Special Report AICPA National Conference on Current SEC and PCAOB Developments
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<str<strong>on</strong>g>Special</str<strong>on</strong>g> <str<strong>on</strong>g>Report</str<strong>on</strong>g><br />
<str<strong>on</strong>g>AICPA</str<strong>on</strong>g> <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g><br />
<str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g> <strong>on</strong><br />
<strong>Current</strong> <strong>SEC</strong> <strong>and</strong><br />
<strong>PCAOB</strong> <strong>Developments</strong>
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Bloomberg BNA <str<strong>on</strong>g>Special</str<strong>on</strong>g> <str<strong>on</strong>g>Report</str<strong>on</strong>g>:<br />
<str<strong>on</strong>g>AICPA</str<strong>on</strong>g> <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g> <strong>on</strong> <strong>Current</strong> <strong>SEC</strong> <strong>and</strong> <strong>PCAOB</strong> <strong>Developments</strong><br />
This special report offers a first-h<strong>and</strong> summary of the year-end c<strong>on</strong>ference <strong>on</strong> <strong>SEC</strong> <strong>and</strong> <strong>PCAOB</strong><br />
developments held by the American Institute of Certified Public Accountants. Many in the<br />
financial reporting community view the <str<strong>on</strong>g>AICPA</str<strong>on</strong>g>’s year-end c<strong>on</strong>ference in Washingt<strong>on</strong>, D.C. as the<br />
most important – <strong>and</strong> most timely – accounting-related c<strong>on</strong>ference in the United States. Drawing<br />
the largest audience of any such accounting-related event, this c<strong>on</strong>ference often reveals insights<br />
from the st<strong>and</strong>ard setters through officials’ speeches <strong>and</strong> generous questi<strong>on</strong>-<strong>and</strong>-answer<br />
sessi<strong>on</strong>s.<br />
Bloomberg BNA’s Accounting Policy & Practice <str<strong>on</strong>g>Report</str<strong>on</strong>g> provided unparalleled coverage of this<br />
event, including remarks from Financial Accounting St<strong>and</strong>ards Board Chairman Leslie Seidman<br />
<strong>and</strong> Internati<strong>on</strong>al Accounting St<strong>and</strong>ards Board Chairman Hans Hoogervorst. Coverage that was<br />
unmatched by other news <strong>and</strong> informati<strong>on</strong> outlets.<br />
Leaders of regulatory agencies <strong>and</strong> private st<strong>and</strong>ard-setting bodies – including FASB <strong>and</strong> IASB<br />
chairmen <strong>and</strong> members of the Securities <strong>and</strong> Exchange Commissi<strong>on</strong> <strong>and</strong> the Public Company<br />
Accounting Oversight Board – often present their freshest perspectives <strong>on</strong> issues at the<br />
c<strong>on</strong>ference. They typically unveil new speeches there.<br />
Senior enforcement officials at the <strong>SEC</strong> <strong>and</strong> <strong>PCAOB</strong> – al<strong>on</strong>g with mid-level staff members, as well<br />
as auditors, corporate accountants <strong>and</strong> analysts – also drill down into the detail of rule-making,<br />
regulatory <strong>and</strong> more general financial reporting topics. In doing so, they give color to the bigger<br />
pictures offered in speeches presented by the c<strong>on</strong>ference’s leading lights.<br />
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For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
© 2013 The Bureau of <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> Affairs, Inc.
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The <str<strong>on</strong>g>AICPA</str<strong>on</strong>g> <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g> <strong>on</strong> <strong>Current</strong> <strong>SEC</strong> <strong>and</strong> <strong>PCAOB</strong> <strong>Developments</strong> took place December 3-5,<br />
2012 at the Marriott Wardman Park hotel, in Washingt<strong>on</strong>, D.C. This collecti<strong>on</strong> of articles first<br />
appeared in Bloomberg BNA’s Accounting Policy & Practice <str<strong>on</strong>g>Report</str<strong>on</strong>g>.<br />
Auditor Independence<br />
<strong>SEC</strong>'s Top Accountant Again Spotlights Audit Firms' N<strong>on</strong>-Audit C<strong>on</strong>sulting<br />
Auditor Oversight<br />
Aguilar Remains ‘Seriously C<strong>on</strong>cerned’ Over Lack of Oversight for Foreign Auditors<br />
Doty Urges More Focus <strong>on</strong> Academic Papers, Possible Social Impacts of Audit Mistakes<br />
Look to <strong>PCAOB</strong> Inspecti<strong>on</strong>s To Strengthen Audits, <strong>SEC</strong>'s Croteau Urges<br />
Disclosures<br />
<strong>SEC</strong>'s Corporati<strong>on</strong> Finance Official Says Cyber Security Disclosures Improved<br />
Enforcement<br />
Proceedings Against PRC-Based Auditors Aimed at Protecting Agency's Processes<br />
Financial Instruments<br />
<strong>SEC</strong>'s Beswick Hopeful About IASB, FASB Aligning <strong>on</strong> Instruments<br />
Investors Dismayed by C<strong>on</strong>vergence Efforts, FASB, IASB Pace <strong>on</strong> Financial Instruments<br />
Income Taxes<br />
<strong>SEC</strong> Scrutinizing if Companies Justified In Reversing Tax Asset Valuati<strong>on</strong> Allowance<br />
Internati<strong>on</strong>al C<strong>on</strong>vergence<br />
FASB Chairman Describes Characteristics Necessary for C<strong>on</strong>vergence St<strong>and</strong>ards in U.S.<br />
‘Tangible Sign’ of U.S. Commitment To IFRS Is Essential, Says IASB Chief<br />
Internati<strong>on</strong>al St<strong>and</strong>ards<br />
Schapiro Departure Adds to Uncertainty Over Timing of Decisi<strong>on</strong> <strong>on</strong> IFRS Use in US<br />
Segment <str<strong>on</strong>g>Report</str<strong>on</strong>g>ing<br />
<strong>SEC</strong> Staff Urges Comprehensive Story <strong>on</strong> Segment <str<strong>on</strong>g>Report</str<strong>on</strong>g>ing Decisi<strong>on</strong>s<br />
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For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
© 2013 The Bureau of <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> Affairs, Inc.
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Auditor Independence<br />
<strong>SEC</strong>'s Top Accountant Again Spotlights Audit Firms' N<strong>on</strong>-Audit C<strong>on</strong>sulting<br />
Accounting Policy & Practice <str<strong>on</strong>g>Report</str<strong>on</strong>g><br />
<str<strong>on</strong>g>AICPA</str<strong>on</strong>g> <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g>, 12/07/2012<br />
By Steve Burkholder<br />
The top accountant at the Securities <strong>and</strong> Exchange Commissi<strong>on</strong> Dec. 3 again voiced c<strong>on</strong>cerns<br />
about risks to auditor independence presented by leading audit firms boosting their n<strong>on</strong>-audit<br />
c<strong>on</strong>sulting business.<br />
Two years ago, James Kroeker, the <strong>SEC</strong>'s chief accountant at the time, spoke at a major<br />
accounting c<strong>on</strong>ference about hearing word of audit firms rebuilding their c<strong>on</strong>sultancy practices<br />
after the Sarbanes-Oxley Act set boundaries <strong>on</strong> the mix of tasks being provided by a single firm.<br />
Kroeker said he hoped that “the professi<strong>on</strong> will not need to relearn less<strong>on</strong>s of the past <strong>on</strong> the<br />
serious, adverse effects of under-investing” in audit quality.<br />
This year, at the same c<strong>on</strong>ference of the American Institute of Certified Public Accountants, Paul<br />
Beswick, acting chief accountant at the <strong>SEC</strong>, sounded similar cauti<strong>on</strong>ary signals. Speaking for<br />
himself <strong>and</strong> not for the Office of the Chief Accountant or the commissi<strong>on</strong>, Beswick tied the issue of<br />
n<strong>on</strong>-audit c<strong>on</strong>sulting to auditor independence.<br />
“Revenue <strong>and</strong> profit pressures at an accounting firm can give rise to c<strong>on</strong>flicting incentives, but the<br />
accountant's obligati<strong>on</strong> to the public trust cannot change,” said Beswick, who was named acting<br />
chief accountant in July after Kroeker announced his resignati<strong>on</strong>.<br />
“Keeping that in mind, I c<strong>on</strong>tinue to observe some accounting firms actively growing c<strong>on</strong>sultancy<br />
practices,” Beswick said in his speech at the <str<strong>on</strong>g>AICPA</str<strong>on</strong>g> c<strong>on</strong>ference <strong>on</strong> developments at the <strong>SEC</strong> <strong>and</strong><br />
Public Company Accounting Oversight Board.<br />
“Some of this is anecdotal,” he c<strong>on</strong>tinued, “but I can tell you that OCA is occasi<strong>on</strong>ally asked about<br />
transacti<strong>on</strong>s involving accountants that are exp<strong>and</strong>ing their n<strong>on</strong>-audit service practices.”<br />
Beswick noted that some of the growth in n<strong>on</strong>-audit c<strong>on</strong>sulting “relates to businesses that are<br />
fairly removed from the accountant's professi<strong>on</strong>al m<strong>and</strong>ate to perform quality audits.” He cited the<br />
<strong>SEC</strong> staff's becoming aware of accountants “acquiring businesses that provide project<br />
management, system architecture design,” <strong>and</strong> other informati<strong>on</strong> technology “infrastructure<br />
services.”<br />
“At a minimum, these transacti<strong>on</strong>s can raise transiti<strong>on</strong>al issues with respect to compliance with<br />
the auditor independence rules,” Beswick added. “However, in my mind, more important is how<br />
the accounting firm views its n<strong>on</strong>-audit services practice, <strong>and</strong> whether this results in the<br />
accounting firm devoting the appropriate resources to its audit <strong>and</strong> attest practice.”<br />
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For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
© 2013 The Bureau of <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> Affairs, Inc.
