Resources Global Professionals Finance & Accounting Blog

Earlier today, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. The Act, at over 2,000 pages, will require sweeping changes to financial regulation in the coming months. The signing of the Act itself, is really just the first Act! During Act Two we will see many regulatory agencies issue required studies, enact new rules and provide guidelines in the coming months. While the Act clearly impacts the financial services industry - most companies will be impacted in some ways as well. For example, there are many corporate governance provisions- particularly as it relates to disclosure of executive compensation of public companies. Look for requirements to provide a chart comparing executive compensation trends to stock price trends, disclosure of the ratio of CEO pay to the median pay of ALL employees (while it may provide some interesting, and even provocative results, imagine how burdensome that requirement will be to companies with thousands of employees worldwide!), additional independence requirements for compensation committees and more! The SEC itself is required to provide well over 100 studies, rules and creation of new offices in the near term! Mary Schapiro, SEC Chair noted that the SEC would likely require approx. 800 new resources to be able to comply with the myriad of requirements that the commission will have under the new legislation! We have prepared a summary of the major provisions (by no means comprehensive!), and it can be accessed in the Financial Reporting Alerts section of our website.


http://www.resourcesglobal.com/index.php?page=03CS21&lang=USEN

Earlier today the FASB issued a "revised" proposal requiring additional disclosures about loss contingencies. The original proposal was issued in June 2008 and received a significant amount of negative feedback. In particular, the requirements under the previous proposal might have required companies to disclose privileged information with respect to litigation concerns. The revised proposal softens some of those requirements - but does require more disclosures regarding contingencies. In particular, more contingencies that are considered "remote" would be required to be disclosed. The following summary of the proposal can be accessed here:

http://www.resourcesglobal.com/content/us/docs/ifrs/Financial%20Reporting%20Alert-FASB%20Loss%20Contingencies%20ED.pdf

The FASB chose to expose the proposal for a relatively short period - 30 days, comments are due on August 20, 2010. I suspect this is because this is a revised proposal - which took into consideration many of the constituent comments from the first go-round.

I recently wrote an article for the AICPA you can find it here:

http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2010/CorpFin/IFRSintheUS.jsp

The IASB and the FASB recently announced that they are slowing the pace on their convergence activity. They received feedback from constituents, companies in particular, that based on their current schedule (potentially issuing up to 11 new exposure drafts and standards over the next 12 months!) companies just didn't have the band width to provide high quality comments and analysis on the proposals. Some of the projects are contemplating huge changes (financial statement presentation, revenue recognition, leasing, etc.). The SEC has asked that the Boards focus first on financial instruments (both boards have issued EDs on this!) and leasing. For its part, the SEC has indicated that even with the slower pace of convergence, they still intend on making a decision on a potential final roadmap here in the US in 2011.

I think the FASB and the IASB made the right decision by slowing down the pace a bit - but based on where the boards currently are with the financial instruments project (more "diverged" than "converged"), I remain skeptical that we can ever be fully converged with 2 separate boards debating the issues. Not only is it inefficient, but it creates double the work load for companies in the US that need to keep up with the direction that both boards are going until the SEC makes its final decision!

On May 26th, the FASB released two Exposure Drafts (EDs) of proposed Accounting Standards Updates (ASU) for comment by September 30, 2010. The two related proposals could result in a significant change in how companies account and report certain financial instrument transactions. Additional the proposal on Other Comprehensive Income (OCI) seeks to combine the traditional income statement with the Statement of OCI into one. Comments are due on both proposals by September 30, 2010.

Among other changes, the ED on financial instruments would require amortized cost information and fair value information for financial instruments held for collection or payment of cash flows. Additionally, a single method for estimating credit losses for all financial instruments would be created requiring more timely loss recognition (“probability” threshold would be removed). This shifts the model from an “incurred” loss approach to one that is more forward looking. However, it does not appear to go as far as the “expected” loss approach proposed by the International Accounting Standards Board. No proposed effective date was given, but many are guessing it wouldn't be before 2012 or 2013.

