Wednesday, February 23, 2011

Tom Linsmeier Reappointed To FASB Board

Professor Tom Linsmeier has been reappointed to a second five-year term as a member of the FASB board. As stated in a press release issued by FASB's parent organization, the Financial Accounting Foundation, last week:
Mr. Linsmeier was appointed to his first term as a member of the FASB on July 1, 2006. Prior to his appointment, Mr. Linsmeier spent seven years as a member of the accounting faculty at Michigan State University, where he was the Russell E. Palmer Endowed Professor and Chairman of the Department of Accounting and Information Systems in the university’s Eli Broad College of Business. An award-winning professor and researcher, he began his academic accounting career in 1985 at the University of Iowa. In 1994, he became an Academic Fellow in the Office of the Chief Accountant of the U.S. Securities and Exchange Commission (SEC).

Read more about Linsmeier and the other six FASB board members here.

FASB, IASB May Give Operating Leases New Lease on Life

[NOTE: This post was updated 4/11/11 - see also new blog post, dated 4/11/11, on leasing.] At a joint board meeting last week, FASB and the IASB tentatively agreed to give operating leases a new lease on life, and to modify a provision regarding lease renewal options, as the boards move to finalize their proposed standard on lease accounting. As background, according to results of a Deloitte survey published last week (Deloitte Survey: Only Seven Percent of Companies Are Well Prepared To Comply With New Lease Accounting Standard):
From a financial perspective, more than 80 percent of respondents believe that the lease accounting standards will place a significant burden on financial reporting for tenants as well as property owners. More than 40 percent of respondents believe the new standards would make it more difficult to obtain financing. In addition, 68 percent of respondents said it would have a material impact on their debt to equity ratio; and, roughly 40 percent thought the new lease standard would lead to shorter term leases. Only 35 percent of respondents are extremely or very confident in the integrity of their company's lease data needed to comply with the new standard. Further, to accommodate the new standard, major IT investments would likely be needed. One-quarter of respondents said their companies are likely to have to make a major upgrade to their information technology systems, while 20 percent said they are likely to acquire a new system. Among companies with 1,000 or more leases, the need for IT investment was even greater — 39 percent of these respondents expect the new standards will lead to a major technology system upgrade, while 27 percent expect to acquire a new system. In addition, just 21 percent of respondents are extremely or very confident in the capability of their companies' information technology provider to comply. Half the respondents at companies with 1,000 leases or more expect that implementation would take one year or longer.
Regarding potentially modifying the treatment of leases set forth in the boards' August 2010 Leasing Exposure Draft, according to the minutes of the FASB/IASB joint board meeting:
The Boards tentatively decided to identify a principle for identifying two types of leases for both lessees and lessors, with different profit and loss effects, as follows: 1. A finance lease with a profit or loss recognition pattern consistent with the proposals in the Exposure Draft 2. An other-than-finance lease with a profit or loss recognition pattern consistent with an operating lease under existing IFRSs/U.S. GAAP. (FASB: unanimous; IASB: unanimous) The Boards tentatively decided to establish indicators to distinguish a finance lease from an other-than-finance lease (FASB: unanimous; IASB: unanimous). The Boards asked the staff to use these tentative decisions to perform targeted outreach to determine if stakeholders’ concerns about the profit and loss recognition pattern proposed in the Exposure Draft would be addressed.
As noted by Compliance Week's Tammy Whitehouse, in FASB Retreats Again, This Time on Leasing: [4.11.11 NOTE: Whitehouse's article was updated after initial publication, the original version said that the FASB's Feb. 17 decision was "different from the boards' original proposal that all leases would give rise to an asset and a liability appearing on corporate balance sheets." The updated article now says:

