Friday, October 21, 2011

SEC FRS Kicks Off With Nov. 8 Roundtable On Measurement Uncertainty; FASB To Meet On Future Scope of Risks and Uncertainties, Going Concern Project

Earlier today, the SEC announced it will hold the inaugural program in its Financial Reporting Series (FRS) on November 8; the focus of the initial roundtable will be Measurement Uncertainty. As we reported in June, the SEC’s FRS will consist of a series of roundtables focused on “the early identification of risks to the financial reporting system.”

In related news, the FASB is slated to discuss at a board meeting next week the future scope of its project on risks and uncertainties and going concern.

The SEC's FRS is under the aegis of the SEC's Office of the Chief Accountant, in coordination with the Division of Corporation Finance, and SEC Deputy Chief Accountant Mike Starr (Deputy Chief Accountant for Policy and Market Risk) has been charged with coordinating the FRS.

Importantly, as relates to accounting and disclosure matters, some level of coordination with FASB and the PCAOB will take place.

As stated on the SEC’s webpage on the FRS, the objectives of the FRS are as follows:

  • to provide SEC staff, the Financial Accounting Standards Board ("FASB"), and the Public Company Accounting Oversight Board ("PCAOB") with useful information about matters affecting the financial reporting system;

  • for OCA to work closely with both Boards to ensure that they consider the appropriate actions to address emerging issues and changes in the business environment; and

  • for OCA, in coordination with the Division of Corporation Finance (and, where appropriate, other SEC offices or divisions), to consider whether changes to Commission rules and regulations would be appropriate.
See also ‘My Two Cents” at the bottom of this post, regarding an upcoming meeting of the FASB board relating to this subject, and regarding the interplay between FASB, SEC and PCAOB, or more broadly, the need to strike the right balance between the sometimes seemingly conflicting objectives of relevance, reliability and auditability.

Briefing Paper Outlines Issues; Public Comment Sought
As noted on the SEC webpage on Upcoming FRS Roundtables, the focus of the inaugural roundtable will be on:

  • where uncertain measurements provide investors with useful information and how those measurements should be recognized in the financial statements,

  • the information investors need to understand and assess uncertainties,

  • the need for additional guidance on the disclosures associated with uncertainties, and

  • the auditor’s role and responsibility for reporting on uncertainties.
Specific questions the SEC is seeking input on, and additional background information, can be found in this briefing paper prepared by the SEC staff.

The SEC formally invites public comment via Release No. 34-65602 published yesterday, “Inaugural Roundtable of the Financial Reporting Series Entitled “Uncertainty in Financial Statements: How Much to Recognize and How Best to Communicate It”

As noted in the briefing paper:

  • Uncertainty exists in financial statements where measurements “to a large extent…are based on estimates, judgments, and models rather than exact depictions.” As the level of uncertainty increases, challenges may exist for:

  • financial statement preparers to estimate the future outcome of the uncertainties inherent in many business transactions,

  • auditors to verify the subjective judgments about those uncertainties, and

  • investors to understand those uncertainties and assess their potential impact on future earnings or cash flows.

Further, the SEC states that the inaugural roundtable “will bring together investors, preparers, and auditors to provide input about those measurements (and associated disclosures) where the outcome depends on future events that by definition are presently unknown.” Issues of focus will include:

  • Measurement and recognition — whether measurements that involve uncertainty provide investors with useful information.

  • Disclosure — the information that investors find important to understand and assess measurement uncertainties and the challenges or impediments that preparers face in providing that information.

  • Auditability — the auditor's role and responsibility for reporting on financial statements with measurement uncertainties.
Here are the questions on which input is sought from panelists and through public comment, in the above-listed Release. As detailed in the Briefing Paper, "The panel discussions will focus on the following questions. Panelists will be encouraged to specify, where applicable, the topic — financial instruments, goodwill, loss contingencies, etc — that their comments address."

