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=**The Spirit of Accounting: The two evils of lessor accounting**=

(04/19/2010) BY PAUL B.W. MILLER AND PAUL R. BAHNSON

Our most recent column ("To the SEC: Forget the timetable and stop the runaway train," March 15-April 18) reported that the Financial Accounting Standards Board and the International Accounting Standards Board are racing to complete a long list of major projects. We warned that this dash will produce less than the best standards, and promised to describe some specifics, leases in particular. The lease project has generated some tentative conclusions about lessor revenue recognition issues that concern us. We urge the boards to not make them final because they're compromised, anachronistic, misleading and otherwise certain to produce unfaithful representations that won't serve managers, users, capital markets or society. We also believe that a standard based on these decisions would cause lessors to make dysfunctional decisions. We find the boards threw the heart and soul of the Conceptual Framework overboard while resurrecting matching and smoothing practices that FASB declared dead back in 1980. Recent proposed revisions to the framework continue to declare matching to be unsuitable, so it looks like something political is going on, perhaps because of the sprint to the finish and some board members' lingering embrace of matching. THE BROKEN FRAMEWORK Although FASB carefully explains how the framework guides every project's due process, none comply with the guidance perfectly. In the case of lessor accounting, the shortfall is painfully obvious. In particular, FASB's framework (and the new one under construction jointly with the IASB) incorporates the asset/liability theory that is far different from the resuscitated matching convention. Under matching, income is reported when it's anticipated or desired, instead of when it occurs. For example, unrealized gains on appreciated assets cannot be reported until they're sold, but impairment losses must be reported immediately. Depreciation expense is based on assumptions, not observations, spreading the cost over a predicted service life in a predetermined pattern, even though the real value cannot possibly behave that way. The framework was supposed to have ended accounting based on imagination by asserting that income is adequately evidenced only by observed changes in assets and liabilities. That is, because income always changes assets and liabilities, it can be reported usefully only if and when they do change and in the amount of the change. Thus, assets' value changes should be reported as soon as they occur, not merely when a sale occurs and surely not only when they are losses. Concerning depreciation, it should be based on factual observations of real value changes. In fact, assets might actually appreciate, an idea that is completely ignored in traditional matching-based accounting. even though it is the foundation for all market-based economies. Simply put, the two evils of the proposed lessor accounting are that financial statements will not reliably report the consequences of lease transactions, and that the accounting will discourage good leasing practices. A BAD PROPOSAL The boards propose that a lessor record a lease's inception by debiting a receivable for the rents and crediting a liability for its "performance obligation" to allow the lessee to use the property. The balance for the property is unchanged. Collections reduce the receivable and produce interest income, while the performance obligation is amortized ratably into revenue. Actually, we envision situations where the lessor has no cost because the lease actually increases the property's value. Suppose, for example, that the owner of an empty office building leases significant space to a prestigious lessee. Having this anchor tenant will enhance the property's value because more income could be achieved from leasing out the remaining space or from selling the residual to someone else. Alas, the boards' proposal doesn't acknowledge this obvious fact, but perpetuates the old blind-to-reality matching notion that insists that no revenue, expense or income can possibly arise from entering into leases. We suggest that if this fairy tale were true, then grocers would remain obligated to their customers until they had eaten their groceries, and auto dealers would be obligated until buyers had driven their cars. Of course, that's not sensible, and nor is the performance obligation notion. To be clear, a lease is a clean transfer by the lessor to the lessee of a valuable asset in the form of that right to use the property, not the property itself. Once the lessee takes possession, the lessor has no obligation to do anything because it no longer has the ability to do anything. Indeed, all it can do is stand by and collect payments for giving up the right. Thus, its only ongoing income stream is interest on the receivable. In addition, the lessor will experience gains and losses as the property's residual right changes in value. In contrast, the proposed model smoothes reported income by amortizing the illusory "performance obligation." This accounting for imaginary things and events looks to us as if it is designed to produce a predetermined nonvolatile result without regard to real economics. We don't think the board members can defend it as providing useful information. Herein lies the second evil for the lessor: This balance-sheet depiction will cause the enterprise to appear more encumbered and more risky when just the opposite is true. If implemented, the performance obligation approach will discourage lessors from signing long-term leases because they're going to look worse off. Such image consequences are always hard to assess, but we're convinced this accounting will stimulate game-playing with bogus short-term leases to avoid reporting the performance obligation. This disruptive impact on sound decisions is unwise and unnecessary. THE BEST SOLUTION The asset/liability theory in the Conceptual Framework suggests the best answer: Report what is observed, which includes sales revenue, a receivable, and a change in the property's value, but no new liability. This simplicity would put truth in the statements. Opponents of this strategy should not bother to object by asking, "How are you going to measure the value?" After all, the lessor and lessee make reliable estimates of asset values and costs before entering into leases. If they act on those numbers, then they can be audited or otherwise safely used in the statements. A BIGGER IMPLICATION We provide this analysis for two reasons. The first is to encourage the boards to abandon their tentative conclusions. The second is to illustrate the bigger point that a hasty convergence process will lead to bad standards. We're afraid one main impetus for this bad accounting is the mad rush to find a palatable answer, any palatable answer, even if it's not a good answer. More than 20 board members are collectively at work on both sides of the Atlantic, and we think many cling to matching in that they abhor front-loaded revenue (even when it happens), they want original cost on balance sheets (even though it doesn't describe cash flow potential), and they have no problem deferring revenue and trickling it onto the income statement (even though there is no liability and no earnings process). Furthermore, this debate is taking place while trying to meet a years-old artificial deadline while juggling a multitude of major projects. We think logrolling is surely happening, as board members position themselves to win on other projects, even if they have to give up on leases. These immense political pressures are anathematic to good standards. THE SEC TO THE RESCUE? Accounting standards should not be established by picking the lesser of evils. The only consequences are higher capital costs, inefficient markets, and under-compensated accountants who are compelled to prepare and audit useless financial statements. What an incredible waste of time, talent and money. It would be far better if the Securities and Exchange Commission were to encourage FASB and the IASB to do things slow and right, instead of fast and wrong. Paul B. W. Miller is a professor at the University of Colorado at Colorado Springs and Paul R. Bahnson is a professor at Boise State University. The authors' views are not necessarily those of their institutions. Reach them at paulandpaul@qfr.biz.
 * Mistake No. 1. The treatment doesn't acknowledge that the property consists of two imbedded assets: the right to use the property and the residual right to control its future deployment. Creating the lease essentially monetizes the former, with the consequence that something surely happens to the property's real value. Because the value changes, useful financial statements would report an adjusted amount for the property. By ignoring this reality, lease descriptions will be incomplete and the statements will surely provide misleading information.
 * Mistake No. 2. Because the lessor irrevocably transfers the right to use the property to the lessee in exchange for consideration, the lease is clearly a sale of that right. Accordingly, it's more useful to debit the receivable and credit sales revenue. The revenue would be offset on the income statement by any sacrifice related to giving up the right, which would be measured as the change in the property's market value.
 * Mistake No. 3. In order to avoid front-loading revenue, the boards would defer all of it on the balance sheet, but only by pretending it's a liability. Their dubious rationalization is that the lessor is obligated to let the lessee use the property.
 * Mistake No. 4. As we mentioned, it isn't hard to imagine that a lease could actually enhance the property's value. After all, can't an owner sell a leased building at a higher price than one that is vacant? Yet the boards' answer is intended to avoid reporting any change. This isn't just incomplete accounting, it's intentionally misleading. Indeed, the definition of fraud says that it occurs when someone knowingly reports false information as if it is true.
 * Mistake No. 5. Our final point is that this treatment radically misrepresents the lessor's risk situation. For example, suppose a lessor owns a vacant new building worth $10 million that it financed with $8 million of debt, producing a debt-equity ratio of 4-to-1 for the project. Now, suppose it leases out some space for lease payments worth $4 million. Under the boards' proposal, the lessor would report assets of $14 million and debt of $12 million, thereby increasing (!) the debt-equity ratio to 6-to-1 and making the project look more risky. However, the lease actually reduced the lessor's risk by creating contractual future cash inflows and increasing its ability to repay the mortgage.

HIGH & LOW FINANCE
=Demystify the Lehman Shell Game=

Published: April 1, 2010
Making unattractive assets disappear from corporate balance sheets was one of the great magical tricks performed by accountants over the last few decades. Whoosh went assets into off-balance-sheet vehicles that seemed to be owned by no one. Zip went assets into securitizations that turned mortgage loans for poor credit risks into complicated pieces of paper that somehow earned AAA ratings. As impressive as those accomplishments were, they did not make the assets vanish altogether. If you dug deep enough, you could find the structured investment vehicle or the underlying assets of that strange securitization. Now there is another possibility in the world of accounting magic. Did accountants find a way to make some assets disappear altogether? Was it possible for everybody with an interest in them to disclaim ownership? Until recently, it never would have occurred to me that companies would want to do that — particularly if the assets in question were perfectly respectable ones. But now that we have learned __[|Lehman Brothers]__ did it, the question arises of how far the practice went. Lehman’s reasons for doing it were simple: to mislead investors into thinking the company was not overleveraged. Were other firms doing that? Are they still? Lehman thought not, but no one really knows. Now the __[|Securities and Exchange Commission]__ is demanding that other firms disclose whether they did the same. If it finds they did, the commission ought to go further and examine whether there were conspiracies to make the assets vanish, thus making Wall Street appear to be less leveraged than it was. Lehman’s practices, outlined in a bankruptcy examiner’s __[|report]__ released last month, showed the creative use of accounting for repos. Don’t let your eyes glaze over. I’ll try to keep it simple. A repo is simply a “sale” of a financial asset to someone else, with an agreement to repurchase it at a fixed price and date. That amounts to borrowing secured by the asset, often a __[|Treasury]__ bond, with the added security that the lender has the bond, and so can sell it quickly if need be. Normally, such transactions are accounted for as loans, as they should be. They are often the cheapest way for a brokerage firm to borrow money. I had taken for granted that repos were always accounted for as loans, but it turns out there was a loophole. The __[|Financial Accounting Standards Board]__ had accepted that under some conditions a repo could be treated as a sale. One condition: if the securities securing the transaction were worth significantly more than the loan, that could be a sale. In the examples the board provided, it concluded that securing the loan with assets worth 102 percent of the amount borrowed did not produce a sale, but that 110 percent would push the deal over the line. In between was a gray area. Lehman appears to have concluded that 105 percent was enough if the assets being borrowed against were bonds. If they were equities, it set the bar at 108 percent. By doing such sales repos at the end of each quarter, and reversing them a few days later, the firm could seem to have less debt than it really did. It started the practice in 2001 but really accelerated it in 2007 and early 2008, when investors belatedly discovered there were risks to high leverage ratios. At the end of 2007, the bankruptcy examiner concluded, Lehman’s real leverage ratio was 17.8 — meaning it had $17.80 in assets for every dollar of equity. It reported a ratio of 16.1. By the end of June 2008 — Lehman’s last public balance sheet — it was hiding $50 billion of debt that way, enabling it to appear to be reducing its leverage far more than it was. When investors asked how it was doing that, Lehman officials chose not to explain what was actually happening. Lehman’s collapse is history, but after it was allowed to collapse other firms were rescued. We don’t know whether those firms used the same tricks, although we do know that Lehman thought they were not doing so. The __[|questions]__ sent to financial companies by the S.E.C. this week should provide answers to that question. Companies that classified repos as sales are going to have to provide specifics and explain exactly why the accounting was justified. The reports will go back three years, so we can see history as well as current practices. It would be nice if the commission found that other firms did not choose to hide borrowing this way. But if that is not what is found, then the commission should dig deeper into actual transactions. It should find out how the firm on the other side of each repo accounted for it. There are at least two abuses that might have happened. The first would stem from differing reporting periods. One firm could hide debt with another when its quarter ended. Then, when the other firm’s quarter ended, that firm could hide debt with the first firm. The second method would reflect the fact that two companies involved in a transaction do not have to use the same accounting. Lehman could treat the repo as a sale, but the other firm could call it a financing. Presto: Nobody reports owning the assets in question. That could even be legal. The second firm could conclude that an asset-to-loan ratio of 105 percent was not high enough to qualify for sales treatment, while the first firm thought 105 percent was high enough. But legal or not, it would be misleading. Wall Street leverage remains an important issue. The S.E.C. should discover if it was, or is, being concealed, and then get to the bottom of how that was done. //Floyd Norris comments on finance and economics in his blog at nytimes.com/norris.// =SEC launches ‘Repo 105’ probe= By James Politi in Washington Published: March 30 2010 00:12 | Last updated: March 30 2010 00:12 US regulators on Monday asked more than 20 financial groups whether they engaged in transactions along the lines of [|“Repo 105”] – an accounting device that helped [|Lehman Brothers]conceal its high leverage ratio during the financial crisis. The corporate finance division of the Securities and Exchange Commission wrote to chief financial officers of “close to two dozen” large foreign and domestic banks and insurers, demanding details of repurchase agreement deals. EDITOR’S CHOICE

