IASB Updates G-20; FASB, IASB Seek Comment On Proposals

With the first of three joint IASB-FASB roundtables on financial instruments accounting set to take place later this week in Tokyo, (followed by roundtables in London and Norwalk, CT), the IASB released on Aug. 28 an updated table summarizing the IASB's response to recommendations made by the G-20 relating to accounting and financial reporting.

Among the actions taken by FASB and the IASB - partly in response to G-20 recommendations, and partly in response to other recommendations such as those of the Financial Crisis Advisory Group - are proposals relating to financial instruments, fair value, financing receivables (including loans) and the allowance for credit losses. Various proposals carry comment deadlines in September and October.

The comment deadline closed last week on FASB's proposed standard on Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. Sixty-eight comment letters are currently posted on that proposal, and a quick overview of the different points of view can be seen by reading Comment Letter No. 1, filed by FASB's Investors Technical Advisory Committee, which strongly supports FASB's proposal virtually with no changes, vs. Comment Letters 2 & 68, filed by the American Bankers' Association and the Independent Community Bankers' Association, respectively, which do not support the proposal.

A number of the comment letters filed by banks, Fannie Mae, and others, supported the proposal's disclosures in general - with some recommending changes to perceived check-the-box or prescriptive requirements for aggregation/disaggregation of categories, and other suggested changes - but called upon FASB to extend the proposed effective date until 2010. The request to provide more time was made, according to various comment letters, in part due to the need to make systems changes to gather the information requested in the proposal, and in part due to significant changes that financial institutions and others will face in implementating FAS 166 and FAS 167, issued earlier this year, amending FAS 140 and FIN 46R for securitization and consolidatation accounting (e.g., the end of the QSPE.) Additionally, some of these commenters asked that this project be coordinated with related projects at FASB and the IASB, such as projects on financial instruments, fair value, financing receivables and credit losses, and FASB's Disclosure Framework project.

Upcoming comment deadlines on FASB and IASB proposals on other financial instruments projects (we list only those relating to financial instruments, below, refer to FASB and IASB websites for other proposals out for public comment) include:

• Sept. 1: IASB Request for Information: ('Expected Loss' Model) Impairment of Financial Assets: Expected Cash Flow Approach [NOTE: on the subject of 'expected loss' model vs. 'incurred loss' model, see also our earlier post on SEC's 'Dear CFO' letter]
• Sept 1: IASB Discussion Paper: Credit Risk in Liability Measurement
• Sept. 14: IASB Exposure Draft: Financial Instruments: Classification and Measurement
• Sept. 28: IASB Exposure Draft: Fair Value Measurement
• Oct 12: FASB Proposed Accounting Standards Update—Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. (NOTE: This proposed ASU was released by FASB on Aug. 28. )

In related news, see: Basel Committee Doesn't Want Fair Value for Loans (WebCPA, Aug. 28). (See also our earlier post noting concerns of the American Bankers' Association on FASB's tentative decisions regarding fair valuing all financial instruments, as FASB continues its deliberations in anticipation of issuing a proposal on financial instruments accounting.)

Returning to the subject at the top of this post, the next G-20 Summit will take place in Pittsburgh, PA on Sept. 24-25. Links to prior recommendations issued by the G-20 can be found here.

Of note, see also IFRS on the G-20 Summit? (by Joseph Bruce, of Schneider Downs, Aug. 10), which states:

IFAC [the International Federation of Accountants] has urged G-20 leaders to utilize the summit platform as an opportunity to speak to the importance of worldwide adoption of global accounting standards and include that concept in the promotion of global economic recovery. ... IFAC also recommended that further steps be taken to enhance the governance of the International Accounting Standards Board (IASB), to assist in its ability to act independently in a standard-setting role without inappropriate political interference.

IASB Chairman Sir David Tweedie added fuel to the potential discussions with his recent comments on the global frustrations with the SEC’s lack of commitment to a transition to International Financial Reporting Standards (IFRS), which have not yet been approved by SEC Commissioner Mary Schapiro. “This is a very interesting moment for us, a once-in-a-lifetime moment. Where is the USA?” asked Tweedie. “If you’re going to have global standards, we need the U.S., but it can’t go on indefinitely. We’ve been converging for seven years. We have a timetable to finish in 2011. It’s designed to fit these major economies – Korea, Canada, Japan, and India – who are converging that year. We have to finish that year.”

Bernanke Reappointed Chairman of FRB; Kroeker Named Chief Accountant, SEC

Two big appointments announced earlier today: President Barack Obama announced this morning that he is nominating Ben Bernanke to serve a second term as chairman of the Federal Reserve Board. The reappointment is subject to confirmation by the full Senate. Read the White House transcript of the President's and Bernanke's remarks.

Separately, U.S. Securities and Exchange Commission Chairman Mary L. Schapiro announced earlier today that Acting Chief Accountant Jim Kroeker has been named Chief Accountant of the SEC. Read Schapiro's and Kroeker's remarks in the SEC press release.

FASB Stakes A Claim On Disclosure Of Litigation Contingencies

At its board meeting last week, the Financial Accounting Standards Board began redeliberations of its 2008 proposal on Disclosure of Certain Loss Contingencies. (See FASB Project Summary, and FASB staff's Comment Letter Summary on last year's Exposure Draft. FEI's Committee on Corporate Reporting, Committee on Government Business, and Committee on Private Companies - Standards were among those who commented on the Exposure Draft; see FEI comment letter.)

As detailed further below, FASB will continue to meet on this issue before issuing a final standard, which is currently slated to be issued 4Q09. The upcoming final standard could potentially be effective this year-end; as noted in FASB's board handout (pdf pg 11, para. 5), FASB announced last year the final standard would be effective "no sooner than fiscal years ending after Dec. 15, 2009." However, FASB has not yet made a final decision on effective date, and will address that question at a future board meeting.

The discussion at the August 19 meeting focused on litigation contingencies; other types of loss contingencies will be discussed at a future meeting. Following are highlights from the August 19 meeting, as excerpted from FASB's Summary of Board Decisions, unless otherwise noted.

Disclosure objective: The board agreed on the following disclosure object for loss contingencies: An entity shall disclose qualitative and quantitative information about the loss contingency to enable a financial statement user to understand the nature of the contingency and its potential timing and magnitude.

Disclosure principles: The board agreed on three broad principles for loss contingencies:

1. Disclosures about litigation contingencies should focus on the contentions of the parties, rather than predictions about the future outcome.
2. Disclosures about a contingency should be more robust as the likelihood and magnitude of loss increase and as the contingency progresses toward resolution.
3. Disclosures should provide a summary of information that is publicly available about a case and indicate where users can obtain more information.

Quantitative disclosure requirements: The board directed the staff to develop an approach that would focus on disclosure of nonprivileged quantitative information that would be relevant to making an estimate of the potential loss, for consideration by the Board at a future meeting.

Reasonably possible equals more than remote:The board decided to maintain the existing requirement to disclose asserted claims and assessments whose likelihood of loss is at least reasonably possible and to clarify that at least reasonably possible and more than remote have the same meaning.

Disclosure of certain remote contingencies: The board agreed that certain remote loss contingencies should be disclosed, and the board directed the staff to develop possible approaches for discussion at a future meeting.

Unasserted claims: The board agreed to maintain existing threshold requirements for unasserted claims and assessments and agreed to enhance the existing interpretive guidance about the threshold.

Recoveries, indemnifications, and settlement negotiations. The board agreed that:

• entities should not consider the possibility of recoveries from insurance or indemnification arrangements when assessing whether a contingency should be disclosed.
• to require disclosure about possible recoveries from insurance and other sources if and to the extent that the information has been provided to the plaintiff in discovery.
• not to require entities to disclose information about settlement negotiations.

Effective date: "The Board discussed the effective date of any final guidance on this project and decided not to rule out the possibility that it could be effective for fiscal years ending after December 15, 2009."

NOTE: Denise Lugo of BNA reported in the August 20 article, FASB Open to Changing Effective Date On Loss Contingency Accounting Disclosures, that: "FASB Chairman Robert Herz said it is remote that the guidance will be effective for the end of this calendar year, but the board decided to leave the issue open until it is further ahead on the bulk of its discussions."

Other Topics Discussed: Other topics discussed at FASB's Aug. 19 board meeting - separate from the loss contingencies project - included the scope of the financial instruments project, issues relating to FASB's revenue recognition project, and some technical corrections. See FASB's Summary of Board Decisions.

My two cents
The remainder of this post expresses some personal observations relating to the loss contingencies project; I remind you of the disclaimer on the right side of this blog.

