FASB's Anniversary Present To CIFiR

Close to one year ago, (actually Aug. 1, 2008), SEC's Advisory Committee on Improvements to Financial Reporting (CIFiR), chaired by Robert Pozen, issued its final report. Earlier today, the Financial Accounting Standards Board (FASB) and its parent organization, the Financial Accounting Foundation (FAF) announced:

"In acknowledgement of the one-year anniversary of the August 1, 2008 report of the Securities and Exchange Commission’s Advisory Committee on Improvements to Financial Reporting (CIFiR Committee), the FAF and FASB have published a response to that report. The response explains the actions we have taken (or plan to take) with respect to each CIFiR Committee recommendation aimed at improving accounting standard setting."

Some of the language in the FAF/FASB response to CIFiR closely mirrors the recent report issued by the FASB-IASB Financial Crisis Advisory Group (FCAG), and numerous speeches by FASB Chairman Bob Herz (e.g. at the National Press Club earlier this summer). For example, the FAF/FASB response to CIFiR states:

• While accounting did not cause the crisis and accounting will not end it, it did reveal a number of areas requiring improvement in standards and overall transparency.


• Over the past 18 months, the FASB has responded vigorously with a number of new standards and enhanced disclosure requirements relating to securitizations and special-purpose entities, credit default swaps and derivatives, financial guarantee insurance, and fair value measurements and credit exposures. The International Accounting Standards Board (IASB) has similarly been working vigorously to improve international financial reporting standards (IFRS). Responding to the calls for timely improvement within their respective jurisdictions while also advancing convergence has proved challenging for both the FASB and IASB.


• The current financial crisis, in addition to highlighting the need for enhanced communication throughout the financial system, also revealed a need for improved infrastructure and transparency around markets for complex structured securities and certain derivatives. It is notable that during the past year, many companies and other market participants found it difficult to obtain some of the important information needed to measure the fair value of certain complex financial instruments partly due to limited market infrastructure for such instruments.

In the report issued today, FASB lists its accomplishments vis-a-vis CIFiR's recommendations, as detailed further below. However, FASB also notes some limitations on its ability to single-handedly reduce complexity in financial reporting, including the need - as recommended by CIFiR - for the SEC and PCAOB to consider developing a professional judgment framework, and the need for a general consideration of the legal environment.

Professional Judgment Framework Should Be Considered by SEC, PCAOB
CIFiR had recommended various ways to reduce complexity in financial reporting, including direct actions by FASB and others. Among its recommendations, CIFiR recommended that SEC and PCAOB consider potentially issuing a professional judgment framework. Some believe such a framework would assist in the move to a more principles-based framework, such as (but not limited to) that of the IASB (although, all things are relative, and some take issue with trying to describe particular frameworks as all principles based or all rules based, as they may contain elements of each, and some believe that IFRS - which is a relatively younger framework than U.S. GAAP, may become increasingly rules-based if there is a demand for more implementation guidance.).

In the FAF/FASB response to CIFiR issued today, FASB states:

"The Board acknowledges that a high volume of authoritative implementation guidance contributes to the complexity of U.S. GAAP. The Board supports the idea of issuing implementation guidance in the early years only in emergency situations and evaluating as part of a post-implementation evaluation whether additional guidance is needed to reduce application diversity or otherwise improve reporting."

"The [FASB] Board believes that implementation of that approach would be greatly facilitated were the SEC and the PCAOB to act on the Committee’s recommendation that they develop policy statements articulating how they evaluate the reasonableness of accounting and auditing judgments (a judgment framework). That is because based on our recent experience with implementation of the more principles-based standard on fair value measurement, we do not perceive any significant change in the demand for detailed implementation guidance....

"...Although the [FASB] Board is committed to eliminating or reducing the use of bright lines and exceptions, we do not perceive any significant change in the demand for such guidance, suggesting a possible need for further changes to the institutional, legal, and cultural factors driving that demand."