[|In depth: Lehman Brothers] - Jan-26
The SEC probe includes whether companies booked repos as asset sales for accounting purposes over the past three years, and whether these deals were concentrated with certain counterparties or certain countries. Regulators also asked companies to quantify the amount of repos that were disclosed as asset sales and to explain the “business reasons” for use of these structures. The heightened scrutiny of repos is the result of a [|report by a court-appointed examiner]this month which found that Lehman used the Repo 105 technique to book temporary repurchase agreements as permanent asset sales in 2008. This helped Lehman conceal about $50bn from its balance sheet, thus reducing its leverage ratio and appearing healthier to the eyes of investors and analysts. “We are looking at the Lehman activity very, very carefully and all the issues surrounding Repo 105,” Mary Schapiro, SEC chairman, told CNBC on Monday. The report on Lehman caused a flurry of activity in Washington. Chris Dodd, chairman of the Senate banking committee, called on the justice department to investigate alleged accounting wrongdoing at Lehman and prosecute any employees at the bank – or “other companies” – who might have broken the law. The Repo 105 furore highlights how fallout from the crisis continues to generate debate among policymakers, regulators and Wall Street executives even now the banking system has returned to profitability.
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Posted: 17 Mar 2010 11:04 PM PDT I recently recorded a podcast for Compliance Week //with editor Matt Kelly, who interviewed me on the SEC's most recent [add link}statement on IFRS—a clear detour from the original Roadmap by any reasonable estimation.// //Matt gave me some sample questions in advance, so I could organize my thoughts, and this blog post is an edited and somewhat more elaborate version of the notes I wrote down while preparing for those questions. The last third or so of the podcast took a different tack, so if you want to listen to for yourself, click here.// //I get a number of mixed messages from the Commission's statement. Even its title, "Commission Statement in Support of Convergence and Global Accounting Standards" confuses me somewhat. On the one hand, the endgame of the initial Roadmap release is adoption of IFRS. But the title of the Commission's statement only mentions "convergence" and leaves out "adoption."// //You certainly can work toward achieving convergence with IFRS without necessarily sun setting GAAP and adopting IFRS; and perhaps that is factoring into the SEC's current thinking. I have a different view: we in the U.S. should be working toward providing investors in the U.S. capital markets with the highest quality and most transparent financial information available anywhere in the world. I don't believe that working on convergence with the IASB will get U.S. GAAP to where investors should expect our regulators to be.// //Getting deeper into the document, the Commission appears to be willing to accept at face value the benefits of IFRS adoption that have been most frequently cited by convergence proponents: they mention enhanced comparability, savings for multinationals, and lowering the cost of capital worldwide. Yet, there is nothing in the Staff's work plan that indicates there will be any attempt to validate those benefits. I suspect that's because there doesn't appear to be any sort of reliable methods for validating them. The Commission has committed itself to evaluate research on the IFRS question, so academics can make a significant contribution in this regard. They can either: (1) explain to the SEC which propositions regarding the benefits of IFRS adoption/convergence are (or are not) subject to rigorous and reliable estimation; and (2) undertake studies allowing reliable quantification of benefits—if that is indeed possible. The studies themselves must not be directly funded or influenced by the accounting profession, or any other group that clearly has a 'dog in the hunt.'// //Although the benefits part of the IFRS adoption/convergence narrative are given short shrift in their statement, I think the SEC has done a pretty thorough job of laying out the issues that will determine whether IFRS adoption is even feasible or can be accomplished at a reasonable and predictable cost. I'm very happy that the SEC acknowledges that serious thought has to be given to figuring out what the ongoing role of the FASB would be, assumingwe were to take in some or all of IFRS in some manner shape or form.// //So, I guess the answer to the question of whether the SEC is pushing for IFRS adoption, or pulling back, cannot be answered by me with a great degree of confidence—except to say that I am sticking with theprediction I made the day before the Commission's statement was published. I predicted that the ultimate decision maker will be the EU; the most likely scenario being that the EU will state that more convergence is not in something they are interested in. The EU is going to eventually tell the IASB that they will want a divorce if the IASB continues to court the US while everybody else has to sit around and twiddle their thumbs.// //So, in the end, I expect that a no-go decision will be made for the SEC by the EU. If the EU doesn't bail the SEC out, then Mary Schapiro or her successor will be in a big pickle.// // I see two fundamental problems,with the the "doubling and re-doubling" of convergence efforts. First, is the short-timeframe. The initial reaction of Denny Beresford, former FASB chair, to the convergence aspect of the work plan, which I read on the AECM listserv, was that many of the convergence projects that are now supposed to be fast-tracked and completed in the next 16 months have been on the agenda since he was at the FASB; and, he departed over 13 years ago! The consolidation project has been on the agenda since 1982 and the FASB still has not been able to develop a fully satisfactory definition of control. Just a couple of the scores of specific issues that will be addressed in the convergence projects are the direct method of reporting operating cash flows and reporting all financial instruments (including loans) at fair value. Those are highly controversial. // // Another person whose comments I've been reading are those of retired professor Bob Jensen of Trinity University; his point should be a deal breaker, but somehow the Commission doesn't see it that way--yet. Bob says that high quality accounting standards can only occur if there is a reasonable opportunity for consultation with constituents. This would include exposure drafts, field visits, field tests, and other ways of communication that the FASB has developed over many years of experience. It's virtually unthinkable, he says, that seven or so highly technical and highly complicated projects can be compressed into a 16-month period and still maintain a reasonable opportunity for input and, more important, for the Boards to learn from that input and be willing to make changes. // // The second fundamental problem I see is that some critical differences between IFRS and U.S. GAAP aren't even on the agenda. R&D is only one example of an abandoned project; the so-called "convergence" of business combinations standards was half-baked. And with the recently breaking news of the abuses of repo accounting that have come closer to the foreground with the publication of the Lehman bankruptcy report, the FASB may have to divert some of their resources to fix those offending portions of U.S. GAAP—and do it fast, just like they issued FIN 46 on variable interest entities so quickly after Enron. // // But, the elephant in the room is the accounting for impairment of long-lived assets, including goodwill. I don't think you could get the EU to agree with the US approach, and I don't think you'll get US issuers to accept the IFRS standard. The fact is that both impairment standards leave a great deal to be desired—neither are what the SEC should be willing to abide. I don't see how you can end up with a so-called "stable, high-quality platform" unless this issue, among numerous others, is resolved. Yet, so far, it's being ignored. // //Supposedly, IFRS and GAAP will be sufficiently converged so that if the US does adopt IFRS in some manner, the switchover shouldn't be a big deal. A big question is whether college educators will be able to keep up with all the changes. I'm not a faculty member any more, but I've had some interesting indirect experiences through my son, who is an accounting major with plans to take the CPA exam.// //Rick is currently taking "intermediate accounting." His teacher covers one chapter every two days—like clockwork. It doesn't matter how difficult or detailed the concept is, it's one chapter every two class days.// //That's certainly not the way I would teach intermediate accounting. But, I suspect that Rick's teacher is close to the mode, if not right there. The one-chapter-per-two-days approach is a lot of breadth, and extremely little depth. So, given what is already being crammed into curriculua now, I'm not sure how any significant knowledge of IFRS differences can fit in. I prefer to stress depth when I teach, and not to cram as many topics as possible into a semester, but the structure of the current CPA exam and the importance to an accounting program of its students' pass rates goes a long way toward explaining why Rick's professor does what she does.// //I think there is a huge amount to be learned from comparing IFRS with GAAP in class (I co-authored a textbook on comparative accounting for gosh sakes), yet something in college curricula has got to give. But, based on my experience in universities, curriculum change is almost invariably a political football.// //So, even forgetting about every other thorny issue regarding IFRS adoption/convergence, it's an odds-on bet that changes to the education sector will bump up against turf issues galore, and make widespread significant progress in that area a practical impossibility. The fundament problems is that there is only 24 hours in a day, and about 150 semester hours in a 5-year accounting major's curriculum. Something (or some academic discipline) will have to give away a portion of their fiefdom for nothing. I wish accounting departments much good fortune as they try to convince their colleagues in marketing, finance, economics, statistics, psychology, English, foreign languages, math, science, history, gender studies and sociology that teven more time should be given over for teaching 'bean counting.'// [[image:http://feeds.feedburner.com/~ff/typepad/theaccountingonion?d=yIl2AUoC8zA link="@http://feeds.feedburner.com/~ff/typepad/theaccountingonion?a=URmwx70pQ9g:Q5NQItR7jzQ:yIl2AUoC8zA"]] [[image:http://feeds.feedburner.com/~ff/typepad/theaccountingonion?d=7Q72WNTAKBA link="@http://feeds.feedburner.com/~ff/typepad/theaccountingonion?a=URmwx70pQ9g:Q5NQItR7jzQ:7Q72WNTAKBA"]] [[image:http://feeds.feedburner.com/~ff/typepad/theaccountingonion?i=URmwx70pQ9g:Q5NQItR7jzQ:V_sGLiPBpWU link="@http://feeds.feedburner.com/~ff/typepad/theaccountingonion?a=URmwx70pQ9g:Q5NQItR7jzQ:V_sGLiPBpWU"]][[image:http://feeds.feedburner.com/~r/typepad/theaccountingonion/~4/URmwx70pQ9g?utm_source=feedburner&utm_medium=email width="1" height="1"]] //This posting includes an audio/video/photo media file: Download Now// ||
 * Initial Reactions to the SEC Moving IFRS from the Fast Lane
 * What do you think of the SEC's most recent IFRS actions, re-affirming interest but stalling on adoption?**
 * Any final decision really hinges on FASB and IASB converging their standards, whether it's by June 2011 or any other date. How do you see that effort coming along?**
 * Part of the delay in the Roadmap timetable is so the SEC staff can devise a work plan examining implementation obstacles. What are some of the practical adoption and implementation problems—stuff the chief accounting officers of the world will need to deal with— that are going to cause everyone headaches?**

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(03/15/2010)

Norwalk, Conn.-The Financial Accounting StandardsBoard and the International Accounting Standards Board reached some tentative decisions on how to revise fair value accounting standards. The two boards committed late last year to meet on a monthly basis - both in person and via video conference - to resolve some of the thornier issues holding up convergence of International Financial Reporting Standards and U.S. GAAP, with the goal of completing most of their work by June 2011. Fair value and mark-to-market accounting have been among the most controversial issues the two boards have dealt with, especially when both standard-setters came under political pressure last year to revise their standards in response to the financial crisis. Last month, the two boards tentatively agreed to define fair value as an exit price, along with other issues. The boards tentatively decided that a fair value measurement of a nonfinancial asset considers its highest and best use by market participants. They also decided not to require entities to separate the fair value of an asset group into two components when an entity uses an asset in a way that differs from its highest and best use. In addition, they plan to require entities to disclose information about when they use a nonfinancial asset in a way that differs from its highest and best use (and that asset is recognized at fair value based on its highest and best use). The accounting bodies also tentatively decided that the objective of a fair value measurement of an individual asset is to determine the price for a sale of that asset alone, not for a sale of that asset as part of a group of assets or business. However, when the highest and best use of an asset is to be used as part of a group of assets, the fair value measurement of that asset presumes that the sale is to a market participant that has, or can obtain, the "complementary assets" and "complementary liabilities." Complementary liabilities include working capital but do not include financing liabilities. The standard-setters also discussed measuring the fair value of financial instruments, one of the most controversial topics they have been dealing with, as banks have called for easing the rules governing the valuation of assets in illiquid markets, particularly assets that were difficult to sell during the financial crisis, such as mortgage-backed securities.

FRIDAY, FEBRUARY 26, 2010
===[|FAF, FASB React To SEC Statement On Global Accounting Stds.; FASB Releases ASU 2010-10, Defers FAS 167 For Certain Investment Funds]=== The Financial Accounting Foundation and the Financial Accounting Standards Board issued a [|statement]today in reaction to the SEC's Commission Statement in Support of Convergence and Global Accounting Standards,//issued on Wednesday.//

//The FAF and FASB state that they "support the SEC’s view that a single set of high-quality globally accepted accounting standards will benefit U.S. investors, "and "support the SEC’s further consideration of the issues identified in the [SEC's] 'Work Plan' in making its determination on whether and how to transition the current financial reporting system for U.S. issuers to a system incorporating International Financial Reporting Standards (IFRS)." Additionally, they state, "As the FASB aims to complete in 2011 the important projects identified in our MoU with the IASB, we expect 2010 to be a pivotal year of progress... The FASB will continue to address reporting issues of critical importance to U.S. investors and financial markets while pursuing the international standard setting agenda." For futher details, read the [|FAF-FASB statement].//

//See also our related posts: [|FEI Recommends Three-Year Implementation Period For Suite of New Standards Coming Under FASB-IASB MOU;] [|SEC Reaffirms - Contingent on 'Work Plan' and Convergence - Will Decide On IFRS In 2011;] [|FEI, Other Organizations React To SEC Statement On IFRS]//

[|SEC Reaffirms, Contingent On 'Workplan' and Convergence, Will Decide On IFRS in 2011]
At an open commission meeting earlier today, the U.S. Securities and Exchange Commission voted unanimously to issue a Statement: SEC Chairman Mary L. Schapiro said that although "we do not have all the information" to make the decision on wheter to move to IFRS at this time, "we remain on a steady path to make the decision in 2011." SEC Chief Accountant Jim Kroeker added, "The Statement notes, if it is determined in 2011 to incorporate IFRS [into the U.S. financial reporting system], the transition for U.S. issuers would be approximately 2015 or 2016." UPDATE**: According to the [|SEC's press release] issued this afternoon: "[I]f the Commission determines in 2011 to incorporate IFRS into the U.S. financial reporting system, the first time that U.S. companies would report under such a system would be** no earlier than 2015**. The Work Plan would further evaluate this timeline."**
 * 1) reaffirming the Commission's support for a single, globally accepted set of accounting standards,
 * 2) describing issues that need to be analyzed, falling under six categories, in an SEC "Workplan," and
 * 3) describing events that need to occur between now and 2011, isaid, although "we do not haef all ncluding completion of consideration of matters in the SEC's "Workplan," (and presumably, satisfaction with the results), and completion of the convergence projects on the FASB-IASB Memorandum of Understanding (MOU).

