: Committees on Corporate Reporting: Issues

Key Focus Areas for the Committee on Corporate Reporting (CCR)

International Financial Reporting Standards (IFRS):  On August 27, 2008, the SEC voted to issue for comment a proposed roadmap for the potential use by US issuers, for purposes of their filings with the SEC, of financial statements prepared in accordance with IFRS as issued by the International Accounting Standards Board (IASB).  In November 2008, this roadmap was formally posted to the Federal Register and ultimately had a six month comment period which ended in April 2009.  The highlights of the roadmap include mandatory adoption of IFRS in 2014 (potential phase-in based on company size) as well as considerations for early adoption for a limited group of US filers.  The commission will evaluate progress on the milestones and make a decision in 2011 as to whether to move ahead with the mandatory requirement to adopt IFRS.  Additionally, the FASB and IASB jointly published an update to their Memorandum of Understanding (MoU) in September 2008, in which they agreed on a pathway to completing the MoU projects, including projected completion dates of no later than 2011.

On February 24, 2010, the SEC reaffirmed its support for high-quality globally accepted accounting standards and ongoing consideration of IFRS. Schapiro with her fellow commissioners issued the statement and a work plan for how the financial reporting system for U.S. public companies may or may not begin to “incorporate” IFRS. The new plan reiterates the old plan in the original roadmap for delaying an actual decision on whether or not to adopt IFRS until 2011. That decision will be contingent on whether a series of milestones have been met, which are addressed in the work plan. The Work Plan addresses the following six areas of concern that were highlighted in comments on the SEC’s proposed roadmap:

A.      Sufficient development and application of IFRSs for the U.S. domestic reporting system.

B.      The independence of standard setting for the benefit of investors.

C.      Investor understanding and education regarding IFRSs.

D.      Examination of the U.S. regulatory environment that would be affected by a change in accounting standards.

E.       The impact on issuers, both large and small, including changes to accounting systems, changes to contractual arrangements, corporate governance considerations, and litigation contingencies.

F.       Human capital readiness.

Companies would be given four or five years to prepare for the transition, pushing off the date to around 2015. 

Financial Statement Presentation: This is a joint project between the FASB and IASB.  The Boards jointly issued a discussion paper on Financial Statement Presentation in October 2008.  The proposal only impacts presentation and does not have an impact on accounting.  However, the current proposal will have a significant impact on most US companies as most companies have not designed their financial information systems and processes to collect the information required to be disclosed under the proposal.  For example, the DP mandates the use of the direct method when preparing a cash flow statement.  All statements, including the Statement of Financial Position, will now classify balances/activity by Business, both operating and investing, Financing, Income Taxes and Discontinued Operations and Equity.   In addition a detailed reconciliation schedule of cash flows to comprehensive income is required to be included in the footnotes to the financial statements.  Both CCR and CPC have been involved in this project by submitting comment letters and being involved in roundtables and working groups held by the FASB.  The committees are concerned with the amount of changes to fundamental presentation concepts as well as cost/benefit of mandating the direct method for cash flows, mandating disclosures of expenses by nature, and requiring the proposed detailed reconciliation of cash flows to comprehensive income.

In October 2009, the boards tentatively decided to include an analysis of the changes in balances of all significant asset and liability line items and present information about re-measurements in the financial statements. With regard to presentation of cash flow, the boards chose to retain the proposal that an entity present its cash flows using the direct

method. The boards also tentatively decided that an entity should not aggregate income and expense items by function and by nature. A key concern of preparers relates to system changes that will result should the direct cash flow statement be required. An Exposure Draft for comment is expected to be released in the second quarter of 2010, with the final standard slated for 2011.

Leases:  This is a joint project between the FASB and IASB.  The Boards jointly issued a DP on Lessee Accounting on March 19, 2009.  In the model proposed, a lessee will recognize both an asset and a liability at inception of a lease.  The asset includes rights acquired under options and the liability includes obligations arising under contingent rental arrangements and residual value guarantees.  The asset would be initially measured at cost equal to the present value of the lease payments discounted using the lessee’s incremental borrowing rate.  The liability would initially be measured the same way.  In addition, the measurement of both the asset and liability would be based on the most likely estimates for the lease term, purchase options, contingent rents and residual value guarantees.  All estimates and assumptions made for measurement purposes must be reassessed at each reporting date.  CCR and CPC-S filed a joint comment letter with the FASB in July 2009.  Although the committees concur that when estimates are required, the most likely outcome should be used as the basis of the estimate, the committees feel that renewal options, purchase options, and contingent rents do not represent either an obligation or a liability and therefore, should not be included in the initial measurement of the asset and liability.  The committees also feel that the scope of the statement should be expanded to address contracts that contain embedded leases. 