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Weakening of Public Trust?<br />
The <strong>SEC</strong>'s acting chief accountant went <strong>on</strong> to state that he questi<strong>on</strong>s “whether accountants'<br />
exp<strong>and</strong>ing practices into areas unrelated to their primary competencies weakens” the public trust.<br />
“I'm disheartened when I read an article in the press that raises questi<strong>on</strong>s about the propriety of<br />
n<strong>on</strong>-audit services that accountants provide to their audit clients,” he c<strong>on</strong>tinued. “It is firmly rooted<br />
in the independence principles that independence is needed in both fact <strong>and</strong> appearance.<br />
“As you all know, percepti<strong>on</strong> is reality, <strong>and</strong> negative percepti<strong>on</strong>s can undermine investor<br />
c<strong>on</strong>fidence in audits,” said Beswick.<br />
Expansi<strong>on</strong> ‘Does Little to Promote Audit Quality.’<br />
In his wide-ranging speech, Beswick went <strong>on</strong> to also describe his c<strong>on</strong>cern that audit firms'<br />
exp<strong>and</strong>ing “into businesses that have little relevance to the accountant's primary competencies<br />
probably does little to promote audit quality.”<br />
The acting chief accountant said that such expansi<strong>on</strong> also “has the potential to distract a firm's<br />
leadership <strong>and</strong> other pers<strong>on</strong>nel from providing appropriate attenti<strong>on</strong> to their audit practice.” That<br />
kind of growth in n<strong>on</strong>-audit work runs the risk of damaging the accountant's reputati<strong>on</strong>, he added.<br />
“I'm hopeful that my comments today will help to encourage a degree of reflecti<strong>on</strong> when firms are<br />
faced with decisi<strong>on</strong>s about growth that undoubtedly will shape the public's l<strong>on</strong>g-term views of their<br />
firm <strong>and</strong> potentially of the entire professi<strong>on</strong>,” Beswick said in c<strong>on</strong>cluding <strong>on</strong> the topic.<br />
In a brief ad hoc sessi<strong>on</strong> with reporters after his speech, Beswick suggested he was not referring<br />
to any <strong>on</strong>e individual form of transacti<strong>on</strong> that led to his statements of c<strong>on</strong>cern about the growth in<br />
n<strong>on</strong>-auditing c<strong>on</strong>sulting.<br />
“As you see they're increasing their c<strong>on</strong>sultancy practices, should we be stepping back <strong>and</strong><br />
saying is this really the right thing?” he said.<br />
Other Highlights of Beswick's Speech<br />
In other highlights of his Dec. 3 speech at the <str<strong>on</strong>g>AICPA</str<strong>on</strong>g> c<strong>on</strong>ference <strong>and</strong> in comments after the<br />
speech, Beswick spoke about:<br />
<br />
<br />
his measure of optimism that the Financial Accounting St<strong>and</strong>ards Board <strong>and</strong> the<br />
Internati<strong>on</strong>al Accounting St<strong>and</strong>ards Board can achieve an alignment of views <strong>on</strong> their<br />
high-priority joint project <strong>on</strong> financial instruments—<strong>and</strong> not <strong>on</strong>ly <strong>on</strong> classificati<strong>on</strong> <strong>and</strong><br />
measurement, but also <strong>on</strong> the even knottier issue of how to account for loan <strong>and</strong> other<br />
credit losses;<br />
the issue of whether the <strong>SEC</strong> will call for some form of incorporati<strong>on</strong> of internati<strong>on</strong>al<br />
financial reporting st<strong>and</strong>ards into the reporting regime for U.S. public companies, <strong>and</strong> the<br />
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For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
© 2013 The Bureau of <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> Affairs, Inc.
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commissi<strong>on</strong>'s staff working with incoming Chairman Elisse Walter “to determine the next<br />
steps in the process”;<br />
<br />
<br />
<br />
seeking a coordinated implementati<strong>on</strong> of c<strong>on</strong>verged accounting st<strong>and</strong>ards aimed at global<br />
use, the importance of how “a more holistic approach to implementati<strong>on</strong> guidance” can be<br />
taken, <strong>and</strong> how participants in financial reporting should be cautious about following<br />
“first-to-press” n<strong>on</strong>-authoritative guidance written by trade associati<strong>on</strong>s <strong>and</strong> others;<br />
the <strong>SEC</strong>'s plan to hold a public roundtable in coming m<strong>on</strong>ths <strong>on</strong> what should be “the<br />
dividing line between what should appear in financial statements versus the broader<br />
financial reporting package,” such as management's discussi<strong>on</strong> <strong>and</strong> analysis—which he<br />
called, overall, “a critically important issue”; <strong>and</strong><br />
how “there can be no questi<strong>on</strong> at this point,” 10 years after the enactment of the<br />
Sarbanes-Oxley reform act, that due to the instituti<strong>on</strong> of companies' effectively certifying<br />
their internal c<strong>on</strong>trol over financial reporting (ICFR), “investors have benefited from<br />
improvements in the reliability of financial reporting due to the increased focus <strong>on</strong> ICFR,”<br />
<strong>and</strong> that auditors <strong>and</strong> the financial reporting community should “stay focused” <strong>on</strong> that.<br />
Accountants Doing Their Jobs<br />
In c<strong>on</strong>cluding his wide-ranging speech, Beswick homed in <strong>on</strong> what he sees as “an unfortunate<br />
trend to highlight <strong>on</strong>ly when individuals are criticized for failing to do their job.” Rather, in speaking<br />
to the many auditors in the audience at the <str<strong>on</strong>g>AICPA</str<strong>on</strong>g> c<strong>on</strong>ference, he said: “[I]t is not lost <strong>on</strong> me that<br />
there are literally tens of thous<strong>and</strong>s of hard-working <strong>and</strong> dedicated accounting professi<strong>on</strong>als who<br />
show up to work every day <strong>and</strong> do their job well.<br />
“It is unfortunate that we do not have better mechanisms to highlight their successes,” Beswick<br />
c<strong>on</strong>tinued. “So let me try <strong>on</strong>e here today. Thank you. Investors are better protected for your<br />
efforts.”<br />
For More Informati<strong>on</strong><br />
The text of the Beswick's Dec. 3 speech is available at<br />
http://www.sec.gov/news/speech/2012/spch120312pab.htm.<br />
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>><br />
For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
© 2013 The Bureau of <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> Affairs, Inc.
7<br />
Auditor Oversight<br />
Aguilar Remains ‘Seriously C<strong>on</strong>cerned’ Over Lack of Oversight for Foreign Auditors<br />
Accounting Policy & Practice <str<strong>on</strong>g>Report</str<strong>on</strong>g><br />
<str<strong>on</strong>g>AICPA</str<strong>on</strong>g> <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g>, 12/07/2012<br />
By Yin Wilczek<br />
Securities <strong>and</strong> Exchange Commissi<strong>on</strong>er Luis Aguilar Dec. 3 said he remains “seriously<br />
c<strong>on</strong>cerned” about the lack of effective U.S. oversight for foreign auditors that issue audit reports or<br />
participate in the audits of U.S. issuers.<br />
The commissi<strong>on</strong>er, addressing a c<strong>on</strong>ference in Washingt<strong>on</strong> organized by the American Institute<br />
of Certified Public Accountants, noted that the Public Company Accounting Oversight Board has<br />
not been allowed to inspect the auditing work of accounting firms in certain European countries<br />
<strong>and</strong> in China.<br />
Under these circumstances, the questi<strong>on</strong> that arises is whether the issuers audited by such<br />
foreign firms should be allowed to trade in U.S. securities markets, Aguilar said. “This is a<br />
questi<strong>on</strong> that must be answered with the needs of investors in mind—both to protect investors<br />
<strong>and</strong> to promote capital formati<strong>on</strong>,” he said. “This has been an open issue for some time, <strong>and</strong> it is<br />
past time that it be resolved.”<br />
Aguilar said he spoke his own views, which did not necessarily reflect those of the commissi<strong>on</strong>,<br />
other members, or <strong>SEC</strong> staff.<br />
Chinese Reverse Mergers<br />
Aguilar, a supporter of str<strong>on</strong>g <strong>SEC</strong> enforcement, has l<strong>on</strong>g been c<strong>on</strong>cerned about potential fraud<br />
from foreign entities trading in U.S. markets. In April 2011, he highlighted accounting irregularities<br />
<strong>and</strong> other problems discovered in a growing number of China-based companies who gain access<br />
to U.S. investors through reverse mergers.<br />
In his speech, Aguilar also urged the <strong>PCAOB</strong> to c<strong>on</strong>tinue pushing for the ability to inspect the<br />
Chinese operati<strong>on</strong>s of registered accounting firms. While the <strong>PCAOB</strong> now can observe the audit<br />
inspecti<strong>on</strong>s of regulators from the People's Republic of China, “I am hopeful it is a first step to<br />
achieving the ultimate goal of a full inspecti<strong>on</strong>,” he said.<br />
In other remarks, Aguilar urged the <strong>SEC</strong> <strong>and</strong> <strong>PCAOB</strong> to c<strong>on</strong>tinue m<strong>on</strong>itoring the financial<br />
reporting <strong>and</strong> internal c<strong>on</strong>trols of issuers exempted from the auditor attestati<strong>on</strong> requirements of<br />
the 2002 Sarbanes-Oxley Act to determine if reinstatement of the requirement is necessary.<br />
SOX Secti<strong>on</strong> 404(b)<br />
Aguilar noted that auditor attestati<strong>on</strong> of issuers' internal c<strong>on</strong>trols—as required by SOX Secti<strong>on</strong><br />
404(b)—results in more financial transparency <strong>and</strong> investor protecti<strong>on</strong>, <strong>and</strong> promotes true capital<br />
formati<strong>on</strong>.<br />
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For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
© 2013 The Bureau of <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> Affairs, Inc.
8<br />
However, even as the costs of complying with Secti<strong>on</strong> 404(b) have decreased, <strong>and</strong> despite its<br />
benefit to investors, there are repeated efforts to scale back the provisi<strong>on</strong>, Aguilar said. He noted<br />
that in 2010, the Dodd-Frank Wall Street Reform <strong>and</strong> C<strong>on</strong>sumer Protecti<strong>on</strong> Act permanently<br />
exempted all smaller issuers from Secti<strong>on</strong> 404(b) requirements. Following that, the Jumpstart Our<br />
Business Startups Act similarly exempted emerging growth companies from the provisi<strong>on</strong> for up<br />
to five years after their initial public offerings, he observed.<br />
In m<strong>on</strong>itoring the exempt entities, the <strong>SEC</strong> <strong>and</strong> <strong>PCAOB</strong> should “not hesitate to call for<br />
reinstatement of” Secti<strong>on</strong> 404(b) should it be necessary for capital formati<strong>on</strong> <strong>and</strong> investor<br />
protecti<strong>on</strong>, he said.<br />
Meanwhile, speaking to reporters after his speech, Aguilar said investor protecti<strong>on</strong> remains his<br />
goal under the forthcoming chairmanship of Elisse Walter. “Whatever the agenda Chairman<br />
Walter decides, my focus would be—how does that possibly impact investors,” he said. “When it<br />
harms investors, I will fight mightily to have that turned around.”<br />
Following <strong>SEC</strong> Chairman Mary Schapiro's announcement that she will leave the <strong>SEC</strong> Dec. 14, the<br />
White House said it will designate Walter as the new chair.<br />
For More Informati<strong>on</strong><br />
The text of Aguilar's speech is available at<br />
http://www.sec.gov/news/speech/2012/spch120312laa.htm.<br />
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>><br />
For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
© 2013 The Bureau of <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> Affairs, Inc.
