Tuesday, March 3, 2009

Big Issues On Tap For FASB, IASB

Of all the FASB and IASB meetings on tap this week, the one which may have the most profound and lasting impact may be Thursday’s meeting of the Financial Crisis Advisory Group, a high level advisory group formed jointly by the FASB and IASB in late 2008 which began meeting this year. FCAG is co-chaired by Hans Hoogervorst, Chairman of the Netherlands Authority for the Financial Markets (AFM), the Dutch securities regulator and Harvey Goldschmid, former Commissioner of the United States Securities and Exchange Commission, and FCAG's members include a number of current and former regulators and other experts.

At this week's meeting, FCAG is not only slated to discuss issues relevant to the current credit crisis like fair value accounting, consolidation and derecognition, but will also consult on issues that can have lasting consequence to the fundamental governance and due process of the FASB and IASB. According to FCAG’s March 5 agenda/discussion paper), issues to be discussed include:
  1. Display of through-the-cycle provisioning in general purpose financial statements.
  2. Possible approaches to improvement and simplification of accounting and reporting of financial instruments.
  3. Is it appropriate and useful to report gains (or losses) from fair value changes in a reporting entity’s own indebtedness?
  4. What additional guidance, if any, is needed in the area of determining fair value?
  5. What are the best ways to bring about useful information regarding securitizations and other structured entities?
  6. Assuming that a consolidation/de-recognition approach is used, what principles should determine whether the assets and liabilities transferred into a securitization or other structured entity are removed (derecognized) from the balance sheet of a sponsoring entity?
  7. How (and by whom) should oversight be exercised over accounting standard-setters on a national (or international) basis in order to ensure appropriate independence, accountability, and transparency in the standard-setting process?
  8. What criteria should accounting standard-setters consider in balancing the need for resolving an “emergency issue” on a timely basis and the need for active engagement from constituents through due process?

See our previous post on the preceding (Feb. 13) FCAG meeting.

Regarding the second issue on the agenda for the March 5 FCAG meeting, some have proposed that a full fair value accounting for all financial instruments would result in ‘simplification’ (e.g. by eliminating the need for complex hedge accounting rules). However, not all are in agreement on the pros and cons of a potential move to full fair value.

On this point, an article by Stephan Bouvier in BNA’s Daily Report for Executives (March 3) entitled Poll of IASB Advisory Council Shows Little Support for Full Fair Value Plan, reported that: “The [IASB’s] Standards Advisory Council [SAC], Feb. 23 rejected the suggestion that the board should require entities to measure all financial instruments at fair value through profit or loss. On an informal show of hands, just two members of the SAC indicated they favored the fair value proposal… Against this, 14 wanted the board to develop ‘objective criteria’ to differentiate instruments held at fair value as opposed to amortized cost, while 18 wanted to base the dividing line on a ‘subjective criteria’ such as management intent.”… Summing up the views of SAC members, recently appointed council Chairman Paul Cherry said there was “unanimous agreement that putting everything on fair value is not feasible at this juncture.”

BNA's Bouvier added, “The lukewarm reaction to the notion of a full fair value world for financial instruments echoes the message delivered to the board at the January 2008 meeting of its Financial Instruments Working Group. During that meeting, working group member Russell Picot charged that IASB appeared to have reached conclusions on the use of fair value with insufficient reasoning to support that conclusion.”

Another interesting article by BNA’s Bouvier covered a recent meeting of IASB’s Analyst Representative Group (ARG). IASB's ARG is similar in concept to FASB’s Investors Technical Advisory Committee or ITAC. In his Feb. 27 BNA article, Analysts Register Indifference To IASB EPS Convergence Project, Bouvier reported: “[ARG member Jed] Wrigley … pounced on staff's assertion that the board had received just a single comment letter on the EPS project from users. ‘That user letter did come from the CRUF [Corporate Reporting User Forum]—it was signed by 16 people,’ [Wrigley] said. ‘It went through a number of iterations in order to get everyone to agree and sign that letter. … If you want that for your table [summary of responses], we are quite happy to send you 16 copies.’”