Revenue Recognition:  In December of 2008, the FASB and IASB jointly issued for comment a Discussion Paper, Preliminary Views on Revenue Recognition in Contracts with Customers.  The discussion paper proposes a customer contract based model with a focus on enhancements of assets and settlements of liabilities, rather than on the earnings process.  A contract is defined as “an agreement between two parties that creates enforceable obligations.” Revenue is recognized upon satisfaction of performance obligations.   If performance obligations will be satisfied at different times, the transaction price must be allocated to each performance obligation based on standalone selling price (estimated if actual is not available). In its comment letter, CCR voiced concerns that (i) the model needs a more robust framework on the definition of a performance obligation and on the aggregation criteria for performance obligations; (ii) the definition of control needs to be enhanced; and (iii) there are several industries where the new model will be problematic such as certain long-term construction and production-type contracts, long-term service contracts with characteristics of insurance arrangements, rights-to-use intellectual property, and cooperative agreements.   An exposure draft is expected in the second quarter of 2010.

Pension Plans:  Accounting for post-employment benefits forms part of the MoU between the FASB and IASB.  To leverage FASB and IASB resources effectively, the FASB decided to initially conduct the next phase of its project separately from the IASB’s project and assess opportunities for convergence as the work in each of the projects progresses, consistent with an end goal of convergence.  At the end of 2008, the FASB completed FSP FAS 132(R)-1 (now ASC 715-20) which addresses disclosures about postretirement benefit plan assets.  The FASB is currently monitoring the work of the IASB to determine the next steps on this project.  The IASB has separated their project into three components:  (i) recognition and presentation of changes in the defined benefit obligation and in plan assets and disclosures, (ii) contribution-based promises, and (iii) proposed amendments to delete from IAS 19 the requirement to use market yields on government bonds to determine the discount rate used to discount employee benefit obligations.  An ED was issued by the IASB on the third component in August 2009.  CCR and CBF filed a joint comment letter on the ED with the IASB concurring with the proposal.  The IASB also issued a DP, Preliminary Views on Amendments to IAS 19 Employee Benefits.  CCR and CBF filed a joint comment letter on this DP and are actively monitoring this IASB project. 

Financial Instruments: This is a joint project between the FASB and IASB although the Boards are not moving in sync on this project.  The IASB is breaking the project into three phases: classification and measurement, impairment methodology, and hedge accounting.  The IASB issued an ED in July 2009 on classification and measurement.  Early adoption for 2009 will be permitted but not required.  The IASB plans on issuing an ED on impairment in October 2009 and another ED on hedge accounting in December 2009.  On the other hand, the FASB plans on issuing one ED addressing all three phases in the first half of 2010.  Although the Boards are monitoring each other’s progress and positions, these disjointed processes increase the likelihood of differences between the standards.  In addition, the Boards have already released differing viewpoints on certain aspects of classification and measurement.  However, the Boards did hold joint roundtables on financial instruments in September 2009 in Tokyo, London and Norwalk, CT. 

Fair Value Measurements:  FAS 157, now ASC 820, originally issued in September 2006, set up a three-tiered hierarchy which dictated how to measure fair value when fair value was required by existing standards.  The standard was effective for financial assets and liabilities for fiscal years beginning after November 15, 2007.  Due to various appeals (including comment letters from CCR), the FASB deferred the implementation, by one year, for certain non-financial assets and liabilities.  Fair value is determined to be a market-based measurement based on “observable” inputs (active markets, etc.) and “unobservable” inputs.  Implementation issues have continued to arise, particularly as it relates to valuing non-financial assets and liabilities in an illiquid market, and the FASB and SEC have issued guidance in this area.  Moreover, over the last year or so, the FASB has issued clarifications, implementation guidance, and additional interim and annual disclosure requirements on fair value measurements.  CCR continues to comment as the FASB proposes changes. 

Consolidation: The IASB issued an ED on Consolidated Financial Statements in December 2008 where it defined control as “a reporting entity controls another entity when the reporting entity has the power to direct the activities of that other entity to generate returns for the reporting entity.” The comment letter period for this ED closed in March 2009.  The IASB plans on issuing a final standard before the end of 2009.  The FASB is monitoring the IASB’s progress and tentatively plans on issuing an ED on Consolidations: Policy and Procedures in the fourth quarter of 2009 with a final Accounting Standards Update in the first half of 2010.  In June 2009, The FASB issued FAS 166, New Guidance for Transfers of Financial Assets, and FAS 167, New Consolidation Guidance for Variable Interest Entities (at this writing, neither statement had been codified but are expected to impact ASC 810 Consolidation). Among other provisions, these statements eliminate the concept of QSPE and change the criteria for consolidating VIEs which will most likely result in the consolidation of many off-balance-sheet entities.