The boards have agreed to consider a structure where “finance leases” would be treated like an installment purchase, putting an asset on the balance sheet as well as a liability to be paid down over time. “Other-than-finance” leases would also appear on the balance sheet, but would flow through the income statement like today's operating leases because the financing element would not be considered significant. That's different from the boards' original proposal that would establish a single accounting method for all leases. The boards have asked their staff to establish indicators that would be used to identify the difference between the two types of leases and do some outreach to see if that would quell the criticism of the original proposal.
My two cents (I remind you of the disclaimer on the right side of this blog): I am a little surprised to see the label of 'other-than-financing' chosen for leases that, under this modified proposal, would be, well, I grant you, 'other-than-financing.' The label may seem self-explanatory to some, but given the history of another recent 'other-than' ... standard (other-than-temporary-impairment, or OTTI, as in declines in market value, see, e.g. prior posts here, here, here, here, here, here, here, here and here), the 'other-than' category may have seemed self-explanatory at the time, and FASB and the IASB have stated they will seek to identify 'indicators' for the financing vs. 'other-than-financing' (OTF?) category, but the contentiousness of the OTTI experience as exacerbated during the credit crisis is still fresh in some minds. A world of difference between OTF and OTTI, maybe just a deja vu thing. 'More Likely Than Not' Would Change to 'Reasonably Assured' Reflecting another tentative decision at the FASB/IASB boards' February 17 joint meeting: the 'more likely than not' trigger related to accounting for renewal options, criticized in comment letters as too vague and/or too low of a bar, would change to 'reasonably assured.' As pointed out by Bob Cook in his Corporate Real Estate Strategy Blog, in a post entitled Lease Accounting Update: More Likely Than Not is No More:
FASB/IASB have dropped one of the most controversial parts of their proposed lease accounting. The Exposure Draft, released in August 2010, had called for lessees with options-to-renew to capitalize lease obligations for renewal periods that were “more likely than not” to occur. This part of the accounting was attacked on many grounds... Before “the people” start celebrating, though, they should understand that there will still be a need to evaluate each and every lease, with an option to renew, to determine whether there is an economic incentive in that option such that renewal of the lease is “reasonably assured” … in which case the renewal period would have to be capitalized … just as is the case under present accounting for capital (or financing) leases. This test will be much less onerous, though. FASB/IASB are going to work on the exact wording, but this “reasonably assured” test has a much higher bar than would have the “more likely than not test” … akin to the difference between 99% and 51%. Few leases will go over the bar and most won’t even come near it so assumption-making will be much easier, and easier to justify to auditors, than it would have been with “more likely than not”.
According to FASB's Technical Plan, a final standard on Leasing is to be issued 2Q11. Read more about the Leasing project and other projects discussed at the FASB/IASB joint board meeting in Summaries of Board Decisions posted in FASB's News Center.

Monday, February 14, 2011

IASB Parent Org. Opens Regional Office In Tokyo; Could Norwalk Be Next?

With last week’s announcement by the IFRS Foundation – parent of the IASB – of the opening of the IFRSF's first regional office (outside their London HQ) in Tokyo, some may wonder, could Norwalk (home of the U.S. Financial Accounting Standards Board) be next?

Could Norwalk Be Next?
Pure speculation here (I remind you of the disclaimer posted on the right side of this blog), but as we noted on Dec. 7, 2009 (citing speculation by then-FASB Chairman Bob Herz in remarks to the International Federation of Accountants, as noted in various articles published on Dec. 11, 2007):
"FASB Could Become Part of IASB, Herz Reportedly Tells IFAC Conference; SEC
To Meet Next Week." Here's what our post from Dec. 11, 2007 said:

There’s been a flurry of reporting on FASB Chairman Bob Herz’ remarks at the International Federation of Accountants (IFAC) 30th anniversary World Accountancy Forum earlier this week, in which Herz is reported to have said that in light of the move toward one global standard setter – and, as he has previously stated, that one global standard setter will one day be the IASB - FASB can essentially become a branch or satellite office of the IASB. This was reported in "FASB Sees Its Future as Part of IASB,” Accountancy Age, Dec. 7, “FASB Could Become Branch of IASB,” Webcpa, Dec. 6, and “FASB Members Suggest Board Could Become IASB ‘Satellite’ or U.S. Office,” BNA Daily Report for Executives, Dec. 7. The BNA article notes not only Herz remarks at IFAC on Dec. 4, but similar remarks by FASB board member Michael Crooch at yesterday’s (Dec. 6) FASB Accounting Standards Advisory Council (FASAC) meeting.*

BNA describes Herz' remarks at IFAC as "suggest[ing] IASB could have an office ‘in
the United States – maybe in Norwalk [Conn.]’ for example, and it ‘might have an office in Japan.’ BNA also notes Crooch told FASAC yesterday: “At some point, the FASB is going to have to be out of the business of writing accounting standards, if you’re going to have one global standard-setter.”

NOTE: As shown in the minutes of the Dec. 6, 2007 FASAC meeting, (para. 10, particularly para. 10d, pages 5-6 of minutes), some of the thinking at that time regarding a potential satellite office for the IASB in the U.S. was as follows:

The views expressed by FASAC members on the potential future direction and
organization of financial reporting may be summarized as follows:

... There should be one standard setter for one set of global standards, so the FASB cannot continue to exist in its current capacity. Instead, the FASB could act as a resource (or satellite office of the IASB) with 100 years of experience, collecting the views in the U.S. and presenting them to the IASB.

