XBRL Happenings...

No, the SEC hasn’t announced when it will meet to vote on a final rule on XBRL (following on its proposed rule issued for public comment earlier this year), but there are other happenings afoot on the XBRL front.

Last week, XBRL-U.S. announced the release of the latest version of the data tags (officially called, the ‘taxonomy’) for tagging information in interactive data form, relating to financial statements filed in accordance with U.S. Generally Accepted Accounting Principles or U.S. GAAP. Specifically, the latest version of the data tags, called U.S. GAAP Taxonomy, Release 2009, has been released by XBRL-US for a public review period, ending January 15, 2009.

Michelle Savage of XBRL U.S. told us, “The ‘taxonomies’ are collections of financial elements like net income or EPS that help describe your own financial statement information; each element has an associated label, definition and in some cases, authoritative reference materials. This set of taxonomies includes recent FASB pronouncements, including FAS141R, FAS160, FAS161 and FAS163.”

Savage added, “With an expected final rule from the Securities and Exchange Commission on mandatory XBRL submissions for all public companies coming any day now, this is a perfect opportunity to take a look at these collections of U.S. GAAP disclosures and common reporting practices and provide comment back to the XBRL U.S. project team. Are there elements missing? Labels or definitions that should be revised so that it’s easier for you to create XBRL-formatted financials?”

Further speculation on when SEC will come out with its final rule on XBRL can be found in Bob Schneider’s Nov. 30 post in the Hitachi XBRL blog, Data Interactive, “Waiting for a Mandate on XBRL.” Among the people Schneider quotes are remarks of SEC Chairman Christopher Cox at FEI’s Current Financial Reporting Issues conference. Schneider also cites a Nov. 21 post in the CrossBorder Group Blog, “Waiting for XBRL,” which cites to remarks by SEC Office of Interactive Disclosure Director David Blaszkowski at a Nov. 20 Business Wire webcast on “Understanding XBRL and the SEC’s Proposed Rule.”

• According to the CrossBorder Group Blog cited above, here is the conversation that took place on the Business Wire webcast as to expected timing of a final rule from SEC on XBRL: “Business Wire’s vice president of global disclosure and financial reporting services Michael Becker posed THE question to the interactive disclosure czar himself, David Blaszkowsky. ‘I’m going to have to ask you this… when does it happen?’ said Becker. The reply? ‘Our commitment is to bring this before the commission in the fall, recognizing we are deep in to the fall,’ said Blaszkowsky. ‘This is an important issue to the chairman and this will be reviewed. You’ll see some news shortly, I expect. No, I’m not ready to give a particular date.’"

Blaszkowski participated in a concurrent session on “The State of XBRL Today” on Nov. 17 at FEI’s CFRI conference. Although I did not sit in on that session, I understand from others who attended that his remarks as to timing of a final rule were similar to his statement on the Business Wire webcast quoted above.

In a related development, as previously reported, the SEC embarked on its 21st Century Disclosure Initiative (21CDI) earlier this year. As initially announced in June, the first phase of 21CDI, originally slated to be completed in 2008, is an SEC staff study led by Bill Lutz, PhD. The study is aimed at contemplating improvements to the SEC filing and disclosure system, including considering a potential move to an interactive company file system.

Also as originally announced, 21CDI’s second phase contemplates forming a Federal Advisory Committee in 2009 to review the SEC staff’s plan and make recommendations to the Commission for implementing it. There would then be a multi-year phase in which the Commission would consider and begin acting on the Advisory Committee's recommendations, which, said the SEC, would include its normal notice and comment rulemaking process. CFO.com’s Sarah Johnson reported on SEC’s October roundtable on the 21CDI in her Oct. 8 article, “On Defensive, SEC Touts Reporting Plan.”

Some have speculated that the change in administration (i.e. the incoming Obama-Biden administration and other changes at regulatory agencies) and the need to focus on the financial crisis may impact the ultimate timing of release of a final rule on XBRL - and its ultimate effective date - as well as timing of any proposed changes arising from SEC’s 21CDI.

In other news, the SEC voted yesterday to adopt certain final rules - and to release for public comment certain proposed rules - on credit rating agencies, see SEC’s press release and the NRSRO Fact Sheet.