The CPA Exam Can Be Like a Triathlon**," by Judy Padar, WebCPA, February 9, 2010 ---**
 * Read more about the six categories in the SEC's Workplan, and the SEC's view on the role of the FASB in the event the SEC decides to incorporate IFRS into the U.S. system, in this [|FEI Summary.]We anticipate to post additional information later today, in the summary on FEI's website, and in a subsequent blog post.**
 * On January 15, 2010, the SEC Division of Corporation Finance issued new CDIs on non-GAAP financial measures. The new CDIs update and replace previous FAQs issued by the staff in 2003 (the “2003 FAQs”) and are intended to relax the Division’s policy on the use of non-GAAP financial measures. In a recent public speech, the staff of the Division of Corporation Finance indicated that it believed that some companies were interpreting the previous guidance as more restrictive than intended and were therefore excluding non-GAAP financial measures that companies believed were meaningful to investors from their periodic reports and other SEC filings. Consequently, the new CDIs were issued to clarify the staff’s expectations on the use of non-GAAP financial information, including providing guidance that:**
 * Eliminates the requirement that only non-GAAP financial measures used in managing the company’s business or for “other purposes” may be presented in filings. Registrants can provide any non-GAAP financial measure that they believe will be meaningful to investors and, “to the extent material” should include a statement disclosing the additional purposes, “if any,” for which the registrant’s management uses the non-GAAP financial measure.
 * Eliminates certain disclosures that were required by question 8 of the 2003 FAQ, such as the manner in which management uses the non-GAAP measure to conduct or evaluate its business, the economic substance behind management’s decision to use the measure, material limitations related to the measure and how management compensates for those limitations, and why the measure is useful to investors.
 * Clarifies that registrants can adjust a GAAP measure for a charge or gain even though it may be prohibited from being characterized as non-recurring, infrequent, or unusual. Item 10(e) prohibits adjusting a non-GAAP financial performance measure to eliminate or smooth items identified as non-recurring, infrequent, or unusual, when the nature of the charge or gain means that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years. Prior guidance had stated that a registrant must meet the “burden of demonstrating the usefulness of any measure that excludes recurring items.”
 * Reiterates that registrants can disclose certain non-GAAP per-share performance measures, but cannot disclose non-GAAP liquidity measures on a per-share basis.
 * Clarifies that a registrant may present an adjustment “net of tax” when reconciling a non-GAAP performance measurement.
 * Deletes language that discouraged using Earnings Before Interest & Taxes (EBIT) and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) as a performance measure and stated that if adjusted measures are used, then the titles should reflect that fact (e.g., Adjusted EBITDA). The guidance had previously stated that the titles should clearly identify the earnings measures being used and all adjustments.
 * Confirms that presentation of financial information in “Constant Currency” is permitted and that registrants may comply with Regulation G by presenting the amounts historically and in constant currency, including describing the calculation process and the basis of presentation.
 * Provides clarification of when foreign private issues can include non-GAAP financial measures in filings.
 * http://www.webcpa.com/news/ CPA-Exam-Triathlon-53234-1. html**
 * Check out that picture. Yes, it’s me (a plumpish Judy Padar). And yes, I finished a triathlon. **
 * OK, it was a sprint distance, not an Ironman, but still it was a 400-yard (16-pool-lengths) swim in Lake Michigan, an 18-mile bike ride followed by a 3.1 mile run. And yes, look at me. I am overweight. More than that, I am fat! But I finished. I was DFL…Dead Freaking Last. But DFL is not DNF (Did Not Finish). Twenty people didn’t finish; they got pulled out of the water, or fell off their bikes or more likely just gave up. So what does my triathlon finish have to do with your CPA Exam? All you have to do is finish. No one will know if you were DFL. All they will know is that you passed. **
 * Passing the CPA Exam is like finishing a triathlon. It takes guts, will and determination. More than intelligence, it takes discipline. If you have the coursework to sit for the CPA Exam, you have the knowledge to pass the exam. However, are you willing to train? Are you willing to get on a schedule and get up every morning before dawn and do problems before starting your day, or at night do your evening problem set workout? For my triathlon, it was six months of workouts. Lots of days it seemed easier to just skip a workout. But I had a goal, so I put on my heart rate monitor and went for a walk, ride or swim. **
 * Are you willing to commit your time, energy and focus to one event? Are you willing to pay for a trainer or a review course to keep you on track? The review course will help you focus on what is important and teach you the tricks of the exam. **
 * In training for the triathlon, I took a “Triclass.” My Triclass had two important purposes. The first was to educate me with the information needed for my event. For example, we practiced transitions, where you get out of the water and get yourself ready for the bike ride. If you have never transitioned in a triathlon it can be quite intimidating, but practicing makes it not as scary. **
 * We also learned how to train with a heart rate monitor, which allows you to effectively use your time training to gain endurance. The class’s second purpose was to help form a support system of people who were going through exactly what I was. We could complain together, and we could celebrate our small successes. Although we came from all different levels, we all had strengths to draw upon and weaknesses to learn from. **
 * A review for the CPA Exam will help you to practice so you are not intimidated by the exam and train you effectively, so that the time spent studying is effective, just like a heart rate monitor. You will also find support from your peers in the review; they will be on the same path as you and making the same sacrifices. They will help you to train. **
 * I passed my CPA Exam exactly 10 years ago. I know because I my daughter is almost 10. My husband wanted me to pass my CPA Exam before we had kids. I passed in August and I was pregnant in October. **
 * I did not pass it on my first try. I originally took it the fall after I graduated from college and basically did nothing to study, except for some practice problems. I never had an issue in college with passing an exam, but boy was I surprised when I opened that exam. **
 * Four years later, I tried again. I took a review, studied a ton, and I missed a condition by one percent. Devastated! At that time it was required to take all four parts at the same time. I was so upset, but I was determined I was going to pass. I studied again and passed three of the four parts and then finished the last one. So my advice to you as future CPAs — set your mind to the task ahead, make a workout schedule, take a review and you will see yourself at the finish line. **
 * If the burden gets to be too heavy, take a breath, close your eyes, think of the Slow Fat Triathlete, and know that you can cross the finish line to the profession of a CPA. It’s a good place to be! **
 * Jody L. Padar is a CPA at James J. Matousek, CPA, in Park Ridge, Ill., and is a Certified QuickBooks ProAdvisor.**

House Members Question Obama's Call to End LIFO Accounting
By Brett Ferguson Publication date: 02/04/2010 House Ways and Means members crossed party lines in Feb. 3 budget hearings to criticize the Obama administration's proposal to raise an additional $59 billion in tax revenues by eliminating firms' ability to use the last-in, first-out accounting method. “If we do this, if we end it, what's going to happen is U.S. small businesses are going to take a big tax hit and their competitors overseas are going to have a terrific advantage over us in the marketplace,” Rep. Mike Thompson (D-Calif.) told Treasury Secretary Timothy Geithner. “There're some industries that have to hold their inventory for a long time; this is a fair and reasonable way to recognize that and I would strongly urge you to go back and revisit that.” The practice can reduce a business's tax liability, particularly in times of rising inflation, because it takes into account the higher costs of replacing inventories. The LIFO method is especially important to companies that maintain large inventories over a period of years, such as wineries and distilleries that need to age their inventories. As a result, shifting to a first-in, first-out accounting practice would have the effect of giving those producers income on which they would have to pay taxes, even though the products they have put into inventory may not be available for sale for several years. Rep. Geoff Davis (R-Ky.) said the proposal not only hurts distillers, but also the aerospace industry and other business fields that sit on inventory for many years. “If we want to create jobs in manufacturing, the repeal of LIFO creates many challenges,” Davis said, noting that Congress already rejected the same proposal from Obama in his fiscal year 2010 budget. Geithner said the administration still believes the change would be a “reasonable policy,” but he promised to work with Congress on the idea.

Caps on Deductions

 * Lawmakers also attacked the administration's plan to cap the value of itemized tax deductions at the 28 percent tax rate, rather than allowing tax deductions to be valued as high as the 39.6 percent top tax rate that would be in place in 2011 under the Obama budget.**
 * Critics have argued that capping the value of the deductions could have a chilling effect on charitable giving and—like the LIFO proposal—the idea was rejected by Congress in 2009.**
 * “The limit on itemized deduction has been somewhat controversial within our ranks and across party lines. We need to talk about that,” Rep. Sander Levin (D-Mich.) told White House Office of Management and Budget Director Peter Orszag in a separate budget hearing later in the day.**
 * The White House said in its budget proposal that capping the value of the tax deductions would make the income tax system more progressive and “distribute the cost of government more fairly among taxpayers of various income levels.”**
 * The proposal would raise an estimated $291.2 billion over 10 years. Combined with the proposal to raise the top tax rates to their pre-2001 levels for high-income individuals and the reinstatement of certain phaseouts on exemptions and deductions, the budget would raise an additional $969.5 billion from upper-income taxpayers.**
 * The complete text of this article can be found in the BNA Daily Tax Report, February 4, 2010. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »**
 * //© 2010, The Bureau of National Affairs, Inc.//**

//**http://www.accountancyage. com/accountancyage/news/ 2256893/fair-value-rules- complicate**// //** The head of the city regulator said US attempts to adopt international accounting rules could result in unnecessary complexity. **// //** Adair Turner, chairman of the Financial Services Authority, told Accountancy Age that the International Accounting Standards Board (IASB) risks adding complexity to its fair value accounting rule, if it continues converging with US st **// //** It is not so much that they are in danger of compromising (international standards), it is that, in the process of trying to reconcile them, they make it more complex,” he said. **// //** He went on to say the world didn’t need the US to adopt international standards. **// //** “We have had a capitalist system without full convergence in the past, it can be a complete pain in the neck… it hasn’t stopped the system working,” he said. **// //** The IASB, together with its US counterpart the Financial Accounting Standards Board (FASB), is working to harmonise US and international accounting rules. US authorities however have provided no firm adoption timetable. **// //** Lord Turner’s comments add to growing concern surrounding the convergence project. In July the Fédération des Experts Comptables Européens said there were “diminishing returns”, from further convergence. Two months later Nigel Sleigh-Johnson, head of financial reporting at the ICAEW, said the process needed to be kept under “close review”. More recently, Stephen Haddrill, chief executive at the Financial Reporting Council, said the process should not be about “translating American standards into an international shape”. **// //** Lord Turner’s concerns centre on the boards’ divergent approaches to fair value. The rule forces companies to value assets at market price and was blamed for exaggerating the effects of the downturn. **// //** In the months following the downturn, both boards, under pressure from world governments, sought to revise their fair value standards. FASB’s approach would result in all assets valued at fair value. The IASB exempted banks’ loan books. **// //** The issue has proved a sticking point in negotiations. **// //** Within the IASB there is little appetite for steering away from convergence. US adoption is a key reason driving other nations to adopt international standards. Walking away from convergence might also embolden Europe, especially German and France, which have attracted criticism for politicising accounting standards. Haddrill said the IASB was “walking a tightrope” but had made progress addressing inter­national concerns. “Because of the politicisation of differences in view in the continent, people are failing to see just how far the IASB has moved towards recognising some of the concerns that Europe has had, whilst at the same time preserving the principles of fair value.” **// //** Also this week Lord Turner delivered a keynote speech where he said the IASB were trying to address accounting and regulatory concerns. **// //** “The IASB is again facing that inherit trade off between what are the divergent, and in a sense, incompatible demands.” **// //**Further reading:**// //**ASB work plan - projected timetable as of 6 November 2009**// //Bob Jensen's threads on the controversies of replacing US GAAP with IFRS are at// //http://www.trinity.edu/ rjensen/theory01.htm# MethodsForSetting//
 * //"//**//US fair value rules complicate convergence, warns Lord Turner: Converging with US standards may compromise international standards, explains FSA chairman**," Wby Mario Christodoulou, AccountinAge, January 28, 2010 ---**//

//**"**Critical Points in the Learning Process**," by Joe Hoyle,**// **Teaching Financial Accounting Blog//, January 21, 2010 ---//**
 * //http://joehoyle-teaching. blogspot.com///**
 * //Author’s Note: Before I get started today, I wanted to mention a note that I received from Professor David Albrecht. I am always pleased to pass along information that might help in better teaching.//**


 * // From David: I've been blogging for a while. My blog is at http://profalbrecht.wordpress. com On my blog, a have a page of links http://profalbrecht.wordpress/ com/links/ for all other accounting professors that blog. You might be interested. http://profalbrecht.wordpress. com/2008/12/30/ace-your- accounting-classes-12-hints- to-maximize-your-potential///**

// I have long believed that there are three critical points in the learning process: (1) what students do prior to class to prepare themselves to learn, (2) what takes place during class, and (3) what happens immediately after class to help the students solidify the material that they have just heard and discussed. If I were to guess, I would think that teachers spend about 10 percent of their time and energy on helping guide step (1), 89 percent of their time setting up step (2), and 1 percent of their time and energy guiding step (3). Personally, I think a 33.3, 33.3, 33.3 allocation might make for a much better educational experience. //

// Students leave class and if they are not careful any and all understanding leaks away very quickly. Subsequently, when test time arrives, they find it necessary to cram all that understanding back into their brains in almost a panic. Not surprisingly, they will then complain that they “knew it all until they got to the test.” What they really mean is that they had a vague understanding leaving class but never solidified the knowledge so that it went from a general appreciation of the material to an actual and deep understanding. //

// Therefore, I encourage my students to organize, review, practice, or whatever it takes within a few hours after each class. I stress that this might well be the most important work they do in my class. I do not feel that I can over-emphasize taking the material that we have gone over in class and bringing it into their actual knowledge base. //

// Unfortunately, students seem to have little training as to how to do this. Ask your students some day “what have you done since the last class to make sure that you understood that material we covered?” You may well get some truly bewildered stares. You have introduced a foreign concept. //

// I try to help guide my students AFTER material has been presented. As I have said before in these postings, I use email a lot. One of my favorites uses is a quick email right after class to say “okay, here is what we covered today and here is what you should do next to get that material under control.” //

// For example, on Wednesday of this week, we had our opening discussion on transactions and transaction analysis. Within 10 minutes of leaving class, I sent them the following email to alert them to exactly what I needed for them to do next. Plus, I introduced my concept of “three-second knowledge,” the stuff they should know so well that they really don’t need to think about it. I believe every course has a significant amount of three-second knowledge. If the students can get that learned, they will have an excellent base of understanding on which to build more complicated concepts. //

// Email to students after Wednesday’s class: // // “--We ended class looking at the financial ramifications of seven transactions. I need for you to go back over those seven until you know them backwards and forwards. These are not hard (and there are not many) but you cannot have soft knowledge on this. You need to have this down absolutely solid. If I walk into class Friday and ask you about one of those seven, I need for you to have this at what I call the "three-second level of knowledge." In other words, if I call on you with one of those seven, you should be able to count to three and tell me the answer. Not look it up in your notes or the book but count to three and tell me the answer. If you start coughing and sputtering, then, by definition, you are not at the level that I want. Notice, that this is just for the seven transactions that we specifically covered yesterday.” //

// How can you help your students take their soft knowledge and turn it into an understanding that is absolutely solid? //

//Jensen Comment// //Joe Hoyle is one of our most sharing accounting professors.//

//**Free (updated) Basic Accounting Textbook --- search for Hoyle at**// //**http://www.trinity.edu/ rjensen/ElectronicLiterature. htm#Textbooks**// //CPA Examination --- http://en.wikipedia.org/wiki/ Cpa_examination// //**Free CPA Examination Review Course Courtesy of Joe Hoyle** ---@http://cpareviewforfree.com///

//Forwarded without comment!// //"International Accounting Standards: Why They Might Not Be For Us (Part 1 of 2)," by James Brendel, SmartPros, December 2, 2009 ---// //[]// //Mantra for 'high quality standards' may be troublesome for US companies.//

//Given up for dead just eight months ago, adoption of international accounting standards still has a pulse. And while that may seem like something for someone else to worry about, adopting the standards would add expense and complexity to U.S. companies' financial reporting.// //Here's why your business should be following and possibly contributing to this debate. But first, a little background://

//Adopting an international accounting standard grew out of recognition of a world economy and spurred by a series of financial crises, including the Enron scandal. By the time the Bernie Madoff Ponzi scheme hit, the so-called "roadmap" to a global accounting standard had been established under the Bush administration. In the wake of the current economic crisis and President Obama’s election, many in the industry thought the roadmap would be abandoned, but newly appointed SEC Chief Accountant, James Kroeker, said an international standard is very much one of his priorities and it looks like we are turning back to the roadmap. So, game on.//

//What are international accounting standards?// //At first blush, you might think the call for a "suitable set of high quality accounting standards" that everyone in the world lived by would bring the world economy closer together, make trade and lending easier and facilitate international transactions and mergers and acquisitions. You might think these international standards are based in a tough interpretation of the facts. In reality, international standards are more judgmental than US Generally Accepted Accounting Principles (GAAP).// //Here’s an example of the principle-based approach used by the International Financial Reporting Standards. Lease financing has become the most widely used method of personal property financing in the U.S. today.//

//Under U.S. GAAP rules, there are two ways to record leases. You can expense the monthly costs (off balance sheet) or you can record it as a capital lease, adding up the value of all your future lease payments as debt. Most companies don’t like to record the leases as debt because it makes their balance sheets look bad, but US GA [] has a “bright line standard.”//

//Under the bright line standard for leases, you must meet one of four tests to write off the lease directly, otherwise you have to record it as debt on the balance sheet. The main test is to compare the present value of future lease payments to the value of the leased asset. If you’re at 90 percent or greater, it goes on the balance sheet. That’s the “bright” line. Because of this clear standard, it’s easy for companies to structure their leases to either expense or capitalize them.// //Now let’s look at a lease from the international standards approach.//

//Under the principle-based approach used in the international standards, an auditor asks, “Does this look more like a financing transaction, where they used a lease to obtain the funds to acquire an asset or does it look like a real lease, where the company is paying a monthly fee to use the property?” Under international rules, the accounting is based on the substance of the transaction, and not on the form of the lease agreement. You won’t have bright line standards to guide the company or the auditor. That invites judgment and judgments can obviously vary widely.//

//Another way to look at the difference between U.S. GAAP and international standards is the sheer volume of literature. The U.S. GAAP standards for lease accounting are made up of over 50 original pronouncements, which when codified result in over 120 pages. The international lease accounting standards consist of one primary standard with three interpretations, included in fewer than 30 pages.//

//An invite for litigation?// //One thing we know for sure is that U.S. companies are involved in more litigation than the rest of the world. If companies and their auditors are making more judgments and don’t have standards to fall back on, it invites more suing of companies and their reporting and in turn their auditors who may have been pressured to make judgments that favor certain types of financial reporting. U.S. companies have to ask themselves if this is truly advancement of financial reporting or just the invitation for more headaches in the future.// //International Standards Part II: My next article will explore how adopting international accounting standards will add to a company’s costs and make their reporting more complicated, not less. In addition, I’ll talk about why companies should join the discussion on whether to adopt these standards.//

James Brendel, CPA, CFE, is the national director of audit quality for Hein & Associates LLP, a full-service public accounting and advisory firm with offices in Denver, Houston, Dallas and Southern California. He specializes in SEC reporting and assists companies with public offerings and complex accounting issues. Brendel can be reached at jbrendel@heincpa.com or 303.298.9600.