Was there a consensus on the 'Michael Young [Disclosure] Principles'? As shown above, FASB's "Disclosure Principles" for litigation contingencies center on disclosing information that is already publicly available elsewhere, including "contentions" such as the amount of claims filed against an entity.

The principles of disclosure, centering on 'contentions' vs. 'predictions,' were described by FASB staff and board members at FASB's March 6 roundtable as the 'Michael Young principles' - i.e. principles outlined at the roundtable by Willkie Farr attorney (and former Financial Accounting Standards Advisory Council member) Michael Young.

As noted in the August 19 FASB board handout: "The [FASB] staff believes that there was broad consensus at the March 6, 2009 roundtables on the key principles" of disclosure.

Indeed, in this blog's summary of the March 6 roundtable, Disclosure is Not a Place to Try a Lawsuit, ACC Tells FASB, I noted that: "A number of FASB board and staff members, including FASB Fellow David Elsbree and FASB Board Member Larry Smith, said they heard a ‘consensus’ around the Michael Young Principle of disclosing facts and contentions, but not predictions." However, I also noted: "[N]o formal (or informal) votes were taken during the morning or afternoon sessions of the two part roundtable."

Personally, (and I have said this before about organizations other than FASB) I get a little nervous when a board or staff member of a standard-setting or regulatory organization or advisory group thereto announces "I hear a consensus," when in my view (based on listening to the webcast of the meeting), there was a dispersion of stated views on the particular issue, and there was no formal call for the question. This is particularly true when an announcement is made, e.g., during an afternoon panel of a day-long roundtable (as it was during the March 6 roundtable), expressing a view as to a consensus reached during the a.m. panel, when some members of the a.m. panel were not participants on the p.m. panel during which their perceived consensus was presented.

As I recall, some panelists at the March 6 roundtable were concerned that the disclosure of 'contentions' could in itself be misleading (particularly depending how granularly one interprets the related principle among the disclosure principles described further above, which would require disclosure of a "summary of information that is publicly available about a case and indicate where users can obtain more information.")

Additionally, it will be interesting to see how the FASB staff's proposal shapes up - to be discussed at a future board meeting - as to potentially requiring disclosure of "nonprivileged quantitative information that would be relevant to making an estimate of the potential loss."

"Reasonably Possible" and "More Than Remote"
Given the relatively recent history of experience in practice with the terms "reasonably possible" and "more than remote" as applied in standards on internal control reporting of the Public Company Accounting Oversight Board, I was a little bit surprised to see that FASB decided on August 19, as noted in FASB's Summary of Board Decisions, to: "clarify that 'at least reasonably possible' and 'more than remote' have the same meaning."

When the PCAOB issued Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That is Integrated With an Audit of Financial Statements, (AS5) amending and superseding AS2 on the same subject, (the audit of internal control under Sarbanes-0xley Section 404), the issue of AS2's "more than remote" threshold of materiality (amended to "reasonably possible" in AS5) was a significant issue to many constituents in terms of how auditors were viewed as approaching the two thresholds. Some perceived a substantive difference between the two thresholds, while others did not.

As stated in AS5's Adopting Release, on printed pgs A4-6 and A4-7 (pdf pgs 108-109), under Definition of a Material Weakness:

Financial Accounting Standards Board ("FASB") Statement No. 5 describes the likelihood of a future event occurring as "probable," "reasonably possible," or "remote." The definition in [AS2] referred to a "more than remote" likelihood of a misstatement occurring. In accordance with [FAS 5], the likelihood of an event is "more than remote" when it is either "reasonably possible" or "probable."

As the Board noted in the proposing release [for AS5], however, some auditors and issuers have misunderstood the term "more than remote" to mean something significantly less likely than a reasonable possibility. This, in turn, could have caused these issuers and auditors to evaluate the likelihood of a misstatement at a much lower threshold than the Board intended. Because the term "more than remote" could have resulted in auditors and issuers evaluating likelihood at a more stringent level than originally intended, the Board proposed changing the definition to refer to a "reasonable possibility."

... While the Board agrees that, as a definitional matter, "reasonable possibility" and "more than remote" describe the same threshold, it believes that "reasonable possibility" describes that threshold more appropriately and clearly, and will therefore avoid the misunderstanding of the threshold created by the way it was described in Auditing Standard No. 2. As a result, it retained that term [i.e., reasonable possibility] in the final definition in the standard [AS5]."

(See the related discusion about 'reasonable possibility' and 'more than remote' on pgs 16-17 of SEC's Final Rule published in June, 2007, Amendments to Rules Regarding Management's Report on Internal Control Over Financial Reporting.)

The subject of differing interpretations of 'reasonably possible' vs. 'more than remote' was one of the focal points in the paper Fixing 404, published in the Michigan Law Review [Vol. 105: 1643] in 2007, co-written by former SEC commissioner Joseph Grundfest and Wilson Sonsini Goodrich & Rosati then-Partner (and now, Partner & CEO) Steven Bochner. (The paper included a postscript noting PCAOB's move to amend AS2.)

I wonder if any attempt by FASB at this time to 'clarify' that 'more than remote' equates to 'at least reasonably possible' would, in practice, lower the perceived threshold of "reasonably possible," or raise the perceived threshold of 'more than remote;' and if that would be a desired/desirable outcome in the view of the legal community and others; I invite readers to post comments on this point (or any other point of interest).

The next step in the disclosure of loss contingencies project, according to FASB's Current Technical Plan and Project Updates , is for a final Accounting Standards Update to be issued 4Q09. Deliberations on the final standard will continue at FASB board meetings in the late summer and potentially into the fall. As noted further above, FASB is not yet ruling out that the upcoming final standard could still be effective this year-end, although (as noted in the BNA article cited above), the FASB chairman indicated he currently believes it is a 'remote' possibility that the final standard would be effective at year-end. FASB's final decision on effective date of the upcoming standard is still pending as the board proceeds closer to finalizing the standard.

SEC's 'Dear CFO' Letter on MD&A Disclosure of Loan Loss Provisions, ALLL

On Aug. 18, the SEC posted a new "Dear CFO" letter - more formally called a "Sample Letter Sent to Public Companies" - a communication vehicle the Commission uses from time to time to spread the word through direct mail of a standard letter to a group of company exec's (e.g. CEOs and/or CFOs of all public co's, co's in a particular industry, or certain public co's).

By posting a copy of the letter on the SEC website for illustrative purposes, the SEC is able to communicate with a large number of constituents (issuers, investors, analysts and others) as to the specific or general disclosures which the Commission is encouraging companies to provide, such as by suggesting specific or general disclosures that companies "may" wish to consider. (The SEC telling you that you "may" wish to consider disclosing something is somewhat akin to a policeman telling you that you "may" wish to follow the posted speed limit.)

The Dear CFO letter posted by the SEC on Aug. 18, entitled: "Sample Letter Sent to Public Companies on MD&A Disclosure Regarding Provisions and Allowances for Loan Losses, was sent by the SEC's Division of Corp Fin to "certain public companies" in August, 2009, with the objective of "identifying a number of disclosure issues they may wish to consider in preparing Management's Discussion & Analysis." General highlights from the letter include:

• Clear and transparent disclosure about how you account for your provision and allowance for loan losses has always been critically important to an investor’s understanding of your financial statements.
• While generally accepted accounting principles regarding how to account for these items have not changed in recent years, the current economic environment may require you to reassess whether the information upon which you base your accounting decisions remains accurate, reconfirm or reevaluate your accounting for these items, and reevaluate your Management’s Discussion and Analysis disclosure.
• Item 303 of Regulation S-K requires you to discuss, in your Management’s Discussion and Analysis, any known trends, demands, commitments, events or uncertainties you reasonably expect to have a material favorable or unfavorable impact on your results of operations, liquidity, and capital resources.

Specific disclosures which the SEC suggests "you should consider" providing in MD&A - "if they are relevant and material to you" - are enumerated in some detail under the following categories in the letter:

• Higher-Risk Loans
• Changes in Practices
• Declines in Collateral Value
• Other (including risk mitigation strategies, key ratios, and certain trend reporting)

The final paragraph of the letter - signed "Sincerely, Associate Chief Accountant"- states:

"[A]lthough determining your allowance for loan losses requires you to exercise judgment, it would be inconsistent with generally accepted accounting principles if you were to delay recognizing credit losses that you can estimate based on current information and events. Where we believe a financial institution’s financial statements are inconsistent with GAAP, we will take appropriate action."