Webcast Dec. 2: COSO’s New Guidance and You

Final guidance is forthcoming from COSO on Monitoring Internal Control Systems. The guidance follows from COSO’s earlier Exposure Draft released earlier this year, with the COSO Project Team – led by Grant Thornton – incorporating certain changes based on comments received. COSO’s upcoming publication focuses on Monitoring – one of the five elements of internal control established in COSO’s 1992 Internal Control-Integrated Framework. (The five elements are: control environment, risk assessment, control activities, information & communication, and monitoring.)

Public and private companies have certain requirements set forth by the SEC/PCAOB and AICPA respectively relating to generally accepted internal control frameworks which reference the COSO framework. For example, the SEC’s rule for management reporting under Sarbox 404 states (in Section II. B. 3. a. of the SEC rule): “The COSO Framework satisfies our criteria and may be used as an evaluation framework for purposes of management's annual internal control evaluation and disclosure requirements.” [Footnote 67 in the SEC rule notes there may be other acceptable frameworks used outside the U.S., such as guidance issued by the Canadian Institute of Chartered Accountants and the ICAEW’s Turnbull Report]. Additionally, the SEC's rule states: “The final rules require management's report to identify the evaluation framework used by management to assess the effectiveness of the company's internal control over financial reporting.” Similar sentiments are expressed in PCAOB’s Auditing Standards No. 5 (AS5) (see e.g. AS 5 footnote 7, para. 87 and 88).

We referenced once before, but in case you missed it or were waiting to see how your calendar lined up, it’s not too late to register for a webcast taking place tomorrow where you can learn more about COSO’s Guidance on Monitoring Internal Control Systems – expected to be issued in December or early January. Tune into the webcast sponsored by Financial Executives International and Grant Thornton on Tues. Dec. 2 at 2:00 pm EST by registering at the following link; all registrants should enter company code 710004.

Immediate SEC Action Needed On Fair Value, ABA Tells Treasury; FEI, U.S Chamber Ask FASB To Take Certain Actions on Fair Value

In a letter sent yesterday by the American Bankers Association to U.S. Treasury Secretary Henry Paulson, (see ABA letter) ABA President Edward Yingling stated: “While the government makes billions of dollars available to increase capital, other policies simultaneously are needlessly, and wrongly, erasing billions of dollars of bank capital.”

Noting that Paulson acknowledged in a Nov. 20 speech that mark-to-market accounting has procyclical effects, ABA stated: “the consequences of these procyclical accounting standards are grave,” and calls for immediate action to be taken by the SEC, to be effective for year-end reporting. The three actions recommended by ABA, which it says “do not require a wholesale re-working of mark-to-market, but rather are clarifications that the SEC can and should make now,” include: (1) Other Than Temporary Impairment (OTTI): The accounting rules for OTTI should be based on credit impairment [rather than impairment in ‘fair value’ as determined under FAS 157] (2) Fair value definition: The definition of fair value should be based on willing buyer/willing seller rather than exit price, and (3) Mergers and acquisitions: The implementation date for the new business combinations rules [FAS 141R], which are controversial and are based on fair value, should be delayed.

ABA cc’d the following regulators on its letter to Paulson: the Chairmen of the SEC, Federal Reserve System, and Federal Reserve Bank of New York, as well as the Chairmen and Ranking Members of the House Financial Services Committee and the Senate Banking Committee. ABA’s letter follows on its earlier letters to FASB and the SEC.

FEI, U.S. Chamber, Ask FASB To Take Certain Actions On Fair Value
Separately, in a letter filed with FASB yesterday by FEI’s Committee on Corporate Reporting (CCR) and the U.S. Chamber of Commerce Center for Capital Market Competitivenes (CCMC), the two groups asked FASB to further delay the application of FAS 157 to nonfinancial assets and liabilities, and urges the board to consider related implications in FAS 141R, Business Combinations. Additionally, the letter makes a formal request under FASB’s Rules of Procedure for FASB to reconsider some aspects of FAS 157 in light of information learned about application of the standard during the credit crisis. For complete details, see the FEI CCR-US Chamber CCMC letter to FASB.