9<br />
Auditor Oversight<br />
Doty Urges More Focus <strong>on</strong> Academic Papers, Possible Social Impacts of Audit Mistakes<br />
Accounting Policy & Practice <str<strong>on</strong>g>Report</str<strong>on</strong>g><br />
<str<strong>on</strong>g>AICPA</str<strong>on</strong>g> <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g>, 12/07/2012<br />
By Che Odom<br />
Misstatements <strong>and</strong> fraud create more issues than financial costs, including social damages that<br />
may be felt for years, according to Public Company Accounting Oversight Board Chairman James<br />
R. Doty.<br />
“Our ec<strong>on</strong>omic success depends <strong>on</strong> the c<strong>on</strong>fidence of the users of capital <strong>and</strong> the providers of<br />
capital alike,” Doty said Dec. 3 in a presentati<strong>on</strong> to the American Institute of Certified Public<br />
Accountants' <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g> <strong>on</strong> current <strong>SEC</strong> <strong>and</strong> <strong>PCAOB</strong> developments.<br />
Doty's talk referenced history, case law, <strong>and</strong> academic research that c<strong>on</strong>cerned financial<br />
reporting <strong>and</strong> fraud. He described accountants as the gatekeepers of “accurate <strong>and</strong> detailed<br />
informati<strong>on</strong>” up<strong>on</strong> which corporate managers <strong>and</strong> other users of capital must base their decisi<strong>on</strong>s.<br />
Mistakes in the data provided by accountants can send a company into business practices or<br />
markets that may squ<strong>and</strong>er corporate resources, he said. The damage caused by financial<br />
misstatement is “much greater than stock market fallout, c<strong>on</strong>comitant lawsuits, <strong>and</strong> insurance<br />
claims,” he added.<br />
Impact <strong>on</strong> Workers<br />
Doty pointed to research completed by Simi Kedia, a professor at Rutgers University, <strong>and</strong><br />
Thomas Philipp<strong>on</strong>, now an associate professor at New York University's Stern School of<br />
Business.<br />
The two academics wrote an article in 2009 that reported the costs of misstatements by<br />
companies known to have been managing earnings between 1997 <strong>and</strong> 2000. They found that<br />
“the essential point that merges” is that if management wants to maintain appears of good<br />
financial health, then hiring <strong>and</strong> investment must be c<strong>on</strong>sistent with reported profits, Doty said.<br />
“Therefore, they found, during the years of earnings management the companies increased hiring<br />
by 25 percent,” Doty said. “Competitors increased hiring, <strong>on</strong> average, by <strong>on</strong>ly 7 percent. As so<strong>on</strong><br />
as companies came clean, the unneeded employees were fired.”<br />
The researchers estimated that the restating companies fired between 250,000 <strong>and</strong> 600,000<br />
workers between 2000 <strong>and</strong> 2002, slashing payrolls by more than 25 percent, while other<br />
companies cut them by just 1.5 percent, Doty said.<br />
Impact <strong>on</strong> Competitor Companies<br />
Columbia Business School Professor Gil Sadka did his doctorate dissertati<strong>on</strong> at the University of<br />
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For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
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10<br />
Chicago <strong>on</strong> the effects of fraudulent reporting <strong>on</strong> competitor companies.<br />
“He found that false reporting leads both companies who misreport <strong>and</strong> their competitors to<br />
overinvest in new technology <strong>and</strong> engage in misguided price wars,” Doty said.<br />
Manipulating financial records misleads investors <strong>and</strong> other companies into inefficient capital<br />
allocati<strong>on</strong>, he said.<br />
“Ec<strong>on</strong>omists warn that this, in turn, leads workers to train up, <strong>and</strong> sometimes move families, for<br />
jobs in industries that d<strong>on</strong>'t really need them,” he said. “Years later, when they lose those jobs,<br />
their potential productivity is yet again wasted in unemployment.”<br />
Doty encouraged auditors to look at academic literature <strong>and</strong> the writing of other “thought leaders”<br />
who have refocused their attenti<strong>on</strong> <strong>on</strong> the important of the professi<strong>on</strong>.<br />
“Their new look at the archives of the last decade may lead you to new insights of your own,” he<br />
said.<br />
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For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
© 2013 The Bureau of <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> Affairs, Inc.
11<br />
Auditor Oversight<br />
Look to <strong>PCAOB</strong> Inspecti<strong>on</strong>s To Strengthen Audits, <strong>SEC</strong>'s Croteau Urges<br />
Accounting Policy & Practice <str<strong>on</strong>g>Report</str<strong>on</strong>g><br />
<str<strong>on</strong>g>AICPA</str<strong>on</strong>g> <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g>, 12/07/2012<br />
By Steven Marcy<br />
Accounting firms should look to Public Company Accounting Oversight Board inspecti<strong>on</strong> reports<br />
for guidance <strong>on</strong> how to strengthen internal c<strong>on</strong>trols <strong>and</strong> enhance the remediati<strong>on</strong> of deficiencies<br />
in their audits, Securities <strong>and</strong> Exchange Commissi<strong>on</strong> Deputy Chief Accountant Brian Croteau told<br />
the American Institute of Certified Public Accountants' <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g> <strong>on</strong> <strong>Current</strong> <strong>SEC</strong> <strong>and</strong> <strong>PCAOB</strong><br />
<strong>Developments</strong>.<br />
The inspecti<strong>on</strong> reports can help firms identify the important shortcomings in audits that the<br />
<strong>PCAOB</strong> is c<strong>on</strong>cerned about when firms fail to adequately correct their audit deficiencies, <strong>and</strong> they<br />
can help firms develop “a robust audit feedback loop” with companies, Croteau said Dec. 3.<br />
Such a feedback loop can provide insight into “the nature of current deficiencies, the likely causes<br />
of them, <strong>and</strong> potential soluti<strong>on</strong>s to address them,” Croteau said.<br />
Croteau also said that the <strong>PCAOB</strong> should make as a “high priority” the replacement of interim<br />
auditing st<strong>and</strong>ards inherited from the <str<strong>on</strong>g>AICPA</str<strong>on</strong>g> with permanent st<strong>and</strong>ards promulgated by <strong>PCAOB</strong>.<br />
However, audit firms need not await such new st<strong>and</strong>ards, which must be approved by the <strong>SEC</strong><br />
before becoming effective, <strong>and</strong> can embark <strong>on</strong> upgrading their own auditing practices, in part by<br />
using insights gleaned from <strong>PCAOB</strong> inspecti<strong>on</strong> reports, Croteau said. The firms can start by<br />
making sure they do not commit the same types of deficiencies “most often cited” in <strong>PCAOB</strong><br />
inspecti<strong>on</strong> reports, he said.<br />
Croteau also urged audit committees of companies to have their potential auditors “compete <strong>on</strong><br />
engagement quality” as a “key element” when hiring or retaining auditors as a way of ensuring<br />
audit quality.<br />
Auditors also should strive to look bey<strong>on</strong>d audit evidence provided <strong>on</strong>ly by management to verify<br />
asserti<strong>on</strong>s being made by the company, Croteau said.<br />
Pricing Services, Fair Value<br />
The transparency of informati<strong>on</strong> provided by pricing services over the techniques they use to<br />
value assets <strong>and</strong> instruments has improved over the last year, Croteau said. Pricing service users<br />
have increased the challenges they make to prices that services provide <strong>and</strong> “deep dives” by<br />
users of pricing services into how those prices are calculated, he said.<br />
The increased transparency <strong>and</strong> underst<strong>and</strong>ing by management of pricing techniques will lead to<br />
greater investor c<strong>on</strong>fidence in the quality <strong>and</strong> veracity of financial statements, Croteau said.<br />
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For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
© 2013 The Bureau of <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> Affairs, Inc.
12<br />
Disclosures<br />
<strong>SEC</strong>'s Corporati<strong>on</strong> Finance Official Says Cyber Security Disclosures Improved<br />
Accounting Policy & Practice <str<strong>on</strong>g>Report</str<strong>on</strong>g><br />
<str<strong>on</strong>g>AICPA</str<strong>on</strong>g> <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g>, 12/07/2012<br />
By Denise Lugo<br />
The Securities <strong>and</strong> Exchange Commissi<strong>on</strong>'s Divisi<strong>on</strong> of Corporati<strong>on</strong> Finance has seen improved<br />
cyber security disclosures when “it is reas<strong>on</strong>ably likely that an attack will lead to reduced<br />
revenues or increase protecti<strong>on</strong> costs or litigati<strong>on</strong> costs,” Melissa Rocha, an accounting branch<br />
chief at Corp. Fin., said Dec. 4.<br />
Specifically, during a panel discussi<strong>on</strong> at the <str<strong>on</strong>g>AICPA</str<strong>on</strong>g>'s <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g> <strong>on</strong> <strong>Current</strong> <strong>SEC</strong> <strong>and</strong> <strong>PCAOB</strong>,<br />
Rocha said “registrants have been disclosing these possible outcomes in their [management<br />
discussi<strong>on</strong> <strong>and</strong> analysis]—if material.” If an attack does not result in lost revenues but however<br />
causes a company to increase its cyber security measures <strong>and</strong> expenditures, said Rocha,<br />
registrants have also been disclosing that impact—if material.<br />
Materiality<br />
This is c<strong>on</strong>sistent with the requirements under Regulati<strong>on</strong> S-K, that a material event, trend or<br />
uncertainty that is reas<strong>on</strong>ably likely to have a material impact <strong>on</strong> financial results would need to be<br />
disclosed. In other words, materiality needs to be the driver of these disclosures.<br />
Last year the <strong>SEC</strong> issued CF Disclosure Guidance, Topic 2, <strong>on</strong> cyber security, a disclosure guide<br />
premised <strong>on</strong> materiality to cyber security measurements.<br />
Incremental dependence <strong>on</strong> digital technologies to c<strong>on</strong>duct business has seen increased focus<br />
by the legal <strong>and</strong> accounting community <strong>on</strong> how cyber security risks <strong>and</strong> their related impact <strong>on</strong><br />
operati<strong>on</strong>s of a registrant should be described in their exposure documents, said Rocha.<br />
Areas where Divisi<strong>on</strong> May Comment<br />
Asked about examples of incidents where the divisi<strong>on</strong> may issue cyber security comments,<br />
Rocha said in some cases they “look to informati<strong>on</strong> gathered outside of the filings <strong>and</strong> asked<br />
pointed questi<strong>on</strong>s regarding the disclosure of a particular event.”<br />
In other cases, said Rocha, corporati<strong>on</strong> finance has actually questi<strong>on</strong>ed risk factor disclosures<br />
where a company has implied that they might experience an attack when in fact they have been<br />
attacked.<br />
“In those cases we simply wanted companies to acknowledge that they were experiencing<br />
attacks. Overall, we've seen incremental improvement in these disclosures,” she said.<br />
In terms of the level of details related to the disclosures, Rocha said companies should provide<br />
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For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
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13<br />
sufficient disclosure to allow investors to appreciate any internal risk that they face.<br />
“We underst<strong>and</strong> the c<strong>on</strong>cerns that detailed disclosures would comprise a company's security<br />
measures,” said Rocha. “We're not projecting that all incidents should be reported, we're <strong>on</strong>ly<br />
asking for specific details of those incidents, she said.<br />
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>><br />
For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
© 2013 The Bureau of <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> Affairs, Inc.
