In December 2011, the AICPA held its annual National Conference on Current SEC and PCAOB Developments (the "Conference"). The major question on most attendees’ minds was when and how IFRS would be incorporated into the U.S. financial reporting system for public companies. The Conference began and SEC Chief Accountant James Kroeker stepped forward with the word that a final determination had not yet been made. The positive news on the subject was that the framework was almost complete and a comprehensive report was in the works.
Further discussion of the IFRS topic brought out that Mr. Kroeker is positive about the incorporation of IFRS but wants a “strong and lasting framework”. He stated that the SEC has received encouraging feedback on the approach and that it has been positive. Mr. Kroeker stated that it is his belief that the IFRS framework should “provide both in fact and in substantive operation clear U.S. authority over standards applicable in the U.S. capital markets” and “provide for and facilitate a strong U.S. voice in the process of establishing global accounting standards” and “be responsive to the economic and other impacts of change.”
FASB Chairman Leslie Seidman and IASB Chairman Hans Hoogervorst generally support the endorsement approach described in the SEC’s May 2011 staff paper. Ms. Seidman discussed a “modified incorporation” approach under which the boards would complete their priority convergence projects and the IASB would subsequently issue new accounting standards. The FASB would later incorporate the standards into U.S. GAAP. Under this approach the FASB would retain the ability to set U.S. standards if there are significant topics that are not on the IASB’s active agenda. Mr. Hoogervorst stated that there should be a clear timeline for the completion of the initial endorsement process and that the threshold for non-endorsement should be very high with deviations from standards issued by the IASB “extremely rare”. Mr. Hoogervorst further presented the idea that before mandating the incorporation of IFRS into U.S. reporting for public companies the SEC should give serious consideration to giving a limited number of U.S. companies the option to early adopt IFRS for their own consolidated financial reporting in SEC filings. Ms. Seidman and Mr. Kroeker questioned the advisability of this approach since it will result in a lack of comparability in financial reporting between companies.
While there were no major dramatic announcements that came out of the 2011 conference, there were a number of themes that came through as being key. Clearly one such item discussed was the convergence topics between IASB and FASB and SEC. Of these items the one that will impact virtually every company that prepares financial statements in accordance with U. S. GAAP is the new proposed standard on accounting for leases. The impact of the new standard coming out of the joint lease project will virtually eliminate the operating lease and will place an asset and liability on the financial statements of the leasee giving recognition to the life of the lease including any extensions or renewals afforded under the terms of the lease. It is anticipated that an updated exposure draft will be released during the first half of 2012.
Another joint topic discussed was the revenue recognition project. The FASB is currently working to improve the wording of the proposed guidance to make it easier to understand. Some concerns of adopting the proposed guidance are how the change in timing of revenue recognition may have a direct impact on sales-based compensation to employees and the impact of adjusting transaction prices for the time-value of money in a contract with a significant financing component where the period between payment and transfer of the promised goods and services is greater than one year and the challenges of gathering the information required for the proposed disclosure requirements.
The financial instrument project was also discussed along with the differences in the FASB and IASB approaches in the areas of classification and measurement, impairment, hedge accounting and offsetting of financial assets and financial liabilities.
If one theme came to the forefront of the Conference it was that of the investor being the beneficiary of financial reporting. Mr. Kroeker discussed the topic of improving audit quality and the key role that audit committees play in this area. Mr. Kroeker pointed out that “even the best audit committees can find ways to improve.” He stated that audit committee oversight should include asking tough questions of the auditor for example “about the culture of the audit firm, the results of PCAOB and internal inspections, the impact of non-audit services on auditor independence and objectivity, the audit team’s risk assessments and the quality and sufficiency of audit evidence obtained by the audit team.” Brian Croteau, SEC Deputy Chief Accountant talked about a continuous “audit performance feedback loop” which would detect audit deficiencies, identify the root causes, create the audit policies to prevent such deficiencies in the future and perform an assessment of the benefits (or lack thereof) of past auditing policies and standards. Other speakers at the Conference addressed management’s and audit committee’s responsibility to provide relevant and clear disclosures with transparency being the key. "Boilerplate” disclosures within the MD&A and risk factors sections of the financial reports should be avoided; disclosures should be comprehensive and address the many business risks that exist in today’s environment.
The current economic environment was addressed in discussions on liquidity and capital resources including the interplay of what the financial statements present on a company’s liquidity situation and what is discussed in the MD&A. The SEC's Division of Corporation Finance (the "Division") staff provided reminders of other areas where current liquidity and capital resources might be affected by the current economic environment including critical accounting estimates, company borrowings, impairment testing for goodwill and the funding requirements of pension and other postretirement plans to name but a few of the areas.
The SEC staff from the Office of the Chief Accountant and the Division discussed an increased focus on registrants’ use of fair value information obtained from third-party pricing services, specifically the use of such information to value financial instruments that are not actively traded (Level 2 as described in ASC 820). The SEC staff reminded registrants of their responsibilities relating to estimating fair value for these financial instruments and their obligations relating to these estimates to (1) comply with GAAP, including disclosure requirements; (2) maintain appropriate internal controls to prevent or detect material misstatements and (3) assess the effectiveness of internal control over financial reporting.