Roundtable On Disclosure Of Loss Contingencies (FAS 5)
FASB is holding a public roundtable on Friday, March 6 to discuss its proposed changes to the disclosure of loss contingencies under FAS 5, Accounting for Contingencies. FASB received a total of 240 comment letters on its proposal last year to amend FAS 5, with many voicing concern over proposed disclosures relating to litigation contingencies, particularly due to concerns about the impact of such disclosures (and related audit work beneath those disclosures) as potentially threatening attorney-client privilege and work-product privilege, and potentially weakening a companies position in litigation.

Typifying these concerns, the Aug. 8, 2008 comment letter filed by the Association of Corporate Counsel stated: “ACC's membership has followed closely the proposed amendments to FAS 5, which has governed for decades the disclosure of litigation-related loss contingencies in corporate financial statements. The proposed amendments have generated a greater response from our membership, in a shorter period of time, than any other single issue within memory. … Without exception, our members and their clients have expressed profound opposition to the proposed amendments. …Forcing the extensive and detailed disclosures mandated by the proposed amendments in a far broader range of cases than FAS 5 now requires will cause serious harm to the disclosing companies and their shareholders. The proposed disclosures create a substantial risk of waiver of the attorney-client privilege and work-product immunity, with catastrophic consequences to the corporation. Confidential legal advice, lawyer thought processes, and legal analysis disclosed in public filings allow an adversary in litigation to essentially review the files and strategies of the company's defense counsel. This would inflict serious damage on the company and its shareholders. Opposing parties easily can leverage such information to extract higher settlements or otherwise disadvantage the corporation ”

Comment letters were also filed by FEI, including a joint comment letter from FEI’s Committee on Corporate Reporting (CCR) and Committee on Government Business (CGB) – cosigned by 31 members from individual companies, and a comment letter from FEI’s Committee on Private Companies, Standards Subcommittee, voicing concern about the proposal.

In light of comments received, FASB has considered proposing an alternative disclosure model, and invited companies to participate in a field test. Read more in FASB’s Project Update.

Other FASB, IASB Meetings Taking Place This Week
The FASB Board will meet on Wednesday March 4 to discuss issues relating to its proposed amendment of FAS 140, Transfers of Assets, (relates to securitizations and other transfers of assets) and to consider comments received on, and whether to finalize proposed FAS 133 Implementation Issue No. C22, “Exception Related to Embedded Credit Derivatives.” Read more in FASB’s Board Handout.

IASB’s IFRIC (International Financial Reporting Interpretations Committee) will meet on Thursday March 5. IFRIC performs a similar interpretive function to FASB’s Emerging Issues Task Force (EITF). IFRIC’s March 5 agenda (see related materials) includes customer related intangible assets, equity method accounting, puttable and perpetual instruments, derecognition of financial assets, fair value in inactive markets, and more.

Next Up: Interim Fair Value Disclosures?
March 2nd was the comment deadline on a Proposed FASB Staff Position: Proposed FSP No. 107-a and APB 28-a, Interim Disclosures About Fair Value of Financial Instruments. 31 comment letters are posted on FASB’s website so far; and others are in the process of being posted, including the comment letter filed today by FEI’s Committee on Private Companies (CPC), Standards Subcommittee. The letter filed by FEI's CPC, signed by William Koch, chair of FEI's Committee on Private Companies Standards Subcommittee, requests that private companies be exempted from the proposal, due to a lack of user demand for the proposed disclosures from private companies, and the burden of providing the disclosures. Additionally, the letter filed by FEI's CPC recommends that that if FASB does not exempt private companies from the proposal, that FASB amend the current exemption threshold, and extend the proposed effective date.

Since FASB proposed an effective for the new disclosures under Proposed FSP 107b/APB28a of financial statements for interim or annual periods ending after March 15, 2009, it would not be surprising if FASB puts this item on the agenda for a board meeting next week, i.e. to consider comments received on the proposed FSP, and whether to issue the proposed FSP as final (as proposed, or in an amended form). Board agendas for the following week are generally announced on Thursday’s through FASB’s Action Alert.

SEC Approves FASB Annual Support Fee
Earlier today, the SEC issued an Order Regarding Review of FASB Accounting Support Fee For 2009 Under Section 109 of the Sarbanes-Oxley Act of 2002. This is an annual exercise the SEC conducts in accordance with Sarbox. The SEC Order issued today states: “After its review, the Commission determined that the 2009 annual accounting support fee for the FASB is consistent with Section 109 of the Act.”

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