BASB, DASB, KASB and More Comment On Offsetting; Roundtables This Week

Among the over 140 comment letters filed on FASB and the IASB's January, 2011 proposals on offsetting (netting) of balance sheet assets and liabilities, evidencing the international scope of constituents sharing their views with the boards on this proposal, are comment letters from the Belgian Accounting Standards Board (BASB), Dutch Accounting Standards Board (DASB), Korea Accounting Standards Board (KASB), among other national accounting boards.

Topics addressed in comment letters include the definition of netting 'simulatenously' in different time zones, netting of multiple contracts/books of business with particular counterparties through clearinghouses vs. individual contracts directly via the counterparties, issues relating to legal terminology and contracts, and the extent of disclosures required on a cost-benefit basis.

Comment letters were also filed by preparer organizations including FEI's Committee on Corporate Reporting, FEI Canada's Committee on Corporate Reporting, and IMA's Financial Reporting Committee. A number of companies filed individual comment letters as well.

Organizations filing comment letters on behalf of the audit profession include those filed by the AICPA's Financial Reporting Executive Committee , and separate letters filed by the largest accounting firms as well as midsize/regional firms.

Letters were also filed by industry specific groups that would be keenly impacted by changes to the offsetting (netting) rules, particularly in the financial services industry, such as the American Banker's Association, the Securities Industry and Financial Markets' Association's Dealer Accounting Committee, and SIFMA's Funding Executive Committee. Other international banking organizations and individual financial services companies filed comment letters as well.

Interestingly, the Federal Housing Finance Agency (FHFA - regulator of Fannie Mae and Freddie Mac) filed a one page FHFA comment letter supporting the proposals, while the 12 Federal Home Loan Banks filed a four-page FHLB comment letter objecting to various aspects of the proposals.

In addition, IOSCO (and other national and international regulatory organizations) added their views to the mix.

Refer to the exposure drafts and the comment letter page linked above for further details on the offsetting proposal and constituent views.

ROUNDTABLES THIS WEEK
The first of 3 public roundtable discusions jointly sponsored by the IASB and FASB on the offsetting (netting) proposal is slated to take place tomorrow May 3 at the IASB in London. Additional roundtables will be held May 6 in Singapore, and next Monday May 9 at FASB's offices in Norwalk, CT. The roundtables will be available by public webcast; registration is required.

IFRS Foundation Seeks Comment On 2nd Strategy Review Document

Earlier this week, the International Financial Reporting Standards Foundation, which oversees the International Accounting Standards Board, and the Monitoring Board established as a linkage between the IFRSF and public authorities, issued a joint statement “reaffirm[ing] their commitment to seeking close co-ordination in taking forward their respective efforts in reviewing the Foundation’s governance and strategy.”

The ‘respective efforts’ of the Monitoring Board and the IFRSF include the governance review of the IFRSF, being conducted by the Monitoring Board (addressing the composition, roles and responsibilities of the Monitoring Board, IFRSF and IASB), and the strategy review being conducted by the IFRSF Trustees (addressing the IFRSF’s mission, governance, and funding, as well as the IASB’s standard-setting process, including operational aspects of due process and standard-setting oversight).

According to the IFRSF, an integrated package of improvements covering the Monitoring Board and the Trustee’s Strategy Review is expected to be issued by the end of August. To help inform their work, a series of roundtables will be held in June in Tokyo, Hong Kong, New York and London.

In addition, as follow-on to the first IFRSF strategy review document issued in November, 2010 (see Nov. 2010 report and comments) a second document was released for public comment this week, entitled: Report of the Trustees Strategy Review: IFRSs as the Global Standard: Setting a Strategy for the Foundation’s Second Decade. The comment deadline on the most April, 2011 IFRSF strategy review report is July 25.

Due Process Oversight Committee
In related news, the IFRSF Due Process Oversight Committee, chaired by David Sidwell, has published various meeting summaries, its calendar and agenda, and related documents, in a separate section of the IFRSF website. See DPOC.