NOTE - my two cents: Crafting, applying, auditing, inspecting to, and enforcing a 'professional judgment framework' may not be as easy as it sounds. See, e.g. our Feb. 28, 2008 blog post (you'll have to scroll down, we currently have all Feb. 2008 posts on one page) on "SAG Members Warn CIFIR Professional Judgment Framework Could Become Litigation Trap." See also attorney Michael Young's early comments on this issue (Young is co-chair of Willkie Farr & Gallagher's Litigation Department and of its Securities Litigation & Enforcement Practice Group), in question 4 of this April 4, 2008 FEI Q&A With Michael Young.

Accomplishments
The FAF/FASB response to CIFiR issued today lists FASB's accomplishments as relate to CIFiR's recommendations. Below are a few highlights.

Investor Input: Although FASB had several investor advisory committees already in place which predate CIFiR's recommendations, FASB has taken additional steps in response to CIFiR to enhance investor participation in the standard setting process. FASB lists these steps in great detail, and adds: "The FASB and the FAF agree that investors are the primary consumers of financial reports. It is critically important that the Board understand investors’ perspectives and give them appropriate weight in developing accounting standards."

Field Testing the Cost-Benefit Equation: FASB notes: The Board agrees that field work is one of several important ways of gathering input about the potential benefits and expected costs of proposed standards. Over the past year, the Board tried several new approaches to field testing its proposals with investors. The Board had to modify a potentially promising approach in response to a number of practical challenges." FASB adds: "[T]he Board plans to consider in the near future how it might enhance other aspects of its field work to make it more consistent and transparent."


Process for post-adoption reviews of standards coming in 2009, may coordinate with IASB: FASB states "We agree that the Committee’s [CIFiR's] suggestions for formalizing the post-adoption reviews of new standards have the potential to reduce the complexity of U.S. financial reporting. We are working to develop and implement a post-implementation review process by the end of 2009."

Disclosure Framework Project - Examining SEC and FASB Dislosures - Discussion Doc for Public Comment Expected 1st Half 2010: FASB states that its Disclosure Framework project (announced in July), will "develop a principles-based framework that would strengthen disclosure quality, rationalize U.S. GAAP and SEC requirements, and improve the consistency and organization of existing and future financial statement disclosures to make them more meaningful for investors." FASB notes that "The Committee’s [CIFiR's] final report contains many thoughtful recommendations about the elements of an effective disclosure framework, and the Board [FASB] will carefully consider them as it develops a proposal. The FASB plans to seek comment on a proposed framework by issuing a Discussion Paper in the first half of 2010."

FASB Governance: CIFiR had recommended that: "The SEC should continue to recommend that the FAF enhance governance of the FASB, as follows: (1) Recommend that the FAF amend the FASB’s mission statement, stated objectives, and precepts to emphasize that an additional goal should be to minimize avoidable complexity, and (2) Recommend that the FAF develop performance metrics to ensure that key aspects of the standards-setting process are effective, efficient, and compliant with the goals in the FASB’s mission statement, objectives, and precepts."

FASB notes it expects to complete the process of updating its Rules of Procedures in "upcoming months," and as part of that update, "will consider whether and how to amend its mission statement, objectives, and precepts." Additionally, FASB notes that the FAF Trustees established an Oversight Committee in Aug. 2008.

FASB Codification vs. Non-authoritative guidance: CIFiR had recommended: "In order to fully realize the benefits of the FASB’s codification efforts, the SEC should ensure that the literature it deems to be authoritative is integrated into the FASB Codification by following, to the maximum extent practicable, a format consistent with the one used by the FASB. All other sources of interpretive implementation guidance should be considered non-authoritative and should not be required to be given more credence than any other non-authoritative sources that are evaluated using reasonable judgments made in good faith that are supportable under U.S. GAAP. "

FASB notes that its Codification - now the single source of U.S. GAAP - was launched on on July 1, 2009, with an effective date of interim and annual periods ending after September 15, 2009. The final numbered "Statement of Financial Accounting Standards" or SFAS, FAS issued under the old (pre-codification) system, FAS 168, "makes clear that all other accounting literature not included in the Codification is nonauthoritative."

NOTE - my two cents: In my view, now that the Codification is out, and in light of the CIFiR rec noted above, it will be interesting to see what evolves going forward, in upcoming speeches of SEC staff, in terms of what was previously informally referred to as "speech GAAP" or guidance communicated by the SEC staff in the form of speeches, e.g. at the annual AICPA Conference in December each year on current SEC and PCAOB Developments.