My Two Cents
(I remind you of the disclaimer on the side of this blog.) I may be trying to read too much into this, but I'm trying to figure out if that last paragraph in the Dear CFO letter is meant to:

• insure a status quo approach, which I believe many if not most people believe to be the "incurred loss" model, which many view as the approach that has received SEC's direct or indirect approval over the past decade or so, or
• send a signal that the SEC is going to allow more conservative loan loss provisions for "expected" losses - e.g. based on current projections of future events, or under certain stress test or sensitivity analysis scenarios - rather than strictly permitting provisioning aimed at "incurred" losses.

For a general discussion of pros and cons of the "incurred loss" model vs. "expected loss" model, see, the Final Report of the FASB-IASB Financial Crisis Advisory Group (FCAG), printed pg. 4 (pdf pg 11) which states:

Whatever the final outcome of the debate over fair value accounting, it is unlikely that, on balance, accounting standards led to an understatement of the value of financial assets. While the crisis may have led to some understatement of the value of mark-to-market assets, it is important to recognize that, in most countries, a majority of bank assets are still valued at historic cost using the amortized cost basis. Those assets are not marked to market and are not adjusted for market liquidity. By now it seems clear that the overall value of these assets has not been understated – but overstated. The incurred loss model for loan loss provisioning and difficulties in applying the model – in particular, identifying appropriate trigger points for loss recognition – in many instances has delayed the recognition of losses on loan portfolios. (The results of the US stress tests seem to bear this out.) Moreover, the off-balance sheet standards, and the way they were applied, may have obscured losses associated with securitizations and other complex structured products. Thus, the overall effect of the current mixed attribute model by which assets of financial institutions have been measured, coupled with the obscurity of off-balance sheet exposures, has probably been to understate the losses that were embedded in the system.

And see printed pg 7 (pdf pg 14) of the FCAG Final Report, which states:

[B]oth accounting standard setters and prudential regulators now are inclined to agree that the incurred loss model and/or its application may delay recognition of losses.

Some had viewed SEC's policy over at least the past decade or so as effectively prohibiting the booking of "expected" losses, under the theory that "expected" losses appeared to fall under the same bucket as 'cookie jar reserves' criticized in then-SEC Chairman Arthur Levitt's seminal speech in the SEC's anti-earnings management campaign - a speech entitled "The Numbers Game," delivered at NYU law school on Sept. 28, 1998. (In fact, loan losses are expressly referenced briefly under the subsection of that speech, in a section entitled "Miscellaneous Cookie Jar Reserves.")

However, analysis of the fallout from the credit crisis over the past couple of years has led some to consider whether loan loss provisioning methodology under GAAP (including the implicit if not explicit support of the SEC) should move from an incurred to an expected loss model. There is also a particular version of provisioning which has received a fair amount of attention over the past year, called 'dynamic provisioning,' which is said to offer the benefit of being counter-cyclical, by essentially putting away reserves for a rainy day, precisely what some may view as 'cookie jar reserves.'

In fact, FCAG's Recommendations 1.3 and 1.4 in its Final Report state:

1.3. In the financial instruments project, the Boards should explore alternatives to the incurred loss model for loan loss provisioning that use more forward-looking information. These alternatives include an expected loss model and a fair value model.

1.4. If the Boards pursue an expected loss model, care must be taken to avoid fostering “earnings management,” which would decrease transparency.

For related discussion, see also our blog post earlier summarizing some highlights from the U.K.'s Turner Review.

Tea Leaves, Anyone?
On the one hand, the SEC states early on in the Dear CFO letter that "GAAP regarding how to account for these items hasn't changed in recent years." On the other hand, the SEC states later in the letter that "it would be inconsistent with generally accepted accounting principles if you were to delay recognizing credit losses that you can estimate based on current information and events."

I would take the SEC at its word that in its view, GAAP in this area hasn't changed. But, is current GAAP a strict incurred loss view, or is the SEC saying there's room for interpretation under current GAAP to allow an expected loss view, as long as it is "based on current information and events."

And, look again at the FCAG report cited above, whose authors maintained that: "The incurred loss model for loan loss provisioning and difficulties in applying the model – in particular, identifying appropriate trigger points for loss recognition – in many instances has delayed the recognition of losses on loan portfolios."

Yet another possibility - although this may not be the driving force behind the last paragraph in the letter - is that the SEC may subconsciously if not consciously be laying the groundwork for FASB's upcoming proposal that would require all financial instruments - including loans - to be carried at fair value.

Still another possibility is that the SEC is signaling a willingness to move to an expected loss model for loan loss provisioning as a potential alternative to fair valuing or 'marking to market' loans - particularly in light of recent experience with challenges experienced by issuers, auditors, and others in trying to arrive at a proxy for 'market value' for illiquid financial instruments.

I invite all tea leaf readers and experts who subscribe to this blog to share their two cents (or whatever your home currency may be) in the comment section of our blog.

SEC Issues Interpretive Release on FASB Codification

On Aug. 18, the SEC issued an Interpretive Release: Commission Guidance Regarding the Financial Accounting Standards Board's Accounting Standards Codification (Release Nos. 33-9062, 34-60519, FR-80). Some Highlights from the Release:

• Concurrent with the effective date of the FASB Codification, references in the Commission’s rules and staff guidance to specific standards under U.S. GAAP should be understood to mean the corresponding reference in the FASB Codification.
• …[T]he FASB Codification includes a cross-reference finding tool that can assist users in identifying where previous accounting literature resides in the Codification.
• The Commission and its staff also intend to embark on a longer term rulemaking and updating initiative to revise comprehensively specific references to specific standards under U.S. GAAP in the Commission’s rules and staff guidance.
• It should be noted that although the FASB has stated that the FASB Codification supersedes existing references in U.S. GAAP, the FASB Codification does not supersede Commission rules or regulations. We understand that the FASB Codification, as a service to users, includes references to some Commission rules and staff guidance. However, the FASB Codification is not the authoritative source for such content, nor does its inclusion in the FASB Codification affect how such content may be updated in the future.

Although not expressly addressed in the Aug. 18 interp. release, on the matter of issuers' providing citations in their SEC filings to pre-Codification cites (e.g. SFAS No. XXX) or post-Codification cites, that the most recent SEC staff views on that subject were provided in recent remarks of SEC Div. of Corp Fin Chief Accountant Wayne Carnall, e.g. Carnall's remarks at a July roundtable sponsored by the Global Accounting Alliance and the AICPA, as cited in the July 17, 2009 CFO.com article by David McCann: Companies Exasperate SEC Accounting Chief [i.e., Carnall, Chief Accountant, Div. of Corp Fin], in which McCann reported:

The SEC's Division of Corporation Finance has been receiving a "surprisingly" large number of questions recently on the new codification of accounting standards, noted Wayne Carnall, the division's chief accountant. What most people want to know, he said, is whether they have to amend existing filings, so that references to specific standards using the old numbering system are replaced with references to their new groupings by topic under the codification, which took effect July 1.

The answer is that they don't. Only filings made for periods ending after September 15 must refer to the standards as they're newly codified. But what Carnall finds bothersome is that the question needs to be asked at all. "You should not be making references to specific standards that very few [users of financial statements] understand," he said. Disclosures can be greatly improved and simplified by clearly expressing the concept the preparer is trying to communicate, as opposed to citing a
standard.

Carnall spoke during a panel discussion of complexity in financial reporting hosted by the American Institute of Certified Public Accountants. He said that when it comes to simplifying financials, while "standard setters and regulators can do a lot," the onus is also on individual filers and their auditors. "Don't write documents just to protect yourself from litigation or to satisfy a regulator," he said. "Think about the user."

(Separately, additional reporting on the Global Accounting Alliance can be found in Accounting Leaders Discuss Simplifying Financial Reporting by Alexandra Defelice in the AICPA JofA.)

Financial Instruments ED Coming Year-End or Early Next Yr; Final Std Expected 2010, Could Be Effective 2011; ABA Notes Concern

(Aug. 13) In opening remarks at today’s FASB board meeting, FASB Chairman Robert Herz said that the board is working toward issuing an Exposure Draft by year-end or early next year of proposed changes to Financial Instruments – Recognition and Measurement (FIRM).Following issuance of the ED and review of public comments received thereon, a final standard on FIRM is currently expected to be issued in 2010, said Herz. He added, "Based upon our current timetable, I at least could not see [a final standard on financial instruments] being effective any earlier than 2011."

