Monday, August 4, 2008

SEC Ready To Roll with All Five Commissioners in Place; Pozen Committee Report Issued

With all five commissioners now in place upon last week’s swearing in of Commissioners Luis Aguilar and Troy Paredes, and the July 9 swearing in of Commissioner Elisse Walter - joining Chairman Christopher Cox and Commissioner Kathleen Casey - the SEC is ready to roll on issues like IFRS and the 25 recommendations contained in the final report of its ‘complexity’ committee.

SEC released the list of panelists for today’s 1pm EDT roundtable (which will be webcast): Roundtable on Performance of IFRS, U.S. GAAP During Subprime Crisis. It will be interesting to see if SEC provides an update on expected timing of release of its “IFRS Roadmap,” following on last year’s Concept Release, as to whether U.S. companies should be given the option – or be required – to report their financial statements in SEC filings in IFRS instead of U.S. GAAP. (Further background in SEC's "Spotlight on Global Accounting Standards/IFRS" webpage.)

Recommendations of ‘Complexity’ Committee (aka 'Pozen Committee' aka 'CIFiR')
At a press conference on Aug. 1, Robert Pozen, chair of the SEC Advisory Committee on Improvements to Financial Reporting (CIFiR), formally delivered a copy of CIFiR's Final Report to SEC Chairman Christopher Cox. The report contains 25 recommendations to improve the usefulness of, and reduce complexity in, financial reporting.

Timing of Implementation of CIFIR Rec's
The SEC has already implemented two of the recommendations contained in CIFiR’s Progress Report released earlier this year, noted Cox (re: SEC’s XBRL proposal – on which the comment deadline was Aug. 1 - and last week’s Interpretive Release: Guidance on Use of Company Websites).

Going forward, said Cox, “I’ve asked the commission staff to immediately begin analyzing the balance of the proposals with a view to presenting [them for consideration of] the commission.”

Asked how long he thought it would take to implement some of CIFiR’s recommendations, Cox replied, “I don’t know that the commission will be able to address all the recommendations by year end, but we will certainly start immediately.”

He added, “I’m sure a lot of that will continue into 2009,” and noted “the process for … proposal is not different than on other SEC rulemakings; once a proposal is voted on by the commissioners, it would be exposed for public notice and comment for a month, two months, [or] three months.” The next step, noted Cox, is, “those comments are collated and weighted,” and “the final recommendation goes back to the commission for action.” All in all, he said, “that process tends to take about six months.”

Observing where we are in the calendar now, Cox said, “You can figure the normal gestation period would take us into spring of next year for any recommendations we would bring up right away.” He added, “There are some recommendations in here that might be more tractable than others, might be more susceptible to immediate action, simply because they build on work the staff has been doing here for a long time,” however, others may take longer.

Highlights from CIFIR Report: Fair Value (FV), Quasi-GAAP
Certain recommendations in CIFiR's report are addressed to the Financial Accounting Standards Board and the Public Company Accounting Oversight Board; FASB Chairman Robert Herz and PCAOB Chairman Mark Olson also participated in the press conference.

Asked to give some highlights from the report, Pozen singled out one item from each of the four chapters in the report (standard-setting, substantive complexity, audit process and compliance, and delivering financial information), among the items he highlighted were CIFiRs recommendations relating to Fair Value (FV).

“[There is an] important conceptual debate whether FV or historical cost (HC) is the appropriate way to go.” He continued, “we were not able to solve the debate ... but we took the view that we could make the distinction a lot clearer and we could educate investors about the different quality of earnings and the different aspects of them,” such as how much is from core earnings are, and how much from unrealized profit or loss based on FV estimates. “While we had pressures from both sides,” (i.e. pro- and con-FV), said Pozen, “we did not yield to either pressure.” Instead, given they believe the ‘mixed attribute’ system (i.e. some items measured at FV, others at HC or still other measurements) would be with us for some time, CIFIR accepted that reality and made a recommendation to provide more transparency to investors as to which components of income were measured by which attributes.

FASB Chairman's Remarks
Also present at the press conference announcing release of the CIFiR report was FASB Chairman Robert Herz, who observed, “There are people who love FV, people who hate FV, and people in the middle.”

He added, “I think generally the recommendations are congruent with where we’re headed.” He noted one of CIFiR’s recommendations is that FASB “be ‘judicious’ with further expansion of FV while we deliberate the measurement phase of the conceptual framework project with the international folks.”

Additionally, Herz noted that CIFIR’s recommendation “that there be a better articulation in financial statements from those things that derive from ongoing activities, (e.g. core earnings) and other things” is tied into the FASB-IASB project on Financial Statement Presentation. FV is not the only thing being addressed in that project, noted Herz, adding the project will “try to construct a better set of financial statements that would much more clearly show these kinds of differences.”

Another significant proposal released by CIFiR, said Pozen, was “if there is an industry wide issue that comes up at the SEC, we should try to move that to FASB and have the sort of notice and process [i.e. public notice and comment period] FASB is good at.”

“There is a tendency on the registrants’ part, if some comment is made by [an SEC] staffer [e.g., in communicating with the registrant on their filings] that there is a broader rule. If we can divide what’s industry applicable and have some kind of notice and process and at same time give guidance on registrant issues, [it would be a] significant step forward.”

Separately, Pozen noted, “we support the excellent work of FASB in trying to codify all of accounting literature into one volume, this hopefully will reduce the amount of quasi-GAAP that runs around the world, and everyone will know what’s authoritative.”

Regarding audit firm guidance, the SEC’s press release issued Aug. 1 noted, “The Committee [CIFIR] said that others such as audit firms may still publish their views on accounting issues, but they should be labeled as non-authoritative. … the Committee also called for a clearer delineation of functions on interpreting accounting standards — with the FASB taking the lead on broad issues and the SEC on registrant-specific issues.”

Additional highlights from the press conference can be found in this press release. The full list of 25 recommendations is provided in the compendium of recommendations in the executive overview section of CIFiR’s final report. We provide further details from the press conference in this FEI summary. (FEI members only.) If you received this blog post from ‘a friend’ you can sign up for the FEI blog by emailing and putting in subject line: Sign Up.

In other news, the SEC formally announced on July 31 that Deputy Chief Accountant Zoe-Vonna Palmrose is leaving the SEC to return to teaching at USC.

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