Nominations Invited For FEI Hall of Fame

As recently announced, FEI is currently accepting nominations for the Class of 2011 for the FEI Hall of Fame. As noted on the Hall of Fame website, http://www.feihall.org/: "The FEI Hall of Fame provides acknowledgment to senior financial executives who have epitomized the integrity, leadership and performance of the most exemplary financial professionals throughout their careers and in doing so, have made significant contributions to the betterment of their respective organizations and to the financial profession as a whole."

Nominations may be made by FEI members and nonmembers who register in the nomination section of the Hall of Fame website.

Eligibility requirements for nominees are as follows: "Nominees should have a career history of strong leadership and innovation, demonstrated organizational performance and a reputation for acting with integrity and ethical behavior.

"Inductees will be in the later stages of their careers or retired. Eligible inductees would be individuals who have served as senior financial executives, at some point in their careers, in public, private or non-profit organizations and, in that role or others, have significantly impacted their organizations, industry or society at large.

"Both members and nonmembers of FEI are eligible for nomination. Longstanding and distinguished FEI leadership is honored through FEI’s Distinguished Service Award and while commendable, it should not be the major contributing factor for determining admission to the Hall of Fame."

Readers of this blog will recognize many of the names of past inductees, for their leadership role in the finance profession, in corporate, non-profit, and public service.

Nomination Deadline: May 26
The deadline for nominations to be submitted for the 6th annual FEI Hall of Fame is May 26. Additional information, including Hall of Fame FAQs, can be found on http://www.feihall.org/.

HOF Gala Will Be Held Nov. 14 at Gotham Hall
The FEI Hall of Fame (HOF) Class of 2011 will be inducted at a black-tie Gala event on November 14 at Gotham Hall in New York City. (That's Gotham Hall, not Gotham City.)

Join premier sponsor Microsoft, bronze sponsor Merrill Datasite, and media sponsor CNBC by checking out sponsorship opportunities at the FEI Hall of Fame; register to attend the event; registration info will be posted on the reservations page.

Make It A Two-Day or Three-Day Event: Attend FEI CFRI, IFRS Boot Camp
As in past years, the FEI Hall of Fame is being held in conjunction with (separate registration required) FEI's annual Current Financial Reporting Issues Conference (CFRI).

FEI, celebrating its 80th anniversary this year, will hold its 30th annual CFRI conference on Nov. 14-15, at the New York Marriott Marquis hotel on Times Square in New York City.

Extend your stay by a day to attend the IFRS Boot Camp on Nov. 16 in NYC (separate registration required.) Visit the event webpages as further details will be added.

SEC Releases Special Study on Sarbox 404(b) For Smaller Public Co's

Earlier today, the SEC released a special study on implementation of Sarbanes-Oxley Section 404 (b) – the auditor’s report on internal control over financial reporting – with respect to smaller public companies (specifically, accelerated filers with market cap between $75 million and $250 million).

The SEC study, required by Section 989G(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, examined existing studies and included a call for public comment.

Conclusions

Following are the summary conclusions reached by the SEC staff as cited in their study:
1. The costs of Section 404(b) have declined since the Commission first implemented the requirements of Section 404, particularly in response to the 2007 reforms;
2. Investors generally view the auditor‘s attestation on ICFR as beneficial;
3. Financial reporting is more reliable when the auditor is involved with ICFR assessments; and
4. There is not conclusive evidence linking the requirements of Section 404(b) to listing decisions of the studied range of issuers.