While both the FASB and the IASB have come to different tentative conclusions regarding the accounting for financial instruments. Sir David Tweedie, IASB Chair, indicated that the IASB will "expose" the FASB's proposal to its constituents as well. The thought would be that both boards would ultimately "converge" their methodologies and conclusions in final standards after much deliberation from constituents (particularly users of financial statements).

The combining of the income statement and the OCI statement is part of a related project, the Financial Statement Presentation project. The IASB issued an ED on this topic yesterday similar to the FASB's proposal.

The IASB recently issued two proposals that differ substantially from current practice and from US GAAP.

The first governs pension accounting (a proposed update from IAS 19). Under the exposure draft (ED) the IASB proposes that the impact of asset gains and losses would be reflected in other comprehensive income (OCI) rather than net income. Currently, under US GAAP, companies recognize these gains and losses in income - but can "smooth" them over several years - sometimes essentially deferring them. The proposal requires that pension accounting be separate into 3 parts. 1) Operating income - would include service cost and past service cost; 2) Net financing cost - would include estimated interest income and expense and 3) OCI - would include remeasurements (actual return on plan assets excluding the amounts included in net financing cost, actuarial gains/losses associated with changes in assumptions, pension settlements, surplus restrictions, foreign currency rate changes). Essentially, by including the remeasurements in OCI - there would be likely less volatility in the income statement.

It should also be noted, that under the joint project on Financial Statement Presentation that the FASB/IASB has ongoing - the income statement and the statement of comprehensive income would be combined - so at some all would be on the same statement.

The other change is to how companies measure financial liabilities. Currently, under US GAAP, FAS 157 (Fair Value Measurements) requires that financial liabilities be recorded at fair value, which includes the requirement to record gains or losses associated with an entity's own debt due to credit rating changes. This has the inane effect of recording gains when an entity's credit rating is downgraded and losses when it is upgraded. (I sat on the Financial Accounting Standards Advisory Committee(FASAC) at FASB when this was first discussed - the reaction from virtually everyone on the committee was disbelief. However, the FASB proceeded with requiring this inane accounting anyway.) Thankfully, the IASB was rational in its decision making and came to the conclusion in this proposal that changes in a company's own credit rating should not impact the profit or loss statement.

Both of these proposals seem rational and appropriate. The IASB, while taking heat for "listening" to its constituents, at least has some rationality in its decision making and takes the real world into account!

Prolific blogging today! Congress has passed both HR 2590, the Patient Protection Affordable Care Act and HR 4872, The Reconciliation Act as of March 25, 2010. The following are some of the provisions that may impact businesses:

- Medicare Part D subsidy is no longer tax-free (see previous blog entry for details on how this will impact 1Q10 financial reporting as well as how it will impact ongoing earnings)
- Health insurance providers will pay an annual fee based on net premiums written beginning in 2014. The fee is calculated on an escalating schedule and are not deductible for federal tax purposes
-Pharmaceutical companies that manufacture or import brand-name drugs for sale to a government program will pay an annual fee beginning in 2011. It will be calculated based on each company's relative market share and are not deductibel for federal tax purposes.
- 40% excise tax on high-cost employer-sponsored coverage (so-called Cadillac Plans) beginning in 2018. The tax is calculated by the employer, but paid for by the insurance company or plan administrator. High-cost is considered in excess of $10,200 for individuals and $27,500 for families.
- 2.3% excise tax on Medical Device Manufacturers.
- Fines for large companies that fail to provide coverage to employees of $2,000 per employee
- Employer W2 reporting of value of health benefits beginning in 2011

There are also changes that will impact individuals such as a 10% excise tax beginning July 1, 2010 on indoor tanning services, an excise tax for the uninsured of $695 (2014), refundable tax credits for eligible taxpayers to help cover the cost of insurance premiums, extension to age 26 for a child to be considered a "dependent" for medical costs, Medicare tax on investment income of 3.8% for individuals earning more than $200,000 and married couples earning more than $250,000 (investment income defined as income from interest, dividends, annuities, royalties and rents), limiting flexible spending account contributions beginning in 2013 to $2,500, Medicare payroll taxes will increase by .9% for individuals earning more than $200,000 and married couples earning more than $250,000, and an increase in the AGI floor on medical expenses in 2013 to 10%.