Banking Regulator Warnings: Back to the Future?
The ABA’s letter to Treasury yesterday essentially notes their view that the livelihood of the banking system and by extension the economy is at risk if some adaptation to the accounting rules for other than temporary impairment and fair value is not accomplished in time to apply to year-end reports. While not stated in exactly this way in the letter, Reuters’ (via FinancialWeek) summed up the message in ABA’s letter as, “FAS 157 Canceling Out TARP, Bankers Say.”

The role of fair value accounting [established in FAS 157 (fair value measurement) and FAS 115 (accounting for certain debt and equity securities, which specifies mark to market accounting for assets in trading accounts and those classified as available-for-sale; i.e. other than those for which there is a stated intent and ability to hold to maturity] vis-à-vis the health of banks and the TARP program was also a subject of discussion on Kudlow & Company Monday night. Kudlow’s guests included former FDIC Chairman William Isaac, who has been an outspoken critic of FAS 157 (including in WSJ op-eds and in his testimony at the SEC’s Oct. 29 roundtable.) To hear the discussion of accounting standards vis-à-vis TARP, fast forward to about 2:30 on the clip, right after CNBC economist Steve Liesman refers to the government’s four-pronged rescue of Citigroup as the Four Horsemen of the Apocalypse.

Toward the end of the clip, Isaac noted that the then-Secretary of the Treasury, Federal Reserve Board Chairman, and Chairman of the FDIC warned the SEC in 1992 about mark-to-market accounting. Such correspondence, including letters dated March 2, 1992 and March 24, 1992 is noted in former Citibank CEO Walter B. Wriston’s article which appeared in the Wall Street Journal on June 11, 1992: “Mark to Market: Wild Accountants Crazy Idea,” (a copy is available in the Walter B. Wriston Archives) and in “Battle of the Bean Counters,” Fortune, June 1, 1992. In fact, the Fortune article is particularly interesting in that it names many of the people who are active in these issues today, who were speaking on these issues back then, including former SEC Chief Accountant Don Nicolaisen and former Federal Reserve Board Governor Susan Bies (in different roles they held at that time). And my fellow Chase alums will enjoy seeing the reference to a 1992 Chase comment letter.)

The debate back in 1992 was over whether banks entire portfolios of debt and equity investments, or only portions thereof, should be required to be marked to market, due in part to an SEC concern about alleged selective sales of assets with gains and burying unrealized losses in assets carried at historical cost, also referred to as ‘cherry picking’ or ‘gains trading.’ The SEC asked FASB to address this issue, and the resulting standard, FAS 115, “Accounting for Certain Investments in Debt and Equity Securities” established the 3 tier hierarchy in which assets are fair valued except for those for which the entity has the intent and ability to hold those assets to maturity. As such, some may view FAS 115 as an ‘anti-abuse’ standard, in particular guidance that developed after it surrounding ‘tainting’ of the remaining portion of a held to maturity portfolio, when similar assets were sold that had previously been in a ‘hold to maturity’ portion of the portfolio. For some back to the future vibes, see paragraph 99-100 of FAS 115 about concerns of the standard ‘exacerbating the credit crunch’ and see para. 113 describe why the impairment methodology in FAS 115 was based on market values vs. the discounted cash flow methodology in FAS 114, Accounting by Creditors for Impairment of a Loan.”

FASB-IASB Roundtable on Accounting Issues In Financial Crisis
Yesterday, FASB and the IASB held the second in their series of three joint roundtables on accounting issues arising in the financial crisis. Among the primary questions raised to panelists were impairment triggers and fair value measurement.

FASB Chairman Robert Herz responded to some panelists’ suggestions of conforming impairment accounting in FAS 115 (market value) to that set forth in FAS 114 (based on discounted cash flows) as follows: “No doubt you can do that calculation…[using] estimated cash flows and stick in a discount rate, that’s what we do in 114, but I’ve heard users say, in a pejorative way, this is ‘happy cash flows’ with ‘happy (discount) rates’ [such as the discount rates] when first issued… [users] would rather, for accounting, have full fair value, not this calculated value.”