The Accounting Onion
Going to School on Revenue Recognition Posted: 05 Dec 2009 12:35 AM PSTI'm a night owl, but once I hit the sack, I'm out light a light for 8-9 hours. In fact, the two things I would say that I do best are type fast and sleep like a log. One recent night was a rare exception, though. I woke up only about two hours into my hibernation and couldn't fall back asleep. After about another hour, I gave up. It was too late to have a toodle, so I decamped to my office and turned on the computer. The first thing on the web to catch my eye was a blurb in the Chronicle of Higher Education, in which it was reported that the revenue recognition policies of the Apollo Group Inc., the parent company of the University of Phoenix, were the subject of an "informal inquiry" by the SEC's Division of Enforcement. Apollo has declined to provide any further specifics, but their share price declined about 18% around the time of the announcement. Hmm. I decided to look further into this for three reasons: (1) I thought it might help me get to sleep; (2) I was in the midst of preparing to lead a one-day workshop on revenue recognition, so I could actually benefit by a review of some of the rules; and (3) Apollo's headquarters are in Phoenix, where I live.

What I Found – Before I Went Back to Bed The first thing I did was to download Apollo's most recent 10-K and to read their description of critical accounting policies on revenue recognition. I also pulled 15 years worth of financial statements in spreadsheet format from a data service. Here is what I found after a few minutes of perusal: Students are billed on a course-by-course basis. But, judging by the ratio of the allowance for doubtful accounts to gross student accounts receivable, 29%, it appears that a significant number of student accountants are eventually written off as uncollectible. Upon the first day of attendance, Apollo records a receivable and deferred revenue in the amount of the billing. As I will explain later, I was surprised to learn this; 'executory contracts' are usually not recognized (with the notable exception of capital lease accounting). Tuition revenue is recognized pro rata over the duration of the course, which may be around a semester in length. As we say in the trade, it appears that Apollo has adopted a 'proportional performance' revenue recognition model. A more conservative choice would be a 'completed performance' model. Apollo recently changed its refund policy whereby students who attend 60% or less of a course are eligible for a refund for the portion of the course they did not attend. Apollo prepared its statement of cash flows under the direct method through 1997. They switched to the indirect method in 1998. I would have thought that a 'preferability letter' for such a change would have been included in the 1998 10-K, but I was unable to locate one.

What Could the SEC Be Looking At? It appears that the SEC Enforcement Division received a referral from the Division of Corporation Finance, which reviewed Apollo's most recently filed 10-K, issued a comment letter, and received a reply from Apollo. Corp Fin's comments addressed, among other things, Apollo's revenue recognition policy for refunds, and whether bad debt expense and revenue were both overstated (i.e., certain amounts of bad debt expense should have been treated as reductions in revenue). My own questions start at a much more basic level than Corp Fin's comments: when, if ever, it would be appropriate for Apollo to recognize revenue prior to the receipt of payment? Accounting for the Students Who Pay in Arrears The general rule in GAAP is that revenue cannot be recognized until it is earned, and realized or realizable (see Statement of Financial Accounting Concepts No. 5). The SEC staff has interpreted this general rule in Topic 13 of the Codification of Staff Accounting Bulletins (SAB Topic 13) to mean that four criteria must be met in order for revenue to be recognized. I won't go into all of them, but the last criteria is that "collectibility is reasonably assured." If the probability is 29% that a student won't pay you, can it be said that collectibility is reasonably assured? Apollo and its auditors might respond by stating that 71% of the billings to students are reasonably assured; moreover, Apollo has accumulated an extensive history of course delivery that enables them to reliably estimate the allowance at 29%. But, nothing in SAB Topic 13 specifically allows Apollo to combine similar arrangements for the purpose of determining whether collectability is reasonably assured. The SEC did state that one can estimate future liabilities for warranties and returns by aggregating similar customer arrangements and estimating an average for the group; however, it did not specifically provide that those procedures were available for non-payments of enforceable claims. Notwithstanding, historic experience may not be all that helpful in determining the non-payment rate in the current economic environment. For companies with low non-payment rates, maybe, but for companies with a 29% payment rate, perhaps not. I suppose it would have been clearer if SAB Topic 13 stated what was to be accomplished by providing that collectibility must be reasonably assured; and had specifically prohibited combining accounts when evaluating the criteria. Nonetheless, the following example may serve to illuminate the SEC's intent. Take two companies, A and B; they are equally profitable and differ principally in collectibility rate of accounts receivable. Company A estimates its allowance for doubtful accounts to be 2% of gross accounts receivable, and B's allowance is 30%. Both companies discover, after the fact, that the real allowance was only two-thirds of what it should have been: that is, 3% for A and 45% for B. The premature recognition of earnings by Company A may or may not be material, but for B, it will be as cataclysmic to the income statement as was the AZ Cardinals loss last Sunday on a final-play touchdown pass.

It could be permissible to estimate an allowance for doubtful accounts for a group of similar arrangements, but it does not seem appropriate to determine that collectibility is reasonably assured on the same basis. When is Revenue from a Course Earned?While collectability may be an issue for some arrangements with students, many of Apollo's students pay in advance. These comments apply to all arrangements, regardless of the timing and/or uncertainty of cash flows.SAB Topic 13 provides that revenue should not be recognized for "delivered elements" (i.e., classes) if remaining elements to be delivered to the customer are "…essential to the functionality of the delivered … services." The staff created an exception to this rule for undelivered elements that are "inconsequential" or "perfunctory," but it is not applicable if failure to complete the activities would result in the customer receiving a full or partial refund … (or a right to a refund…)." Stated from a balance sheet perspective, the underlying principle is that one is generally precluded from recognizing a receivable that is not backed by enforceable rights. I am unfamiliar with the way courses are conducted by Apollo, but I assume that they all end with an evaluation leading to a final grade. In my experience, students will not pay for a course that doesn't provide them with a grade. Grading is an essential function of the service provided; therefore, it would seem that SEC guidance would require Apollo to defer revenue related to a course until a grade is given to the student. But, to be fair, I did check the revenue recognition policies of a number of other public companies in the same industry as Apollo, and they all recognize revenue in some ratable fashion as courses progress. For me, that is just one more reason why the SEC's investigation of Apollo's revenue recognition practice is significant. It could change the practices of an entire industry. Accounting for Students Who Drop a Course The question that the SEC seems to be homing in on is whether Apollo has properly allowed for refunds to students who may drop the course before the 60% point. That also happens to be the only revenue recognition issue that analysts were asking about in Apollo's fourth quarter earnings conference call. It could be that the analysts and the SEC are both missing the boat. The SEC may believe that Apollo should allocate a portion of the deferred revenue to an estimated liability for refunds. That would initially affect balance sheet classification of liabilities, and it may affect the pattern by which revenue hits the income statement; but it doesn't seem to be that big a deal to me. Yet, it must be said that Apollo's stock price did take an 18% hit around the time of the announcement of the SEC investigation. If the accounting for the new refund policy is the reason for the stock price drop, then so be it.

Other Red Flags I have two final thoughts regarding items that I noticed in my relatively brief perusal of the financial statements. First, even though the ratio of the allowance for doubtful accounts to accounts receivable is around 30%, the ratio of the allowance to receivables for which Apollo actually has enforceable rights could be significantly higher. That's because Apollo has a practice of recognizing receivables for which it has no enforceable rights. Recall that Apollo recognizes a receivable and deferred revenue for the price of a course when the student shows up for the first day of class. I suppose Apollo is reasoning that both parties have gone down the road somewhat, but it pretty much looks like an executory contract to me. Be that as it may, the SEC should be asking whether the allowance for doubtful accounts is based on the total reported balance of accounts receivable, or just the portion representing enforceable rights. It makes no sense to me to create an allowance for doubtful accounts (and an offset to bad debt expense) on a 'receivable' that ist not owed, and may never become owed if the student drops the course. If Apollo sees it the same way, the ratio of doubtful accounts to enforceable student receivables could be significantly higher than even the 29% reported. Second, regarding the change in the method of presenting cash flows, it would be pretty big stretch for an auditor to maintain that the switch in accounting was to a preferable method; the FASB has stated in SFAS 95 that the direct method is the approach they encourage issuers to employ as "the more comprehensive and presumably useful." (para. 119) I sure would like to see the SEC ask Apollo and their auditors about that one.I also hope that the FASB will take a look at this case. Apollo could be their poster child for why the direct method for presentation of cash flows should be required. Would 18% of total shareholder value have been destroyed in one fell swoop, had Apollo reported cash flows to investors using the direct method? Perhaps not, because trends in the amount of cash collected from customers would have been disclosed; and that would have made revenue recognition accounting policies less critical to analysts' valuation models.Winding Up My goal for this posting was simply to raise interesting questions about Apollo's revenue recognition policies. I want to explicitly state that my intention is not to pass judgment on any of Apollo's choices, even though the market may have spoken to that effect by devaluing Apollo's shares. Indeed, there are many more questions suggested by this case, and they go beyond the specific effects on Apollo. For example, one could consider whether the revenue recognition rules applicable to Apollo's arrangements with students are themselves representationally faithful or appropriate. We might also ask whether a different result would obtain if the revenue recognition rules under IFRS were applied. Finally, and perhaps most interesting, we could ask how the revenue recognition project being undertaken by the FASB and the IASB jointly has the potential to improve the quality of financial reporting by companies like Apollo. Unfortunately, I am not confident that the proposed approach would be an improvement, but that's for another post.

Fraudulent Revenue Accounting
"Detecting Circular Cash Flow: Healthy doses of skepticism and due care can help uncover schemes to inflate sales," by John F. Monhemius and Kevin P. Durkin, Journal of Accountancy, December 2009 --- [] Following an initial customer confirmation request with no response, a first-year auditor mails a second and third request, all under the supervision of the auditor-in-charge assigned to the account. Field work begins on the audit, but there is still no response from the customer. Another auditor scanning the cash journal from the beginning of the year through the current date notes that all outstanding invoices have subsequently been paid from this customer during this period. Customer check copies are provided, and remittances indicate that payment has been received in settlement of all outstanding invoices at fiscal year-end for this customer. But has the existence of accounts receivable from this customer at fiscal year-end really been established? Fraudsters have been creating increasingly complex and sophisticated schemes designed to rely on potential weaknesses in the execution of audit procedures surrounding key assertions such as existence. A financial statement auditor can use his or her professional judgment while carrying out audit procedures to detect such a scheme. Given the difficult economic times of the past year, special care should be given to consider fraud while performing audit engagements. One fraud scheme that has been encountered with increasing frequency involves the inflation of accounts receivable and sales through the creation of a circular flow of cash through a company to give the appearance of increasing revenue and existence of accounts receivable. This article addresses this fraud technique when used to materially overstate assets and inflate borrowing capacity under an asset-based revolving line of credit. This article also points out red flags that may help uncover such a scheme. BACKGROUND A typical asset-based revolving line of credit allows a company to borrow funds for working capital. The borrowing limit is based on a formula that takes into account various working capital assets and related advance rates. A typical availability formula allows for loan advances equal to a set percentage of asset balances. This article focuses on an accounts receivable- backed line of credit, an asset that is prone to manipulation in this specific fraud scheme. Typical advances against accounts receivable range from 75% to 85% of eligible accounts receivable. Items excluded from eligible collateral would include invoices aged over 90 days, affiliate receivables or any other invoice that would create a nonprime receivable from the lender’s perspective. The loan agreement in an asset-based loan facility requires management to submit an availability calculation periodically. This allows the lender to monitor collateral levels and exposure. A generic accounts receivable availability calculation is illustrated in Exhibit 1. Continued in article

Bob Jensen's threads on revenue accounting frauds Revenue Reporting Frauds --- [] Bob Jensen's Fraud Updates --- [] =Off-Balance-Sheet Entities: The Good, The Bad And The Ugly= by Rick Wayman ([Contact Form&ContentID=129|Contact Author] | [|Biography]) Companies have used [|off-balance-sheet entities] responsibly and irresponsibly for some time. These separate legal entities were permissible under [|generally accepted accounting principles] (GAAP) and tax laws so that companies could finance business ventures by transferring the risk of these ventures from the parent to the off-balance-sheet subsidiary. This was also helpful to investors who did not want to invest in these other ventures.

Since the Enron scandal, however, companies that have any kind of off-balance-sheet items, whether justifiably or not, are being branded with a scarlet letter "E". This article will define some typical off-[|balance-sheet] items and discuss whether they are "good" or "bad".

The term "off-balance-sheet" can refer to many things. Typically, it refers to separate legal entities (separate companies of which the parent holds less than 100% ownership) or contingent liabilities such as [|letters of credit] or loans to separate legal entities that are guaranteed by the parent. GAAP allows these items to be excluded from the parent's financial statements but usually they must be described in footnotes.