Herz noted he has received several phone calls from constituents who were under the impression that today’s board meeting would be the last public board meeting at which the FIRM project would be deliberated prior to issuing an Exposure Draft. He emphasized that is not the case, and that FASB plans to hold several additional board meetings on the FIRM project prior to releasing an ED.

He provided an extensive discussion of due process in his opening remarks (perhaps, in part, as a result of recent comment letters filed by the American Bankers Association, detailed further below), including, "I expect that we will have many more public meetings to discuss a whole host of issues that we need to address in developing a comprehensive proposal," before an ED is issued. "Once we receive comments on our ED, we identify all the key issues that come out of those comments, all the other input that we receive, then we go thru a redeliberation process [in] a series of board meetings." He added, "experience indicates changes often are made [in the final standard] based on the comments and input that we get. And, only after we have gone thru that kind of very extensive and thorough public due process, would we issue a final standard."

Herz also noted that several public roundtables on financial instruments are set to take place in September, [Sept. 3 (Tokyo), Sept. 10 (London), Sept. 14 (Norwalk, CT)], jointly sponsored by FASB and the International Accounting Standards Board.

FASB's Assistant Director of Technical Activities, Kevin Stoklosa added that the staff plans to post a detailed project plan on the financial instruments project ‘soon’ (supplementing material currently posted), which will address the project plan on FIRM, impairment, and hedging. Additionally, staff plan to post a comparison between FASB’s proposed model for financial instruments, and the IASB’s proposed model.

All Financial Instruments To Be Carried At Fair Value
As recapped in the August 13 FASB board handout, FASB decided at its July 15 board meeting that: “All financial instruments will be presented on the balance sheet at fair value with changes in value recognized in net income or other comprehensive income with an optional exception for own debt in certain circumstances, which will be measured at amortized cost.” Further details are in the board handout.

At the August 13 board meeting, FASB discussed: (1) Balance sheet presentation for financial instruments whose changes in fair value are recognized in net income, (2) Presentation within net income for financial instruments whose changes in fair value are recognized in net income, and for financial liabilities eligible for the amortized cost option, (3) Balance sheet presentation of cumulative credit losses for financial instruments whose changes in fair value are recognized in other comprehensive income (OCI), (4) Foreign currency transaction gains/losses for financial instruments whose fair value changes are recognized in OCI, and (5) Disaggregation of other changes in fair value. See FASB's Summary of Board Decisions for official results of the August 13 board meeting. Additional highlights from the board's discussion can be found in this FEI Summary. (NOTE: FEI members-only can download the FEI Summary; Join FEI to have access to members-only summaries, reduced registration fees at our upcoming conferences and events, and more.).

American Bankers Association Voices Concern
In related news, the American Bankers Association issued a white paper yesterday, entitled: The Current Pace and Direction of Accounting Standard Setting. The white paper, attached to an ABA Aug. 12 comment letter to FASB and the IASB, follows on an earlier white paper entitled, Loans and Debt Securities - Principles to Follow in Developing a New Accounting Model, attached to an ABA Aug. 4 comment letter. In their August 4 letter, ABA said it is "deeply concerned about the direction being taken on the FASB and IASB 'joint project' relating to recognition and measurement of financial instruments... Because ...two types of assets [loans and debt securities] represent a majority of the U.S. banking industry's total assets, your actions are expected to have a major impact on the business of banking."

"During the current economic crisis," continues ABA's Aug. 4 letter, "preparers of financial statements, external auditors, regulators and others have agreed that 'mark to market' accounting (MTM) estimates have lacked a sufficient level of reliability. With this experience, it is surprising that the IASB and FASB would both establish new accounting models that expand the use and prominence of MTM rather than either reduce it or at least maintain the current level."

ABA adds, "We understand that certain investors and investment bankers who provide input to the Boards advocate MTM... however, accounting rules should address a wide variety of users and provide information that is relevant to generating cash flows and determining the prospect for generating future cash flows. Therefore, bankers have consistently advocated that, in contrast to a "one-size fits all" model that is emphasized by pro-cyclical MTM, accounting for loans and debt securities held at banking institutions should reflect the applicable business models used by bankers."

In their follow-up letter to FASB and the IASB on Aug. 12, ABA states it is "concerned about the process being taken on the FASB and IASB projects relating to financial instruments." Observing that, "[t]he changes that the FASB and IASB are considering represent the most significant accounting changes we have ever experienced," and that "[t]he rapid paces at which both organizations are working, as well as the paths being taken, are causing some to question whether there is due process in evaluating these important issues," ABA states, "We encourage the FASB and IASB to make such changes only with utmost caution and the appropriate level of due process to correspond with the magnitude of the changes."

ABA also observes that some have pointed to pressure on FASB and the IASB from the U.S. Securities and Exchange Commission, Members of Congress, the G-20, and others. However, ABA notes in its August 12 letter/white paper, that: "[B]ankers question whether the massive changes being contemplated by the IASB and FASB were truly contemplated by those requesting quick action."

"Given the possible consequences upon all financial services industries, bankers believe a more deliberate discussion among these groups, financial statement users, regulators and preparers be conducted to identify what degree of change is needed," says ABA in their August 12 letter. "For instance, confusion over the mere terms "transparency" and "fair value" can have unintentional adverse repercussions and result in missing a more reasonable repair of current standards."

[My two cents: I understand ABA's point about potential confusion among some constituents or members of the public about the meaning of the term 'fair value.' I've noted from time to time that many people would not necessarily know how fair value is arrived at in accordance with generally accepted accounting principles, (including requirements, in certain circumstances, to arrive at 'hypothetical' market values) and if you ask the man/woman/child on the street "Would you like to see Fair Value?" it's doubtful they'd answer "No." Or, as someone else told me, nobody's going to say, "No, I'd rather see Unfair Value."]

Read more highlights from the ABA letters.

FASB Response/Outreach
FASB Director of Communications Neal McGarity provided the following reaction to the ABA letter. (Note: McGarity's comment was provided to me separate from the FASB meeting, there was no mention of specific comment letters during FASB's meeting):

"The ABA white paper makes mention of a 'rapid pace' that is underway and that is just flatly not true. This morning FASB chairman Herz underscored in our board meeting the very long and robust due process ahead on this issue and he noted he could not foresee real changes pertaining to financial instruments in place earlier than 2011. We are taking a very measured and comprehensive approach to this complex issue and have many discussions and roundtable meetings ahead before an exposure draft will even be created."

FASB Project Manager Melissa Maroney noted at the conclusion of the August 13 board meeting that the staff has begun to conduct additional outreach on fair valuing deposits.Maroney said that staff has been “Reaching out to firms and constituents to get an understanding of methods used to value deposit intangibles, and additional outreach to users.”

She added that the staff is documenting various alternative approaches for the board, and plans to bring the issue back to the board for deliberation later in August or September.

FASB Chairman Robert Herz asked the staff if they are doing outreach to regulators; staff responded that they are.

FASB Board Member Mark Siegel said ,“To amplify that, on deposits specifically, [outreach] has already started. He noted that at one of the board’s educational sessions, there was “a walkthrough presentation how this could be done to figure out the fair value of deposits,” and that, “we have had a couple of analyst calls, small group meetings” at which that issue was discussed. As noted further above, FASB and the IASB will hold a series of roundtables on financial instruments in September.

Changes To Securitization, Consolidation (of SPE/VIE) Rules

Separately, ABA noted in their Aug. 12 comment letter to FASB/white paper that they had previously requested regulatory guidance relating to capital requirements in light of changes to FASB's rules on securitizations and consolidation (i.e. relating to changes in accounting for special purpose entities or variable interest entities.) ABA states:

• These new rules [FAS 166, FAS 167], which are expected to significantly increase regulatory capital requirements for entities that securitize assets, puts into question whether such coordination [with regulators] was performed.
• While some are still digesting the rules and continue to question the logic used in the rules, as of this date, banks have not been notified as to how to react to these new requirements from a regulatory capital perspective.
• The restoration of securitized credit markets may be delayed further because of these new rules and the lack of information about the regulatory impact.

NOTE: on the subject of the changes to securitization and consolidation (of SPE, VIE) accounting under FAS 166, FAS 167 (amending FAS 140 and FIN 46R) issued in June, FASB has a webcast slated for Aug. 24 to further describe these changes.

Everybody's Got an Opinion
Fair value/financial instruments accounting has received a fair amount of interest in the blogosphere lately. See, e.g. Prof. Tom Selling's Aug. 12 post, FASB Could Finally Get Loan Accounting Right - Well, Less Wrong, in his blog, The Accounting Onion. Of course, what's a blog if there isn't somebody with another point of view - and earlier today, Prof. Bob Jensen, a former American Accounting Association Educator of the Year, shared his views on this subject in a CPA listserv sponsored by Loyola College in Maryland. Looks like this matter will be in Friday's edition of the Wall Street Journal as well, see FASB Looks To Expand Mark Rules by Michael Rapoport.