On March 23, 2010, President Obama signed into law HR 2590, the Patient Protection Affordable Care Act and on March 25, 2010, Congress passed HR 4872, Reconciliation Act of 2010, which amends HR 2590. Together, this ended the tax-deductibility of retiree drug benefits to the extent offset by a tax-free subsidy. In addition, to a one-time adjustment in the period of enactment (1Q10) to deferred taxes, future retiree drug benefit accruals for companies receiving the subsidy will have smaller associated tax benefits (ie, a likely higher effective tax rate for impacted companies).

The specific provision relates to the Medicare Part D subsidy paid by the government to certain companies. The Medicare Prescription Drug, Improvement and Modernization Act of 2003, provided certain drug benefits to recipients of Medicare. Additionally, this act included an annual tax-free subsidy to companies that provided actuarially equivalent benefits. The subsidy was tax-free, plus companies were allowed to fully deduct the benefits they paid to retirees. At the time, FASB issued FSP No. 106-2, which required that companies treat the subsidy as a permanent tax difference, which reduces the tax provision.

Under Healthcare reform, the subsidy is no longer tax-free, as it disallows a tax deduction for the company's costs that are offset by the subsidy. This change is effective for taxable year's beginning after December 31, 2012. Accounting rules require that companies record the tax impacts on the date of enactment. This means that the loss of the subsidy would reduce deferred taxes as of 1Q10, and the impact would be calculated assumed that it would begin to impact tax expense in 2013. If the company had a valuation allowance associated with the subsidy, the reversal of the valuation allowance may partially offset the charge. This charge would be a one-time charge in the period of enactment and would reflect the loss of the tax deduction related to the existing liability recorded for future retiree prescription drug coverage.

The change will also have a negative impact on companies ongoing effective tax rate - as deductions will be reduced. Will this change also impact companies decisions as to whether to continue to provide this benefit to retirees?

Earlier today, the SEC held a public meeting to discuss the current roadmap proposal to move to IFRS in the US. The SEC released a preliminary plan which would require US-listed companies to report under international accounting rules no earlier than 2015. (The previous roadmap had an 2014 effective date - with a voluntary option). LIke the previous proposal, the SEC will not make a final determination on the path to IFRS until 2011. This is consistent with the G20 request for the FASB and the IASB to converge accounting standards in some important areas such as financial instruments, fair value, financial statement presentation, revenue recognition, consolidations, etc. by June of 2011. Between now and 2011, the SEC will investigate whether international standards are sufficiently developed, consistent with the U.S. reporting system and the independence of the IASB. It will also look into whether there is sufficient education regarding IFRS for preparers, auditors users, etc. Other issues include determining the potential impact on US laws or regulations, including tax and regulatory reporting. Other areas of concern are the impact to accounting systems, existing contractual agreements, corporate governance, etc. The SEC staff is expected to begin to execute the work plan for IFRS no later than October 2010.

While today's statement appears to have been a bit of a "non-statement" - the SEC effectively reiterated that they won't make any decision until 2011 - the gameplan and the roadmap is now "owned" by the current group of SEC commissioners. The previous roadmap was issued under SEC Chair Christopher Cox. This reaffirmation - issued under current SEC Chair Mary Shapiro - effectively becomes hers. This was an important step towards moving the issue forward. Other countries that have made decisions to move to IFRS under the expectation that the SEC would also make such a move are likely a bit disappointed with today's announcement.