  1. Please provide feedback on any topics where the extent of uncertainty is less useful to investors and why a more certain measurement would be preferable. Likewise, provide comments on those topics where a measurement with uncertainty gives investors more useful information and why it is preferable to a more certain measurement.

  2. For those topics where uncertain measurements are useful to investors, how should the uncertainties be incorporated into the measure? Please explain the reasons for the measurement method(s) you selected.

  3. What information do investors utilize to understand uncertainty? Please describe why such information is useful and, if it is not disclosed in the financial statements, indicate its source.

  4. What are the challenges for investors in understanding the nature and extent of measurement uncertainty?

  5. As measurement uncertainty increases, please explain whether (and how, if applicable) it changes the investor’s expectation of preparers and auditors.

  6. For preparers, what are the challenges in or impediments to providing investors with information to understand the nature and extent of measurement uncertainties?

  7. What are the challenges for auditors in evaluating management’s judgments related to measurement uncertainties?

  8. Please provide comments on whether (and how) a change in the auditor’s responsibility or role would enhance the investor’s understanding of the nature and extent of measurement uncertainties.

  9. Please provide any additional comments or suggestions pertinent to how much uncertainty to recognize and how best to communicate it.
Future FRS Programs/Topics
The SEC’s webpage on the FRS states that “Suggestions for topics are strongly encouraged and may be submitted via email to the FRS mailbox at or on the FRS webpage.”
More formally, the SEC states that topics of future FRS roundtables may come from :”public comments, matters arising from OCA research and interaction with capital market participants; and input from the FASB, the PCAOB, and other offices and divisions of the SEC.”

My Two Cents
A couple observations (please see the disclaimer posted on the right side of this blog).

Cent one: the SEC briefing paper lists a number of prior studies, articles, and related material under “Additional Resources;” I was surprised there was no link (or reference elsewhere in the documents cited above) to one of FASB’s current projects: Disclosures about Risks and Uncertainties and the Liquidation Basis of Accounting (Formerly Going Concern).

FASB recently discussed this project during an Education Session, and as shown in FASB’s calendar and reported in yesterday’s FASB Action Alert, the FASB board is scheduled to discuss the following at its board meeting next week (Wed. Oct. 26):

“The Board will discuss whether to continue with the project as it is currently designed or modify the scope to provide guidance on assessing an entity’s ability to continue as a going concern.”

As reported by Dena Aubin of Reuters in the run-up to the Ed session, in her article FASB Weighs ‘Going Concern’ Self-Test for U.S. Firms the role of management vs. the auditor in assessing and/or attesting to a ‘going concern’ status of an entity is one issue that has been the subject of debate in the profession.

Francine McKenna, managing editor of Re:TheAuditors has her own view on going concern opinions during the financial crisis, e.g. see her post from Jan., 2009 Going, Going, Gone.
Of course, the subject of Going Concern is not to be confused with the popular ‘accounting tabloid,’ Going Concern.

Cent two: A key group of sometimes contrasting objectives is the triad cited in the SEC briefing paper, noted above: that is, the desire for additional disclosures relating to items with sometimes significant measurement uncertainty, and the ‘auditability’ of the information. This gets to the age-old, but still relevant, ‘relevance’ vs. ‘reliability’ debate with respect to accounting and disclosure. ‘Reliability’ historically incorporated verifiability within FASB’s Conceptual Framework; although the concept of verifiability is seen by some as having been watered down in more recent iterations of the conceptual framework, which to some overly deemphasized verifiability and reliability in favor of ‘representational faithfulness.’ These ‘concepts’ have real impact and cost real dollars, when they impact reporting and auditing requirements of the FASB, SEC, and PCAOB; for preparers, auditors, corporate counsel, directors and others in fulfillment of those requirements, and in the usefulness of the resulting information. If you’d like to read more about the importance of ‘concepts’ in navigating the waters of relevance vs. reliability (and cost-benefit) see my earlier post from Sept. 2009.

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