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Changes To Securitization, Asset Sale Rules Featured On FASB Webcast

The Financial Accounting Standards Board is hosting a webcast on August 24 from 1-2pm EDT on Amendments to the Accounting for Securitizations and Special Purpose Entities.

The webcast, featuring FASB Board member Tom Linsmeier and FASB project managers Patricia Donoghue and Christopher Roberge , will discuss the changes in the ways entities will account for securitizations and special purpose entities under two standards issued by FASB in June: FAS. 166, Accounting for Transfers of Financial Assets, and FAS 167, Amendments to FASB Interpretation No. 46(R).

Register for the live or archived FASB webcast here.

FASB, IASB Projects Advance on the FIRM

FASB and the IASB are continuing their focus on developing new standards on accounting for financial instruments. FASB is slated to meet tomorrow (Thurs. Aug. 13) on its FIRM project: Financial Instruments Recognition and Measurement.

Separately, comment deadlines are approaching on related proposals issued by the IASB (comment deadline in parenthesis): Financial Instruments: Classification and Measurement (Sept. 14); Financial Instruments: Impairment of Assets (Sept. 1); Credit Risk in Liability Management (Sept. 1); Fair Value Measurement (Sept. 28). (See also: Fair Value Measurement ED – Marked Up Text.)

FASB also has a proposal currently out for comment on Proposed Statement, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (Aug. 24).

In related news on the financial instruments front, FASB and the IASB recently announced they will hold a series of roundtables on financial instruments. Dates/locations are: Sept. 3 (Tokyo), Sept. 10 (London), Sept. 14 (Norwalk, CT).

DiPascali, Pleading Guilty To Criminal Charges, Faces Up To 125-Year Prison Term In Madoff Affair

(Aug. 11) In a Manhattan courtroom this afternoon, Frank DiPascali, former CFO at admitted Ponzi schemer Bernard Madoff's firm, Bernard L. Madoff Investment Securities LLC, pleaded guilty to a ten-count criminal charge this afternoon. According to the US DOJ press release, DiPascali pleaded guilty to: conspiracy, securities fraud, investment adviser fraud, falsifying records of a broker-dealer, falsifying records of an investment adviser, mail fraud, wire fraud, international money laundering, perjury and attempting to evade federal income taxes.

DiPascali, 52, of Bridgewater, New Jersey, faces a statutory maximum sentence of 125 years in jail. U.S. District Judge Richard J. Sullivan remanded DiPascali to prison, setting a sentencing date of May 15, 2010.

"DiPascali's cooperation could lead to a reduced sentence," NBCBayArea.com noted in Ex-Madoff CFO Pleads Guilty, Cooperating With Feds. However, Judge Sullivan denied DiPascali be released on bail, stating: "I'm not persuaded he will be here at the time of sentencing given the monumental sentence he's facing," as reported by Reuters in Madoff Firm's CFO Pleads Guilty, Denied Bail.

According to Reuters, "DiPascali, who worked for Madoff for 33 years from the age of 18, appeared stunned at the judge's ruling at the end of a two-hour long court hearing.
DiPascali told the court that he recorded securities trades for clients that were 'all fictitious' and that in January 2006, 'under Bernie Madoff's direction, I lied to the SEC about the activities of the firm.'"

Madoff recently began serving a 150-year prison sentence for his role leading the Ponzi scheme, which was originally described as a $65 billion fraud, including phantom profits. Madoff has claimed to date that he acted alone.

In a prepared statement read in court today, DiPascali said, as reported in this Reuters article: "I'm standing here today to tell you that from the early 1990s to 2008 I helped Bernie Madoff and other people carry out a fraud that hurt thousands of people. I am guilty."

As further noted in the NBC.com article cited above, "DiPascali described the fraud, saying he 'represented that trades were taking place when they weren't. Most of time money just went into bank accounts Bernard Madoff controlled.' He said at Madoff's direction he 'lied under oath' to the Securities and Exchange Commission. ... 'It was all fictitious,' he said. 'It was wrong, and I knew it was wrong at the time. '"

SEC Files Civil Charges
Also today, the SEC filed civil charges against DiPascali. After news of DiPascali's guilty plea to the criminal charges, the SEC's press release noting DiPascali neither admitted nor denied the SEC's civil charges was somewhat anti-climactic. The SEC press release stated in part:

According to the SEC's complaint, filed in U.S. District Court for the Southern District of New York, DiPascali helped generate bogus annual returns of 10 to 17 percent by fabricating backdated and fictitious trades that never occurred. The SEC further alleges that DiPascali helped Madoff cover up the fraud by preparing fake trade blotters, stock records, customer confirmations, Depository Trust Corporation (DTC) reports and other phantom books and records to substantiate the non-existent trading.

"DiPascali and Madoff ran an extraordinary and massive counterfeiting operation that concealed their fraud from investors and regulators alike," said Robert Khuzami, Director of the SEC's Division of Enforcement.

Without admitting or denying the allegations of the SEC's complaint, DiPascali has consented to a proposed partial judgment, which if entered by the court would impose a permanent injunction against DiPascali and leave the issues of disgorgement and a financial penalty to be decided at a later time.

Others Expected to be Charged
A number of articles say that - although Madoff maintained he acted alone - now that DiPascali has pleaded guilty and presumably turned evidence against others, others are expected to be charged in the Madoff affair.

For instance, the closing paragraph of the NBCBayArea.com article states: "Officials will not say which relatives or former co-workers at Madoff Investment Securities will face charges. But investigators have said they expect about a dozen others to be charged as probe moves forward."

Read All About It
Numerous books recently published on the Madoff affair include, perhaps most significantly, Too Good To Be True, by Erin Arvedlund (Penguin Books). As noted in a Bloomberg article published today, Madoff Got Cozy With SEC, Ran Ponzi Scheme on Old IBM [Computer], Arvedlund was virtually the sole journalist who questioned Madoff's alleged strategy years ago, in an article she wrote for Barron's in 2001. Other books on this subject, notes the Bloomberg article, include “Betrayal” by Andrew Kirtzman (Harper) and “Madoff With the Money” by Jerry Oppenheimer (Wiley).

If you are looking for a general read on Madoff and other famous fraudsters, see How to Smell a Rat: The Five Signs of Financial Fraud, published earlier this year by JW Wiley, written by Ken Fisher of Fisher Investments, with Lara Hoffmans.

Since I like to use mnemonics to remember lists (even 5 point lists) (guess I got into that habit from the Becker CPA Review Course way back when), I have reordered Fisher's five points somewhat, to align with some associated key words, as follows (phrases in quotes are the 'five signs' of fraud as outlined by Fisher in his book):

A: Assets - "Your adviser also has custody of your assets - the number one, biggest, reddest flag."

B: Too Good to "B" True: "Returns are consistently great! Almost too good to be true."

C: Complexity: "The investing strategy isn't understandable, is murky, flashy, or 'too complicated' for him (her, or it) to describe so you easily understand."

D: Due Diligence: "You didn't do your own due diligence, but a trusted intermediary did."

E: Exclusivity: "Your adviser promotes benefits like exclusivity, which don't impact results."

Up Next: SEC I.G. Report
Of course, aside from perhaps Arvedlund's book, or a potential tell-all by Madoff, DiPascali, or Madoff's auditor David Friehling (who pleaded not guilty to fraud charges on July 17, as noted in this FT.com article,) perhaps the most watched-for read will be the SEC's Report of the Inspector General on the IG's internal investigation of the SEC's handling of the Madoff affair.

SEC Inspector General David Kotz testified to the Subcommitee on Oversight & Investigations of the House Financial Services Committee on July 13 that the SEC "plan[s] to issue shortly a comprehensive investigative report detailing all the examinations and investigations that the SEC conducted of Madoff or Madoff-related entities from 1992 until the present, and analyzing the reasons why the SEC did not uncover the Madoff Ponzi scheme, notwithstanding these examinations and investigations."

He added, "We have already interviewed over 100 witnesses and reviewed millions of e-mails and documents in connection with these investigative efforts," and, "We also plan to issue two additional reports providing specific and detailed recommendations for improvement of both the SEC’s Division of Enforcement and the Office of Compliance Inspections and Examinations, which will incorporate the findings from our investigative report."