14<br />
Enforcement<br />
Proceedings Against PRC-Based Auditors Aimed at Protecting Agency's<br />
Processes<br />
Accounting Policy & Practice <str<strong>on</strong>g>Report</str<strong>on</strong>g><br />
<str<strong>on</strong>g>AICPA</str<strong>on</strong>g> <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g>, 12/07/2012<br />
By Yin Wilczek<br />
The fact that People's Republic of China-based affiliates of auditing <strong>and</strong> accounting firms are<br />
barred by local laws from turning over documents to the Securities <strong>and</strong> Exchange Commissi<strong>on</strong><br />
has no bearing <strong>on</strong> the commissi<strong>on</strong>'s recent administrative acti<strong>on</strong>s against these entities, a senior<br />
enforcement official said Dec. 4.<br />
Howard Scheck, the chief accountant of the <strong>SEC</strong>'s Divisi<strong>on</strong> of Enforcement, said that the<br />
commissi<strong>on</strong>, through the proceedings, is trying to protect its processes <strong>and</strong> ensure that it has<br />
access to audit work papers in its investigati<strong>on</strong>s of issuers.<br />
“The reas<strong>on</strong> for the n<strong>on</strong>-producti<strong>on</strong> is somewhat irrelevant to the nature of our acti<strong>on</strong>, which is a<br />
[Rule] 102(e) proceeding to protect the commissi<strong>on</strong>'s processes,” he said.<br />
Scheck spoke during an enforcement panel at an American Institute of Certified Public<br />
Accountants' c<strong>on</strong>ference in Washingt<strong>on</strong>. He <strong>and</strong> David Woodcock, director of the <strong>SEC</strong>'s Fort<br />
Worth Regi<strong>on</strong>al Office, said they voiced their own views, which did not necessarily reflect those of<br />
the <strong>SEC</strong> or other staff members.<br />
Failed Talks<br />
The <strong>SEC</strong> disclosed Dec. 3 in a filing in the U.S. District Court for the District of Columbia that<br />
negotiati<strong>on</strong>s with Chinese authorities to establish a disclosure mechanism through which it can<br />
access audit work papers of China-based auditors have ended unsuccessfully. Specifically, the<br />
agency asked the court to lift the stay <strong>on</strong> its lawsuit against Deloitte Touche Tohmatsu's Shanghai<br />
unit to compel producti<strong>on</strong> of work papers relating to a China-based issuer.<br />
The same day, the <strong>SEC</strong> filed an administrative proceeding against Chinese affiliates of five major<br />
U.S. audit <strong>and</strong> accounting firms for failing to h<strong>and</strong> over documents sought by the <strong>SEC</strong> in its<br />
investigati<strong>on</strong> of their clients. The administrative acti<strong>on</strong> was brought pursuant to the commissi<strong>on</strong>'s<br />
Rule 102(e), under which the <strong>SEC</strong> may bar pers<strong>on</strong>s from appearing or practicing before it if they<br />
have been found to have willfully violated or willfully aided the violati<strong>on</strong> of the federal securities<br />
laws.<br />
The accounting <strong>and</strong> auditing firms generally have asserted that their h<strong>and</strong>s are tied because of<br />
c<strong>on</strong>flicting Chinese <strong>and</strong> U.S. law.<br />
Co-panelist William McLucas, a partner in Wilmer Cutler Pickering Hale & Dorr LLP, Washingt<strong>on</strong>,<br />
suggested that the soluti<strong>on</strong> to the matter likely is not the “blunt instrument of an enforcement<br />
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For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
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15<br />
proceeding.” Instead, the situati<strong>on</strong> calls for a high-level government-to-government resoluti<strong>on</strong> that<br />
might best be tackled by the State Department or others, he said.<br />
Problematic C<strong>on</strong>duct<br />
In other comments, Scheck reported that with respect to auditors, enforcement staff c<strong>on</strong>tinues to<br />
witness certain problematic c<strong>on</strong>duct. Such c<strong>on</strong>duct includes perfunctory materiality analyses,<br />
suspicious rati<strong>on</strong>alizati<strong>on</strong>s to support management views, <strong>and</strong> “plain failures” to assess the<br />
issues at h<strong>and</strong>, calling into questi<strong>on</strong> the auditors' professi<strong>on</strong>al skepticism.<br />
Woodcock also told the audience that the <strong>SEC</strong> thus far has reached 46 cooperati<strong>on</strong><br />
agreements—including n<strong>on</strong>- <strong>and</strong> deferred-prosecuti<strong>on</strong> agreements—with individuals <strong>and</strong> entities.<br />
“There is a good chance that the cooperati<strong>on</strong> program will c<strong>on</strong>tinue to exp<strong>and</strong> as potential<br />
defendants learn about it,” he said.<br />
Meanwhile, McLucas commented that at some point, a questi<strong>on</strong> may arise as to whether the<br />
<strong>SEC</strong>'s whistleblower bounty program is worth the resources currently devoted to it. McLucas<br />
asked the <strong>SEC</strong> panelists whether, from a cost <strong>and</strong> policy st<strong>and</strong>point, there is a way to assess<br />
whether the program is yielding the kind of results needed to justify its existence.<br />
“My worry is that [the program] puts in tremendous risks for individuals in the commissi<strong>on</strong> who are<br />
trying to process” the whistleblower complaints, he said. He added that he also is c<strong>on</strong>cerned that<br />
enforcement staff members will spend too much time <strong>on</strong> worthless tips for fear of being<br />
sec<strong>on</strong>d-guessed.<br />
Woodcock resp<strong>on</strong>ded that he did not know the answer to the questi<strong>on</strong>, or whether it was “too so<strong>on</strong><br />
to ask that questi<strong>on</strong>.”<br />
Moving <strong>on</strong> to the Foreign Corrupt Practices Act, Woodcock told the audience that issuers'<br />
compliance programs should include accountants because of the books <strong>and</strong> records <strong>and</strong> internal<br />
c<strong>on</strong>trol provisi<strong>on</strong>s of the statute.<br />
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>><br />
For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
© 2013 The Bureau of <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> Affairs, Inc.
16<br />
Financial Instruments<br />
<strong>SEC</strong>'s Beswick Hopeful About IASB, FASB Aligning <strong>on</strong> Instruments<br />
Accounting Policy & Practice <str<strong>on</strong>g>Report</str<strong>on</strong>g><br />
<str<strong>on</strong>g>AICPA</str<strong>on</strong>g> <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g>, 12/07/2012<br />
By Steve Burkholder<br />
The top accountant at the Securities <strong>and</strong> Exchange Commissi<strong>on</strong> expressed a measure of<br />
optimism Dec. 3 that the Financial Accounting St<strong>and</strong>ards Board <strong>and</strong> its internati<strong>on</strong>al partner in<br />
rulemaking will be able to harm<strong>on</strong>ize <strong>on</strong> accounting for financial instruments—including <strong>on</strong><br />
accounting for loan losses—despite their differences <strong>on</strong> the issue.<br />
At an ad hoc press scrum at a Washingt<strong>on</strong> accounting c<strong>on</strong>ference, Paul Beswick, the <strong>SEC</strong>'s<br />
acting chief accountant, was asked by Bloomberg BNA whether he was dismayed that FASB <strong>and</strong><br />
the Internati<strong>on</strong>al Accounting St<strong>and</strong>ards are at loggerheads <strong>on</strong> impairment, or accounting for credit<br />
losses. St<strong>and</strong>ard-setters have deemed that a must-c<strong>on</strong>verge topic in the closely watched joint<br />
instruments project.<br />
“No,” Beswick resp<strong>on</strong>ded, citing progress by IASB <strong>and</strong> FASB—against expectati<strong>on</strong>s in the<br />
accounting world—<strong>on</strong> another aspect of the joint effort, <strong>on</strong> how to classify <strong>and</strong> measure financial<br />
instruments.<br />
“Remember classificati<strong>on</strong> <strong>and</strong> measurement. They were at each others' throats over this,” he<br />
c<strong>on</strong>tinued, referring to the time preceding the panels' formally floating of proposals <strong>on</strong> the topic.<br />
“And when they put the two models out there, both boards learned a lot,” said Beswick. “That is<br />
what I'm hopeful will happen with impairment.” The seeking of the feedback from the financial<br />
reporting community preceded a more-or-less coming together <strong>on</strong> a basic classificati<strong>on</strong><br />
prescripti<strong>on</strong>. That tentative aligning was marked by a substantial shift by FASB away from having<br />
loans, for example, recorded at fair value, which the U.S. panel proposed in May 2010.<br />
Beswick Accentuating the Positive<br />
In his comments to reporters, as in his earlier speech, Beswick <strong>on</strong> Dec. 3 accentuated the positive<br />
in viewing the work to date by IASB <strong>and</strong> FASB <strong>on</strong> what he called the three main “c<strong>on</strong>vergence<br />
projects.”<br />
The <strong>SEC</strong>'s acting chief accountant said he is “encouraged about the level of c<strong>on</strong>vergence” in the<br />
revenue recogniti<strong>on</strong> <strong>and</strong> leases projects, <strong>on</strong> which the boards have labored for a number of years.<br />
“When thinking about the status of the financial instruments project, I think some perspective is<br />
important,” he c<strong>on</strong>tinued. “As I frequently menti<strong>on</strong>, 18-24 m<strong>on</strong>ths ago it was called almost<br />
unthinkable by some that the boards would be able to reach substantive agreement <strong>on</strong><br />
classificati<strong>on</strong> <strong>and</strong> measurement. Yet today the Boards are a lot closer than probably many of you<br />
expected.”<br />
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For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
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17<br />
Divergence <strong>on</strong> Impairment<br />
Beswick noted, however, that during the same period, IASB <strong>and</strong> FASB “have diverged <strong>on</strong> the<br />
impairment aspect of the project.”<br />
On how the boards might move forward <strong>on</strong> impairment, the <strong>SEC</strong>'s top accountant said he thinks it<br />
is important for both Boards to release their respective accounting models “for public feedback to<br />
see if there is a way to rec<strong>on</strong>cile the two views.” He added: “It is also important that the exposure<br />
period for the documents be similar so that interested parties can have the benefit of both boards'<br />
thinking <strong>and</strong> can provide feedback to both boards c<strong>on</strong>currently.”<br />
FASB plans to keep its forthcoming impairment proposal open for comment for some four m<strong>on</strong>ths.<br />
The comment period would be end <strong>on</strong> the later of 120 days after release of the fresh exposure<br />
draft or April 30.<br />
Timetable for Issuing Recast Proposals<br />
In coming m<strong>on</strong>ths, both FASB <strong>and</strong> IASB plan to issue—or “re-expose” for public<br />
comment—revised proposals <strong>on</strong> classificati<strong>on</strong> <strong>and</strong> measurement <strong>and</strong> <strong>on</strong> impairment.<br />
In the impairment proposal that FASB expects to issue by Dec. 31, it will formally propose a<br />
“current expected credit loss” approach to accounting for credit losses. That model would be<br />
applied to debt securities as well as to loans <strong>and</strong> other financial assets.<br />
The FASB model differs markedly from the IASB's “three-bucket” approach. The latter is based <strong>on</strong><br />
the credit quality or deteriorati<strong>on</strong> in such quality of financial assets. The three-bucket model had<br />
been chiseled out painstakingly by the L<strong>on</strong>d<strong>on</strong>- <strong>and</strong> Norwalk, C<strong>on</strong>n.-based boards.<br />
Both the FASB <strong>and</strong> IASB approaches are built <strong>on</strong> reporting of expected credit losses,<br />
representing a shift away from current accounting policies built <strong>on</strong> incurred losses, as members of<br />
the boards stress. A main aim of the joint rulemaking <strong>on</strong> impairment is to remedy the kind of “too<br />
little, too late” reporting of banks' loan losses that figured prominently in the 2008 financial crisis.<br />
Hans Hoogervorst, in comparing <strong>and</strong> c<strong>on</strong>trasting the IASB's approach with that of the FASB<br />
model, said of the U.S. board's prescripti<strong>on</strong> at a Nov. 20 joint meeting <strong>on</strong> impairment: “We did not<br />
come up with a model that is so obviously wr<strong>on</strong>g as this.”<br />
Similar Feedback <strong>on</strong> Earlier Model<br />
In speaking with reporters after his speech, Beswick elaborated <strong>on</strong> his reas<strong>on</strong>s for having a<br />
relatively optimistic view <strong>on</strong> IASB-FASB being able to get <strong>on</strong> the same track.<br />
“Once you can actually see a st<strong>and</strong>ard, <strong>and</strong> people can start to comment—because right now<br />
people are commenting based <strong>on</strong> board meetings <strong>and</strong> Power Point presentati<strong>on</strong>s,” he said. “I<br />
think the feedback will be much better informed <strong>on</strong>ce you have a st<strong>and</strong>ard to look at.”<br />
In seeking interest parties' input <strong>on</strong> whether the earlier, “three-bucket“ impairment model—still<br />
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For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
© 2013 The Bureau of <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> Affairs, Inc.
