Summary Of CIFiR’s 12 Recommendations In Feb. 11 Draft Progress Report
February 6, 2007
FEI Summary
Following is a summary of the twelve recommendations (‘developed proposals’) contained in the Draft Progress Report published February 6, 2008 by the U.S. Securities and Exchange Commission (SEC) Advisory Committee on Improvements to Financial Reporting (CIFiR). The Draft Progress Report was posted in advance of CIFiR’s February 11 meeting, at which CIFiR is scheduled to vote to release the report to the SEC (and presumably, for public comment).
The Draft Progress Report contains a dozen recommendations (‘developed proposals’ or formal recommendations), as well as additional ‘conceptual approaches and matters for future consideration’ which CIFiR notes it will continue to discuss before making formal recommendations.
Following are the 12 recommendations (developed proposals) contained in CIFiR’s February 11 Draft Progress Report (copied verbatim from their report):
1. GAAP should be based on business activities,6 rather than industries. As such, the SEC should recommend that any new projects undertaken jointly or separately by the FASB be scoped on the basis of business activities rather than industries. Any new projects should include the elimination of existing industry-specific guidance in relevant areas as a specific objective of those projects, unless, in rare circumstances, retaining industry guidance can be justified on the basis of cost-benefit considerations (discussed in section II.A of chapter 1). The SEC should also recommend that, in conjunction with its current codification project, the FASB add a project to its agenda to remove or minimize existing industry-specific guidance that conflicts with generalized GAAP, taking into account the pace of convergence efforts.7 (Chapter 1 – developed proposal 1.1)
2. GAAP should be based on a presumption that formally promulgated alternative accounting policies should not exist. The SEC should recommend that any new projects undertaken jointly or separately by the FASB not provide additional optionality, unless, in rare circumstances, it can be justified. Any new projects should include the elimination of existing alternative accounting policies in relevant areas as a specific objective of those projects, unless, in rare circumstances, the optionality can be justified. (Chapter 1 – developed proposal 1.2)
3. Additional investor representation on standards-setting bodies is central to improving financial reporting. Only if investor perspectives are properly considered by all parties will the output of the financial reporting process meet the needs of those for whom it is primarily intended to serve. Therefore, the perspectives of investors should have pre-eminence. To achieve that pre-eminence in standards-setting, the SEC should encourage the following improvements:
· Add investors to the FAF to give more weight to the views of different types of investors, both large and small
· Give more representation on both the FASB and the FASB staff to experienced investors who regularly use financial statements to make investment decisions to ensure that standards-setting considers fully the usefulness of the resulting information. (Chapter 2 – developed proposal 2.1)
4. The SEC should assist the FAF with enhancing its governance of the FASB, as follows:
· By encouraging the FAF to develop performance metrics to assess the FASB’s adherence to the goals in its mission statement, objectives and precepts and to improve its efficiency
· By supporting the FAF’s changes outlined in its Request for Comments on Proposed Changes to Oversight, Structure and Operations of the FAF, FASB and GASB, with minor modifications regarding composition of the FAF and the FASB, as proposed in section II of chapter 2, and agenda-setting, as proposed in section IV of chapter 2
· By encouraging the FAF to amend the FASB’s mission statement objectives, and precepts to emphasize that an additional goal should be to minimize avoidable complexity. (Chapter 2 – developed proposal 2.2)
5. The SEC should encourage the FASB to further improve its standards-setting process and timeliness, as follows:
· Create a formal Agenda Advisory Group that includes strong representation from investors, the SEC, the PCAOB, and other constituents to make recommendations for actively managing U.S. standards-setting priorities
· Refine procedures for issuing new standards by: (1) implementing investor pre-reviews designed to assess perceived benefits to investors, (2) enhancing cost-benefit analyses, and (3) requiring improved field visits and field tests
· Improve review processes for new standards by conducting post-adoption reviews of every significant new standard, generally within one to two years of its effective date, to address interpretive questions and reduce the diversity of practice in applying the standard, if needed
· Improve processes to keep existing standards current and to reflect changes in the business environment by conducting periodic assessments of existing standards. (Chapter 2 – developed proposal 2.3)
· The number of parties that either formally or informally interpret GAAP and the volume of interpretative implementation guidance should continue to be reduced. The SEC should coordinate with the FASB to clarify roles and responsibilities regarding the issuance of interpretive implementation guidance, as follows:
· The FASB Codification, a draft of which was released for verification on January 16, 2008, should be completed in a timely manner. 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 to the extent possible, or separately re-codified, as necessary. To the extent practical, going forward, there should be a single standards-setter for all authoritative accounting standards and interpretive implementation guidance that are applicable to a particular set of accounting standards, such as GAAP or IFRS. For GAAP, the FASB should continue to serve this function. To that end, the SEC should only issue broadly applicable interpretive implementation guidance in limited situations (see section VI of chapter 2). 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 well-reasoned, documented professional judgments made in good faith. (Chapter 2 – developed proposal 2.4)
6. The number of parties that either formally or informally interpret GAAP and the volume of interpretative implementation guidance should continue to be reduced. The SEC should coordinate with the FASB to clarify roles and responsibilities regarding the issuance of interpretive implementation guidance, as follows:
o The FASB Codification, a draft of which was released for verification on January 16, 2008, should be completed in a timely manner. 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 to the extent possible, or separately re-codified, as necessary.
o To the extent practical, going forward, there should be a single standards-setter for all authoritative accounting standards and interpretive implementation guidance that are applicable to a particular set of accounting standards, such as GAAP or IFRS. For GAAP, the FASB should continue to serve this function. To that end, the SEC should only issue broadly applicable interpretive implementation guidance in limited situations (see section VI of chapter 2).
o 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 well-reasoned, documented professional judgments made in good faith. (Chapter 2 – developed proposal 2.4)
7. The SEC or its staff should issue guidance reinforcing the following concepts:
· Those who evaluate the materiality of an error should make the decision based upon the perspective of a reasonable investor.
· Materiality should be judged based on how an error affects the total mix of information available to a reasonable investor.
· Just as qualitative factors may lead to a conclusion that a quantitatively small error is material, qualitative factors also may lead to a conclusion that a quantitatively large error is not material. The evaluation of errors should be on a “sliding scale.”
The SEC should also direct its staff to conduct both education sessions internally and outreach efforts to financial statement preparers and auditors to raise awareness of these issues and to promote more consistent application of the concept of materiality. (Chapter 3 – developed proposal 3.1)
8. The SEC or its staff should issue guidance on how to correct an error consistent with the principles outlined below:
· Prior period financial statements should only be restated for errors that are material to those prior periods.
· The determination of how to correct a material error should be based on the needs of current investors. For example, a material error that has no relevance to a current investor’s assessment of the annual financial statements would not require restatement of the annual financial statements in which the error occurred, but would need to be disclosed in an appropriate document, and, to the extent that the error remains uncorrected in the current period, corrected in the current period.
· There may be no need for the filing of amendments to previously filed annual or interim reports to reflect restated financial statements, if the next annual or interim period report is being filed in the near future and that report will contain all of the relevant information.
· Restatements of interim periods do not necessarily need to result in a restatement of an annual period.
· All errors, other than clearly insignificant errors, should be corrected no later than in the financial statements of the period in which the error is discovered. All material errors should be disclosed when they are corrected.
· The current disclosure during the period in which the restatement is being prepared, about the need for a restatement and about the restatement itself, is not consistently adequate for the needs of investors and should be enhanced. (Chapter 3 – developed proposal 3.2)
9. The SEC or its staff should develop and issue guidance on applying materiality to errors identified in prior interim periods and how to correct these errors. This guidance should reflect the following principles:
· Materiality in interim period financial statements must be assessed based on the perspective of the reasonable investor
· When there is a material error in an interim period, the guidance on how to correct that error should be consistent with the principles outlined in developed proposal 8 above. (Chapter 3 – developed proposal 3.3)
10. The SEC or its staff should adopt a judgment framework for accounting judgments. The SEC or its staff should also encourage the PCAOB to consider similar action with respect to auditing judgments. Careful consideration should be given in implementing any framework to ensure that the framework does not limit the ability of auditors and regulators to ask appropriate questions regarding judgments and take actions to require correction of unreasonable judgments.