XBRL-US Issues Codification Patch- UPDATED

Last week, as an interim measure to provide companies with the ability to use XBRL data tags referencing the newly published FASB Codification, which became the single source of U.S. GAAP on July 1, XBRL-US issued a patch of sorts (technically, a "taxonomy extension file" or "taxonomy reference linkbase") to enable referencing to the Codification. This is an interim step pending full incorporation of Codification references in XBRL-US' U.S. GAAP Taxonomy in 2010, as explained on the XBRL-US website under FASB Codification and U.S. GAAP Taxonomy. Further information is available in FASB's Project Update, and the XBRL-US Aug. 4, 2009 press release. See also UPDATE at the bottom of this post for additional information from Neal Hannon of The Gilbane Group on this subject.

XBRL, or eXtensible Business Reporting Language, is a system of tagging data with interactive tags based on a dictionary of tags, or taxonomy, developed by XBRL-U.S. The XBRL-US taxonomy is written for companies that report under U.S. GAAP. A separate taxonomy is being developed by XBRL-International for companies that report under International Financial Reporting Standards issued by the International Accounting Standards Board.

Beginning this year (phased in over a three-year period based on company size), public companies must begin including XBRL-tagged information with their financial reports filed with the U.S. Securities and Exchange Commission. See SEC Final Rule: Interactive Data to Improve Financial Reporting, published on Jan. 30, 2009.

In related news, see information published by FEI's research affiliate, the Financial Executives Research Foundation, http://www.ferf.org/, on the topic of XBRL (and a wide range of other topics), including FERF's July 23, 2009 Issue Alert: The XBRL Exhibit: A Checklist of Things Not to Miss.

Other XBRL Commentary: Hitachi XBRL Blog
An interesting item appears in the Hitachi XBRL Blog, Data Interactive, today. The post, entitled XBRL and Retail Investors: Where are the Missing Masses? is written by Joanne Locke, a senior lecturer at the University of Birmingham (UK), and a member of the International Accounting Standards Committee Foundation’s XBRL Advisory Council. (IASCF is the parent body of the IASB. As noted above, XBRL-International is developing data tagging for use by companies that report in IFRS as published by the IASB.)

Locke's post addresses the questions: "Are Retail Investors Important?" and "What Is Needed to Provide Retail Investors with Interactive Data in a Useful Format?"

Scroll down to view other recent posts on the Data Interactive blog for more insights on XBRL.

UPDATE: Info on XBRL and Codification from Neal Hannon, The Gilbane Group
Neal Hannon, Senior Consultant, XBRL Strategies at The Gilbane Group, provides some further details on this subject today in an item published in Compliance Week’s Remediation Center entitled, Filing in XBRL Using the New Codification, at www.complianceweek.com (sub req’d).

In the Compliance Week article, Hannon states:

The new extension taxonomy provides pointers only to the public sections in the Codification. In other words, if you are in an XBRL tool (which almost everyone will be when working with XBRL) and want to see the authoritative literature, the hyperlink takes you out of your XBRL software and asks you to log into the FASB Codification to see the results. This inconvenience should be rectified in the SEC’s next release of a taxonomy, slated for sometime early next year.

Meanwhile, those looking to discover a direct link from XBRL elements to the underlying authoritative literature will have to do some discovery work on their own or wait for further XBRL software developments to make the linkage easier to use.

For the remainder of 2009, use all available resources to choose the closest accounting fit between your company’s accounting and the XBRL element in the 2009 taxonomy. That should include tracing the links back to the Codification to ensure there are no accounting conflicts. Once we move into 2010, the official taxonomy reference linkbase will contain FASB Codification references only.

...The only additional step that could be taken at this point is for the SEC to create a new reference database with Codification references only and modify EDGAR to accept the new linkbase.

That will happen with the 2010 release, although it would be nice to have it in place by the time third-quarter 2009 filings are due.

Hannon shared with the FEI blog the following additional information, and noted he will be posting further details in a blog post later today at http://gilbane.com/xml/:

Meanwhile, [pending the upcoming modification to EDGAR noted above] there are a few problems.

The new reference linkbase is unofficial and will not be accepted by the SEC's EDGAR system. URI links point to the proper places in the COD for FASB publications but require a separate log in and give you access to the public (high level) view only.

Firms and organizations with professional access to the Codification will not find this a problem, but individual practitioners will have to subscribe (at $850 per year) to get any views beyond the bare bones.

SEC literature stops at the top of the page for ALL SEC GAAP citations. For example, any XBRL element that has a regulation SX reference will point to exactly the same place, the top of the document. Not very useful. The SEC should address
this.

So it appears we have three levels of accounting material to deal with, 1) the high level public access literature, which is official US GAAP in the Codification; 2) the professional view additional detail and explanations, and 3) and the non-GAAP material the FASB left out of the COD that is in their hard copy literature but didn't make the COD/US GAAP cut. ideally, all literature coming from the SEC or the FASB should be, in my opinion, easily accessible via the Internet.

FASB's Anniversary Present To CIFiR

Close to one year ago, (actually Aug. 1, 2008), SEC's Advisory Committee on Improvements to Financial Reporting (CIFiR), chaired by Robert Pozen, issued its final report. Earlier today, the Financial Accounting Standards Board (FASB) and its parent organization, the Financial Accounting Foundation (FAF) announced:

"In acknowledgement of the one-year anniversary of the August 1, 2008 report of the Securities and Exchange Commission’s Advisory Committee on Improvements to Financial Reporting (CIFiR Committee), the FAF and FASB have published a response to that report. The response explains the actions we have taken (or plan to take) with respect to each CIFiR Committee recommendation aimed at improving accounting standard setting."

Some of the language in the FAF/FASB response to CIFiR closely mirrors the recent report issued by the FASB-IASB Financial Crisis Advisory Group (FCAG), and numerous speeches by FASB Chairman Bob Herz (e.g. at the National Press Club earlier this summer). For example, the FAF/FASB response to CIFiR states:

• While accounting did not cause the crisis and accounting will not end it, it did reveal a number of areas requiring improvement in standards and overall transparency.


• Over the past 18 months, the FASB has responded vigorously with a number of new standards and enhanced disclosure requirements relating to securitizations and special-purpose entities, credit default swaps and derivatives, financial guarantee insurance, and fair value measurements and credit exposures. The International Accounting Standards Board (IASB) has similarly been working vigorously to improve international financial reporting standards (IFRS). Responding to the calls for timely improvement within their respective jurisdictions while also advancing convergence has proved challenging for both the FASB and IASB.


• The current financial crisis, in addition to highlighting the need for enhanced communication throughout the financial system, also revealed a need for improved infrastructure and transparency around markets for complex structured securities and certain derivatives. It is notable that during the past year, many companies and other market participants found it difficult to obtain some of the important information needed to measure the fair value of certain complex financial instruments partly due to limited market infrastructure for such instruments.

In the report issued today, FASB lists its accomplishments vis-a-vis CIFiR's recommendations, as detailed further below. However, FASB also notes some limitations on its ability to single-handedly reduce complexity in financial reporting, including the need - as recommended by CIFiR - for the SEC and PCAOB to consider developing a professional judgment framework, and the need for a general consideration of the legal environment.

Professional Judgment Framework Should Be Considered by SEC, PCAOB
CIFiR had recommended various ways to reduce complexity in financial reporting, including direct actions by FASB and others. Among its recommendations, CIFiR recommended that SEC and PCAOB consider potentially issuing a professional judgment framework. Some believe such a framework would assist in the move to a more principles-based framework, such as (but not limited to) that of the IASB (although, all things are relative, and some take issue with trying to describe particular frameworks as all principles based or all rules based, as they may contain elements of each, and some believe that IFRS - which is a relatively younger framework than U.S. GAAP, may become increasingly rules-based if there is a demand for more implementation guidance.).

In the FAF/FASB response to CIFiR issued today, FASB states:

"The Board acknowledges that a high volume of authoritative implementation guidance contributes to the complexity of U.S. GAAP. The Board supports the idea of issuing implementation guidance in the early years only in emergency situations and evaluating as part of a post-implementation evaluation whether additional guidance is needed to reduce application diversity or otherwise improve reporting."

"The [FASB] Board believes that implementation of that approach would be greatly facilitated were the SEC and the PCAOB to act on the Committee’s recommendation that they develop policy statements articulating how they evaluate the reasonableness of accounting and auditing judgments (a judgment framework). That is because based on our recent experience with implementation of the more principles-based standard on fair value measurement, we do not perceive any significant change in the demand for detailed implementation guidance....