Restatements: FASB notes that CIFiR recommended that "[T]he FASB or the SEC consider the potential benefits that would result from providing or improving guidance with respect to materiality and the accounting and reporting of error corrections." FASB adds: "Representatives of the FASB and the SEC’s Office of the Chief Accountant carefully evaluated each of those recommendations and concluded that they related to SEC reporting requirements. Accordingly, the FASB has no plans to act on those recommendations at this time."

XBRL: In August, FASB completed a project with XBRL-US to embed the new FASB Codification references into the XBRL taxonomy and display all XBRL elements within the Codification. FASB states this project will produce three main benefits: (1) Financial statement preparers, auditors, and other taxonomy users will be able to electronically link from an element to the relevant content in the Codification to ascertain the appropriateness of using an element. (2) When software vendors integrate the electronic links into analysis tools, financial statement users will be able to link to the associated content in the Codification. (3) The Codification will display all XBRL elements linked to a Subtopic and a paragraph this will enable financial statement preparers, auditors, and others to electronically link the XBRL taxonomy to the relevant portions of the Codification.

Additional highlights from the FAF/FASB response to CIFiR can be found in this FEI Summary, which can be viewed by FEI members only. Consider joining FEI for our many membership benefits, including reduced charge to attend conferences like our Oct. 21 Private Co Forum in Chicago, or our Nov. 16-17 Current Financial Reporting Issues Conference (CFRI) in NYC!

FASB Proposal On Fair Value Disclosures To Include Sensitivity Analysis For Level 3; Proposal Coming On Oil & Gas; Final Std on FV Alt. Inv.

At its board meeting earlier today, FASB authorized its staff to proceed to ballot draft on a proposed Accounting Standards Update on Improvements to Fair Value Disclosures. [ASU is the new term used by FASB for proposed changed to U.S. Generally Accepted Accounting Principles, which as of July 1 are contained in FASB’s Codification.] The proposed effective date will be reporting periods (annual or interim) ending after 12/15/2009 except for Level 3 sensitivity disclosures which would be effective for reporting periods (annual or interim) ending after 03/15/2010. Staff expects to have the proposed ASU ready for release by the end of August, and there will be a 45-day comment period.

According to FASB's Summary of Board Decisions , "The Board will propose three new disclosure requirements:

• Information about the sensitivity of certain fair value measurements: If a change in one or more of the significant inputs to a Level 3 fair value measurement would significantly change the fair value, the reporting entity would state that fact and disclose the effect of those changes.
• Information about transfers in and/or out of Levels 1 and 2: A reporting entity would disclose information about significant transfers in and out of Levels 1 and 2 and the reasons for the transfers.
• Gross reporting of changes in Level 3 fair value measurements: Information about purchases, sales, issuances, and settlements, included in the reconciliation of Level 3 fair value measurements, would be presented on a gross basis rather than a net basis."

Additionally, FASB's Summary of Board Decisions states "The Board will propose two clarifications of existing disclosure requirements:

• Level of disaggregation: An entity is currently required to provide fair value measurement disclosures for each major category (class) of assets and liabilities, and the Board plans to provide guidance on the meaning of the term class. The Board believes a class is often a subset of assets or liabilities within a line item in the statement of financial position. An entity would apply judgment in determining the appropriate classes of assets and liabilities.
• Disclosures about inputs and valuation techniques: An entity is currently required to provide disclosures about the valuation techniques used to measure fair value. The Board will clarify that the disclosures about the inputs used are required for both recurring and nonrecurring fair value measurements. The Board also will clarify that those disclosures are required for fair value measurements that fall in both Level 2 and Level 3."

Sensitivity Analysis a Sensitive Issue
The propsed disclosure of sensitivity analysis proved to be a sensitive issue. As discussed at today's board meeting, the FASB board had previously asked the staff (at the May 27 board meeting) to conduct some preliminary outreach to preparers on the proposed sensitivity analysis disclosures for level 3 assets.