18<br />
favored by IASB—would be operati<strong>on</strong>al <strong>and</strong> auditable, FASB received appraisals from banks,<br />
other companies, auditors <strong>and</strong> investors that the model is overly complex <strong>and</strong> difficult to apply.<br />
To <strong>on</strong>e reporter's statement <strong>on</strong> investor feedback <strong>on</strong> the earlier-agreed impairment model,<br />
Beswick said FASB “did a tremendous amount of outreach to investors <strong>and</strong> they were able to<br />
dem<strong>on</strong>strate that investors didn't like the model that they had come out with.”<br />
IASB, in seeking comments <strong>on</strong> the workability of its impairment approach, is “getting very similar<br />
feedback that the FASB got when they were originally in the three-bucket approach,” Beswick told<br />
reporters in resp<strong>on</strong>se to a questi<strong>on</strong> from Bloomberg BNA.<br />
For More Informati<strong>on</strong><br />
A descripti<strong>on</strong> of FASB's <strong>and</strong> IASB's joint st<strong>and</strong>ard-setting <strong>on</strong> accounting for financial instruments<br />
is available at http://www.fasb.org.<br />
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>><br />
For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
© 2013 The Bureau of <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> Affairs, Inc.
19<br />
Financial Instruments<br />
Investors Dismayed by C<strong>on</strong>vergence Efforts, FASB, IASB Pace <strong>on</strong> Financial Instruments<br />
Accounting Policy & Practice <str<strong>on</strong>g>Report</str<strong>on</strong>g><br />
<str<strong>on</strong>g>AICPA</str<strong>on</strong>g> <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g>, 12/07/2012<br />
By Steve Burkholder<br />
A panel of investors voiced dismay Dec. 5 with efforts of the Financial Accounting St<strong>and</strong>ards<br />
Board <strong>and</strong> its internati<strong>on</strong>al counterpart in completing what are to be improved, aligned new<br />
st<strong>and</strong>ards <strong>on</strong> financial instruments, especially <strong>on</strong> loan loss accounting.<br />
“With financial instruments, I'm stunned that it's taken as l<strong>on</strong>g as it has. I'm sure that the board<br />
members are, too,” Alan Zimmerman, an insurance analyst at Macquarie Securities, said at a<br />
Washingt<strong>on</strong> c<strong>on</strong>ference of the American Institute of Certified Public Accountants. That joint effort<br />
of FASB <strong>and</strong> the Internati<strong>on</strong>al Accounting St<strong>and</strong>ards Board began some six years ago.<br />
“I mean, we had the financial crisis five years ago,” c<strong>on</strong>tinued Zimmerman. “We're still trying to<br />
figure out how to account for financial instruments.”<br />
Another investor <strong>on</strong> the panel, Elizabeth Mo<strong>on</strong>ey, of Capital Strategy Research, San Francisco,<br />
said she is “pretty discouraged” with the recent outcomes of the c<strong>on</strong>vergence efforts of FASB <strong>and</strong><br />
IASB. Mo<strong>on</strong>ey, a member of FASB's Investors Technical Advisory Committee, spoke of work to<br />
improve financial statement presentati<strong>on</strong> <strong>and</strong> segment reporting—topics important to users of<br />
financial statements, she suggested—essentially being deferred.<br />
Project Warranting Quickest Completi<strong>on</strong>, C<strong>on</strong>vergence<br />
Zimmerman, an insurance specialist, later commented that he sees the instruments effort as the<br />
most important of the quartet of c<strong>on</strong>vergence projects <strong>on</strong> which FASB <strong>and</strong> the Internati<strong>on</strong>al<br />
Accounting St<strong>and</strong>ards Board have been working for years – that is, the <strong>on</strong>e warranting the<br />
so<strong>on</strong>est completi<strong>on</strong> <strong>and</strong> the quickest alignment. The other rulemaking topics are leases, revenue<br />
reporting <strong>and</strong> insurance c<strong>on</strong>tracts.<br />
“I think that really drives a lot of the whole capital markets,” Zimmerman said of financial<br />
instruments <strong>and</strong> the reporting <strong>on</strong> them. ”To me there's no comparis<strong>on</strong> to the others.”<br />
Zimmerman was asked by the panel's moderator, S<strong>and</strong>ra Peters, accounting policy chief at CFA<br />
Institute, whether he sees that, because new instruments rules have taken more than five years to<br />
be written <strong>and</strong> likely will not be effective for two to three years, a questi<strong>on</strong> is raised about the<br />
usefulness of financial statements.<br />
“I d<strong>on</strong>'t think that gets at the usefulness of financial statements,” replied Zimmerman. “I think its<br />
gets at the usefulness of financial st<strong>and</strong>ard-setters.” The line drew scattered applause <strong>and</strong> some<br />
laughter in the audience of some 1,600 accountants at the <str<strong>on</strong>g>AICPA</str<strong>on</strong>g>'s annual c<strong>on</strong>ference <strong>on</strong><br />
developments at the Securities <strong>and</strong> Exchange Commissi<strong>on</strong> <strong>and</strong> the Public Company Accounting<br />
Oversight Board.<br />
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Zimmerman later praised accounting st<strong>and</strong>ard-setters for their pending efforts to significantly<br />
improve insurance <strong>and</strong> lease accounting. He also spoke positively of FASB's work to reach out to<br />
investors for feedback <strong>on</strong> accounting issues <strong>and</strong> for making comprehensive income <strong>and</strong> “other<br />
comprehensive income”—the latter he called “a dumping ground for unwanted earnings<br />
volatility”—more visible in the financial statements.<br />
Janet Pegg, another analyst <strong>on</strong> the panel, said she agreed with Zimmerman that the financial<br />
instruments effort is the most important project to complete, “<strong>and</strong> within that, very specifically,<br />
impairment.”<br />
Impairment, or accounting for credit losses, including loan losses, has been a topic of c<strong>on</strong>tenti<strong>on</strong><br />
between FASB <strong>and</strong> IASB. The boards have proposed different accounting prescripti<strong>on</strong>s.<br />
“The so<strong>on</strong>er we can get this d<strong>on</strong>e, the better,” said Pegg, a managing director as UBS AG. “It<br />
would be w<strong>on</strong>derful if it could be d<strong>on</strong>e quicker.<br />
Challenges to Rulemakers <strong>on</strong> Instruments<br />
“To some extent, I underst<strong>and</strong> that there are some real strains out there,” Pegg, a former member<br />
of both FASB's Financial Accounting St<strong>and</strong>ards Advisory Council, or FASAC, <strong>and</strong> the board's<br />
Investors Technical Advisory Committee, added. “The business world is evolving. So that's why<br />
accounting st<strong>and</strong>ards are c<strong>on</strong>stantly trying to catch up.<br />
“And with a difficult st<strong>and</strong>ard <strong>and</strong> <strong>on</strong>e <strong>on</strong> which they're trying to c<strong>on</strong>verge, it's going to take extra<br />
time,” she said. “I wish that wasn't the case. I underst<strong>and</strong> it. I'd love to try <strong>and</strong> figure out a way to<br />
make it go faster.”<br />
Need for ‘Broader Discussi<strong>on</strong>’ Am<strong>on</strong>g Regulators?<br />
The fourth member of the panel, Adam Hurwich, a portfolio manager at Ulysses Management,<br />
also spotlighted accounting for financial instruments.<br />
“Financial instruments is a problem,” said Hurwich. He pointed to a recent article in a respected<br />
financial news publicati<strong>on</strong>. The article displayed, he suggested, a large amount of “c<strong>on</strong>fusi<strong>on</strong>”<br />
about the issue of raising capital at European banks. He added that he believes that c<strong>on</strong>fusi<strong>on</strong><br />
stems from “a lack of clarity in terms of thinking about we're doing means.<br />
“And I think the regulators should play a role in this,” Hurwich c<strong>on</strong>tinued, “because regulators<br />
themselves look at the accounting numbers somewhat differently than maybe some people think.<br />
“I think that financial instruments definitely should be looked at, <strong>and</strong> I think we should get a<br />
broader discussi<strong>on</strong>, <strong>and</strong> if we solved for that, some of the other issues can be solved as well,” said<br />
Hurwich, who, like Peters, is a member of FASAC.<br />
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Income Taxes<br />
<strong>SEC</strong> Scrutinizing if Companies Justified In Reversing Tax Asset Valuati<strong>on</strong> Allowance<br />
Accounting Policy & Practice <str<strong>on</strong>g>Report</str<strong>on</strong>g><br />
<str<strong>on</strong>g>AICPA</str<strong>on</strong>g> <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g>, 12/07/2012<br />
By Steven Marcy<br />
As some companies are returning to profitability in 2012 after the impacts of the financial crisis,<br />
the Securities <strong>and</strong> Exchange Commissi<strong>on</strong> is looking closely at whether companies are justified in<br />
reversing valuati<strong>on</strong> allowances against their deferred tax assets, members of the <strong>SEC</strong>'s Divisi<strong>on</strong><br />
of Corporati<strong>on</strong> Finance accounting staff said Dec. 4.<br />
Accounting rules require companies to lower the value—a valuati<strong>on</strong> allowance—of their deferred<br />
tax assets if ec<strong>on</strong>omic c<strong>on</strong>diti<strong>on</strong>s or other factors are likely to prevent them from making enough<br />
revenue to equal the amount they had booked as a deferred tax asset, <strong>and</strong> therefore realize it.<br />
Losses from the ec<strong>on</strong>omic downturn in recent years “are a significant negative when assessing<br />
the realizability of deferred tax assets,” Mark Shann<strong>on</strong>, Corp. Fin.'s Deputy Chief Accountant told<br />
the American Institute of Certified Public Accountants' <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g> <strong>on</strong> <strong>Current</strong> <strong>SEC</strong> <strong>and</strong> <strong>PCAOB</strong><br />
<strong>Developments</strong>. But he also said that recurring losses need not always result in a valuati<strong>on</strong><br />
allowance of a deferred tax asset.<br />
The <strong>SEC</strong> “would find it difficult to c<strong>on</strong>clude that losses due to an ec<strong>on</strong>omic downturn would be an<br />