Last week, several accounting bloggers were invited by Financial Executives International (FEI) to participate in the making of a music video in Second Life. The song, "If I were an Auditor" is a song parody of "If I were a Carpenter". It was my first foray into Second Life - and I managed not to embarrass myself too much! It was produced by Tom Hood and the Maryland Association of CPAs - a leading edge group when it comes to embracing social media. We "filmed" virtually, but as it happened, I was in Maryland for a meeting already, so myself and Steve Jackovitz, Resources Global Professionals Managing Director for the Baltimore office, took the short drive to the MACPA offices and spent lunch with the production team. Here is the link to the video:
http://www.youtube.com/watch?v=Q-FR_fkTFKY

I am the one in the cool boots with the funky dance moves! Steve is the one in the glasses working the sound in the studio!

Here are some of the other participants blogs on the video:

http://tomhoodcpa.typepad.com/slcpa/2010/02/alist-of-accounting-bloggers-visit-cpa-island-to-film-music-video.html

http://financialexecutives.blogspot.com/2010/02/auditors-in-love.html

http://www.accountingweb.com/topic/social-networking/accounting-music-video-launches-time-holiday

Enjoy!

The SEC issued a mandate to require all registrants to "tag" their SEC filings using XBRL over a 3- year period. The largest companies began tagging their filings for periods ended after 6/15/09. For the first year, registrants are permitted to "block tag" their footnotes. This means each footnote can be one tag. For the second year of reporting, companies will be required to detail "tag" all of the different data points in their footnotes. This is expected to significantly increase both the effort and the time spent tagging information. All along, the regulators, such as the SEC and the FDIC (which has required financial institutions to use XBRL for their call reporting since 2005) have been the largest supporters of moving to XBRL. One of the benefits they tout is the ability of users, such as investors and analysts, to take the XBRL data and more easily analyze and compare companies. These users have, however, been slow to begin using the technology. Presumably, once we have critical mass of SEC registrants tagging their financials using XBRL, more users will utilize it.

Currently, the XBRL data is considered "furnished not filed" which effectively limits the liability that may be associated with the data. However, if XBRL data is ultimately used as it is intended, that is, for users to analyze and compare, once has to wonder how long the SEC will tolerate this limited liability. Additionally, at some point, to be useful investors and others will demand some sort of assurance on the data. Many organizations are working on guidance and standards for "auditing" XBRL. These include the PCAOB, the ACIPA, the IAASB, and others. In fact, just today, the UK's Accounting Principles Board issued audit guidance for providing assurance on the data.

Many companies have outsourced the effort to others, mainly to their financial printers. If assurance is going to be ultimately provided, it is critical that companies consider that in their implementation, particularly as it relates to the detailed tagging required in Year 2. Make sure that you have internal folks who can validate the data and the the preparation of the XBRL data is part of your Disclosure Committee purview. Expect that at some point management will have to "certify" the validity and the internal controls around the preparation and reporting of the data, not to mention that your external auditors may be required to provide assurance on it.