"...Although the [FASB] Board is committed to eliminating or reducing the use of bright lines and exceptions, we do not perceive any significant change in the demand for such guidance, suggesting a possible need for further changes to the institutional, legal, and cultural factors driving that demand."

NOTE - my two cents: Crafting, applying, auditing, inspecting to, and enforcing a 'professional judgment framework' may not be as easy as it sounds. See, e.g. our Feb. 28, 2008 blog post (you'll have to scroll down, we currently have all Feb. 2008 posts on one page) on "SAG Members Warn CIFIR Professional Judgment Framework Could Become Litigation Trap." See also attorney Michael Young's early comments on this issue (Young is co-chair of Willkie Farr & Gallagher's Litigation Department and of its Securities Litigation & Enforcement Practice Group), in question 4 of this April 4, 2008 FEI Q&A With Michael Young.

Accomplishments
The FAF/FASB response to CIFiR issued today lists FASB's accomplishments as relate to CIFiR's recommendations. Below are a few highlights.

Investor Input: Although FASB had several investor advisory committees already in place which predate CIFiR's recommendations, FASB has taken additional steps in response to CIFiR to enhance investor participation in the standard setting process. FASB lists these steps in great detail, and adds: "The FASB and the FAF agree that investors are the primary consumers of financial reports. It is critically important that the Board understand investors’ perspectives and give them appropriate weight in developing accounting standards."

Field Testing the Cost-Benefit Equation: FASB notes: The Board agrees that field work is one of several important ways of gathering input about the potential benefits and expected costs of proposed standards. Over the past year, the Board tried several new approaches to field testing its proposals with investors. The Board had to modify a potentially promising approach in response to a number of practical challenges." FASB adds: "[T]he Board plans to consider in the near future how it might enhance other aspects of its field work to make it more consistent and transparent."


Process for post-adoption reviews of standards coming in 2009, may coordinate with IASB: FASB states "We agree that the Committee’s [CIFiR's] suggestions for formalizing the post-adoption reviews of new standards have the potential to reduce the complexity of U.S. financial reporting. We are working to develop and implement a post-implementation review process by the end of 2009."

Disclosure Framework Project - Examining SEC and FASB Dislosures - Discussion Doc for Public Comment Expected 1st Half 2010: FASB states that its Disclosure Framework project (announced in July), will "develop a principles-based framework that would strengthen disclosure quality, rationalize U.S. GAAP and SEC requirements, and improve the consistency and organization of existing and future financial statement disclosures to make them more meaningful for investors." FASB notes that "The Committee’s [CIFiR's] final report contains many thoughtful recommendations about the elements of an effective disclosure framework, and the Board [FASB] will carefully consider them as it develops a proposal. The FASB plans to seek comment on a proposed framework by issuing a Discussion Paper in the first half of 2010."

FASB Governance: CIFiR had recommended that: "The SEC should continue to recommend that the FAF enhance governance of the FASB, as follows: (1) Recommend that the FAF amend the FASB’s mission statement, stated objectives, and precepts to emphasize that an additional goal should be to minimize avoidable complexity, and (2) Recommend that the FAF develop performance metrics to ensure that key aspects of the standards-setting process are effective, efficient, and compliant with the goals in the FASB’s mission statement, objectives, and precepts."

FASB notes it expects to complete the process of updating its Rules of Procedures in "upcoming months," and as part of that update, "will consider whether and how to amend its mission statement, objectives, and precepts." Additionally, FASB notes that the FAF Trustees established an Oversight Committee in Aug. 2008.

FASB Codification vs. Non-authoritative guidance: CIFiR had recommended: "In order to fully realize the benefits of the FASB’s codification efforts, the SEC should ensure that the literature it deems to be authoritative is integrated into the FASB Codification by following, to the maximum extent practicable, a format consistent with the one used by the FASB. All other sources of interpretive implementation guidance should be considered non-authoritative and should not be required to be given more credence than any other non-authoritative sources that are evaluated using reasonable judgments made in good faith that are supportable under U.S. GAAP. "

FASB notes that its Codification - now the single source of U.S. GAAP - was launched on on July 1, 2009, with an effective date of interim and annual periods ending after September 15, 2009. The final numbered "Statement of Financial Accounting Standards" or SFAS, FAS issued under the old (pre-codification) system, FAS 168, "makes clear that all other accounting literature not included in the Codification is nonauthoritative."

NOTE - my two cents: In my view, now that the Codification is out, and in light of the CIFiR rec noted above, it will be interesting to see what evolves going forward, in upcoming speeches of SEC staff, in terms of what was previously informally referred to as "speech GAAP" or guidance communicated by the SEC staff in the form of speeches, e.g. at the annual AICPA Conference in December each year on current SEC and PCAOB Developments.

Restatements: FASB notes that CIFiR recommended that "[T]he FASB or the SEC consider the potential benefits that would result from providing or improving guidance with respect to materiality and the accounting and reporting of error corrections." FASB adds: "Representatives of the FASB and the SEC’s Office of the Chief Accountant carefully evaluated each of those recommendations and concluded that they related to SEC reporting requirements. Accordingly, the FASB has no plans to act on those recommendations at this time."

XBRL: In August, FASB completed a project with XBRL-US to embed the new FASB Codification references into the XBRL taxonomy and display all XBRL elements within the Codification. FASB states this project will produce three main benefits: (1) Financial statement preparers, auditors, and other taxonomy users will be able to electronically link from an element to the relevant content in the Codification to ascertain the appropriateness of using an element. (2) When software vendors integrate the electronic links into analysis tools, financial statement users will be able to link to the associated content in the Codification. (3) The Codification will display all XBRL elements linked to a Subtopic and a paragraph this will enable financial statement preparers, auditors, and others to electronically link the XBRL taxonomy to the relevant portions of the Codification.

Additional highlights from the FAF/FASB response to CIFiR can be found in this FEI Summary, which can be viewed by FEI members only. Consider joining FEI for our many membership benefits, including reduced charge to attend conferences like our Oct. 21 Private Co Forum in Chicago, or our Nov. 16-17 Current Financial Reporting Issues Conference (CFRI) in NYC!

FASB Proposal On Fair Value Disclosures To Include Sensitivity Analysis For Level 3; Proposal Coming On Oil & Gas; Final Std on FV Alt. Inv.

At its board meeting earlier today, FASB authorized its staff to proceed to ballot draft on a proposed Accounting Standards Update on Improvements to Fair Value Disclosures. [ASU is the new term used by FASB for proposed changed to U.S. Generally Accepted Accounting Principles, which as of July 1 are contained in FASB’s Codification.] The proposed effective date will be reporting periods (annual or interim) ending after 12/15/2009 except for Level 3 sensitivity disclosures which would be effective for reporting periods (annual or interim) ending after 03/15/2010. Staff expects to have the proposed ASU ready for release by the end of August, and there will be a 45-day comment period.

According to FASB's Summary of Board Decisions , "The Board will propose three new disclosure requirements:

• Information about the sensitivity of certain fair value measurements: If a change in one or more of the significant inputs to a Level 3 fair value measurement would significantly change the fair value, the reporting entity would state that fact and disclose the effect of those changes.
• Information about transfers in and/or out of Levels 1 and 2: A reporting entity would disclose information about significant transfers in and out of Levels 1 and 2 and the reasons for the transfers.
• Gross reporting of changes in Level 3 fair value measurements: Information about purchases, sales, issuances, and settlements, included in the reconciliation of Level 3 fair value measurements, would be presented on a gross basis rather than a net basis."

Additionally, FASB's Summary of Board Decisions states "The Board will propose two clarifications of existing disclosure requirements:

• Level of disaggregation: An entity is currently required to provide fair value measurement disclosures for each major category (class) of assets and liabilities, and the Board plans to provide guidance on the meaning of the term class. The Board believes a class is often a subset of assets or liabilities within a line item in the statement of financial position. An entity would apply judgment in determining the appropriate classes of assets and liabilities.
• Disclosures about inputs and valuation techniques: An entity is currently required to provide disclosures about the valuation techniques used to measure fair value. The Board will clarify that the disclosures about the inputs used are required for both recurring and nonrecurring fair value measurements. The Board also will clarify that those disclosures are required for fair value measurements that fall in both Level 2 and Level 3."

Sensitivity Analysis a Sensitive Issue
The propsed disclosure of sensitivity analysis proved to be a sensitive issue. As discussed at today's board meeting, the FASB board had previously asked the staff (at the May 27 board meeting) to conduct some preliminary outreach to preparers on the proposed sensitivity analysis disclosures for level 3 assets.