FASB Project Manager Bob Bhave provided the results of that outreach to the board today. He stated: "Preparers provided extensive feedback and suggestions to improve the proposed guidance, [including] concerns about operationality... based on input received from preparers during the outreach process and discussed last week at [FASB's] Ed session [referring to Educational sessions the FASB board frequently holds to provide additional information to the board], the staff's recommendation is that the board proceed with the proposal including all the proposed disclosures at the May 27 board meeting EXCEPT FOR the sensitivity disclosures for Level 3 measurements... [and] come back to the sensitivity disclosures after further progress is made on the Financial Instruments Recognition and Measurement (FIRM) project." Some board members noted that with the apparent direction to move more assets to fair value as part of the FIRM project, the need for some of the sensitivity analysis information may change. Other board members noted the board also recently launched a disclosure framework project.

The board considered the staff's recommendation, but a majority of board members (including FASB Chair Bob Herz and FASB board members Tom Linsmeier and Mark Siegel) disagreed with the staff recommendation, and voted to keep the sensitivity analysis disclsoures in the proposal. (Board members Leslie Seidman and Larry Smith sided with the staff view.)

Herz explained he was in favor of including the proposed sensitivity analysis to get additional preparer feedback on the operationality of the proposed disclosures, as well as additional feedback from users of financial reporting (investors and others).

He noted: "Every time we meet with sophisticated users, they always talk about sensitivity analysis." He added that he'd like to obtain, through the public comment period, "a little better understanding from some more users, what exactly they are going to do with the information; they say they want it, but [for us to] say, you’ve got this piece of information, now what do you do [with it]?"

There were also varying views expressed by board members as to whether the proposed sensitivity analysis disclosures would, or would not, be akin to the kind of 'stress test' exercise performed by U.S. banking regulators earlier this year.

Use of pricing services for illiquid assets was also discussed, with Seidman noting: "We need to proactively reach out to a couple of pricing services [during the public comment period], it’s a real issue raised by every kind of constituent we have."

On the question of practicality/operationality, Smith suggested: "I’d like to ask a specific question [in the proposed ASU] about the ability [of companies] to do this on a quarterly basis and meet filing deadlines that currently exist. We have consistently continued to add to quarterly disclosure requirements, I question whether there is enough time for people to do things effectively."

The board had also asked the staff to gather some preliminary feedback from preparers on the level of disaggregation of the proposed fair value disclosures, and as noted above, agreed to simplify the level of disaggregation of the proposed fair value disclosures, to be more in line with that described in para. 5, pg. 2 in today’s board handout.

Linsmeier asked if the level of disaggregation would be based on the categories in the statement of financial position (balance sheet), or the footnotes (which are generally more detailed). It was not clear to me from the discussion that ensured as to what the response to that question was; reference should be made to FASB's Summary of Board Decisions and the proposed ASU.

Proposal Coming On Oil & Gas Reporting
In other matters discussed at today's FASB board meeting, the board agreed to proceed with a proposed ASU to conform oil and gas reporting to SEC’s final rule on that topic issued last year. The effective date of the proposed ASU would be annual reporting periods ending on or after December 31, 2009. Early application would not be permitted.

Final Standard Coming On Fair Value of Alternative Investments
Also at today's FASB meeting, the board agreed to finalize an ASU on fair value of alternative investments, following discussion of comments received on related proposed FSP FAS 157-g. The board agreed the final ASU would be effective at year-end (specifically, periods ending after Dec. 15, 2009), with early adoption permitted.

Additional Information
For official results of FASB meetings, refer to FASB’s Summary of Board Decisions, generally posted same-day or next-day in FASB’s News Center.

Additional background on matters discussed at today’s FASB meeting can be found in the board handout, and in FASB’s project summaries on improving fair value disclosures, fair value of alternative investments, and oil & gas reporting.

Profession Mourns Ben Neuhausen

The accounting and auditing profession lost a great leader on Friday, when Ben Neuhausen, National Director of Accounting at BDO Seidman LLP, and former chairman of the AICPA's Accounting Standards Executive Committee (AcSEC), passed away at the age of 59 after a long illness. Earlier in his career Neuhausen was a partner in the Professional Standards Group with Arthur Andersen and a FASB Practice Fellow.

Earlier this year, Neuhausen received an AICPA Special Recognition Award in honor of his outstanding contributions to accounting standard-setting. (See: Neuhausen Recognized for Contributions to Standard-Setting , Journal of Accountancy, June 2009.)