As we end 2009, a year that was challenging, to say the least, for most, I put together a list of the top 10 issues that finance execs will likely be faced with in 2010.
10. The economy. While some indications are that we are moving out of the recession, we still have many challenges. Most companies are doing more with less, and still face ongoing cost cutting. Expect to see continued restructuring.
9. Financial Regulatory Reform. The House passed their version of regulatory reform late in the year, and the Senate will likely begin deliberations on a version proposed by Senator Dodd in early 2010. Expect to see major regulatory reform to be passed by Congress in early 2010. Some changes expected: regulation of OTC derivatives, creation of a consumer protection agency, expanded proxy access, more responsibility for the SEC, more governance provisions that will impact the way companies are run.
8. Tax Reform. The administration announced some proposals earlier in 2009, but nothing has made it into any legislation at this point, other than the extenders of tax credits passed in late 2009. Expect to see major international tax reform in 2010, perhaps a repeal of LIFO for tax purposes (likely over a period of time), and increases in tax rates required to pay for some of the other reforms/legislation.
7. "Green" initiatives. While the meeting of the minds in Copenhagen appears to have been a bust, we will continue to see more and more initiatives to protect our environment. The House passed the American Clean Energy and Security Act this summer, while relies on a cap and trade scheme. The proposal is stalled in the Senate, but expect to see it reinvigorated once healthcare reform and regulatory reform are done.
6. Ongoing IASB/FASB convergence activities. The Financial Instrument convergence activity is expected to be completed early in 2010. Other major projects to watch: Revenue recognition, Financial Statement Presentation and Lease Accounting.
5. Governance - The Year of the Shareholder. We are seeing more and more influence in standard setting and regulation from well-funded shareholder advocacy groups. They are interested in influencing executive compensation, proxy access, and are well-positioned on several newly formed advisory groups to the FASB, SEC and PCAOB.
4. Impact of Social Media. If you don't have an internal social media policy at your company - you will have one in 2010. There are many issues companies need to address including interplay with Regulation FD, privacy issues, productivity issues and more. A best practice is to have guidelines on how to use SM for business development as well as a standard SM policy.
3. Technology. Technology is part of our lives. Year 2 of XBRL implementation will create more work for large companies, and as more and more investors begin to embrace it - there will be more pressure to have it validated.
2. Newly effective accounting pronouncements, such as FAS 166 and 167 (Securitizations and variable interest entities), and recently issued updates to the codification on revenue recognition kick in in 2010. Make sure you are up to date on the implications for your company.
1. Return of M&A. We are already seeing more M&A activity in the last few weeks of 2009. Expect to see even more in 2010. In particular, watch the interplay of new accounting requirements for business combinations that went into effect last year with the new fair value measurements requirements.

After months of radio silence, the SEC started talking about the IFRS roadmap again over the last few months. Initially, they were indicating that something might be coming out this Fall (and Fall ends at 9 a.m. on 12/21/09!), but last week, they pushed that out to early 2010. What do I expect to happen?
I expect that the SEC will continue to discuss the roadmap over the next few months. Despite, the many comment letters to the proposal that asked "set a date already!", I fully expect that the SEC will keep the current uncertainty until 2011. That is the year that many "big ticket" convergence topics that are being worked on by both the IASB and the FASB are expected to be complete. Interestingly, despite the boards statements to "retriple" the efforts to converge, we are beginning to see more areas of divergence, rather than convergence. The Financial Instruments project is an illustration of that. Both boards are addressing, but are headed in different directions, with FASB likely to require more use of fair value than the IASB. My contention is that convergence is elusive. While we have two separate boards voting on standards, with differing governance (FASB only requires a simple 3-2 majority vote and the IASB requires a super-majority vote 9-5 to pass a standard), I don't expect we will ever be fully converged. Most FASB standards issued in the last few years just eked by with a 3-2 vote. The IASB tends to allow for more options and flexibility to get the super majority required to pass a standard. Look at the Business Combinations standards. This was the first completed major convergence project by both boards, and the standards are not identical. To be sure, the accounting for business combinations is much more aligned than before, but differences exist. The major difference related to the full goodwill method. The IASB could not get the votes to pass it - so they allowed an option to use the full goodwill method or the proportionate method.
There is also no longer any incentive for the rest of the world to continue to support this convergence effort. As the funding mechanism for the IASB becomes more stable and dependent on those countries (that is, every county except the US) that use IFRS, I expect international impatience for the convergence effort with US GAAP to escalate. IFRS won.

Yesterday, SEC Chair Mary Schapiro named Jim Kroeker as Chief Accountant of the SEC. Jim had been serving as the acting Chief Accountant since Con Hewitt's departure at the end of 2008. I believe Jim is a good choice, but a surprising one. He is the first internal promotion at the SEC. Schapiro had been largely going outside of the Commission for appointments. So what could this mean for the US and the proposed IFRS roadmap? Kroeker has largely been silent on the issue. Unlike some of the other candidates for the job, who have been largely opposed to moving to adopting IFRS.