aberrati<strong>on</strong>” that would permit the reversal of a valuati<strong>on</strong> allowance, although Shann<strong>on</strong> also noted<br />
that this remains a matter of judgment for the filer.<br />
What Evidence Justifies a Reversal?<br />
“The current ec<strong>on</strong>omic envir<strong>on</strong>ment seems fairly uncertain,” Shann<strong>on</strong> said, “but we have seen<br />
some [<strong>SEC</strong>] registrants return to profitability this year, which underst<strong>and</strong>ably has led to some<br />
questi<strong>on</strong>s of when a valuati<strong>on</strong> allowance can be reversed. In other words, when does the positive<br />
evidence outweigh the negative evidence that exists in the form of cumulative losses in recent<br />
years. But, unfortunately, there's not <strong>on</strong>e-size-fits-all approach to that analysis.”<br />
Corp. Fin.'s Nili Shah emphasized that companies “really need to c<strong>on</strong>tinue to evaluate the positive<br />
<strong>and</strong> negative evidence in determining whether to look forward, maintain, or reverse a valuati<strong>on</strong><br />
allowance” <strong>and</strong> to make sure the evidence can be “objectively verified.”<br />
In deciding if it is justified in reversing a valuati<strong>on</strong> allowance, company management should<br />
examine the “magnitude <strong>and</strong> durati<strong>on</strong>” of its losses, Shann<strong>on</strong> said. That requires weighing the<br />
“magnitude <strong>and</strong> durati<strong>on</strong> of the current profitability,” he said. That requires analyzing <strong>and</strong><br />
identifying what factors are “driving” the previous losses <strong>and</strong> current profitability, he said.<br />
Shah added that companies should examine the past performance of their forecasts in light of<br />
actual results in determining if their currently profitability is sufficiently sustainable to reverse a<br />
valuati<strong>on</strong> allowance. Companies should also examine if there have been significant changes in<br />
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For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
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their type of business that would affect the ability to evaluate accurately the sustainability of their<br />
profitability.<br />
Shann<strong>on</strong> also warned that the <strong>SEC</strong> will have questi<strong>on</strong>s if a company reports impairment of<br />
goodwill while at the same time also asserting a reversal of a valuati<strong>on</strong> allowance—<strong>on</strong>e would<br />
seem to c<strong>on</strong>tradict the other.<br />
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For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
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23<br />
Internati<strong>on</strong>al C<strong>on</strong>vergence<br />
FASB Chairman Describes Characteristics Necessary for C<strong>on</strong>vergence St<strong>and</strong>ards in U.S.<br />
Accounting Policy & Practice <str<strong>on</strong>g>Report</str<strong>on</strong>g><br />
<str<strong>on</strong>g>AICPA</str<strong>on</strong>g> <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g>, 12/07/2012<br />
By Denise Lugo<br />
The reas<strong>on</strong>s why the Financial Accounting St<strong>and</strong>ards Board <strong>and</strong> the Internati<strong>on</strong>al Accounting<br />
St<strong>and</strong>ards Board have been disagreeing <strong>on</strong> some key accounting issues stems from FASB's<br />
need to provide clarity or resolve issues raised by U.S. c<strong>on</strong>stituents that the IASB has not heard<br />
feedback <strong>on</strong>, FASB Chairman Leslie Seidman said Dec. 4.<br />
Seidman—at the <str<strong>on</strong>g>AICPA</str<strong>on</strong>g> <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g> <strong>on</strong> <strong>Current</strong> <strong>SEC</strong> & <strong>PCAOB</strong><br />
<strong>Developments</strong>—stated that the characteristics necessary for c<strong>on</strong>vergence st<strong>and</strong>ards to work in<br />
the U.S. envir<strong>on</strong>ment—a heavily regulated, litigious envir<strong>on</strong>ment—requires clear <strong>and</strong><br />
unambiguous st<strong>and</strong>ards that can be applied in an efficient way in the short reporting time periods<br />
preparers <strong>and</strong> auditors need. In additi<strong>on</strong>, a U.S. envir<strong>on</strong>ment needs st<strong>and</strong>ards that are<br />
completely c<strong>on</strong>sistent with the wording of the st<strong>and</strong>ard, she said.<br />
The FASB as a result, sometimes, has to pause <strong>and</strong> deal with feedback received about the<br />
st<strong>and</strong>ards' clarity or operati<strong>on</strong>ality <strong>and</strong> ensure that the feedback has been incorporated in the<br />
st<strong>and</strong>ard before proceeding, Seidman stated.<br />
U.S. Marketplace Drove Impairment Model Change<br />
The unique U.S. marketplace prompted the FASB's recent change in directi<strong>on</strong> <strong>on</strong> impairment<br />
accounting, she said.<br />
In August <strong>and</strong> September 2012, FASB made a number of key decisi<strong>on</strong>s <strong>on</strong> an alternative current<br />
expected credit loss impairment model (CECL) to address U.S. stakeholders' significant c<strong>on</strong>cerns<br />
about the underst<strong>and</strong>ability, operability <strong>and</strong> auditability of the three-bucket credit impairment<br />
model under joint development with the IASB <strong>and</strong> whether it would reflect an appropriate measure<br />
of risk.<br />
“After repeated attempts to explain the three-bucket model, the FASB c<strong>on</strong>cluded that the<br />
approach, as written, was not c<strong>on</strong>sistently understood <strong>and</strong> therefore would not improve the<br />
reporting of impaired assets,” said Seidman.<br />
“We decided that we had to address the c<strong>on</strong>cerns now, before we move forward with an Exposure<br />
Draft; we think we now have a much simpler <strong>and</strong> clearer expected loss principle. I'm sure we will<br />
still get comments about whether the revised approach is right, because it is a very c<strong>on</strong>troversial<br />
issue. But my point is more basic; we can't even have that debate until people underst<strong>and</strong> what<br />
we are proposing,” she said.<br />
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St<strong>and</strong>ards Enforced Differently Within Jurisdicti<strong>on</strong>s<br />
Seidman moreover stated that the same words in a st<strong>and</strong>ard can be a good start, but it is not<br />
necessarily going to produce c<strong>on</strong>sistent informati<strong>on</strong> if the st<strong>and</strong>ard is interpreted differently or<br />
enforced differently within a jurisdicti<strong>on</strong> or across jurisdicti<strong>on</strong>s.<br />
<strong>Current</strong>ly, there is some level of diversity in the implementati<strong>on</strong> of internati<strong>on</strong>al financial reporting<br />
st<strong>and</strong>ards (IFRSs) across jurisdicti<strong>on</strong>s. Some other countries adapt IFRS to deal with their<br />
individual cultural, business, <strong>and</strong> ec<strong>on</strong>omic issues, the staff report said. For example, China has a<br />
unique situati<strong>on</strong> with government-c<strong>on</strong>trolled entities, so it has adapted the related parties<br />
st<strong>and</strong>ard to address that situati<strong>on</strong>.<br />
“This apparent need for some adjustments does not mean that IFRS is flawed; it simply suggests<br />
that a goal of 100 percent comparability (such as a single set) is not achievable in the near term,<br />
for very legitimate reas<strong>on</strong>s, in some of the world's largest capital markets,” Seidman said.<br />
Proactively M<strong>on</strong>itor New Revenue Recogniti<strong>on</strong><br />
The importance of c<strong>on</strong>sidering <strong>and</strong> underst<strong>and</strong>ing the unique nature of a U.S. financial reporting<br />
envir<strong>on</strong>ment was also highlighted by Seidman in a questi<strong>on</strong> <strong>and</strong> answer segment with moderator<br />
Jack Ciesielski, also President at R.G. Associates Inc.<br />
Ciesielski asked the board how they would keep c<strong>on</strong>verged st<strong>and</strong>ards c<strong>on</strong>verged if FASB <strong>and</strong><br />
IASB have no plans for further joint work <strong>on</strong> major projects together. His comments, addressed to<br />
both Seidman <strong>and</strong> IASB Chairman Hans Hoogervorst, apply to the four c<strong>on</strong>vergence projects the<br />
boards are working <strong>on</strong>—revenue recogniti<strong>on</strong>, insurance c<strong>on</strong>tracts, financial instruments <strong>and</strong><br />
leases. The st<strong>and</strong>ard <strong>on</strong> revenue, Revenue from C<strong>on</strong>tracts with Customers, is expected to be<br />
finalized during the first half of 2013.<br />
Hoogervorst said that the c<strong>on</strong>vergence work with the United States was an effort to pave the way<br />
towards IFRS adopti<strong>on</strong>, but was not intended to be a permanent way forward since other<br />
countries—that have adopted IFRSs—want a seat at the table. He pointed out that groups of<br />
st<strong>and</strong>ard setters coming together to resolve issues as they arise is the potential path towards<br />
resoluti<strong>on</strong>.<br />
Seidman, again highlighting the U.S. envir<strong>on</strong>ment, stated that U.S. c<strong>on</strong>stituents expect the board<br />
to resp<strong>on</strong>d to questi<strong>on</strong>s that emerge in a timely manner. “It would be completely unacceptable<br />
within revenue recogniti<strong>on</strong> to have companies do their best to implement it <strong>and</strong> then have the<br />
auditor enforcement process, to have numerous questi<strong>on</strong>s <strong>and</strong> restatements occur—it would be a<br />
disaster,” Seidman said.<br />
She stated that the board has to proactively m<strong>on</strong>itor the need for clarificati<strong>on</strong> of a revenue<br />
recogniti<strong>on</strong> st<strong>and</strong>ard <strong>and</strong> “we have to have a protocol of the IASB to deal with all of these issues<br />
so that we can stay c<strong>on</strong>verged.”<br />
Seidman also stated that there are times when the FASB sees the need to interpret something<br />
when the IASB does not. “We would hope that we would have a higher threshold before being<br />
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required to amend a st<strong>and</strong>ard, but I do think there's a lot [of room] between doing nothing <strong>and</strong><br />