FASB, ASBJ, Hold 10th Meeting To Discuss Global Convergence
Last week, representatives of the FASB and the Accounting Standards Board of Japan (ASBJ) held the 10th in a series of meetings to continue a dialogue on global convergence.

As noted in a joint press release issued by FASB and the ASBJ (formatting added for emphasis):

The decisions connected with the use of IFRSs are expected to be

- during 2011 for the United States and

- in or around 2012 for Japan

....With those forthcoming decisions in sight, both the ASBJ and the FASB are vigorously conducting their respective convergence programs with the IASB.

... At this meeting, taking into account these trends, the ASBJ and the FASB updated each other with the recent developments in their respective convergence projects with the IASB. Furthermore, the ASBJ and the FASB exchanged views on [various convergence] projects...

...Ikuo Nishikawa, Chairman of the ASBJ, stated, “As the decisions connected with the use of IFRSs in both countries approach, it is extremely meaningful to exchange views with the FASB regarding financial instruments, revenue recognition, leases, and the measurement of liabilities, most of which are high priority MOU projects between the FASB and the IASB. I am pleased that we were able to affirm our continuing relationship between the ASBJ and the FASB under the leadership of newly appointed Chairman, Ms. Leslie Seidman. The ASBJ will continue to contribute to the development of high-quality, global accounting standards.”

Leslie F. Seidman, Chairman of the FASB, affirmed that notion, saying, “The FASB is committed to working cooperatively with the ASBJ on important issues related to the international convergence of accounting standards. Our dialogue on major joint projects with the IASB, and our shared interest in international convergence, are important to ensuring the future of high-quality financial reporting in both Japan and the United States. ”

The next joint meeting is planned in the summer of 2011 in Tokyo, Japan.

Monitoring Board Releases Report on IFRSF Governance; FAF To Meet

Last week, the IFRS Foundation Monitoring Board - currently consisting of five major securities regulators from around the world, announced the release for public comment of its report on the IFRS Foundation's governance. The 60-day comment period on the report, formally entitled the 'Consultative Report on the Review of the IFRS Foundation's Governance,' ends April 8.

The Monitoring Board, formed in 2009 to provide a public accountability link between international securities regulators whose mandate is investor protection, and the IFRS Foundation which oversees the IASB, currently includes five members:
  1. Masamichi Kono (Acting Chairman).Mr. Kono represents the IOSCO Technical Committee on the Monitoring Board and is Vice Commissioner for International Affairs, Financial Services Agency, Japan (JFSA)
  2. Katsunori Mikuniya, Commissioner of the JFSA
  3. Zarinah Anwar, Representative of the IOSCO Emerging Markets Committee, Chairman of the Securities Commission Malaysia
  4. Mary Schapiro, Chairman of the U.S. Securities and Exchange Commission (SEC)
  5. Michel Barnier, Commissioner for Internal Market and Services, European Commission
Additionally, Sylvie Matherat, a Representative of the Basel Committee on Banking Supervision, currently serves as an Observer of the Monitoring Board.

Comment is sought by the Monitoring Board on the fourteen recommendations and 3 additional questions included in the report (FEI Summary), which address governance matters at the IASB, the IFRS Foundation, and the Monitoring Board itself.

Monitoring Board Takes Lead On Institutional Review; IFRS Foundation Takes Lead on Operational Review - Including Due Process
The Monitoring Board's report notes efforts have been made to coordinate its governance review - centered on the IFRS Foundation's and in turn, the IASB's and IFRIC's accountability and independence - with the Strategic Review currently being conducted by the Trustees of the IFRS Foundation.

The goal of the Monitoring Board's governance review of the IFRS Foundation, at the 50,000 foot level, is evident in this passage in the Monitoring Board's press release:

The Monitoring Board review’s fundamental question is whether the current governance structure effectively promotes the standard-setter’s primary mission
of setting high quality, globally accepted standards as set forth in the Constitution of the IFRS Foundation, and whether the standard-setter is appropriately independent yet accountable. The primary focus of the review is institutional aspects relating to governance, in particular the composition and the respective responsibilities and roles of the Monitoring Board, Trustees and IASB.
In line with its focus on review of institutional aspects of the IFRS Foundation's governance, the Monitoring Board's report on IFRS Foundation governance indicates it is leveraging off the separate Strategy Review being conducted by the IFRS Foundation Trustees, with the IFRS Foundation Trustees taking the lead on the review of 'operational aspects' of governance, including 'due process.' Specifically, the report states (reformatted in bullets, emphasis added):
  • The Monitoring Board has asked the Trustees to report on operational aspects of governance, in particular the due process of the IASB and IFRS Interpretations Committee.
  • In particular, the Trustees are being asked to identify changes to (a) the due process for public input and public feedback in relation to standard setting and (b) the operation of the IASB throughout the standard-setting process.
  • While the Monitoring Board’s governance review addresses the appropriate allocation of responsibilities to the IASB, the Trustees are asked to contribute to this review in identifying improvements in how the IASB fulfills those responsibilities.
  • Hence, the issues concerning the assessment and possible improvement to the standard-setter’s due process will be covered primarily by the Trustees.
  • The Monitoring Board and the Trustees will continue to communicate with each other as their respective projects progress, with a view towards achieving an integrated package of proposals that will improve the current governance framework.

My two cents
(I remind you of the disclaimer posted on the right side of this blog). Avoiding a duplication of effort between the Monitoring Board's governance review of the IFRS Foundation, and the IFRS Foundation's own strategy review, sharing information between the two reviews, and maintaining a goal of an 'integrated package of proposals' as stated in the Monitoring Board's report, appears to be a sensible approach in terms of resource management.

It is particularly interesting to note that in the slicing and dicing of the IFRS Foundation Governance Review, the 'due process' review was bucketed in with 'operational' issues being examined as part of the IFRS Foundation's own Strategy Review, including a review of due process being conducted by the IFRSF's Due Process Committee. Importantly, the Monitoring Board notes that it will look 'primarily' (but evidently not 'solely') to the IFRSF's own due process review, leaving room for independent analysis.

I would observe that, perhaps beyond what some may define as 'operational' issues, due process issues in particular can involve difficult decisions of substance over form: e.g., when might the sheer volume of comment letters on a proposed accounting standard, even if 'form letters,' lend credence to a particular point of view, in spite of the fact that the view is contained in 'form letters'? Or, the flipside: when might substantive theoretical and/or practical considerations in a minority of comment letters outweigh a higher volume of comment letters taking the opposite point of view?

Additionally, due process considerations can sometimes be viewed through the lens of human nature and the need for an organization - any organization, not only standard-setting organizations - to demonstrate progress in achieving the milestones on its agenda - as it weighs the pros and cons of objections to, or suggested improvements to, a particular proposal, final standard, or set of standards.

It will be interesting to watch how the interaction between the two governance reports - that of the IFRSF and that of the Monitoring Board - plays out. As noted above, the deadline for comment on the Monitoring Board's governance review report is April 8.

IFRS Foundation Extends Comment Deadline on Its Own Strategy Review Consultation Document; FEI Files Comment Letter
In related news, the IFRS Foundation extended the comment deadline on its own strategy review consultation document to February 24.

Separately, see our earlier post on a letter sent by FEI President and CEO Marie N. Hollein on the IFRSF Strategy Review.

FAF Trustees To Discuss Report of Standard-Setting Oversight Committee
In other news, the Notice of Meeting published in advance of tomorrow's Financial Accounting Foundation meeting includes on the agenda a 'Report of the FAF Standard-Setting Process Oversight Committee.'

Some have also speculated (see Feb. 2010 JofA article by Alexandra Defelice) the FAF may discuss the recent report and recommendations of the Blue Ribbon Panel on Standard-Setting for Private Companies. Analogous to the IFRSF's oversight of the IASB, the FAF oversees the Financial Accounting Standards Board.

FEI Letter Addresses Endorsement Of IFRSF Monitoring Board; Funding Mechanism

In a recent letter to the International Financial Reporting Standards Foundation (IFRSF), FEI President and CEO Marie N. Hollein recommended formal political endorsement - potentially by the G20 --of the IFRS Foundation Monitoring Board, and suggested government-sponsored levies of companies that follow IFRS, to achieve a secure and stable funding source for the IASB.

Following are highlights from FEI's letter, sent in response to questions posed in the Consultation Document on the IFRSF Strategy Review. NOTE: The IFRSF recently extended the comment deadline on its Strategy Review until February 24.

1. The current Constitution states, “These standards [IFRSs] should require high quality, transparent and comparable information in financial statements and other financial reporting to help investors, other participants in the world’s capital markets and other users of financial information make economic decisions.” Should this objective be subject to revision?

FEI Response: The IASB’s primary objective should be to serve the needs of investors and other providers of capital. In developing standards that “require high quality, transparent and comparable information in financial statements” that objective is met. As such, we believe the current objective is appropriate.