Recommendations

Based on the information studied, the SEC staff makes two recommendations:

1. Maintain existing investor protections of Section 404(b) for accelerated filers, which have been in place since 2004 for domestic issuers and 2007 for foreign private issuers

The Staff believes that the existing investor protections for accelerated
filers to comply with the auditor attestation provisions of Section 404(b)
should be maintained (i.e., no new exemptions). There is strong evidence that
the auditor‘s role in auditing the effectiveness of ICFR improves the
reliability of internal control disclosures and financial reporting overall and
is useful to investors. The Staff did not find any specific evidence that such
potential savings would justify the loss of investor protections and benefits to
issuers subject to the study, given the auditor‘s obligations to perform
procedures to evaluate internal controls even when the auditor is not performing
an integrated audit. Also, while the research regarding the reasons for listing
decisions is inconclusive, the evidence does not suggest that granting an
exemption to issuers that would expect to have $75-$250 million in public float
following an IPO would, by itself, encourage companies in the United States or
abroad to list their IPOs in the United States. The Staff acknowledges that the
reasons a company may choose to undertake an IPO are varied and complex. The
reasons are often specific to the company, with each company making the decision
as to whether and where to go public based on its own situation and the market
factors present at the time. The costs associated with conducting an IPO and
becoming a public company no doubt factor into the decisions and may be
particularly challenging for smaller companies. The Staff appreciates that the
costs and benefits of the regulatory actions that the Commission takes – and
does not take – certainly can impact these decisions. At Chairman Schapiro‘s
request, the Staff is taking a fresh look at several of the Commission‘s rules,
beyond those related to Section 404(b), to develop ideas for the Commission
about ways to reduce regulatory burdens on small business capital formation in a
manner consistent with investor protection. However, the Dodd-Frank Act already
exempted approximately 60% of reporting issuers from Section 404(b), and the
Staff does not recommend further extending this exemption.

2. Encourage activities that have potential to further improve both effectiveness and efficiency of Section 404(b) implementation

The Staff recommends that the PCAOB monitor its inspection results and consider publishing observations, beyond the observations previously published in September 2009, on the performance of audits conducted in accordance with AS 5. These observations could assist auditors in performing top-down, risk based audits of ICFR. These communications could include the lessons that can be learned from internal control deficiencies identified through PCAOB inspections.

The Staff is observing COSO‘s project to review and update its internal control framework, which is the most common framework used by management and the
auditor alike in performing assessments of ICFR. The Staff believes that this project can contribute to effective and efficient audits by providing management and auditors with improved internal control guidance that reflects today‘s operating and regulatory environment and by allowing constituent groups to share information on improvements that can be made that enhance the ability to design, implement, and assess internal controls.

PCTF – Modeled After EITF – Suggested By FEI to FAF For Private Co's.

In a comment letter filed with the Financial Accounting Foundation last week, FEI’s Committee on Private Company Standards called for the formation of a Private Company Task Force (PCTF) – modeled after FASB’s Emerging Issues Task Force (EITF) – which would “have the ability to propose changes [to accounting standards] which are approved, adjusted or denied by the FASB.”

The letter, signed by CPC-S Chairman George Beckwith, continued:

The new group’s [e.g., PCTF] opinions and proposals would have to be taken seriously. If over time, the majority of its proposals are denied or not acted upon, the group will not have achieved its objectives and its structure would have to be re-evaluated. However, if over time the new group’s proposals were seriously considered and private company constituents were provided some relief from standards they feel add cost without enhancing relevant information, the group will have achieved its goal and the new group would be part of the FASB process.

CPC-S’ letter was sent in response to the FAF’s request for input as it considers the recommendations of the Blue Ribbon Panel (BRP) on Standard Setting for Private Companies and other possible actions relating to improving the FASB’s responsiveness to the needs of private companies and the users of their financial statements.

Earlier this year, the BRP (cosponsored by the FAF, the AICPA, and NASBA) made a recommendation that, in the long-term, a new board be formed under the oversight of the FAF – at a peer level to the FASB and GASB which operate under the FAF – to focus on private company accounting.

Reflecting on the BRP’s long-term recommendation, and on more recent actions taken by the FASB to be responsive to the needs of its private company constituents (preparers, auditors and users of private company financial statements), FEI’s CPC-S concluded (reformatted to bullets),

• There seems to be a credibility gap that may have caused some people to question whether the FASB as an organization can produce high quality standards for private companies.