amending the st<strong>and</strong>ard, where we can work cooperatively through a very important<br />
implementati<strong>on</strong> <strong>and</strong> transiti<strong>on</strong> period to try <strong>and</strong> keep the applicati<strong>on</strong> as close together as<br />
possible,” she said.<br />
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For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
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26<br />
Internati<strong>on</strong>al C<strong>on</strong>vergence<br />
‘Tangible Sign’ of U.S. Commitment To IFRS Is Essential, Says IASB Chief<br />
Accounting Policy & Practice <str<strong>on</strong>g>Report</str<strong>on</strong>g><br />
<str<strong>on</strong>g>AICPA</str<strong>on</strong>g> <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g>, 12/07/2012<br />
By Steve Burkholder<br />
The chief of the Internati<strong>on</strong>al Accounting St<strong>and</strong>ards Board spoke Dec. 4 of the need for a clear<br />
signal from the United States that it aims to more fully embrace internati<strong>on</strong>al financial reporting<br />
st<strong>and</strong>ards as the set of accounting principles to be used by U.S. public companies.<br />
That message c<strong>on</strong>veyed by IASB Chairman Hans Hoogervorst—reminiscent of words of his<br />
predecessor 18 m<strong>on</strong>ths ago—is indicative of frustrati<strong>on</strong> felt at the L<strong>on</strong>d<strong>on</strong>-based board stemming<br />
from the Securities <strong>and</strong> Exchange Commissi<strong>on</strong>'s holding in abeyance a decisi<strong>on</strong> <strong>on</strong> incorporati<strong>on</strong><br />
of IFRS.<br />
A ruling <strong>on</strong> that issue was widely anticipated to be made in 2011. Its further c<strong>on</strong>siderati<strong>on</strong>, after<br />
much study <strong>and</strong> joint labor of IASB <strong>and</strong> the Financial Accounting St<strong>and</strong>ards Board to align <strong>on</strong> key<br />
rules, remains <strong>on</strong> a side track at the <strong>SEC</strong>, idle <strong>and</strong> without a timetable.<br />
“After a decade of progress, after tireless <strong>and</strong> sometimes painful work by the boards to bring<br />
about c<strong>on</strong>vergence between IFRS <strong>and</strong> US GAAP,” Hoogervorst said at a major accounting<br />
c<strong>on</strong>ference in Washingt<strong>on</strong>, ”after two years of analysis <strong>and</strong> report writing, many people around<br />
the world expect a clearer perspective of this country's intenti<strong>on</strong>s with IFRS.<br />
“That is why we really need a tangible sign of c<strong>on</strong>tinued US commitment to a single set of global<br />
st<strong>and</strong>ards,” the IASB chairman c<strong>on</strong>tinued in comments at the c<strong>on</strong>ference <strong>on</strong> <strong>SEC</strong> developments<br />
held by the American Institute of Certified Public Accountants.<br />
“Merely striving for greater comparability between st<strong>and</strong>ards will not do,” he said. “We tried that<br />
during the 1990s <strong>and</strong> it was a failure.”<br />
Hoogervorst, who became IASB chairman in July 2011, said that “in the absence of a credible,<br />
tangible step” by the United States <strong>on</strong> IFRS, “internati<strong>on</strong>al c<strong>on</strong>cern could turn into internati<strong>on</strong>al<br />
skepticism.” He warned that calls by the Group of Twenty nati<strong>on</strong>s for global accounting st<strong>and</strong>ards<br />
“would start to ring hollow.”<br />
End of the ‘Exclusive’ Relati<strong>on</strong>ship<br />
In other remarks, Hoogervorst reiterated a message from earlier, recent speeches that the<br />
“exclusive” st<strong>and</strong>ard-setting partnership between IASB <strong>and</strong> FASB will not c<strong>on</strong>tinue. Rulemaking<br />
going forward will be c<strong>on</strong>ducted <strong>on</strong> a more multilateral basis, he said—with other countries <strong>and</strong><br />
regi<strong>on</strong>al st<strong>and</strong>ard-setters involved.<br />
However, Hoogervorst voiced an expectati<strong>on</strong>, for example, that the U.S. board will become “a<br />
fully engaged partner” in a global forum of st<strong>and</strong>ard-setters that IASB expects to c<strong>on</strong>vene within<br />
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several m<strong>on</strong>ths.<br />
Maintaining the status quo carries “a big risk” of slipping backward <strong>and</strong> moving down a path of<br />
divergence <strong>on</strong> accounting st<strong>and</strong>ards rather than c<strong>on</strong>vergence, the IASB chairman warned.<br />
“The uncertainty about where the <strong>SEC</strong> is going to l<strong>and</strong> is not a helpful backdrop for our work <strong>on</strong><br />
the remaining c<strong>on</strong>vergence projects,” he said, referring to projects such as those <strong>on</strong> leases,<br />
revenue recogniti<strong>on</strong> <strong>and</strong> financial instruments.<br />
A Risk of Increasing Divergence?<br />
“Already, <strong>on</strong> some issues it is getting increasingly hard to find comm<strong>on</strong> soluti<strong>on</strong>s,” Hoogervorst<br />
added. “If we cannot achieve c<strong>on</strong>verged outcomes within a c<strong>on</strong>vergence program, then how will<br />
we maintain c<strong>on</strong>vergence <strong>on</strong>ce the program has ended?<br />
“The risk of increasing divergence will be enormous. What a waste that would be.”<br />
At the same time, the movement toward acceptance <strong>and</strong> increased use of IFRS around the world<br />
does not show signs of abating or turning around, notwithst<strong>and</strong>ing the absence of the United<br />
States in the body of nati<strong>on</strong>s that have generally adopted the IASB-written rules, Hoogervorst<br />
suggested.<br />
“Five years ago, a st<strong>and</strong>still in the United States would have had very serious c<strong>on</strong>sequences for<br />
the IASB,” he said. “The risk was that without the US <strong>on</strong> board, Europe would go its own way <strong>and</strong><br />
Asia would develop its own regi<strong>on</strong>al st<strong>and</strong>ards.<br />
“Today, such talk has g<strong>on</strong>e,” added the IASB chairman, who had noted by name a substantial list<br />
of countries that have embraced IFRS. “For the many countries I referred to, the cost of transiti<strong>on</strong><br />
to IFRS is behind them. There is no appetite to undo this work <strong>and</strong> revert to nati<strong>on</strong>al or regi<strong>on</strong>al<br />
st<strong>and</strong>ards.<br />
“IFRS already has a global impact <strong>and</strong> that will not change,” he said. “So there is no l<strong>on</strong>ger any<br />
risk of IFRS disintegrating as a result of a st<strong>and</strong>still in the United States.”<br />
Remarks of <strong>SEC</strong> Chief Accountant <strong>on</strong> IFRS<br />
The day before Hoogervorst spoke at the <str<strong>on</strong>g>AICPA</str<strong>on</strong>g> c<strong>on</strong>ference <strong>on</strong> developments at the <strong>SEC</strong>, FASB,<br />
IASB <strong>and</strong> the Public Company Accounting Oversight Board, the acting chief accountant at the<br />
securities commissi<strong>on</strong> was asked if when people are gathered at the same c<strong>on</strong>ference in<br />
December 2013, whether attendees “will know whether <strong>and</strong>, if so, how <strong>and</strong> when” IFRS will be<br />
incorporated into reporting system for U.S. public companies will take place.<br />
Paul Beswick, the <strong>SEC</strong>'s top accountant, spoke Dec. 3 of the challenges of c<strong>on</strong>sidering what the<br />
incentives are “for the U.S. to go to IFRS.” Given the depth <strong>and</strong> breadth of the U.S. capital<br />
markets, identifying those incentives “can be a little more challenging,” he suggested.<br />
“I would be hopeful that we would at least have a better indicati<strong>on</strong> of where we're going,” Beswick<br />
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For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
© 2013 The Bureau of <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> Affairs, Inc.
28<br />
c<strong>on</strong>tinued, “But, as always, this is really a decisi<strong>on</strong> by the commissi<strong>on</strong>, <strong>and</strong> they've got quite a lot<br />
<strong>on</strong> their work plate right now.”<br />
He menti<strong>on</strong>ed several items <strong>on</strong> <strong>SEC</strong>'s docket, including rulemaking under the Dodd-Frank reform<br />
law; tasks required under the 2012 Jumpstart our Business StartUps (JOBS) Act; <strong>and</strong> “some very<br />
important issues” such as m<strong>on</strong>ey market funds <strong>and</strong> central clearing <strong>and</strong> credit derivatives.<br />
“The best advice I can give you is to stay tuned,” said Beswick, referring to further weighing by the<br />
<strong>SEC</strong> of a decisi<strong>on</strong> <strong>on</strong> IFRS incorporati<strong>on</strong>.<br />
Earlier Words From Tweedie, Herz<br />
In July 2011, in a wide-ranging BNA interview c<strong>on</strong>ducted just after his stepping down from the<br />
helm of IASB, Sir David Tweedie spoke of the need for a signal from the <strong>SEC</strong> <strong>on</strong> IFRS<br />
incorporati<strong>on</strong>. At the time, he predicted “some form of yes” from the agency, amounting to a<br />
message “that the U.S. is in the game.”<br />
In April of this year, Tweedie <strong>and</strong> Robert Herz, FASB's former chairman, c<strong>on</strong>curred in their views<br />
that clarity from the commissi<strong>on</strong> <strong>on</strong> the future of the internati<strong>on</strong>al accounting rules in the United<br />
States was needed.<br />
Tweedie <strong>and</strong> Herz spoke at a New York forum of former chairmen of internati<strong>on</strong>al <strong>and</strong> nati<strong>on</strong>al<br />
st<strong>and</strong>ard-setting bodies in accounting. That event also featured Paul Cherry, former chief of<br />
Canada's Accounting St<strong>and</strong>ards Board.<br />
For More Informati<strong>on</strong><br />
The text of the IASB chairman's formal remarks <strong>on</strong> Dec. 4 at the <str<strong>on</strong>g>AICPA</str<strong>on</strong>g> c<strong>on</strong>ference is available at<br />
http://www.ifrs.org/Alerts/PressRelease/Pages/<str<strong>on</strong>g>AICPA</str<strong>on</strong>g>-Dec-12.aspx.<br />
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>><br />
For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
© 2013 The Bureau of <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> Affairs, Inc.