The Voice of Clarity, Common Sense
In a statement issued today, Jack Weisbaum, CEO of BDO Seidman, said:

“All of us at BDO Seidman are deeply saddened by the loss of our friend and colleague, Ben Neuhausen. His technical knowledge and high ethical standards were a very valuable resource to our firm. In a time of increasing complexity, Ben was the voice of clarity and common sense."

Although I never met Neuhausen, except perhaps in a large meeting or conference, I found his remarks in testimony at public meetings and in articles he had written to illustrate that he not only had mastered technically complex issues, but also that he was an articulate advocate of -as described by the BDO CEO - clarity and common sense.

Here's an example of Neuhausen's advice, from remarks he made at a May 2, 2008 CIFiR meeting. (NOTE: Neuhausen was among various experts invited to testify to CIFiR on particular topics at special roundtables convened by CIFiR in addition to their regular meetings.) Neuhausen's remarks below are excerpted from Panel Tesifying to CIFiR Split on Role of Non-Authoritative Guidance (FEI Summary, May 2, 2008):

“I think non-authoritative guidance is a symptom of complexity in the authoritative standard… preparers and practitioners want the guidance because they find the authoritative standards very hard to read, very hard to understand, very hard to apply, and they want non-authoritative guidance to help them apply the standards. If there is a problem with non-authoritative guidance, the solution lies in simplifying the authoritative standards, not in trying to reduce the number of people issuing non-authoritative guidance."

Also at the May 2, 2008 CIFiR meeting, Neuhausen noted that he concurred with an observation made by Linda Bergen of Citigroup about the comment letter process, in which she noted that at times, comment letters raise concerns which were previously considered by FASB during development of the proposed standard, but FASB sometimes appeared to conclude that "no new points were raised, let’s proceed to the final standard." (Note: I have heard FASB staff tell the board that 'no new points were raised' that had not been previously considered, therefore no further deliberation was necessary on a particular point raised in comment letters.)

Neuhausen stated at the May 2, 2008 CIFiR meeting:

“We [BDO] cited in our comment letter [to CIFiR] a number of cases where the FASB has significantly revised or deferred provisions in newly issued standards and we think in many of those cases, those issues were raised in the comment letters; it’s just that somehow the importance of the comment or significance of the issue wasn’t recognized when the standard was issued - it only became clear after the final standard came out. Somehow, a better process of analyzing those comment letters would have picked up on some of these issues on a more timely basis.”

Note: a more positive view on the FASB's handling of comment letters was expressed by Jeff Mahoney, general counsel of the Council of Institutional Investors and formerly counsel to the FASB chair, as noted in the FEI summary of the CIFiR meeting.

Articles by and about Neuhausen
I'm sure there are many articles written by and about Neuhausen, a couple are listed below (readers: feel free to post a comment with links to additional material):

Achieving Greater Transparency: A More Comprehensive Approach To Disclosure Is Needed To Restore Confidence (Directorship Magazine, June/July 2009) This article written by Neuhausen, published on June 1, recommended someone take on a holistic review of the entire disclosure framework - SEC and FASB - vs. continuing to issue new, piecemeal requirements in a relatively rushed timeframe. In essense, he essentially foresaw FASB's July 8 announcement of its new Disclosure Framework project.

The Standard-Bearer: Chairman Examines AcSEC's Changing Role and the Progress of International Convergence, (Journal of Accountancy, August 2008). In this article, Neuhausen responds to the interviewer's question about his receiving a diagnosis of pancreatic cancer late in 2007. Neuhausen said:

"While I am feeling good, it is likely that tougher days lie ahead. Pancreatic cancer is one of the most aggressive cancers, and the long-term survival rates are not good. For now, I savor every day and am grateful for the strength to fill my roles as parent and as partner. If and when my condition worsens, I feel confident that I’ll continue to receive incredible support from my firm and the entire profession."

BDO CEO Weisbaum, in the statement issued today, said of Neuhausen:

"One of our most respected partners, his high professional standards served as a beacon for all of our professionals to follow.”

My sympathies to Neuhausen's family, friends and colleagues, and my wishes that his influence as a beacon continue to light all our paths.