FASB Project Manager Bob Bhave provided the results of that outreach to the board today. He stated: "Preparers provided extensive feedback and suggestions to improve the proposed guidance, [including] concerns about operationality... based on input received from preparers during the outreach process and discussed last week at [FASB's] Ed session [referring to Educational sessions the FASB board frequently holds to provide additional information to the board], the staff's recommendation is that the board proceed with the proposal including all the proposed disclosures at the May 27 board meeting EXCEPT FOR the sensitivity disclosures for Level 3 measurements... [and] come back to the sensitivity disclosures after further progress is made on the Financial Instruments Recognition and Measurement (FIRM) project." Some board members noted that with the apparent direction to move more assets to fair value as part of the FIRM project, the need for some of the sensitivity analysis information may change. Other board members noted the board also recently launched a disclosure framework project.

The board considered the staff's recommendation, but a majority of board members (including FASB Chair Bob Herz and FASB board members Tom Linsmeier and Mark Siegel) disagreed with the staff recommendation, and voted to keep the sensitivity analysis disclsoures in the proposal. (Board members Leslie Seidman and Larry Smith sided with the staff view.)

Herz explained he was in favor of including the proposed sensitivity analysis to get additional preparer feedback on the operationality of the proposed disclosures, as well as additional feedback from users of financial reporting (investors and others).

He noted: "Every time we meet with sophisticated users, they always talk about sensitivity analysis." He added that he'd like to obtain, through the public comment period, "a little better understanding from some more users, what exactly they are going to do with the information; they say they want it, but [for us to] say, you’ve got this piece of information, now what do you do [with it]?"

There were also varying views expressed by board members as to whether the proposed sensitivity analysis disclosures would, or would not, be akin to the kind of 'stress test' exercise performed by U.S. banking regulators earlier this year.

Use of pricing services for illiquid assets was also discussed, with Seidman noting: "We need to proactively reach out to a couple of pricing services [during the public comment period], it’s a real issue raised by every kind of constituent we have."

On the question of practicality/operationality, Smith suggested: "I’d like to ask a specific question [in the proposed ASU] about the ability [of companies] to do this on a quarterly basis and meet filing deadlines that currently exist. We have consistently continued to add to quarterly disclosure requirements, I question whether there is enough time for people to do things effectively."

The board had also asked the staff to gather some preliminary feedback from preparers on the level of disaggregation of the proposed fair value disclosures, and as noted above, agreed to simplify the level of disaggregation of the proposed fair value disclosures, to be more in line with that described in para. 5, pg. 2 in today’s board handout.

Linsmeier asked if the level of disaggregation would be based on the categories in the statement of financial position (balance sheet), or the footnotes (which are generally more detailed). It was not clear to me from the discussion that ensured as to what the response to that question was; reference should be made to FASB's Summary of Board Decisions and the proposed ASU.

Proposal Coming On Oil & Gas Reporting
In other matters discussed at today's FASB board meeting, the board agreed to proceed with a proposed ASU to conform oil and gas reporting to SEC’s final rule on that topic issued last year. The effective date of the proposed ASU would be annual reporting periods ending on or after December 31, 2009. Early application would not be permitted.

Final Standard Coming On Fair Value of Alternative Investments
Also at today's FASB meeting, the board agreed to finalize an ASU on fair value of alternative investments, following discussion of comments received on related proposed FSP FAS 157-g. The board agreed the final ASU would be effective at year-end (specifically, periods ending after Dec. 15, 2009), with early adoption permitted.

Additional Information
For official results of FASB meetings, refer to FASB’s Summary of Board Decisions, generally posted same-day or next-day in FASB’s News Center.

Additional background on matters discussed at today’s FASB meeting can be found in the board handout, and in FASB’s project summaries on improving fair value disclosures, fair value of alternative investments, and oil & gas reporting.

Profession Mourns Ben Neuhausen

The accounting and auditing profession lost a great leader on Friday, when Ben Neuhausen, National Director of Accounting at BDO Seidman LLP, and former chairman of the AICPA's Accounting Standards Executive Committee (AcSEC), passed away at the age of 59 after a long illness. Earlier in his career Neuhausen was a partner in the Professional Standards Group with Arthur Andersen and a FASB Practice Fellow.

Earlier this year, Neuhausen received an AICPA Special Recognition Award in honor of his outstanding contributions to accounting standard-setting. (See: Neuhausen Recognized for Contributions to Standard-Setting , Journal of Accountancy, June 2009.)

The Voice of Clarity, Common Sense
In a statement issued today, Jack Weisbaum, CEO of BDO Seidman, said:

“All of us at BDO Seidman are deeply saddened by the loss of our friend and colleague, Ben Neuhausen. His technical knowledge and high ethical standards were a very valuable resource to our firm. In a time of increasing complexity, Ben was the voice of clarity and common sense."

Although I never met Neuhausen, except perhaps in a large meeting or conference, I found his remarks in testimony at public meetings and in articles he had written to illustrate that he not only had mastered technically complex issues, but also that he was an articulate advocate of -as described by the BDO CEO - clarity and common sense.

Here's an example of Neuhausen's advice, from remarks he made at a May 2, 2008 CIFiR meeting. (NOTE: Neuhausen was among various experts invited to testify to CIFiR on particular topics at special roundtables convened by CIFiR in addition to their regular meetings.) Neuhausen's remarks below are excerpted from Panel Tesifying to CIFiR Split on Role of Non-Authoritative Guidance (FEI Summary, May 2, 2008):

“I think non-authoritative guidance is a symptom of complexity in the authoritative standard… preparers and practitioners want the guidance because they find the authoritative standards very hard to read, very hard to understand, very hard to apply, and they want non-authoritative guidance to help them apply the standards. If there is a problem with non-authoritative guidance, the solution lies in simplifying the authoritative standards, not in trying to reduce the number of people issuing non-authoritative guidance."

Also at the May 2, 2008 CIFiR meeting, Neuhausen noted that he concurred with an observation made by Linda Bergen of Citigroup about the comment letter process, in which she noted that at times, comment letters raise concerns which were previously considered by FASB during development of the proposed standard, but FASB sometimes appeared to conclude that "no new points were raised, let’s proceed to the final standard." (Note: I have heard FASB staff tell the board that 'no new points were raised' that had not been previously considered, therefore no further deliberation was necessary on a particular point raised in comment letters.)

Neuhausen stated at the May 2, 2008 CIFiR meeting:

“We [BDO] cited in our comment letter [to CIFiR] a number of cases where the FASB has significantly revised or deferred provisions in newly issued standards and we think in many of those cases, those issues were raised in the comment letters; it’s just that somehow the importance of the comment or significance of the issue wasn’t recognized when the standard was issued - it only became clear after the final standard came out. Somehow, a better process of analyzing those comment letters would have picked up on some of these issues on a more timely basis.”

Note: a more positive view on the FASB's handling of comment letters was expressed by Jeff Mahoney, general counsel of the Council of Institutional Investors and formerly counsel to the FASB chair, as noted in the FEI summary of the CIFiR meeting.

Articles by and about Neuhausen
I'm sure there are many articles written by and about Neuhausen, a couple are listed below (readers: feel free to post a comment with links to additional material):

Achieving Greater Transparency: A More Comprehensive Approach To Disclosure Is Needed To Restore Confidence (Directorship Magazine, June/July 2009) This article written by Neuhausen, published on June 1, recommended someone take on a holistic review of the entire disclosure framework - SEC and FASB - vs. continuing to issue new, piecemeal requirements in a relatively rushed timeframe. In essense, he essentially foresaw FASB's July 8 announcement of its new Disclosure Framework project.

The Standard-Bearer: Chairman Examines AcSEC's Changing Role and the Progress of International Convergence, (Journal of Accountancy, August 2008). In this article, Neuhausen responds to the interviewer's question about his receiving a diagnosis of pancreatic cancer late in 2007. Neuhausen said:

"While I am feeling good, it is likely that tougher days lie ahead. Pancreatic cancer is one of the most aggressive cancers, and the long-term survival rates are not good. For now, I savor every day and am grateful for the strength to fill my roles as parent and as partner. If and when my condition worsens, I feel confident that I’ll continue to receive incredible support from my firm and the entire profession."

BDO CEO Weisbaum, in the statement issued today, said of Neuhausen:

"One of our most respected partners, his high professional standards served as a beacon for all of our professionals to follow.”

My sympathies to Neuhausen's family, friends and colleagues, and my wishes that his influence as a beacon continue to light all our paths.