29<br />
Internati<strong>on</strong>al St<strong>and</strong>ards<br />
Schapiro Departure Adds to Uncertainty Over Timing of Decisi<strong>on</strong> <strong>on</strong> IFRS Use in US<br />
Accounting Policy & Practice <str<strong>on</strong>g>Report</str<strong>on</strong>g><br />
<str<strong>on</strong>g>AICPA</str<strong>on</strong>g> <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g>, 12/07/2012<br />
By Steven Marcy<br />
The Dec. 14 departure of Securities <strong>and</strong> Exchange Commissi<strong>on</strong> Chairman Mary Shapiro has<br />
increased the uncertainty over when the commissi<strong>on</strong> might c<strong>on</strong>sider use of internati<strong>on</strong>al financial<br />
reporting st<strong>and</strong>ards in the United States, but has not ended the c<strong>on</strong>siderati<strong>on</strong>, <strong>SEC</strong> staff said Dec.<br />
3.<br />
The <strong>SEC</strong> staff told BNA at the American Institute of Certified Public Accountants' <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g> <strong>on</strong><br />
<strong>Current</strong> <strong>SEC</strong> <strong>and</strong> <strong>PCAOB</strong> <strong>Developments</strong> that the timing of IFRS c<strong>on</strong>siderati<strong>on</strong> will be up to the<br />
commissi<strong>on</strong>ers under the interim chairmanship of Elisse Walter, but that no <strong>on</strong>e has signaled<br />
when that would be or where IFRS c<strong>on</strong>siderati<strong>on</strong> might fit into the <strong>SEC</strong> priority list or work plan for<br />
the coming year.<br />
Up to Commissi<strong>on</strong>ers<br />
The <strong>SEC</strong> staff completed its final staff report <strong>on</strong> work completed so far <strong>on</strong> issues surrounding<br />
possible adopti<strong>on</strong> of IFRS for U.S. use, but that report “does not imply, <strong>and</strong> should not be<br />
c<strong>on</strong>strued to imply” about when or how IFRS can be incorporated into U.S. financial reporting,<br />
Jenifer Minke-Girard, <strong>SEC</strong> Senior Associate Chief Accountant in the Office of the Chief<br />
Accountant, told the c<strong>on</strong>ference.<br />
A decisi<strong>on</strong> <strong>on</strong> how to proceed next is “up to the commissi<strong>on</strong>ers,” Minke-Gerard told BNA, <strong>and</strong> the<br />
staff has heard no scuttlebutt about when that might be or when the commissi<strong>on</strong>ers might ask the<br />
staff to prepare recommendati<strong>on</strong>s for possible <strong>SEC</strong> adopti<strong>on</strong>.<br />
Minke-Gerard, who m<strong>on</strong>itors the activities of the Financial Accounting St<strong>and</strong>ards Board <strong>and</strong> the<br />
Internati<strong>on</strong>al Accounting st<strong>and</strong>ards board for the <strong>SEC</strong>, gave an overview to the c<strong>on</strong>ference of the<br />
staff's final report that was released in July.<br />
Schapiro told reporters at the time she had “no time line” for when the <strong>SEC</strong> might c<strong>on</strong>sider IFRS<br />
adopti<strong>on</strong>. She indicated that the commissi<strong>on</strong> was preoccupied with developing rules to implement<br />
the Dodd-Frank Wall Street reform act <strong>and</strong> the JOBS Act, which she said “are hugely important<br />
issues with respect to accounting st<strong>and</strong>ards.”<br />
That c<strong>on</strong>tinues to be the case at the <strong>SEC</strong>, staff indicated at the <str<strong>on</strong>g>AICPA</str<strong>on</strong>g> c<strong>on</strong>ference. “We need to<br />
think about what the incentives are to go to IFRS in the U.S.,” said Paul Beswick, the <strong>SEC</strong>'s acting<br />
chief accountant.<br />
“I would hope that we would get a better indicati<strong>on</strong> of where we are going” with IFRS as the new<br />
year progresses, Beswick said. “This is always a decisi<strong>on</strong> of the commissi<strong>on</strong>, <strong>and</strong> they have got<br />
quite a lot <strong>on</strong> their work plate right now, like Dodd-Frank, the JOBS Act, some very important<br />
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For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
© 2013 The Bureau of <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> Affairs, Inc.
30<br />
issues like m<strong>on</strong>ey market funds, central clearing <strong>and</strong> credit, [<strong>and</strong>] derivatives. So the best advice<br />
I can give you is, stay tuned.”<br />
Important Decisi<strong>on</strong><br />
“The c<strong>on</strong>siderati<strong>on</strong> of incorporating IFRS may be the single most important accounting<br />
determinati<strong>on</strong> for the Commissi<strong>on</strong> since the determinati<strong>on</strong> to look to the private sector to establish<br />
accounting st<strong>and</strong>ards in the 1930's.” Beswick said “We underst<strong>and</strong> individuals' interest in this<br />
topic <strong>and</strong> the potential uncertainty that may exist, but the staff is working to ensure that the<br />
Commissi<strong>on</strong> is properly informed <strong>on</strong> the issue. Obviously, we will work with our new chairman <strong>and</strong><br />
our existing Commissi<strong>on</strong>ers <strong>on</strong> determining the next steps in this process.”<br />
Minke-Girard summarized the findings of the July final staff report. That document noted that the<br />
<strong>SEC</strong> had thought that FASB <strong>and</strong> the IASB would have been further al<strong>on</strong>g in their c<strong>on</strong>vergent<br />
efforts <strong>on</strong> four priority items—revenue recogniti<strong>on</strong>, leasing, financial instruments, <strong>and</strong><br />
insurance—than when the staff embarked <strong>on</strong> its work plan to evaluate IFRS for the commissi<strong>on</strong>.<br />
Minge-Girard also noted <strong>on</strong>e of the c<strong>on</strong>clusi<strong>on</strong>s of the report—that IASB still does not have a fully<br />
independent source of funding <strong>and</strong> c<strong>on</strong>tinues to rely <strong>on</strong> voluntary c<strong>on</strong>tributi<strong>on</strong>s from its<br />
c<strong>on</strong>stituents.<br />
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For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
© 2013 The Bureau of <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> Affairs, Inc.
31<br />
Segment <str<strong>on</strong>g>Report</str<strong>on</strong>g>ing<br />
<strong>SEC</strong> Staff Urges Comprehensive Story <strong>on</strong> Segment <str<strong>on</strong>g>Report</str<strong>on</strong>g>ing Decisi<strong>on</strong>s<br />
Accounting Policy & Practice <str<strong>on</strong>g>Report</str<strong>on</strong>g><br />
<str<strong>on</strong>g>AICPA</str<strong>on</strong>g> <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g>, 12/07/2012<br />
By Steven Marcy<br />
Financial-report filers need to “tell a complete story” <strong>on</strong> the reas<strong>on</strong>ing behind their identificati<strong>on</strong> of<br />
their operating segments <strong>and</strong> any aggregati<strong>on</strong> of them, Securities <strong>and</strong> Exchange Commissi<strong>on</strong><br />
Divisi<strong>on</strong> of Corporati<strong>on</strong> Finance staff members said Dec. 4.<br />
Filers also should explain how they employed <strong>SEC</strong> guidance in making their identificati<strong>on</strong> <strong>and</strong><br />
aggregati<strong>on</strong> decisi<strong>on</strong>s, the staff also said.<br />
One of Main Triggers<br />
Mark Shann<strong>on</strong>, Corp. Fin. Associate Chief Accountant, told the American Institute of Certified<br />
Public Accountants' <str<strong>on</strong>g>C<strong>on</strong>ference</str<strong>on</strong>g> <strong>on</strong> <strong>Current</strong> <strong>SEC</strong> <strong>and</strong> <strong>PCAOB</strong> <strong>Developments</strong> that incomplete<br />
descripti<strong>on</strong>s of how filers identified their segments is <strong>on</strong>e of the main triggers of <strong>SEC</strong> comment<br />
letters to filers.<br />
“Comprehensive explanati<strong>on</strong> of how you applied the guidance really goes a l<strong>on</strong>g way in enabling<br />
us to parse through your resp<strong>on</strong>se” to a comment letter <strong>on</strong> issues over segment reporting,<br />
Shann<strong>on</strong> said.<br />
If the <strong>SEC</strong> has questi<strong>on</strong>s about how a filer identified an operating segment, filers should discuss<br />
“how your chief operating decisi<strong>on</strong> makers makes his [business segment] allocati<strong>on</strong> decisi<strong>on</strong>s or<br />
assesses performance,” Shann<strong>on</strong> said.<br />
With respect to aggregating the performance of different together in the report, “really digging into<br />
how you applied the guidance in aggregating your operating segments <strong>and</strong> reportable segments<br />
really helps us get through the analysis,” Shann<strong>on</strong> said. “One final point there—if you have any<br />
outlier or n<strong>on</strong>recurring circumstances, make sure you build that into your resp<strong>on</strong>se so that we<br />
have the full picture.”<br />
M<strong>on</strong>itoring Important<br />
Filers also must be sure to c<strong>on</strong>tinue to “m<strong>on</strong>itor your facts <strong>and</strong> circumstances” of their businesses<br />
for any changes that would inform the <strong>SEC</strong> of how why the filer had any potential changes in their<br />
operating or reportable segments, Shann<strong>on</strong> said. He cited as examples of changed<br />
circumstances the acquisiti<strong>on</strong> of a business or asset that could trigger the aggregati<strong>on</strong> of a filer's<br />
operati<strong>on</strong>s.<br />
The Financial Accounting Foundati<strong>on</strong>—the parent organizati<strong>on</strong> of the Financial Accounting<br />
St<strong>and</strong>ards Board—<strong>and</strong> the Internati<strong>on</strong>al Accounting St<strong>and</strong>ards Board have c<strong>on</strong>ducted<br />
post-implementati<strong>on</strong> reviews of the practical impact <strong>on</strong> filers of segment-reporting st<strong>and</strong>ards,<br />
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For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
© 2013 The Bureau of <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> Affairs, Inc.
32<br />
Corp. Fin. Acting Chief Accountant Craig Olinger noted. However, those reviews are still<br />
undergoing analysis <strong>and</strong> have so far had little impact <strong>on</strong> <strong>SEC</strong> evaluati<strong>on</strong>s of how well filers are<br />
adhering to good segment-reporting practices, Shann<strong>on</strong> said.<br />
“Obviously, we're very interested in what the output of those post-implementati<strong>on</strong> reviews are, but<br />
at this point, I think it's a little premature to speculate what effect, if any, those<br />
post-implementati<strong>on</strong> reviews will have <strong>on</strong> our work,” Shann<strong>on</strong> said.<br />
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>><br />
For more informati<strong>on</strong>, visit www.bna.com or call 800.372.1033<br />
© 2013 The Bureau of <str<strong>on</strong>g>Nati<strong>on</strong>al</str<strong>on</strong>g> Affairs, Inc.