, FAS 140, Pensions/Postretirement Benefits on Tap for July 16 FASB Meeting
As noted in FASB's Action Alert, FASB will discuss at its July 16 board meeting:
Revenue recognition: FASB will discuss a revised measurement chapter that reflects the Board’s tentative decision to use a customer consideration measurement approach
FAS 140: FASB will discuss whether to eliminate the practicability exception in para. 71 relating to fair value measurement, and will discuss other issues on its proposed amendment to FAS 140.
Pensions/Postretirement Benefits:
FASB will begin redeliberations and discuss comments received on proposed FSP FAS 132(R)-a, Employers’ Disclosures about Postretirement Benefit Plan Assets.
[UPDATE 5PM JULY 15: FASB has posted the board handout which contains more specifics on what will be voted on at the July 16 meeting.]

IASB Projects Final Standard on IFRS For Private Entities 1Q09
On July 14, 2008 the IASB updated its IFRS for Private Entities project webpage. As noted therein, this project was previously called the IFRS for Small and Medium Sized Entities (IFRS for SMEs) project, and was renamed in April 2008 as “IFRS for Private Entities.”
The objective and scope of the IFRS for Private Entities project is: “to develop an IFRS expressly designed to meet the financial reporting needs of entities that (a) do not have public accountability and (b) publish general purpose financial statements for external users. Examples of such external users include owners who are not involved in managing the business, existing and potential creditors, and credit rating agencies. The IFRS for Private Entities will be derived from full IFRSs with appropriate modifications based on the needs of users of private entity financial statements and cost-benefit considerations.”

As noted in the IASB’s update, “Staff plans to submit a ballot draft of a final IFRS for Private Entities to the Board towards the end of the fourth quarter of 2008,” and “The standard is expected to be published in the first quarter of 2009.”

Further details on decisions reached to date on this project can be found in the full project summary (18 pages) also posted July 14 on IASB’s website.

FEI’s Committee on Private Companies (CPC), standards subcommittee submitted comment letters on the IASB’s Exposure Draft on IFRS for SMEs (now called IFRS for Private Entities) last fall.

Arthur V. Neis, a member of FEI’s CPC standards subcommittee, is a member of IASB’s Working Group on this project.

Private Companies: Check Out FEI’s Fall 2008 Private Company Forum
Private companies interested in networking with other leading financial executives from private companies and being briefed on the latest developments are invited to check out FEI’s Fall 2008 Private Company Forum, taking place in Chicago Sept. 23-24. See details on the agenda and speakers.

For information on FEI’s Committee on Private Companies or the Private Company Forum, contact Serena D├ívila, Director, Technical Activities, in FEI’s Washington, DC office, 202-626-7809.

Friday, July 11, 2008

SEC's Complexity Committee Agrees On Report

Earlier today (July 11), the SEC Advisory Committee on Improvements to Financial Reporting (CIFiR) passed all recommendations in its Draft Final Report unanimously, with some editorial changes described below. [NOTE: a 10 page summary appears in the Compendium of Recommendations in the Executive Summary of the 180-page report.] CIFiR will meet by teleconference on July 31 to vote on issuing its final report to the SEC (i.e., incorporating editorial changes agreed to today).

SEC Chairman Christopher Cox thanked the entire committee for its work, in particular chair Robert Pozen and the subcommittee chairs, noting it was ‘pretty remarkable’ to see so much ‘fire power’ … ‘assembled in a room with no windows in a basement in Washington, DC. ” He added a press conference would be held on August 1 (to announce delivery of the final report from CIFiR to the SEC).

CIFiR’s focus, reiterated Cox, was “on making financial reporting [more] useful to investors and broader markets.” He noted, “Lord knows we need that more than ever right now, when a great deal of turmoil in the market is from people not understanding where the risk is.” Cox added, “we all have in common a thorough commitment to making sure information which drives the markets is presented in the most useful, accurate and clear fashion.”

Importantly, Cox noted the SEC has already moved on some of CIFiR’s recommendations and others may see action soon. Specifically:

  • The SEC has already moved forward on CIFiR’s interactive data (XBRL) recommendation, noted Cox [i.e. by issuing a proposed rule in May, on which comments are due August. 1].
  • “We’re close to doing something on your corporate website recommendation,” noted Cox, referring to CIFiR’s recommendation 4.2, which states: “The SEC should issue a new comprehensive interpretive release regarding the use of corporate websites for disclosures of corporate information, which addresses issues such as liability for information presented in a summary format, treatment of hyperlinked information from within or outside a company’s website, treatment of non-GAAP disclosures and GAAP reconciliations, and clarification of the public availability of information disclosed on a reporting company’s website.”
  • Additionally, Cox indicated the SEC is ‘close to doing something’ on a handful of CIFiR’s other recommendations, “including your judgment recommendation.” This refers to CIFiR’s Recommendation 3.5, which states: “The SEC should issue a statement of policy articulating how it evaluates the reasonableness of accounting judgments and include factors that it considers when making this evaluation.” The recommendation continues, “The PCAOB should also adopt a similar approach with respect to auditing judgments.” CIFiR suggests that SEC, in developing its ‘statement of policy,’ consider a list of 11 ‘factors to consider in evaluating the reasonableness of judgments” which are provided on pdf pgs 105-106 (printed page numbers 100-101) of the Draft Final Report.These factors remain unchanged from the 9 in CIFiRs Feb. 14 Progress Report, with 2 additional factors being moved up to the ‘factor’ list previously in the paragraph below it. Such an SEC ‘statement of policy’ enumerating ‘factors’ is meant to be akin in concept to the approach in SEC’s ‘Seaboard’ memo enumerating how the SEC may give ‘credit’ to companies in enforcement proceedings based on certain factors of ‘cooperation,’ including potentially not charging the company.
Among the dozen or so editorial changes agreed to at today’s meeting with respect to CIFiR’s Draft Final Report, some of the more prominent ones include:

  • softening the language relating to materiality, correction of errors and restatements, by potentially removing the reference to ‘large’ errors potentially not being material, and focusing instead on qualitative and quantitative judgments generally
  • adding/clarifying language about comparability still being a desired goal. This clarification would be in response to investor concerns about a potential rise in noncomparability under principles-based vs. rules-based or bright line standards. The clarification may emphasize that use of a principles based framework, when applied with professional judgment (i.e. under CIFiR’s recommendation that SEC issue a ‘statement of policy’ in evaluating judgment) may result in more genuine comparability. [Observation: it was pointed out during CIFiR’s discussion about comparability that factor #8 in their 11 point list of “factors to consider in evaluating the reasonableness of judgments’ states the SEC should (if SEC adopts this list of factors) consider:
  • “The preparer’s consideration of known diversity in practice regarding the alternatives or estimates.” Importantly, footnote 159 that appears at the end of factor 8 states: “If there is not diversity in practice, it would be significantly harder to select a different alternative.” We pointed out in our post on CIFiR’s Feb. 14 progress report, Observations on CIFiR’s Professional Judgment Framework, that there could be unintended consequences from this language, particularly the footnote, in effectively disallowing a different treatment if one can not identify that there is already a diversity in practice. This could lead to the question – what if there is no diversity- but everybody is ‘wrong’? Would this language discourage companies from breaking away from established practice, if the company believes reasonable alternatives are preferable?]
  • deleting a reference to CIFiR ‘supporting’ FASB’s derivatives project, and referring to the project more generally
  • deleting a reference in rec. 1.2 to “litigation and regulatory developments,” which Linda Griggs said “sounds like we are trying to weigh in on [FASB’s proposed changes to FAS 5” on contingency disclosures, which, she added, “the bar is extremely concerned [about]” regarding attorney-client privilege and other issues.
  • clarifying references to recommended changes in the financial statements based on different types of activities (e.g., investing, financing) and differing nature of components of income such as fair value changes vs. core operating earnings, to make such references generic as to the goal of such aggregation, rather than supporting specific categories including those in the FASB-IASB’s current project on Financial Statement Presentation.
  • clarifying that SEC and FASB should work together to determine if existing accounting rules need amending or if existing disclosures need updating or to be removed. It was noted that the SEC’s 21st Century Disclosure Project examining SEC disclosure requirements holistically was recently announced and is referenced in a footnote in CIFiR’s report.
Also of note, it was pointed out that the Draft Final Report has ‘elevated’ the discussion about stealth restatements to a bullet in Recommendation 3.2 which states: “To limit the likelihood of ‘stealth restatements,’ the SEC should revise the instructions to Form 8-K to state clearly that the form needs to be filed for all determinations of non-reliance on prior financial statements.”

CIFiR noted the phenomenon of ‘stealth restatements’ was noted in a GAO report on restatements issued in March, 2007. For further background, see the reference to ‘stealth restatements’ in SEC Corp Fin Director John White’s speech on Jan. 23, 2008.

Personally, if there ever was a committee that deserved a theme song, this one is it (I even thought of some possible theme songs once, maybe some readers have ideas too). For now, the committee known as the ‘Complexity’ committee in some circles, may have to settle for Avril Lavigne’s Complicated. On a more serious note, it has been intriguing to follow this committee’s deliberations, including its openness in incorporating suggestions of its committee members that may not have been on the particular subcommittees drafting the recommendations (such as the editorial changes CIFiR members suggested today, listed above), even as it moves toward its final report. Some of these strengths may prove to be a useful model for the Financial Reporting Forum (FRF) which it recommends to serve as an advisory committee to advise and promote coordination among the FASB, SEC (within bounds of what’s allowed by the federal advisory committee act, as noted by SEC staff today) and PCAOB. FASB Chairman Robert Herz explained a broad-based advisory model was successful in some other countries, including the Financial Reporting Council (FRC) model in the U.K. (wouldn’t you know they’ve got their own Complexity project?)