• In our opinion, the FASB processes are good, the board members are smart and focused on high quality standard setting for all companies.


• We believe there may be a combination of process and structural changes short of a full FASB peer board that would result in high quality standards for both public and private companies.


• Working within the existing governance framework and the FASB would avoid some of the implementation issues that would require state recognition of a new standard setting body.


• A group working under the authority of the existing FASB would also insure a greater level of coordination between public and private company standards and be less expensive than a separate peer board.


• We feel that a separate board may create an us vs. them mentality in standards setting and a perception of inferior standards in the users’ minds to a greater extent than if the process were all under the authority of the FASB with significantly enhanced focus on private company issues.


• For these reasons, we believe that the establishment of a new group with standards proposing ability may be a viable alternative to a separate peer board. In our view, this new group could be modeled after the Emerging Issues Task Force (“EITF”) in that it will have the ability to propose changes which are approved, adjusted or denied by the FASB. This group, which we will call the Private Company Task Force (“PCTF”), would enhance the standard setting process by focusing entirely on private company issues and addressing their unique concerns.


• The PCTF would be able to set its own agenda, suggest exceptions to existing standards and participate in the FASB’s existing due process on proposed standards."
  

The CPC-S letter addressed other points as well, refer to the letter for details.

FASB Proposes Changes to Impairment Testing For Goodwill

Earlier today, FASB released a proposal to ease implementation of the standards for impairment testing for goodwill. See the Exposure Draft of the proposed Accounting Standards Update, FASB's press release , and a podcast featuring FASB board member Daryl Buck and FASB Practice Fellow Kevin Catalano discussing the proposal. Comments are due, in one of two ways: via a new Electronic Constituent Feedback Form, or via the traditional comment letter, by June 6.

FEI, Applauding FASB-IASB Move For More Time on Convergence Projects, Calls For Reexposure of Remaining MOU Projects; SEC Announces IFRS Roundtable

NOTE: Before we launch into today's news, we've had some inquiries about advertising in the FEI blog. We welcome such inquiries, and would be pleased to respond to questions about pricing and placement. If your company or organization has questions about this, please send an email to blogs@financialexecutives.org and write in the Subject line: Advertising.

Big Week on the Convergence Front

In what’s shaping up to be a big week on the convergence front, following last week’s announcement by FASB and the IASB that they would delay completion of their MOU projects ‘by a few months:’

1. FEI sent a letter to FASB and the IASB applauding last week’s announcement, and asking that the boards formally re-expose, for a 90-day comment period, the remaining MOU standards;
2. The SEC announced an IFRS roundtable will take place in July, and
3. FASB and the IASB released their MOU progress report.


Commitment to Convergence, and High Quality Standards
On a podcast posted by FASB today, FASB Chairman Leslie Seidman provided highlights of the MOU progress report (detailed further below), which followed last week's announcement by FASB and the IASB of the decision to take more time to complete the MOU standards. Specifically, Seidman observed:

The primary purpose of [last week’s joint announcement] was to communicate our ongoing commitment to carrying out our robust due process on the convergence projects. Taking a look at the remaining decisions to be made, and our desire to cross-check with stakeholders on any key changes that we are making, we concluded that it was going to take us a few more months to complete our work. We think those changes are necessary to satisfy ourselves that the resulting standards are of high quality…

FEI Applauds FASB/IASB Move To Take More Time; Calls For Reexposure of Remaining MOU Standards

In response to last week’s announcement by FASB and the IASB to take a few more months to complete the remaining MOU convergence projects on revenue recognition, financial instruments and leasing (as well as an additional project on insurance contracts), FEI President and CEO Marie N. Hollein stated in an April 19 letter to FASB Chairman Leslie Seidman and IASB Chairman Sir David Tweedie:

FEI applauds the Boards’ joint decision to allow more time to complete these projects...

