Monday, October 24, 2011

SEC Ready For Full-Court Press With Senate Confirm of Aguilar, Gallagher

The U.S. Securities and Exchange Commission will be back up to its full panoply of five Commissioners, with the Senate's reappointment of Commissioner Luis Aguilar to a second term, and the appointment of Dan Gallagher as a new Commissioner.

Aguilar, a Dem, began his first term as an SEC Commissioner on July 31, 2008. Gallagher, a Republican (replacing the vacancy created at the end of Commissioner Kathleen Casey's term), formerly served on SEC staff, including as Deputy Director of the Division of Trading and Markets. Gallagher re-joined law firm WilmerHale upon leaving the SEC in 2010 (see 2010 press release).

SEC Chairman Mary L. Schapiro made the following announcement following the Senate's action on Friday:

"I very much appreciate the Senate's confirmation of these nominees. Investors and markets are best served when the SEC benefits from the dedication and broad range of views that a full five-member Commission provides. I look forward to Luis's continued service, and I welcome Dan's return to the agency as we continue our efforts to protect investors and improve our markets and the economy."
Read more in blog and in the Washington Post.

FASB Proposes Deferring OCI Reclass Adjustments

The Financial Accounting Standards Board voted on Friday to propose a deferral of certain requirements in ASU 2011-5, Comprehensive Income, issued earlier this year. Important: the only requirements in that standard which will be deferred - while FASB further deliberates those matters - are the requirements for presentation of ‘reclassification adjustments’ from Other Comprehensive Income (OCI); the remaining provisions of ASU 2011-5 will become effective as originally set forth in that standard (beginning with public companies, for fiscal years, and interim periods within those years, ending after Dec. 15, 2011; private companies are subject to a later effective date in the standard). The action was expected, as noted here.

Proposal Expected Soon; At Least 15-Day Comment Period
An AccountingLink Financial Reporting Alert, published by Ernst & Young on Friday was one of the first reports published in the board’s vote. According to E&Y,

“[FASB’s] tentative decision came in response to concerns raised by issuers and other stakeholders that the requirement would significantly increase the number of line items that would have to be displayed in arriving at net income. Issuers also cited challenges in identifying and summarizing certain reclassification adjustments that have been capitalized on the balance sheet before recognition in net income (e.g. pension-related items that are capitalized in inventory).The FASB plans to issue an exposure draft on the decision in the near term and will provide no less than a 15-day period for comment. The Board decided to include in the exposure draft a proposed requirement to disclose in the notes to the financial statements amounts reclassified out of OCI, consistent with the existing disclosure requirement in ASC 220, Comprehensive Income.The deferral, if finalized, would not change the requirement to present items of net income, items of other comprehensive income and total comprehensive income in either one continuous statement or two separate consecutive statements. This requirement is effective for fiscal years and interim periods beginning after 15 December 2011 for public companies and for fiscal years ending after 15 December 2012 and interim periods thereafter for non-public companies.”

Reclassification Adjustments aka ‘Recycling’
BNA’s Steven Burkholder, in an article entitled FASB to Defer Part of Rules On Presenting ‘Recycling’ Adjustments, in today’s BNA Daily Report for Executives, notes that the proposed deferral of “reclassification adjustments,” or “what accountants call recycling” is expected to be released for public comment “in early November.” Like E&Y, he notes the comment period will be “at least 15 days.”

The jist of the new standard (ASU 2011-5), as explained by Burkholder was, “elimination of the option in U.S. GAAP to present those OCI components in the statement of change in stockholders' equity.: He adds, “Accountants and rulemakers frequently refer to such items of OCI being “buried” in that statement of stockholders' equity. The improvements that FASB states the new standards introduce “will help financial statement users better understand the causes of an entity's change in financial position and results of operations.”

Current Disclosure Requirements In Force During Deferral Period
Burkholder added that, “board members noted that the footnote reporting requirements of current, pre-ASC 2011-5 GAAP relating to presentation of comprehensive income would be effective,” during the deferral period. He adds, “Those disclosure rules call for details on reclassification adjustments and amounts coming out of OCI, as Seidman noted. A staff accountant told FASB that she did not know how well companies were complying with those current disclosure requirements pertaining to recycling adjustments. [FASB Board Member Tom] Linsmeier suggested that the board should convey a message, to accompany the proposed deferral, that it expects that companies would comply with current disclosure requirements. Those requirements are in provisions of ASC 220 that were formerly part of FAS 130.

Burkholder also cites FASB Project Manager Patricia Donoghue as explaining at the board meeting that ASU 2011-05 makes U.S. GAAP “more convergent’ with IFRS, “but not completely convergent.”

Watch for FASB’s proposal (and potentially a related press release) on their website,

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.