Off-balance-sheet companies were created to help finance new ventures. Theoretically, these separate companies were used to transfer the risk of the new venture from the parent to the separate company. This way, the parent could finance the new venture without diluting existing shareholders or adding to the parent's debt burden. These separate legal entities could be privately held [|partnerships] or publicly traded [|spin-offs].
 * The Good**

Sometimes the separate companies were created to pursue a business project that was a part of the parent's main line of business. For example, oil-drilling companies established off-balance-sheet subsidiaries as a way to finance oil exploration projects. These subsidiaries were jointly funded by the parent and outside investors who were willing to take the exploration risk. The parent company could have sold shares or borrowed the money directly, but the accounting and tax laws were designed to allow the project funding come from investors who were interested in investing in specific explorations rather than investing in the parent company.

Other times these separate companies were created to house businesses that were decidedly different from the parent's line of work (in order to unlock "value"). For example, Williams Co's, created Williams Communications to pursue the communications business. Williams Companies spun off Williams Communications, but the bankers required the parent to guarantee the debt of Williams Communications. Because Williams Communications was a new company, this is not an unusual request.

This use of off-balance-sheet entities is good in that it transfers risk from the parent's shareholders to others that were willing to take the business risk. Investors in Williams Companies (an energy resource company) may not have wanted to invest in a communications company, so management created a separate entity to house that business. Likewise, oil companies used off-balance-sheet entities to remove the exploration risk from their business to share it with others that wanted a bigger piece of the potential return from exploration.

While GAAP and tax laws allow off-balance-sheet entities for valid reasons noted above, bad things happen when economic reality differs significantly from the assumptions that were used to justify the off-balance-sheet entity. Problems also occur when egos get too big.
 * The Bad**

In Williams's case, the decision to spin off the communications business was reasonable at the time. The parent had the infrastructure on which to build a communications network, but it was an energy company. By spinning off the subsidiary, it was not forcing its investors to take on the risk of a communications company, and it was able to take advantage of the market's demand for communication stocks. At the same time, the need to guarantee the debt of a new subsidiary is a reasonable request that bankers make in this type of transaction.

What went "wrong" was that economic reality differed from the assumptions that were used to justify the spin off. [|Dotcom] mania resulted in over-capacity, causing problems for all telecommunications companies. The loan guarantee, which is never expected to be triggered, is now an issue for the company because of the [|recession] and the slump in the telecommunications sector.

Enron exemplifies how ego can be the basis for the misuse of off-balance-sheet items. Here, off-balance-sheet vehicles appear to have been used to pump up financial results rather than for legitimate business purposes. What started as a plan to legitimately use off-balance-sheet vehicles morphed into ways to manufacture earnings as trades went bad. While one could argue that this is also a case of economic reality differing from expectations, the way management reacted to the situation allows us to classify it as an ego thing.

This financial engineering is usually fueled by the need to reach certain operating targets established by Wall Street or compensation plans. Once management succumbs to this "Dark Side", more time is spent on trying to game the system than trying to manage the core business. It is then only a matter of time before the house of cards falls.

It gets ugly when the markets start to punish a stock just because it has an off-balance-sheet item. Granted, it is not always easy to read a company's [|SEC] filings, let alone dig into the footnotes and figure out how the off-balance-sheet items might impact results. But the companies that provide full disclosure will probably be the better investments.
 * The Ugly**

The loss of faith in accounting's ability to provide full disclosure could have a bigger impact on the stock market than the events of September 11th. The attacks were an exogenous factor and we bounced back nicely. The loss of confidence in financial statements is an attack on one of the core elements of investment decision making. To quote Johnny Cochran, "If the statements aren't true, what will we do?"
 * Conclusion**

However, the focus on off-balance-sheet accounting will have two major benefits. First, it will result in new regulations that will hopefully prevent future Enrons. Some of these changes will likely be the following: Second, market over-reaction creates a buying opportunity. Markets always overreact, causing panic in the Street. Uncertainty created by the loss of faith in financial disclosures could even cause more damage to the market than extreme events like September 11th.
 * Prevention of officers of the parent from being officers of the off-balance-sheet subsidiary
 * Increasing the percentage ownership by outside and non-affiliated companies
 * Enforcing disclosure rules so that investors can clearly understand the risk (if any) posed by off-balance-sheet companies

by Rick Wayman, ([Contact Form&ContentID=129|Contact Author] | [|Biography]) This article and more are available at Investopedia.com - Your Source for Investing Education

[]
[|**Improving disclosures about fair value measurements**]

The Board discussed comments received on Proposed Accounting Standards Update, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. The Board directed the staff to draft a final Accounting Standards Update for a vote by written ballot.

The Board decided to defer the consideration of the Level 3 sensitivity disclosures but proceed with all of the remaining requirements substantially as described in the proposed Update. The FASB plans to reconsider the Level 3 sensitivity disclosure requirements in the joint fair value measurement project. The final Update will amend Subtopic 820-10 as follows: > >> The final amendments to the Accounting Standards Codification will be effective for annual or interim reporting periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activity for purchases, sales, issuances, and settlements on a gross basis. That requirement will be effective starting in annual periods beginning after December 15, 2010. Early adoption is permitted. The amendments in this Update do not require disclosures for earlier periods presented for comparative purposes at initial adoption. The Board expects to issue a final Update by the end of 2009.
 * 1) New disclosure requirements
 * Transfers in and/or out of Levels 1 and 2. A reporting entity should disclose the amounts of significant transfers in and/or out of Level 1 and Level 2 fair value measurements and the reasons for the transfers.
 * Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present information about purchases, sales, issuances, and settlements on a gross basis rather than as one net number.
 * 1) Clarification of existing disclosure requirements
 * Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity should apply judgment in determining the appropriate classes of assets and liabilities.
 * Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the input and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3.

Reporting Rights
FASB’s proposed standards for reporting loss contingencies have GCs up in arms. [|Print this article] [|Reprints] ShareThis Published in the //[|1/1/2009]//Issue of InsideCounsel. //FIN Frustration// Critics of the Financial Accounting Standards Board’s loss contingency disclosure proposal compare the troubled history of its FIN 48, which came into effect at the end of 2006, as a guide to the difficulties inherent in the board’s loss contingency proposal. FIN 48, like the loss contingency proposal, dealt with future uncertainties by dictating how companies should account for uncertain tax positions. It requires corporations to disclose their reserves in the event that tax officials disagree with some of the company’s tax treatments. The difficulties with the ensuing calculation are analogous to those under the loss contingency proposal. To begin with, companies must assume that they will be audited. They must then calculate the odds of their tax decisions holding up. It’s not unlike companies facing potential litigation or litigation in its early stages who must do what amounts to nothing less than handicapping their chances of success. Indeed, many observers believe that FIN 48 disclosures are by themselves so uncertain that they have proven to be little help to investors. Before FIN 48, companies kept their tax strategies and assumptions to themselves, either for fear of waving red flags at the IRS or of having any weaknesses in their strategy thrown back at them in court. As it turns out, FIN 48 has been so controversial that at press time, FASB had delayed extending it to private companies for the second time in two years. //The Financial Accounting Standards Board’s (FASB) recent decision to extend to Dec. 31, 2009, the proposed effective date of a new expanded standard for reporting loss contingencies may be a mixed blessing for general counsel and the defense bar. // //The decision allows counsel to put the issue off until year’s end instead of being obligated to comply with the original December 2008 implementation date. The board hasn’t removed the most offensive parts of the proposed standard, but it did promise to "redeliberate" it, meaning that something akin to Chinese water torture has replaced the agony that likely would have accompanied certainty. // //Undoubtedly, the response to the proposed revision of FASB Statements No. 5 and 141(R), circulated for comment in June 2008, has been nothing less than vitriolic, drawing more than 235 comments of intense criticism from a host of companies, trade associations and lawyers. //
 * By [Melnitzer|Julius Melnitzer]

//Association of Corporate Counsel GC Susan Hackett has publicly gauged her membership’s response as unprecedented in her two decades with the organization. The American Bar Association, the Intellectual Property Owners Association (IPO), Apple GC Daniel Cooperman and Sun Microsystems GC Michael Dillon are among those who have lined up in opposition.// //"I believe the decision to redeliberate the proposal is a direct reaction to the uproar from the corporate an // //Likely Loss // //At the heart of the uproar is the key component of the proposal: lowering the threshold for reporting the potential loss from a lawsuit from the current "probable" to anything short of "remote." The proposal also would require detailed quantitative and qualitative information about the potential impact of loss contingencies, particularly litigation claims, on the company’s financial positions. // //According to David Furbush, a partner at Pillsbury, moving from probable to remote will mean going from a system where detailed reporting of litigation claims is hardly ever required to one where it will be hard to avoid. // //"Probability has been defined as being much greater than 50 percent, more like 80 percent," he says. "In law, few things have a chance of success greater than 80 percent, so reporting is rarely required. Similarly, an adverse outcome is rarely remote, which means that reporting will frequently be required." //

//Currently, because many loss contingencies are reasonably possible rather than probable, companies usually deal with significant litigation by describing it and stating that an estimate of loss cannot be made. That’s a far cry from the detailed liturgy FASB’s original proposal mandated, a liturgy that critics say will not only fail to work as intended, but will prejudice companies in a variety of ways.//

//**Difficult Endeavors **// //The argument against the proposal begins with the assertion that estimating contingent losses is difficult at best. Critics point out that litigation is unpredictable; that plaintiffs frequently do not state the amounts they are seeking and when they do the amounts claimed can be unreasonable; and that the reporting party may not have the information required to make a reasonable estimate of the potential loss. // //Apart from the difficulty of quantifying loss contingencies, critics add that frequent and early disclosure creates undue risks for companies. Most significantly, they say that early disclosure would blur the balance between attorney-client privilege and work product immunity, and increase the likelihood that disclosure will amount to a waiver of privilege. // //"The drum that the defense side has been beating is that the inevitable march to full disclosure simply can’t make it impossible for companies to deal with counsel by bringing privileged documents into the public domain," says Richard Walton, of counsel at Buchalter Nemer. // //Critics also say that forcing defendants to respond to plaintiffs’ unreasonable demands in a disclosure would put unfair pressure on defendants to settle; that the required analysis includes description of factors impacting the litigation such as the strengths and weaknesses of available defenses, thereby providing plaintiffs’ counsel with important information about defendants’ litigation strategies; that the losses estimated in the disclosures would become floor figures for settlement; and that if the disclosures differ significantly from the actual losses, shareholder lawsuits will result. // //"In addition, disclosing parties are likely to err on the side of overestimating potential liability in order to minimize shareholder lawsuits," writes IPO president Steve Miller in his comments on the proposal. "Therefore, the proposed amendments will fail to achieve the goal of providing reliable financial information, and lawsuits will have an unnecessary and depressive effect on the valuations of companies making such disclosures." // //Fortunately, it appears that FASB is prepared to listen and learn. // //**<span style="color: black; font-family: 'Arial','sans-serif'; font-size: 10pt;">Mode <span style="color: black; font-family: 'Arial','sans-serif'; font-size: 11pt;">l Approach **// //<span style="color: black; font-family: 'Arial','sans-serif'; font-size: 10pt;">When it issued the extension in September 2008, FASB announced it would develop an alternative model for loss disclosure aimed at addressing the concerns regarding privilege and prejudicial impact. Field testing of the original and the alternative proposals had been scheduled for November and December 2008. The field testing involves asking volunteer companies to prepare sample disclosures based on both models. // //<span style="color: black; font-family: 'Arial','sans-serif'; font-size: 10pt;">"The idea is to get companies to demonstrate how they would have made the disclosure under either model," Furbush says. "It’s an interesting and atypical way of doing things, but it gives both sides something concrete to discuss." // //<span style="color: black; font-family: 'Arial','sans-serif'; font-size: 10pt;">FASB is expected to conduct a roundtable discussion on the proposal by March, and then recast the proposal by the end of April. // //<span style="color: black; font-family: 'Arial','sans-serif'; font-size: 10pt;">But while these developments have been welcomed favorably by those objecting to the original proposal, it’s not quite clear what the ultimate outcome will be. //

//"FASB has certainly not backed off entirely from consideration of expanded contingency disclosure," White says. "Still, they do seem to have decided to pull back somewhat."// //<span style="color: black; font-family: 'Arial','sans-serif'; font-size: 10pt;">It’s not unreasonable, then, to assume that the final rule will be less expansive and therefore potentially less intrusive on privilege and on forcing companies into prejudicial disclosures. On the other hand, it may be that predicting what FASB will do is as daunting an endeavor as quantifying the vagaries of litigation loss contingencies. //

[|Update On Congressional Consideration Re: FASB]
Updating our post last week, [|FEI Committee on Corporate Reporting (CCR), SEC Chairman, Others Write Congress on Standard-Setting], earlier today, FEI's Committee on Private Companies - Standards Committee (CPC-S) submitted its own letter to Congress (see [|FEI CPC-S letter]) on potential amendments reportedly under consideration by some members of Congress that could impact the independence of the Financial Accounting Standards Board.

The [|FEI CCR letter] filed on Nov. 5, signed by CCR chair Arnold Hanish, stated: "CCR is concerned with recent proposals that would place accounting standards oversight under the jurisdiction of a new oversight board. Acting on such proposals to realign oversight of the Financial Accounting Standards Board (FASB), could change the objectives of financial reporting, harm U.S. capital formation, and potentially politicize the process of setting accounting standards....We urge you to reject any efforts to place accounting standard setting under a new oversight board and continue to support independent accounting standard setting in the United States."

The [|FEI CPC-S letter] filed on Nov. 11, signed by CPC-S Chairman William Koch, stated: "We would like to express our support for the recent letter sent by [FEI CCR] and concur that accounting standard setting should remain in the private sector, by an independent accounting standard setter. Additionally, we would like to expand on CCR's points to reflect the unique observations of privately-held companies."

We noted in our post last week that a number of professional associations have filed letters with Congress against any change to FASB oversight or any tying of systemic risk considerations to the accounting standard-setting process, but an alternate view is held by the American Bankers Association as shown in their testimony at a Congressional hearing last month, linked in our Nov. 6 post.

A more colorful (and perhaps, oversimplified) description of the situation can be found in an article by Ryan Grim appearing in the Nov. 6 edition of the Huffington Post, entitled, [|Civil War in Corporate America: Banks Battling the Chamber on Accounting Rules.]In defense of the Huffington Post, however, they do have access to information like the language of the potential amendment which Rep. Perlmutter (D-CO) was said to be considering offering as an amendment to Section 1103 of the House Financial Services Committee's discussion draft of its systemic risk bill. The Huffington Post said they confirmed with Congressional staff the language of the amendment, and the language was consistent with that circulated by the AICPA last week, along with the AICPA's comment letter to Congress arguing against the amendment. In addition, the Huffington Post posted a copy of [|SEC Chairman Mary L. Schapiro's letter to Rep. Frank;]we had cited some excerpts of that letter in our post last week, based on reporting in BNA.