...[I]t is necessary and appropriate to re-expose the revised standard[s] to ensure that the new guidance achieves the desired result and does not introduce new issues or otherwise create unintended consequences for constituents.

Acknowledging the boards’ outreach efforts to date, and explaining why reexposure of the proposed standards is necessary, Hollein stated:

We understand that members of the Board and staff have engaged in extensive outreach with constituents in face to face meetings and conference calls. We support such interactions as a valuable way to more quickly identify key issues with the Board’s tentative conclusions. However, it is important to remember that the specific language of the proposed standard is what ultimately determines the future path of interpretations, implementation and compliance. ..It is …imperative that ample time and great care …be devoted to ensuring that the literal words of the final standards in each of these areas are capable of high quality application on a consistent and repeatable basis at a reasonable cost.

...We therefore recommend that for each of these projects, the Boards issue revised
Exposure Drafts and allow a comment period of 90 days for each. FEI members stand ready to assist the Boards in whatever means are necessary to help identify potential issues with the revised proposed standards and to ensure that these documents are both operational and capable of cost-effective application in the U.S. environment.

...We wish to stress that the quality and thoroughness of the due process, not the adherence to a timetable, is what is most important to the Boards’ constituents. We therefore ask that the Boards to take whatever steps are necessary to ensure that the final standards to be issued meet the specifications we discuss above, even if it means that the revised standards will be issued after December 31, 2011.

FASB/IASB MOU Progress Report Released
The MOU progress report, issued today, references the initial target completion date for the convergence projects under the FASB-IASB Memorandum of Understanding of June 30, 2011, and the more recent announcement of the extension by a few months of that completion date.

Rev Rec, Leasing ‘Drafts’ Will Be Posted; Boards Will Consider Whether Re-exposure is Necessary
Seidman, in today's FASB podcast, provided highlights from the MOU progress report that would be of particular interest to U.S. constituents, regarding the remaining MOU projects, which are: revenue recognition, leasing, and financial instruments, and the additional convergence project added by FASB and the IASB on insurance contracts.

She noted that after the boards complete their consideration of comments received on the Exposure Drafts on revenue recognition and leasing - which the board's estimate will be completed by June, 2011 - that updated ‘drafts’ of those standards will be posted on the FASB and IASB websites, as part of the boards’ efforts to inform constituents and obtain stakeholder input.

However, she stopped short of committing to issuance of a formal exposure draft (re-exposure, technically, as previous exposure drafts were issued). Rather, she emphasized, analogous to the wording in the MOU progress report itself, that:

Before each standard is issued, the boards will consider:
• whether re-exposure is necessary; and
• whether they have undertaken sufficient outreach on the proposed standard to assure the boards that the proposed standard is operational and will bring improvements to financial reporting.

Detailing further, Seidman said:

Even if we conclude that a formal re-exposure is not necessary, both boards plan to post a draft of the standard on our websites for people to review. We’ll also use this draft as the basis for additional outreach, and our fatal flaw reviews.
Based on that feedback, we will then decide how to proceed:
• can we move to a final standard,
• do we have additional work to do, and
then,
• assess again whether we need to re-expose.

So you can see that we’re building in the quality control procedures to make sure that people are aware of these important standards and that we have an opportunity to discuss them with stakeholders before they are issued as final standards.

Financial Instruments
Regarding financial instruments, Seidman noted on today's podcast:

As you know, the boards approached the financial instruments topics in different ways, so we are not on the same timetable for all of the issues. The progress report [issued today] lays the history of the project in detail. At this point, the FASB and IASB are working side by side on impairment and offsetting, or netting on the balance sheet.

On impairment of financial assets, we received many comments on our supplementary ED; while there was no clear consensus in the comments, we received many helpful suggestions, and we plan to try to decide on a basic impairment approach in the next couple of months. Then, we’ll evaluate what additional outreach we need, and whether re-exposure is necessary, before we finalize a new standard.