A number of panelists suggested moving to an ‘incurred loss’ model, in which an estimate of incurred credit losses would be separately categorized from the portion of a mark to market loss attributable to other factors, such as liquidity discounts in inactive markets. Some suggested the incurred loss go thru P/L (income statement) with the remainder going through equity by means of Other Comprehensive Income (OCI); some suggested, however, to not lose focus on that ‘other’ amount, to move the display of OCI to the income statement. Among those with specific recommendations in this area were Jerry de St. Paer of GNAIE, and numerous references were made to a recommendation of the Center for Audit Quality (CAQ), affiliated with the AICPA.

Many panelists said they support FAS 157 and fair value, but qualified their support that it worked in orderly, active markets, and that there should, in effect, be a redirection to another impairment model (e.g. similar to FAS 114 based on discounted cash flows) when markets are not liquid or orderly.

IASB board member Jim Leisenring noted that nothing precludes people today from disclosing additional information about what they estimated the true value or incurred loss for their assets to be, if they believed the fair values to not be the most representative number. Herz noted the SEC has tried to encourage additional disclosures through its series of "Dear CFO letters," although Herz added he had heard anecdotally that lawyers were advising their clients not to include any information that was not 'required,' lest they expose themselves to second guessing or litigation. Leisenring indicated there was virtually no chance the two boards would be able to put any change in recognition and measurement through, with due process, by the end of this year, and the only thing within the realm of possibity in his view was possible change on disclosures, particularly in light of the fact that companies were saying the fair value numbers have limitations, but they are not voluntarily providing additional disclosures.

Concluding Thoughts
I think the issues raised in the FEI –U.S. Chamber letter to FASB and in the ABA letter to Treasury (which follows ABA’s earlier letters to the SEC and FASB) emphasize that extreme lessons have been learned in the current environment in applying theory to practice which need to be addressed. Among the takeaways from this real-life crucible of learning include the now widely acknowledged view (including as expressed recently by Treasury Secretary Paulson, as noted in ABA’s letter) that mark-to-market accounting does have procyclical effects.

And, while very few have claimed accounting ‘caused’ the economic crisis, more people have begun to refer to the fair value regime as a ‘powerful accelerant’ (including Jerry de St. Paer, Executive Chairman of GNAIE,, see the second bullet on pg. 48 of yesterday’s FASB-IASB roundtable handout, also expressed by Kevin Spataro of Allstate representing GNAIE at the SEC’s roundtable last week). The accelerant argument reflects the fact that there is a feedback loop caused by fire-sale prices in illiquid markets which, in applying FAS 115 and FAS 157, is driving writedowns of, in some cases, entire portfolios (reflecting an extrapolation or some call it ‘tainting’ of similar assets held), in turn driving sales of assets to meet capital requirements or other debt covenants or liquidity requirements, or to reduce portfolios of securities which the market views as risky and which are thought to be dragging down a company’s stock price.

Therefore, some would say the full scope of events has created a downward spiraling market (for assets ranging from housing to mortgages to more exotic securities and plain vanilla equities) with prices offered by buyers (and in some cases, accepted by sellers who by and large are under duress in this market) based on fear, perhaps fear of being left holding the bag on underwater assets when measured under the current construct of FAS 115 and FAS 157, even when the fundamentals such as cash flow on debt securities or other fundamental values of assets point to the assets themselves not being as ‘troubled’ as the ‘market’ prices or hypothetical ‘index’ prices would have one believe.

The role of market and individual psychology is an important consideration that can sometimes outweigh the traditional assumption that ‘the market’ is always ‘rational.’ ’ And, the role of emotion and psychology vs. rationality vis-à-vis the efficient market hypothesis has been pointed out numerous times over the past couple of years by at least one CFA, Vinny Catalano, former president of the New York State Society of Securities Analysts. His views give one pause in considering the views of ‘investor’ reps or ‘users’ who say they view ‘market prices’ as the most transparent and useful information about an asset. Market price may in some circumstances (e.g. rational, liquid markets) be a fair approximation of fair value, but as a number of panelists pointed out at yesterday’s FASB-IASB roundtable and SEC’s roundtable last week, that is not necessarily the case in illiquid markets, and indeed, some believe, can amount to misinformation.

Happy Thanksgiving to all our blog readers and your families, see you next week!