The proposed framework applicable to accounting-related judgments would include the choice and application of accounting principles, as well as the estimates and evaluation of evidence related to the application of an accounting principle. We believe that a framework that is consistent with the principles outlined in this developed proposal to cover judgments made by auditors based on the application of PCAOB auditing standards would be very important and would be beneficial to investors, preparers, and auditors. Therefore, we propose that the PCAOB develop a professional judgment framework for the application and evaluations of judgments made based on PCAOB auditing standards. (Chapter 3 – developed proposal 3.4)
11. The SEC should, over the long-term, mandate the filing of XBRL-tagged financial statements after the satisfaction of certain preconditions relating to: (1) successful XBRL U.S. GAAP Taxonomy testing, (2) capacity of reporting companies to file XBRL-tagged financial statements using the new XBRL U.S. GAAP Taxonomy on the SEC’s EDGAR system, and (3) the ability of the EDGAR system to provide an accurately rendered version of all such tagged information. The SEC should phase-in XBRL-tagged financial statements as follows:
· The largest 500 domestic public reporting companies based on unaffiliated market capitalization (public float) should be required to furnish to the SEC, as is the case in the voluntary program today, a document prepared separately from the reporting companies’ financial statements that are filed as part of their periodic Exchange Act reports. This document would contain the following:
o XBRL-tagged face of the financial statements. [Footnote 8 in CIFiR’s report states:8” To allow this first phase, the SEC EDGAR system must permit submissions using the new XBRL U.S.GAAP Taxonomy. “]
o Block-tagged footnotes to the financial statements.[Footnote 9 in CIFiR’s report states: “ We understand that tagging beyond the face of the financial statements and block-tagging of footnotes, such as granular tagging of footnotes and non-financial data, may require significant effort and would involve a significant number of tags.”]
· Domestic large accelerated filers (as defined in SEC rules, which would include the initial 500 domestic public reporting companies) should be added to the category of companies, beginning one year after the start of the first phase, required to furnish XBRL-tagged financial statements to the SEC.
· Once the preconditions noted above have been satisfied and the second phase-in period has been implemented, the SEC should evaluate whether and when to move from furnishing to the SEC to the official filing of XBRL-tagged financial statements with the SEC for the domestic large accelerated filers, as well as the inclusion of all other reporting companies, as part of a company’s Exchange Act periodic reports. (Chapter 4 – developed proposal 4.1) 10 [Footnote 10 notes Peter Wallison’s dissent to this proposal, he provides a separate statement in the February 11 Draft Progress Report.]
12. The SEC should issue a new comprehensive interpretive release regarding the use of corporate websites for disclosures of corporate information, which addresses issues such as liability for information presented in a summary format, treatment of hyperlinked information from within or outside a company’s website, treatment of non-GAAP disclosures and GAAP reconciliations, and clarification of the public availability of information disclosed on a reporting company’s website.
Industry participants should coordinate among themselves to develop uniform best practices on uses of corporate websites for delivering corporate information to investors and the market. (Chapter 4 – developed proposal 4.2)
The 12 recommendations above are excerpted verbatim from CIFiR’s February 11 Draft Progress Report. See the CIFiR document for further detail on these proposals and for information on additional ‘conceptual approaches’ and ‘matters for future consideration’ contained in CIFiR’s report.
Prepared Feb. 6, 2008 by Edith Orenstein, Director, Technical Policy Analysis, Financial Executives International (FEI). This summary does not reflect FEI opinion unless specifically noted above.