About classification and measurement of financial assets and liabilities, the FASB is in the process of redeliberating the key provisions of our ED in light of the comments we received. We’ve decided to make several changes in response to widespread commentary from all of our stakeholders to reaffirm several provisions, and we identified enhanced disclosure as a priority area of focus. The FASB plans to finalize our discussions in the 3rd quarter on the classification and measurement issues. At that point, we’ll have to evaluate whether we need to re-expose our conclusions.
The IASB then plans to expose the modified FASB approach to its constituents, with the goal of developing a converged standard on accounting for financial instruments.

Hedging
Seidman also provided an update on hedging on today’s podcast:

This is another case where the timing will be different between the two boards… The FASB will be at the table when the IASB discusses the comments it received on its ED, which was basically a new approach to hedge accounting. … If we decide to make more significant changes to hedge accounting, we would need to re-expose those provisions, before the FASB issues a new, final standard.

Insurance
Regarding the FASB-IASB insurance project, Seidman said:

Insurance is actually not one of the projects on our MOU. But because it’s a global industry, we did decide to work together with the IASB on this project. The FASB joined the discussions fairly late, and accordingly, we issued a Discussion Paper when the IASB issued its ED. We’re now working through the comments received on both of those documents, and expect to conclude on the central issues on the project by June. However, there are other issues that we won’t get to until this summer; once we finalize our discussions, the FASB will issue an ED for public comment; so, I don’t expect a final insurance standard to be issued in the U.S. until 2012. The boards will then consider any differences that have arisen, and decide how best to address them.

Coming Attractions: Guidance on Fair Value Measurements, OCI
Seidman noted some other upcoming standards to be issued by FASB:

We expect to issue some clarifications to the guidance on fair value measurements in the next few weeks. We don’t expect these clarifications to result in major changes in practice in the US, but now we’ll have a completely converged standard on how to develop fair value estimates in cases where another standard requires or permits fair value to be used. That standard will be effective in 2012 for a calendar year company.

Other Comprehensive Income (OCI)
Seidman added on today's podcast:

We’re about to issue an amendment to the guidance on how to present Other Comprehensive Income (OCI); this will be a big change for U.S. co’s, because they’ll no longer be able to present OCI as part of the Statement of Changes in Stockholders Equity.

The converged approach would be to present OCI either as part of a single statement
of income, or in a consecutive statement following net income. That change would also go into effect in 2012 for a calendar year company.

Seidman also noted that FASB’s Technical Plan (outlining expected completion dates for various phases of projects on the FASB agenda) has been updated on FASB’s website.

Due Process in Focus
Regarding due process (a favorite topic of this blog), today’s MOU progress report also states:

To provide additional assurance, the Trustees of the IFRS Foundation are undertaking an enhanced oversight process between its Due Process Oversight
Committee and the IASB to ensure that the IASB is meeting its due process requirements. The FASB’s due process is also subject to oversight by its Board of Trustees as well as its Standard-setting Process Oversight Committee.

SEC Announces IFRS Roundable
Rounding out this week's convergence news, running neck-and-neck with issuance of the FASB-IASB's MOU progress report, the SEC announced yesterday that it plans to hold a roundtable on IFRS in July, specifically on the:

benefits or challenges in potentially incorporating International Financial Reporting Standards (IFRS) into the financial reporting system for U.S. issuers.

The SEC's press release continues:

The July 7 event will feature three panels representing investors, smaller public companies, and regulators. The panel discussions will focus on topics such as investor understanding of IFRS and the impact on smaller public companies and on the regulatory environment of incorporating IFRS.

“We must carefully consider and deliberate whether incorporating IFRS into our
financial reporting system is in the best interest of U.S. investors and markets,” said SEC Chief Accountant James Kroeker. “This roundtable will provide an excellent opportunity for investors, preparers, and regulators to provide the SEC staff with valuable information that will help the Commission in its ongoing consideration of incorporating IFRS.”