Nothin' But Net: FASB, IASB Release Proposed Amendment To Netting (Offsetting) Requirements

If your weekend reading did not include Friday's proposal(s) released by the FASB and IASB to align their requirements on netting (offsetting) of balance sheet items, you can view them now: see FASB's proposal ("Proposed Accounting Standards Update—Balance Sheet (Topic 210): Offsetting") and IASB's proposal ("Exposure Draft ED/2011/1 - Offsetting Financial Assets and Financial Liabilities"). The comment deadline on each proposal is April 28.

The jist of the proposal(s) is (are) described in the IASB and FASB's joint press release:

Offsetting, otherwise known as netting, takes place when entities present their rights and obligations to each other as a net amount in their statement of financial position.

At present, the circumstances when financial assets and financial liabilities may be presented in an entity’s statement of financial position as a single net amount, or as two gross amounts, differs depending on whether the entity reports using International Financial Reporting Standards (IFRSs) or US generally accepted accounting principles (GAAP).

The accounting differences result in the single largest quantitative difference in reported numbers in statements of financial position prepared in accordance with
IFRSs or US GAAP...

The boards are proposing that offsetting should apply only when the right of set-off is enforceable at all times, including in default and bankruptcy, and the ability to exercise this right is unconditional, that is, it does not depend on a future event. The entities involved must intend to settle the amounts due with a single payment or simultaneously. Provided all of these requirements are met, offsetting would be required. The proposals would amend IFRSs and US GAAP and eliminate several industry-specific netting practices.

The joint press release includes links to an IASB webcast conducted earlier today on the offsetting proposal, as well as an IASB 'Snapshot Summary' of the document. A 'FASB in Focus' summary of their proposal is forthcoming on www.fasb.org.

Those of you expecting to see a McDonald's commercial starring basketball players based on the title of this blog post, we don't want to disappoint you: here is the 2010 Nothin' But Net commercial; and if you don't recognize the fellow at the end of that video, see the 1993 Nothin' But Net.

Wanted: Your Input For COSO Survey, To Update Internal Control Framework

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) wants you to know it will continue to review feedback submitted via its online survey, aimed to assist in informing COSO as it proceeds with its current project to update its Internal Control-Integrated Framework. You (or someone else from your company, if they are more familiar with applying the COSO Internal Control framework at your company) can complete COSO's online survey here.

The COSO Internal Control framework has had broad applicability and acceptance since it was first published in 1992. For example, COSO's internal control framework is referenced in SEC and PCAOB rulemaking implementing Sarbanes-Oxley Section 404 as a suitable framework for purposes of management's and the auditor's internal control assessments under Section 404. Additionally, AICPA standards applicable to private company audits also reference the COSO Internal Control framework.

COSO, whose founding organizations include the AAA, AICPA, FEI, IIA and IMA, announced last year the launch of a project to update the 1992 Internal Control framework.

The original deadline on the online survey was today (Jan. 31); COSO has extended the deadline to continue reviewing feedback.

Early feedback, particularly prior to March, will help inform COSO's Advisory Task Force formed to oversee the drafting team from audit firm PwC, selected to coordinate this effort, as the COSO Advisory Task Force is currently slated to meet again in March.

No Foolin': FASB, IASB Seek Comment By April 1 On Proposed 'Expected Loss' Model of Impairment

The FASB and IASB announced today the release of their jointly developed proposals providing a common approach in moving from the current 'incurred loss' approach for impairment of financial instruments, to an 'expected loss' approach. April 1 is the comment deadline on the proposals.

See FASB's proposal ("Supplementary Document—Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities—Impairment") and the IASB's proposal ("Supplement to ED/2009/12 Financial Instruments: Amortised Cost and Impairment - Financial Instruments: Impairment").

The applicability and impact of the proposals, as noted in a joint press release issued by FASB and the IASB earlier today, would apply to, among other things, "impairment of financial assets such as loans managed in an open portfolio." The change in methodology represented in the proposal(s) vs. the current method of accounting for impairment of financial instruments, is described by the two accounting standards boards as follows:

At present, International Financial Reporting Standards (IFRSs) and US generally
accepted accounted principles (GAAP) currently account for credit losses using an incurred loss model, which requires evidence of a loss (known as a trigger event) before financial assets can be written down. The boards have proposed moving to an expected loss model that provides a more forward-looking approach to how credit losses are accounted for, which they believe better reflects the economics of lending decisions.

In announcing the release of the proposals, IASB Chairman Sir David Tweedie noted:

A major complaint in the financial crisis was that when loan losses were recognized, it was a case of ‘too little, too late’. Such a situation highlighted the need for a more-forward looking approach to loan losses to ensure provisions are made much earlier than before. The proposed move to an expected loss model will address this issue, in addition to aligning IFRSs and US GAAP.

FASB Chairman Leslie F. Seidman added:

The FASB and IASB have heard the urgent call for an improved, converged approach
to impairment of debt instruments. We are keenly interested in whether investors think this revised approach provides relevant and timely information about credit losses, and whether reporting entities find the proposed requirements operational.

'Snapshot' Summaries, Podcasts/Webcasts Available
To enhance constituent's understanding of the proposals, each board has released a 'snapshot summary' (IASB 'snapshot summary' posted today; FASB 'In Focus' Summary forthcoming on http://www.fasb.org/).

Additionally, each board is holding podcasts/webcasts on the impairment proposals. IASB's interactive live webcast will take place on February 4; FASB's recorded podcast (January, 2011) featuring FASB board member Larry Smith speaking about the impairment proposal was posted earlier today.

Additional References
The FASB-IASB's joint Financial Crisis Advisory Group, among others, had explored moving impairment standards from an 'incurred loss' to an 'expected loss' approach. See our earlier posts, EU's McCreevy, IASB's Smith, On Financial Reporting In A Changing World (May
8, 2009). See also: The Turner Review: U.K. FSA Recommends Response To Global Banking Crisis.

For public companies listed in the U.S., SEC reporting requirements must also be considered; see our earlier post, SEC's 'Dear CFO' Letter on MD&A Disclosure Of Loan Loss Provisions, ALLL' (August 18, 2009).