2. The financial crisis has raised questions among policymakers and other stakeholders regarding the interaction between financial reporting standards and other public policy concerns, particularly financial stability requirements. To what extent can and should the two perspectives be reconciled?

FEI Response: As noted above, the IASB’s primary objective should be to serve the needs of investors and other providers of capital. Although we agree that the IASB should consult with regulators in developing accounting standards, we do not believe that accounting standards should be used as a basis for achieving public policy objectives.

Governance: How should the organisation best balance independence with accountability?

3. The current governance of the IFRS Foundation is organised into three major tiers: the Monitoring Board, IFRS Foundation Trustees, and the IASB (and IFRS Foundation Secretariat). Does this three-tier structure remain appropriate?

FEI Response: We believe the current structure of the FASB’s organization serves as a good model that balances independence with accountability. The FASB issues and improves standards of financial accounting while the Financial Accounting Foundation is the independent, private sector organization that is responsible for the oversight, administration, and finances of the FASB. The Financial Accounting Foundation’s primary duties include protecting the independence and integrity of the standards-setting process and appointing members of the FASB. The U.S. SEC oversees the FASB and is also responsible for funding of both the FASB and PCAOB by invoicing public companies.

Under our proposal, the structure of the IASB would follow the current structure of the FASB and its oversight organization the Financial Accounting Foundation. The IASB would continue its fundamental role as provider of independent accounting standards; whereas the IFRS Foundation Trustees continue their oversight and appointment roles. The Monitoring Board which was established as a public accountability link and to help discharge more effectively the Trustees mandates regarding investor protection, market integrity, and capital formation should continue with its duties.

4. Some stakeholders have raised concerns about the lack of formal political endorsement of the Monitoring Board arrangement and about continued insufficient public accountability associated with a private-sector Trustee body being the primary governance body. Are further steps required to bolster the legitimacy of the governance arrangements (including in the areas of representation of and linkages to public authorities?

FEI Response: We believe formal political endorsement of the Monitoring Board similar to the U.S. SEC and IFRS Foundation Trustees would promote public accountability of the organization. Endorsement by G20 could serve as a basis for establishing that public accountability, however the both the Monitoring Board and Trustees would need to establish a plan to provide accountability to those jurisdictions adopting IFRS or at least undertaking a formal process of convergence and consideration of IFRS adoption.

Process: how should the organisation best ensure that its standards are high quality, meet the requirements of a well functioning capital market and are implemented consistently across the world?

5. Is the standard-setting process currently in place structured in such a way to ensure the quality of the standards and appropriate priorities for the IASB work programme?

FEI Response: Through its work under the Memorandum of Understanding with the
FASB, significant steps have been made in developing an outreach program that enures stakeholders’ views are taken into account during the standard-setting
process. Examples of this outreach have included publishing Staff Drafts prior to issuing an Exposure Draft to unofficially gather constituent feedback on the current direction of the proposed guidance, extensive roundtables to gather constituent views on an Exposure Draft once issued as well as podcasts and webinars to educate constituents on the proposed guidance within the Exposure Draft so as to solicit effective feedback. We believe the current outreach activities undertaken with the FASB under work on the Memorandum of Understanding should serve as a basis for the IASB to establish future outreach activities.

6. Will the IASB need to pay greater attention to issues related to the consistent application and implementation issues as the standards are adopted and implemented on a global basis?

FEI Response: We agree that the IASB will need to pay greater attention to issues related to consistent application and implementation issues as the standards are adopted and implemented on a global basis. We believe the outreach activities noted above will assist the IASB in gathering feedback prior to issuance of the final guidance so as to assist in ensuring consistent application as well as address potential implementation issues. As well, the IASB should establish a post-implementation process to further address consistency and implementation issues.

Financing: how should the organisation best ensure forms of financing that permit it to operate effectively and efficiently?

7. Is there a way, possibly as part of a governance reform, to ensure more automaticity of financing?

FEI Response: A large part of the organization’s funding comes from voluntary contributions. Achieving a secure, stable funding mechanism is a critical milestone. In line with obtaining political endorsement from jurisdictions that use IFRS as noted in our response to question 4 above, we believe the organization needs to develop a plan to obtain authority to require automatic funding mechanisms from jurisdictions that use IFRS. We believe the organization need to ensure a stable and sustainable funding base in the form of a government-sponsored levy system. The levy needs to be broad-based to ensure all “players” are paying in as well as compelling such that “players” do not have a choice. This levy system could initially be based on registered companies, however ultimately needs to capture any company that is issuing statements under IFRS.