Yesterday, Sen. Chris Dodd (D-CT), Chairman of the Senate Banking Committee, commented on this issue during the Q&A that followed his press conference announcing the release of the Senate Banking Committee's Discussion Draft of the Financial Reform Bill. Asked by a member of the press whether the Senate bill contains any provision to move FASB oversight to a systemic risk council, Dodd responded:

We didn't do that in this bill. We modified FASB back a few years ago, because for years I've resisted, at various times, there's been efforts to Congressionally decide accounting standards; and just as I don't want - and I say this respectfully of our institution in which I serve - having the Congress decide Federal Reserve policy, setting accounting standards is precarious, so we have strengthened FASB to be far more independent; I'm satisfied how that works today.

You can watch a clip of Dodd's comment on YouTube [|here].

The House is in recess this week, and will continue with its markup of the systemic risk reform bill when it returns next week.

Links to the Senate Banking Committee's Discussion draft, press release, and summary of the Senate Banking Committee's Financial Reform bill can be found in Broc Romanek's post today in [|The Corporate Counsel.net blog].

See also: Jack Ciesielski's post earlier this week on: [|An Accounting Vortex], and the related post by Bill Sheridan today in the Maryland Association of CPA's Blog, [|CPA Success].

Hinchman Appointed FAF Director of External Relations & Communications In other news, the Financial Accounting Foundation (FAF) - parent of the FASB and GASB, announced earlier today the appointment of Grace L. Hinchman to the position of Vice President, External Relations & Communications. Hinchman formerly served as Senior Vice President, Public Affairs and Technical Activities, at FEI. According to the [|FAF press release,] Hinchman will be based in Washington, D.C.

Separately, the FAF [|announced] earlier this week that the upcoming Nov. 17 FAF meeting will take place in Washington DC instead of at FAF/FASB HQ in Norwalk, CT, and the entire meeting will be closed to the public.

I wonder (and I remind you of the disclaimer on the right side of [|this blog]) with the FAF meeting moving to DC next week, could there be a Beer Summit in FASB's future? And who else would be on the invite list? (See, e.g.: [|Obama Convenes Beer Summit,]by Michael O'Brien, The Hill.com, 7/30/09.) More seriously...if you'd like to hear the latest news on FASB, SEC, IASB developments, join us at FEI's Current Financial Reporting ([|CFRI)] conference in NYC next week. And follow @feiblog on Twitter [|www.twitter.com/feiblog] for upcoming news about a tweetup Monday night.

Print this post Posted by Edith Orenstein at [|5:00 PM]

[|Print this article] | [|Return to Article] | [|Return to CFO.com] =Start Your IFRS Engines?= In the wake of last week's meeting of U.S. and international accounting standard setters, the SEC's Mary Schapiro gives a nod to the rulemakers' convergence efforts. [|Marie Leone], CFO.com | US November 6, 2009 A 40-word statement by Securities and Exchange Commission chairman Mary Schapiro Thursday night, after U.S. and international accounting rulemakers reaffirmed their commitment to creating a single set of principles, didn't say much on its face. The innocuous two sentences read: "I am greatly encouraged by the commitment of the IASB and the FASB to provide greater transparency to the standard setting process and their convergence efforts. I believe that these efforts will result in improved financial information provided to investors." But after being relatively silent on the subject of international standards since taking the SEC reins in January, Schapiro, with her acknowledgment of the convergence project, may have provided the clue companies have been looking for with respect to a major upcoming decision by the regulator. Schapiro and her fellow commissioners are scheduled to decide in 2011 whether to require American companies to file financial reports using international financial reporting standards instead of U.S. generally accepted accounting principles. If the SEC decides that moving to IFRS is a good idea, then according to the current time line, the largest companies will start reporting under the international standards beginning in 2014, and all public companies will make the transition by 2016. But the timetable is likely negotiable, depending on feedback the SEC receives from corporations, investors, and auditors, as well as from educators, who will have to roll out coursework to prepare new accountants for IFRS. Some U.S.-based companies, such as industrial conglomerate United Technologies and health-care-products manufacturer Covidien, have already decided to make the accounting switch ahead of the SEC's decision. The overarching rationale for beginning the IFRS changeover now is that both companies have extensive multinational operations, and reporting consolidated financial results using a single set of standards is, in the long run, more efficient and less costly. At a recent meeting on global standards, executives of the two companies cited additional reasons for switching to IFRS ahead of an SEC mandate. United Technologies has acquired many companies based in countries that already require or at least recognize IFRS for statutory filing, said Margaret Smyth, the company's vice president and corporate controller. So integrating those new subsidiaries has the company already working on IFRS conversion. Lewis Dulitz, Covidien's vice president of accounting policies and research, pointed out a rules-based reason for ramping up IFRS conversion efforts; that is, the SEC's roadmap specifies that companies will have to file three years' worth of IFRS-prepared financial statements along with results filed in U.S. GAAP before making the switch. In practice, the three-year rule means that large companies would have to start dual reporting — in IFRS and U.S. GAAP — beginning in 2012, if the roadmap deadlines stay intact. "It seems more difficult to convert to IFRS now than it did four years ago," noted Dulitz, referring to the one year of comparable financial statements that companies had to provide when his former employer, Amsterdam-based Royal Ahold, converted from various local GAAPs to IFRS. Suddenly, the U.S. GAAP-to-IFRS conversion doesn't seem so far away, opined Dulitz at the conference sponsored by the International Accounting Standards Board and the American Institute of Certified Public Accountants. Other finance executives from U.S. companies have balked at the idea of moving to IFRS. Nearly 40 finance executives who commented on the SEC's proposal worried about the cost of switching accounting systems and doubt that many companies will consider the change worth the trouble if they are not forced into making the change. "Conversion to IFRS could lead to confusion and reduced marketplace confidence in financial statements at a time when confidence in the U.S. financial markets is already low," wrote Patrick Mulva, controller for ExxonMobil. What's more, Robert Pozen, institutional investor and chairman of MFS, asserts in his new book, Too Big to Save? How to Fix the U.S. Financial System//, that only the 100 to 300 largest U.S. companies should be required to switch to IFRS. Pozen writes that the SEC should not adopt the international standards as the nation's official accounting rules until several significant issues are resolved, including working out discrepancies between IFRS and U.S. GAAP with regard to the accounting treatment for revenue recognition, joint ventures, and research and development. Pozen was the chairman of the SEC's Advisory Committee on Improvements to Financial Reporting.// //Schapiro's comments followed a joint meeting of the IASB and the Financial Accounting Standards Board held last week. At the meeting, members agreed to come together more frequently during the next year to meet their deadline of finishing major convergence projects by the end of 2011.//

// © CFO Publishing Corporation 2009. All rights reserved. //

[|FASB, IASB Reaffirm Convergence By June, 2011]
Earlier today, FASB and the IASB [|announced]the release of a [|23-page joint statement]which reaffirms their commitment to improve IFRS and U.S. GAAP, and to bring about their convergence through completion of the major convergence projects outlined in the FASB-IASB Memorandum of Understanding by June, 2011. The joint statement outlines plans and milestone targets that will guide completion of the major projects by the June, 2011 target date. The major convergence projects include: Strive to Align Project Timetables In response to concerns voiced about 'leapfrogging' - i.e. when one of the two boards gets ahead of the other on a joint convergence project- the joint statement notes:
 * Financial Instruments
 * Consolidations
 * Derecognition
 * Fair Value Measurement
 * Revenue Recognition
 * Leases
 * Financial Instruments with the Characteristics of Equity
 * Financial Statement Presentation
 * Other MoU Projects
 * Other Joint Projects

We will strive to avoid creating timeline differences like those that have complicated our efforts to improve and align standards for financial instruments and other areas. If such differences do arise, we will work together to eliminate differences between standards as soon as practicable by drawing stakeholders’ attention to each others’ proposals and reviewing our own requirements with a view to addressing differences on a timely basis. In addition, the joint statement expresses the boards' commitment to: "Fundamental first principles about the purposes of accounting standards and the process by which the standards are determined, as set out in the statement of the Monitoring Board of the International Accounting Standards Committee Foundation, issued on 22 September 2009." It is interesting to note that the FASB-IASB joint statement speaks in some places of converging to a 'single' set of standards, and in other places of converging to a 'common' set of standards. To some, these terms can mean a world of difference. However, the terms are often used interchangably by many different parties. For example, here are some excerpts from the joint statement:
 * "Single Set," "Common" Set of Standards**

We are redoubling our efforts to achieve a **single set** of high quality standards within the context of our respective independent standard-setting processes. Our goal is to develop together **common standards** that improve financial reporting in the US and internationally and that foster global comparability. Achieving such improvements is consistent with the objectives of the IASB that are set out in the Constitution of the IASC Foundation. It also fulfils the responsibility the FASB has under US law and the Securities and Exchange Commission’s 2003 Policy Statement to consider, in developing standards, whether international convergence is necessary and appropriate in the public interest and investor protection.

Presumably, once a set of 'common standards' is acheived, the next step would be to officially adopt one set (again, presumably, IFRS, which is used in over 100 countries) as the 'single' global standard. FASB Chairman Robert Herz said as much in remarks at various conferences and Congressional hearings in 2007 and 2008. For example, in [|testimony]before the Senate Banking Committee, Securities Subcommittee, in October, 2007, Herz said:

[W]e agree with the Securities and Exchange Commission that a widely used single set of high quality international accounting standards for listed companies would benefit the global capital markets and investors. The ultimate goal, we believe, is a common, high-quality global financial reporting system that can be used for decision-making purposes across the capital markets of the world. However, achieving the ideal system requires improvements and convergence in various elements of the infrastructure supporting the international capital markets, including a single set of common, high-quality accounting standards, a well-funded, global standard-setting organization, and a global interpretive body to handle guidance and implementation issues. Improvements are also needed in disclosure requirements; regulatory, enforcement and corporate governance regimes; auditing standards and practices; and education of capital market participants.

Herz first acknowledged that the likely, ultimate 'single' set of accounting standards would one day be an improved version of IFRS, in remarks he gave at an FEI Global Convergence Conference in Sept., 2007, as noted by Marie Leone of CFO.com in [|Sweeping Away GAAP], 9.28.07. For some interesting reading on the practical aspects of convergence, see [|Convergence Doesn't Necessarily Mean the Same,] also by Leone, published Nov. 5 in CFO.com, in which she quotes D.J. Gannon of Deloitte and other experts. Appendix B of the joint statement, Shared Goals, Values and Principles, will likely be very significant, taking on perhaps an almost equal role to the Conceptual Framework of the two boards. The phrase 'relevant, transparent, neutral and comparable' is emphasized, in the context that:
 * Relevant, Transparent, Neutral and Comparable**

[I]t is critically important to achieve high-quality, globally converged financial reporting standards that provide relevant, transparent, neutral, and comparable financial information, regardless of the geographical location of the entity.

High-quality accounting standards are those that foster the provision of relevant, transparent, neutral, and comparable financial information. Some may view the only critical missing factor in that list of four factors as 'reliability,' although the decreasing emphasis on 'reliability' in favor of 'transparency' and 'relevance' has been happening for some time now in the boards' proposals to amend the conceptual framework. FASB's Mission Statement (as described in the April 2009 edition of [|Facts About FASB]) continues to emphasize relevance and reliability:

To accomplish its mission, FASB acts to [i]mprove the usefulness of financial reporting by focusing on the primary characteristics of relevance and reliability and on the qualities of comparability and consistency. My two cents (I remind you of the disclaimer which appears in the right margin of [|this blog]): The tipping of the scales with what some may perceive as more weight on relevance than reliability within the emerging revised conceptual framework, and statement of goals in today's joint statement, reflects the view of some that information about what an asset is worth today, based on what a market participant or third party would say, is more important to investors (i.e. more 'relevant') than a value based on some other valuation methodolog(ies), which may be more reliable. (Keep in mind, third party information for a nonliquid financial instrument, or a formerly liquid instrument in a disorderly or inactive market, can, in theory, be a quote from a broker who is giving a reference price, but may not necessarily actually want to buy and hold the item.) Caught in the middle, however, are preparers and auditors (not to mention members of the boards' of directors) who have legal liability for the information provided in financial reports, who may prefer keeping the historic balance between relevance and reliablity. A one paragraph statement was issued by SEC Chairman Mary L. Schapiro, in recognition of the FASB-IASB joint statement, in which she said:
 * One Paragraph Statement By SEC Chairman**

I am greatly encouraged by the commitment of the IASB and the FASB to provide greater transparency to the standard setting process and their convergence efforts. I believe that these efforts will result in improved financial information provided to investors. Although brief, Schapiro's statement may help pave the way for the SEC to, [|as Schapiro said at a conference in September]: "... speak a little later this fall about what our expectations are with respect to IFRS." The issuance of the joint statement by IASB and FASB, noting support of the G-20 - specifically, the [|G-20 Progress Report] issued on Sept. 25, which "call[s] on our international accounting bodies to redouble their efforts to achieve a single set of high quality, global accounting standards within the context of their independent standard setting process; and complete their convergence project by June 2011" - comes one day ahead of the 10th anniversary meeting of the G-20 Finance Ministers and Central Bank Governors, set to take place in St. Andrews, Scotland Nov. 6 and 7. Following are some early reports relating to this week's G-20 Finance Ministers meeting: [|A Deluge of G20 Meetings](FT, Nov. 4) [|G-20 Will Discuss 'Bubble-Building,' Meirelles Says](Bloomberg, Nov. 3) [|France Sets New Bonus Rules for Banks Ahead of G20] (DJ Newswire, Nov. 5) [|Big Bank 'Living Wills' Gain Traction in G20] (Globe & Mail, Nov. 5) [|Strauss-Kahn Sees G-20 Adopting Timeline, Method on Imbalances](Bloomberg, Nov. 4)
 * UPDATE**: Regarding the status of the SEC's proposed IFRS Roadmap, Reuters' Emily Chasan reports that at a New York State Society of CPAs conference on Nov. 5, SEC Deputy Chief Accountant Julie Erhardt explained that, while commenters on the roadmap generally concurred on moving to a single set of accounting standards, there was no one clear view on how to get there. Read more in Chasan's article, [|Lack of Accounting Rules Consensus Vexes SEC].
 * G-20 Finance Ministers Meet This Week**

GE's $19 Billion (And Increasing) Toxic Asset Sink Hole InboxX Reply |Jensen, Robert to AECM show details 10:39 AM (1 hour ago)

"GE's $19 Billion (And Increasing) Toxic Asset Sink Hole," by Tyler Durden, Zero Hedge, November 3, 2009 --- [] One, and maybe the only, of the recent benefits of the FASB's meager attempts at providing balance sheet transparency has been the requirement for banks and financial companies to disclose the difference between the Fair Market Value and the Carrying (Book) value of their assets, especially as pertains to loans held on the balance sheet. And while even the FMV calculation leaves much to be desired, it does demonstrate which companies take abnormal liberties with their balance sheets, instead of performing needed asset write-downs as more and more loans turn toxic. A good example of just such optimism appears when one evaluates the disclosure by "banking" company General Electric. On page 38 of the firm's just released 10-Q, the firm indicates that the delta between its loan portfolio FMV and Book Value continues increasing, and as of September 30, hit an all time (disclosed) high of $18.8 billion. In other words, General Electric, whose market cap is about $150 billion at last check, is likely impaired by at least $19 billion if it were forced to access the market today and sell off its loans. The $19 billion is 13% of its entire market cap. And the real number is likely much, much worse. The delta between the Carrying and Fair Market Value of GECC's loans can be seen on the chart below: A reminder of how GE calculates loan FMV is taken from the company's 10-K: Based on quoted market prices, recent transactions and/or discounted future cash flows, using rates we would charge to similar borrowers with similar maturities. In other words FMV uses the traditional Level III evaluation methodology. And even when using DCF (we assume that was used as it will always give the firm the "best", most palatable value reading), GE is still seeing a nearly $20 billion balance sheet shortfall? What is more troubling, is that even as GECC has been collapsing its balance sheet, with book value of loans dropping from $305 billion to $292 billion from FYE 2009 to Q3 2008, the FMV-Book delta has increased from $12.6 to $18.8 billion. And this is occurring in a time when the credit market is presumably surging? Is there something wrong with this picture? As we pointed out, the $18.8 billion is likely a gross underestimation of the real valuation shortfall, if one were to really mark all of GE's myriads of illiquid loans to market. Yet if nothing else, this shortfall should explain GE's urgent desire to sell NBCU and to use the ~$30 billion in proceeds to plug what is becoming an ever growing hole.