The next G20 meeting is in September in Pittsburgh. I had wondered what President Obama would say at this meeting - given that at the April 2 meeting, all countries committed to "move to one set of global accounting standards", yet the US was the only country that has not yet done so. The comments on the SEC's proposed roadmap were due in April - but we haven't heard anything from the SEC since. Schapiro has largely focused on enforcement and frankly, in ensuring that her agency survives given the noise around regulatory reform. I think she had left the job open by design, so that she could put off the IFRS discussion. At the September G20, President Obama can say that we got the comments in, we recently named the Chief Accountant and are moving ahead with our analysis. My sense is that Kroeker will start to schedule roundtables, discussions, etc. over the next few months. So look for momentum to kick up a bit over the next few months. I also fully expect more debate to occur regarding the pros and cons of continuing to converge with IFRS vs. adoption of IFRS.

It should be noted though, that the rest of the world is growing more and more impatient with the US. Support for continuing convergence is waning. The rest of the world is wondering why the IASB needs to continue to work so closely with the FASB, while the US has made no commitment to IFRS. The longer we wait to commit to adoption, the less leverage and influence we will have.

Earlier this month, General Electric announced that it had settled a long investigation with the SEC. They incurred a $50 million fine - but also incurred about $200 million in legal fees. Not to mention - the bad publicity associated with this type of thing. The investigation was launched several years ago - when GE restated it's results for improper hedge accounting and revenue recognition. These are two of the most complex areas in accounting. In fact, GE has had several restatements associated with misapplying FAS 133, the hedge accounting standard that numbers over 800 pages. (Tammy Whitehouse of Compliance Week wrote a great post-mortem on this recently.) As I followed this investigation over the years (beginning with the initial restatement) - a few things occurred to me.
1) The restatements appeared to have been immaterial - I wonder if any investor would have actually made a decision to buy/sell based on the results that were only slightly different after the restatement?
2) The infractions appear to have taken place at subs of GE - most corporate accounting policy teams in large companies do not review EVERY single transaction in the company. It would not be cost/beneficial. There are usually parameters (dollar amount, risk, etc.) that would require corporate approval and sign off - I don't know if this was the case at GE - but I wonder based on the immateriality of these transactions whether they would have gone to most corporate teams in most large companies?
3) The complexity of US GAAP standards, like FAS 133, are part of the problem here. These standards are so rules-driven and complicated, with many interpretations, that it is almost impossible to know how to apply them exactly to transactions.
4) If we had been using IFRS in the US - I wonder whether the accounting actually applied by GE may have been acceptable? Since more judgment is permitted based on the substance of the transaction - this may have been a non-event under IFRS. While some may point to this as a flaw in IFRS - I think it is just the opposite. If I was a shareholder of GE, I would be outraged that the investigation not only caused years of distraction for the company, but also cost the company at least $250 million in fees, for what appears to have been an immaterial difference to the totality of GE. To me, the distraction to me, is far more costly than the misapplication itself.

When I first read the CFO.com article that mentions Wayne Carnall's (Chief Accountant for the SEC Division of Corporation Finance) comments recently, I thought for sure it was a typo. When the new FASB codification went into effect on July 1, 2009, the SEC began receiving questions from companies attempting to understand how to deal with it in their filings. This should not have come as a surprise to Carnall. This is a major change to the way companies do accounting research and cite accounting standards. The SEC requires companies to discuss new pronouncements in their filings and to note what their potential impact may have (SAB 74). What was surprising was Carnall's response to the questions. His quote, "You should not be making references to specific standards that very few [users of financial statements] understand". Huh? Did he say that out loud? Companies have been saying for years that the standards are becoming so complex no one understands them! But obviously, based on Carnall's answer - he has clearly never been on the other side of an SEC review letter.