More on the greatest swindles of the world General Electric, the world's largest industrial company, has quietly become the biggest beneficiary of one of the government's key rescue programs for banks. At the same time, GE has avoided many of the restrictions facing other financial giants getting help from the government. The company did not initially qualify for the program, under which the government sought to unfreeze credit markets by guaranteeing debt sold by banking firms. But regulators soon loosened the eligibility requirements, in part because of behind-the-scenes appeals from GE. As a result, GE has joined major banks collectively saving billions of dollars by raising money for... Jeff Gerth and Brady Dennis, "How a Loophole Benefits GE in Bank Rescue Industrial Giant Becomes Top Recipient in Debt-Guarantee Program," The Washington Post, June 29, 2009 --- []

Jensen Comment GE thus becomes the biggest winner under both the TARP and the Cap-and-Trade give away legislation. It is a major producer of wind turbines and other machinery for generating electricity under alternative forms of energy. The government will pay GE billions for this equipment. GE Capital is also "Top Recipient in Debt-Guarantee Program." Sort of makes you wonder why GE's NBC network never criticizes liberal spending in Congress.

Jensen's threads on the bank rescue swindle are at [] z Bob Jensen's fraud updates are at []

Robert E. (Bob) Jensen Trinity University Accounting Professor (Emeritus) 190 Sunset Hill Road Sugar Hill, NH 03586 Tel. 603-823-8482 [|www.trinity.edu/rjensen]

[]

Pro-American Mood Clouds Convergence
Only the biggest U.S. companies should bother adopting the international financial reporting standards written by the International Accounting Standards Board, the former chair of the SEC's advisory committee on financial reporting says. Tim Reason, CFO.com | US October 29, 2009 With regulators pushing hard for a convergence of U.S. generally accepted accounting principles and international financial reporting standards within the next few years, the mood here appears to be swinging decidedly in favor of American standard-setters and American standards. /snip/

//What's more, in a new book to be released early in November, Robert Pozen, former chair of the Securities and Exchange Commission's Committee to Improve Financial Reporting, or CIFR, suggests that only the largest of U.S. companies should bother adopting the international financial reporting standards written by the IASB.// //"The switchover from U.S. GAAP makes sense only for the 100–300 of the largest U.S. companies with extensive global operations," writes Pozen, chairman of MFS Investment Management, in Too Big to Save?, his soon-to-be-released policy analysis of the economic crisis.// //Pozen was asked by the SEC to head the CIFR in 2007, and the blue-ribbon panel was given 12 months to formulate suggestions, which it released in August 2008. The CIFR's 170-page report seemed to endorse the general idea of accounting with fewer bright-line rules ­ which is often touted as the IASB's approach. But Pozen tells CFO that the committee generally avoided making any direct conclusions about IFRS. "We carefully avoided IFRS," he recalls, noting that the SEC was "overwhelmed" with the question of IFRS adoption at the time and that his committee had a broader mandate. "The sorts of reforms we proposed should apply to the way IFRS is done [too]."// //In his new book, however, Pozen has plenty to say about IFRS. He notes that different national flavors of IFRS are undermining its benefit as a universal system, and says significant differences remain between U.S. and international accounting systems. For that reason, he says, the SEC's proposal to allow companies the option of adopting IFRS early is problematic. "The United States should not allow company executives to choose between the two accounting standards because executives will obviously select the one with the highest reported income," he writes.// //While it makes sense for the largest of U.S. companies to convert to IFRS, Pozen says the move would prove too costly for most of the roughly 7,000 publicly traded companies in the United States, which "have modest foreign operations and relatively small accounting departments."// //"We have to look at this as a cost-benefit issue," Pozen tells CFO. His book cites the example of Martin Headley, CFO of Brooks Automation, a Massachusetts company serving the semiconductor industry. "Although 36 percent of its $526 million in revenue came from foreign sales in 2008, the company's chief financial officer says that switching to IFRS would cost millions of dollars without providing substantial benefits," writes Pozen.// //Speaking at a conference last fall attended by CFO's reporters, Headley said he plans to take a minimalist approach to IFRS, training some key individuals on his staff rather than replacing them or hiring more experts. "I'll be waiting until I'm sure it's actually going to happen," he said.//
 * =OUTCOMES - FASB OCTOBER 21, 2009 BOARD MEETING= ||
 * Source: || Financial Accounting Standards Board ||
 * Country: || United States ||
 * Date: || 23/10/2009 ||
 * Contributor: || Andrew Priest ||
 * Web: || http://www.fasb.org ||

Related Items || || [|OUTCOMES - FASB SEPTEMBER 23, 2009 BOARD MEETING]|| || || [|Accounting for financial instruments]. The Board discussed how an entity would account for credit losses (that is, credit impairments) related to financial assets in the fair value through other comprehensive income category. The Board will continue to draft the exact wording of the credit impairment model. Below is a description of that model: At the end of each period, an impairment loss would be measured as the present value of management's current estimate of cash flows that are not expected to be collected. (That is, the impairment loss recognized in a period is the decrease in the net present value amount of cash flows expected to be collected.) In estimating the amount of future cash flows, an entity would consider all available information relating to past events and existing conditions that are relevant to the collectibility of the financial asset(s), such as the remaining payment terms, the financial condition of the issuer, expected defaults, and collateral values, as well as existing environmental factors such as industry, geographical, economic, and political data that indicate that some contractual cash flows are not expected to be collected. The entity would not consider possible future scenarios. The Board will consider how interest income will be recognized at a future meeting. ||
 * The Financial Accounting Standards Board (FASB) has released a summary of its October 21, 2009 Board meeting. The single agenda item was Accounting for financial instruments.
 * [[image:http://accountingeducation.com/img/spacer.gif width="1" height="10" caption="*"]] ||

A new post has been added to the FEI Financial Reporting Blog: FASB, IASB To 'Retriple' Efforts To Meet 2011 Convergence Deadline Feel free to share the FEI blog with colleagues, and let them know they can sign up to receive the blog by emailing blogs@financialexecutives.org and writing in Subject line: Sign Up. You can also follow @feiblog on Twitter at [|www.twitter.com/feiblog]

European bankers don't want FASB-like approach to impairment adjustments
Tweedie noted that the IASB had heard from banks in Europe that they did not want to adopt the U.S. approach on accounting for impaired assets. “I want to emphasize that the alternative of adopting a portion of the FASB approach to impairment, promulgated in April, would not bring about a level playing field,” he said. “Furthermore, on many issues, EU financial institutions would not want us to adopt the U.S. approach on impairment. As I said in June, given the urgency of the fundamental issues surrounding IAS 39, none of us can afford the potential protracted back-and-forth resulting from piecemeal changes in international and U.S. standards that would undermine the comprehensive and desperately needed reform that is under way.” "IASB Not Waiting for FASB," WebCPA, October 20, 2009 --- [] Bob Jensen's threads on fair value accounting are at [|http://www.trinity.edu/rjensen/theory01.htm#FairValue]

==Before I discuss the sordid details of a recent FASB proposal, please take a moment to read this hypothetical: What if the FASB were to issue a proposal to require companies holding marketable equity securities of oil companies to calculate and report their investment as the number of shares owned multipled by the average share price over the past year. The average share price would be calculated from the closing share prices on the first day of each of the past twelve months. (In other words, changes to share prices over the last month of the year would not be counted.) Assume that the FASB issued its proposal to respond to concerns of financial statement issuers with significant holdings of oil and gas shares that reporting full year-to-year fluctuations in investment values would not constitute "meaningful" information to investors. Incredible? Yes. Impossible? No. As I am about to describe, something very close to my hypothetical scenario has left the station and is unlikely to be stopped before pooping on the financial statements of oil and gas producers. In an earlier post, I imparted the common-sense view that the historical-cost based financial statements of oil and gas producers bear almost no relation to a firm's value; because, the historic cost of a producing field, however measured, bears no relation to the value of that field. There are a number of reasons for this, having to do with the luck of the draw or the price for the output that will be obtained from extracting the field's reserves over ensuing decades. To make a long story short, that's why disclosures are critical in the oil and gas industry. In particular, two disclosures are critical, and it should come as no surprise that oil and gas companies go to great lengths to 'manage' them: (1) the quantities of oil and gas that can't be seen, but are estimated to be in the ground; and (2) a standarized calculation of the amount that the "proved" portion of those in-the-ground reserves are worth. The former is technically an SEC-required disclosure, and the latter, which I will refer to as the "present value of proved reserves" is to be found in the FASB's rules. "Modernizing" Oil and Gas Disclosures== ==In December of last year, the SEC issued a final rulemaking release to update the three-decades-old oil and gas disclosure requirements for current practices and changes in technology. As I described in two previous posts (here and here), numerous important and overdue changes to the disclosure rules were made. But there were also numerous sops to the oil and gas industry. Among the biggest gifts was the SEC's statement of intention to get the FASB to muddy up oil and gas valuations -- pretty much in the manner I described in my hypothetical scenario -- by substituting a crude estimation of averages prices for year-end energy prices. The only differences from my scenario are that the measurements are made in disclosures of reserve values, and that they affect the investee's financial reporting (as opposed to the investor's in my hypothetical).== ==Just as they were commanded, the FASB did indeed issue with great alacrity its own proposal to alter the net present value calculation along the dubious lines specified by the SEC. The FASB's "basis for conclusions"? Here ya go: "After taking into consideration more than 70 comment letters from financial statement users, preparers, auditors and other constitutents, the SEC refined its proosed rule on oil and gas reporting and issued the Final Rule on December 31, 2008." There is some brief discussion of other specifics, but with respect to the change in measuring the net present value of proved reserves, there is absolutely nothing more. And even what is provided is grossly misleading. Of the 70 comment letters, virtually all came from oil and gas producers, lawyers representing oil and gas producers, engineers working for oil and gas producers, auditors whose largest clients are oil and gas producers, and consultants whose clients are oil and gas producers. I could not find a single comment from an investor (even notice the weasel term "financial statement users" in the above quotation) among the list of comment letters posted on the SEC's website. A more accurate description from the FASB of their thinking (or lack thereof) would have been something like this: "The Cox-led SEC did their thing, and that's good enough fer us. Cuz they're the SEC. We got nuthin else to say about 'due process' or any other process." But in case you are wondering what the FASB is proposing to swallow -- hook, line and sinker -- here it is from the SEC's proposing release: "Some believed that reliance on a single-day spot price is subject to significant volatility and results in frequent adjustment of reserves. [footnote omitted] These commenters expressed the view that variations in single-day prices provide temporary alterations in reserve quantities that are not meaningful or may lead investors to incorrect conclusions, do not represent the general price trend, and do not provide a meaningful basis for determination of reserve or enterprise value." [italics supplied by me] Some Unsolicited Advice to the FASB And, so, FASB, I'm going to pretend that you have not switched off your brains on this, and provide you with some unsolicited advice. First, your job is not to help financial statement users predict a "general price trend." If future prices of oil could be predicted by past prices, then any person who can perform that trick is in the wrong business—unless they are already oil speculators. I have vivid memories of consulting for an oil and gas producer during a year in which they sold their entire production forward, because they speculated that prices would go down. Unfortunately for everyone involved in their ostensible "hedge," oil prices rose -- a lot. The operations managers I was working with, whose bonuses and shareholdings depended on oil revenues, were not pleased with the 'economists' at corporate headquarters who conjured that one up. And, those guys were privy to the best public and non-public information money could buy. Second, beware of the use of the term "meaningful." To put it as gently as I can, the fundamental attributes of financial information are its relevance and reliability. For example, subsitute either: (1) "relevant," or (2) "reliable," or (3) "relevant and reliable" in the above quotation for "meaningful" and see if it makes any sense. It doesn't, of course. More bluntly, you should treat "meaningful" as if it doesn't exist when discussing the properties of accounting information. I suspect that "meaningful" owes its popularity to the fuzzy psycho-babble of the hippie generation (that would be me). SEC literature is already infested with "meaningful," and you need to put a stop to it before it infects accounting standards. Finally, FASB, you should stiffen your backbone, clear your conscience and earn a gold star for bucking the single-minded, monied special interests. You omitted any reason for concluding that an average price should be substituted for the period-end price, because there is none possible. There is nothing you have ever done, and nothing that you could now say to rationalize the product of an SEC administration that would have babbled and blurted anything for the benefit of its political backers. If the new SEC honchos are still intent on mucking up oil and gas disclosures, they have the statutory authority to do it without any assistance from the FASB. Gratuitous shilling shouldn't have to cost investors $500,000 per vote.==

[|PCAOB Announces Ambitious Agenda; May Be Time to 'Dial Up' on Fraud, Silvers Says]
Earlier today, PCAOB Acting Chairman Dan Goelzer told the PCAOB's [|Standing Advisory Group]: "We are embarking on a new phase in standard-setting, [with] a very ambitious standard-setting agenda in the coming year, focusing on some nuts and bolts issues, particularly issues our inspection program has highlighted where standards could be improved or modernized." He added, "In the coming months, we are likely to see more activity with more impact on financial statement auditing than any similar period in the board's existence."

Marty Baumann, Chief Auditor of the PCAOB, reviewed the PCAOB's [|recent standard-setting activities], including proposed standards, Concept Releases, and final standards issued Oct. 2008-2009. The PCAOB staff also presented a chart in a handout outlining the [|status of previous SAG standard-setting discussion topics], and presented the [|PCAOB Office of Chief Auditor (OCA) Standard-Setting Agenda.]

As in prior years, the standard-setting agenda focuses on the board's current determination of near-term priority projects. Different from prior years, however, the agenda includes 'milestones' for projected dates of finalization of these projects, and the dates go out to 2011. Here are the dozen items listed on PCAOB's standard-setting agenda. [Target dates per PCAOB schedule shown in brackets next to each item.] The above list of projects is subject to change, noted Baumann, based on review of comment letters received on proposals and concept releases, board input on the agenda, and related effects of actions external to the PCAOB, including legislation, and standard-setting or rulemaking activity by the U.S. Securities and Exchange Commission or the Financial Accounting Standards Board.
 * 1) **Risk Assessment** – Comment period on proposals ended Feb. 18, 2009. Staff is working toward re-proposing the standards for public comment. [Re-proposed standards: 4Q2009; Final standard: 3Q2010.]
 * 2) **Audit Confirmations** –Comment period on Concept Release ended May 29, 2009. The staff has analyzed the comments received and is discussing with the Board the staff's views on how to address the comments.[Proposed standard: 1Q2010; Final standard: 3Q2010]
 * 3) **Signing the Auditor's Report** - Comment period on Concept Release ended Sept. 11, 2009. The staff is analyzing the comments received and will be discussing with the Board the staff's views on how to address the comments.[Board decide whether to proceed with this standard-setting project 4Q2009; if decision to proceed, then proposal 1Q2010; final standard 3Q2010.]
 * 4) **Application of the Sarbanes-Oxley Act's Provision on "Failure to Supervise**" – Staff is preparing a draft release for the Board's consideration relating to the Board's application of Section 105(c)(6) of the Act, which authorizes the Board to impose sanctions on firms and individuals for failure to supervise. The release would also seek comment on concepts relating to what, if any, rulemaking or standard-setting might usefully supplement the Board's application of that provision.[1Q2010: consider whether to propose standards; if decision to proceed, proposal 2Q2010; final standard 4Q2010.]
 * 5) **Accounting Estimates, Fair Value Measurements, and Specialists** – Staff is evaluating potential revisions to the standards on accounting estimates, fair value measurements, and using the work of a specialist. [Proposal 2Q2010; re-proposed or final standard 4Q2010; adopt final standard 2Q2011.]
 * 6) **Communication with Audit Committees** –Staff is developing a briefing paper for the Board's consideration on whether the staff should pursue a standards-setting project. [Proposal 1Q2010; re-proposed or final standard 3Q2010; adopt final standard 1Q2011.]
 * 7) **Related Parties** – Staff is evaluating potential revisions to the related parties auditing standard. [Proposal 1Q2010; re-proposed or final standard 3Q2010; adopt final standard 1Q2011.]
 * 8) **Global Quality Control Standards, Including Control Over Work of Affiliated Firms** – Staff is evaluating potential revisions to the quality control standards. This will include an evaluation of Appendix K. [1Q2010: determine whether to propose standards, if decision to propose, then propose 2Q2010; re-propose or adopt final standard 4Q2010; adopt final standard 2Q2011.]
 * 9) **Principal Auditor** – Staff is evaluating potential revisions to the 'principal auditor' auditing standard. [1Q2010: determine whether to propose standards, if decision to propose, then propose 2Q2010; re-propose or adopt final standard 4Q2010; adopt final standard 2Q2011.]
 * 10) **Going Concern** – Staff is monitoring FASB's project on Going Concern, and plans to update the timeline when FASB determines their action plan for the accounting standard. Staff will assess if any conforming amendments are needed to the Board's auditing standards to align with the FASB's final standard, and will evaluate any additional issues and determine whether to pursue a standards-setting project on going concern.[Determine whether to add a project on this 1Q2010.]
 * 11) **Subsequent Events** – Staff is evaluating FASB's new accounting standard on subsequent events and analyzing how it may affect the Board's subsequent events auditing standard. [1Q2010: determine whether to propose standards, if decision to propose, then propose 2Q2010; re-propose or adopt final standard 4Q2010; adopt final standard 2Q2011.]
 * 12) **Applicability of SECPS Requirements to all Registered Firms** – Because registered firms (generally non-U.S. firms and some smaller firms) that were not members of the SECPS in April 2003 when the Board adopted certain of the SECPS [AICPA's former SEC Practice Section] requirements are not subject to these interim quality control requirements, the staff is analyzing different options to determine if it is feasible to extend the SECPS requirements to all registered firms. This excludes Appendices E (superseded by AS No. 7) and K (part of global quality control standards standards-setting project). .[1Q2010: determine whether to propose standards, if decision to propose, then propose 2Q2010; re-propose or adopt final standard 1Q2011; adopt final standard 4Q2011.]

Although not part of the PCAOB's formal standard-setting agenda for the upcoming year, some SAG members argued there was a need for the PCAOB to revisit the fundamental fraud standard (SAS 99) as a standalone or 'foundational' standard, in much the same way as the PCAOB is in the process of re-proposing its suite of risk assessment standards as 'foundational' standards.
 * "We Need To Move The Dial" With Respect to Fraud, Silvers Says**

Baumann and other PCAOB staff emphasized that although they do not currently have a standard-setting project on fraud on their agenda, fraud-related aspects are woven into numerous standard-setting projects, including confirmations, risk assessment, and fair value, among others (with particular emphasis in the risk assessment standards).

Damon Silvers, Associate General Counsel, AFL-CIO, and a member of the Congressional Oversight Panel appointed by Congress for the Troubled Asset Relief Program, stated, "The overall fraud standard needs to be strengthened at the same time you undertake this exercise."

In response to questions, Silvers said, "We should not expect that every audit is a forensic audit... that's absolutely not what I'm saying." However, he added, "I think we need to move the dial a little bit so auditors have some greater obligation than is currently embodied in the current fraud standard, to have an obligation to act when there is reasonable suspicion of fraud."

"This was subject to some extensive discussion in the Treasury committee (Treasury's Advisory Committee on the Auditing Profession or ACAP]," said Silvers, adding, "some people, [e.g.] Lynn [Turner], may feel my approach is not tough enough, some people felt we should move to some absolute liability standard [i.e.] if you don't find fraud, it's the auditors fault; but it's also not my view that looking for fraud is not related to the audit, that doesn't parse with the public's [perception] of the audit profession."

Joe Carcello, Director of Research, Corporate Governance Center, and Ernst & Young Professor, University of Tennessee, said, "I agree with Damon [Silvers], I think an absolute liability standard would be a big mistake. As someone who has spent a lot of my professional career studying fraud, some of these [frauds] are very elaborate, I don't have strong opinion on embedding [in] fraud standard or separate [standards, e.g. risk assessment standards]. (See also our related post today, citing Carcello's remarks on an upcoming COSO fraud study: [|COSO Updated Fraud Study Coming; Garrett Proposes Sarbox Exemption])

Also on the subject of fraud, SAG members asked the PCAOB staff what the status was of PCAOB's response to recommendations directed at the PCAOB included in the final report of the Advisory Committee on the Auditing Profession (ACAP). ACAP was cochaired by former SEC Chairman Arthur Levitt, and former SEC Chief Accountant Don Nicolaisen, and their final report was issued in fall, 2008. A number of SAG members or other individuals from their companies served on ACAP.
 * Status of PCAOB's Response to Treasury ACAP Recommendations**


 * Fraud center:** Among ACAP's recommendations was that the PCAOB launch a Fraud Center to gather and share information about fraud prevention and detection. A couple of SAG members noted they had heard that the SEC may have placed a budget constraint on the PCAOB with respect to forming a Fraud Center.

Baumann responded, "We are continuing to gather evidence with respect to what we might want to do with respect to [a fraud center]." He added, "That is a bit outside the standard setting area."

Goelzer added, "In this year’s budget, we were given what we asked for in terms of implementation of [ACAP's] recommendations." He noted that the PCAOB's budget authorization approved by the SEC "asks that we consult with the SEC, keep them advised."

"On the fraud center specifically," Goelzer continued, "we do regard that as a priority recommendation; it has real potential to benefit audit quality; we are going through the process of gathering input on how a fraud center would best be structured, and what its responsibilities would be. We will go back to the SEC and tell them... what budget [would be appropriate]. He added he was not aware of any budget limitations with respect to the fraud center.

SEC Chief Accountant Jim Kroeker, an observer at the SAG meeting, added he was not aware of any budget limitations with respect to the fraud center.


 * Audit quality indicators**: Another ACAP recommendation called for the PCAOB to consider requiring large audit firms to provide disclosures relating to a set of audit quality indicators. A number of SAG members encouraged the PCAOB to launch a project in this area.

Baumann replied, "We had a lengthy session on audit quality indicators at a SAG meeting about a year ago, a discussion group and breakout groups, that was a very valuable discussion." He added, "We received significant input at that discussion, a lot of support for the importance of measuring and defining audit quality; on the other hand, for virtually all audit quality indicators we discussed at that meeting, there seemed to be as many potential negative unintended consequences." He noted while there was general agreement that audit quality indicators were a good idea, PCAOB staff believed further exploration would be necessary on this subject due to the potential unintended consequences..

SAG member Lynn Turner, a former chief accountant at the SEC, and a member of ACAP, commented, "Just because people said there are some unintended consequences, that is probably the most overused phrase .... these days... used as a reason by people to not do something."

Sam Ranzilla, Audit Partner and National Managing Partner, Audit Quality and Professional Practice, KPMG LLP, referencing comments made earlier in the SAG meeting by Liz Gantnier, Director of Quality Control, Stegman & Company (and a member of the Center for Audit Quality's Professional Practice Executive Committee), said: "I agree with Liz, there is a theme running through the [SAG briefing] papers, to adding requirements in a very prescriptive set of standards."
 * Ranzilla Cautions On "Presumptions" In Audit Standards**

"I think you ought to think very long and hard about going down a path that is very prescriptive," said Ranzilla, "and I also warn you about the presumptive nature, if you presume something is a risk factor, or is a 'bad thing,' and therefore you go to an extended audit response - but you can avoid that by documenting in some level of detail why you overcame that presumption - human behavior will accept whatever you presumed was in the standard, because the risk of getting second guessed by me as an internal inspector, then the [PCAOB] inspector." As a result, according to Ranzilla, "It might be more efficient to do unnecessary work, than to document why you don't need to do unnecessary work." Therefore, he advised, "Going down the presumptive path is a very significant decision, and one you should not take without a great deal of soul searching."

If you are an FEI member, you can read more in [|FEI's seven-page summary] of the SAG meeting. Not an FEI member? What are you waiting for? FEI membership entitles you to our members-only news summaries, networking events, discounts on conferences, free reports from FEI's research affiliate, the Financial Executives Research Foundation, and more! Learn more about [|FEI membership].
 * More Details from SAG Meeting**

Print this post Posted by Edith Orenstein at [|10:50 PM]

||
LIFO vs. IFRS Why the impediment? June 12, 2008 by George White, CPA //IFRS is the acronym for International Financial Reporting Standards. The U.S. Securities and Exchange Commission (SEC) is committed to supporting IFRS, which calls for uniform international reporting standards. Conforming Generally Accepted Accounting Principles (GAAP) to IFRS is known as “convergence.”// //One impediment to smooth convergence is LIFO (last in, first out), an inventory accounting, method used by companies throughout the U.S. economy to determine both book income and tax liability. Long accepted for GAAP, LIFO has little acceptance internationally.//

//If the U.S. accounting standard-setting body, Financial Accounting Standards Board (FASB), were to embrace IFRS fully, LIFO would no longer be acceptable for GAAP. Given the non-parallel aims of GAAP and tax, there would seem to be little connection between the fate of LIFO for financial statement purposes (F/S LIFO) and LIFO for tax reporting (tax LIFO). However, Code § 472(c) links the two: a taxpayer cannot use tax LIFO unless it also uses F/S LIFO.// //There had been speculation that FASB, as part of its agreement to converge, would insist upon having an exception for LIFO. That speculation turns out to have been unfounded. In a lengthy letter to the SEC, the FASB stated that it “strongly oppose(s)” any such exception.// //What the FASB Position Means for Tax LIFO// //No imagination is required to see what the FASB position means for tax LIFO. Once F/S LIFO loses its legitimacy in IFRS, it cannot be used for U.S. tax purposes. That would occur without Congress ever lifting a finger to repeal LIFO. However, it’s extremely unlikely that Congress would remain passive and watch tax LIFO disappear as a result of the demise of F/S LIFO. That’s because the revenue pick-up from taxing LIFO reserves (estimated at more than $100B in Chairman Rangel’s comprehensive corporate reform bill, H.R. 3970) as a consequence of §472(c) would be considered to result from existing law. As such, it cannot be considered as increased revenue in a tax bill. Under Congressional budget procedures, tax reductions (the Holy Grail of politicians) must be “paid for” with new tax raisers. Accordingly, it’s a virtual certainty that Congress would act affirmatively to repeal tax LIFO once convergence becomes a reality.// //One can anticipate a major push-back from LIFO taxpayers (ranging from major oil companies to automobile dealers). They’re undoubtedly more interested in saving taxes than reaching convergence.// Send your responses here. || George White a CPA and attorney, is with the AICPA Tax Division, Washington, D.C. office. His duties include acting as liaison to the Tax Accounting Technical Resource Panel and Corporations and Shareholders Technical Resource Panel. He is a retired tax partner from Ernst & Young, and a prolific author and editor. He holds a B.A. from Holy Cross College, an M.B.A. from the University of Pennsylvania and an LL.B. from Harvard University.
 * Rate this article 5 (excellent) to 1 (poor).

S-OX 404(b) for Non-Accelerated Filers: A Political Crime Waiting to Happen
Posted: 05 Oct 2009 10:41 PM PDT Section 404(a) of the Sarbanes-Oxley Act, together with SEC rules implementing the provisions of the Act, require management to assess and report on the effectiveness of internal control over financial reporting (ICFR). It took a few years for the SEC to phase everybody in, but all public companies, large and small, are now subject to the requirement.

As pretty much everyone knows, however, S-0X 404 doesn't stop with a management report. Auditors get in on the action in Section 404(b). Therein is the lucrative requirement that an independent auditor attest to management's assessment regarding the effectiveness of their internal controls over financial reporting (ICFR). One person testifying before Congress has called the provisions of S-OX 404(b) the largest windfall to audit firm partners in history, and as I will soon describe, 6,000 more public companies await a new 'service' for which the benefits are, to be charitable, unclear.

The corporate corruption scandals that got politicians moving on the Sarbanes-Oxley Act of 2002 were the result of fraud by CEOs and CFOs. ICFR can have little to no impact on the actions of the top executives, because they always possess the power to override internal controls, or sometimes to orchestrate collusive schemes that circumvent those controls. Thus, Section 404 cannot possibly do much to mitigate these particular sources of fraud risk; and there is no better example of that than Enron itself. I have been told (but have not verified) that Enron was the only public company to disclose with much pride and pomp that it paid its world-class, independent auditor to perform a separate evaluation of internal controls. Andersen's report was, of course, clean as a whistle. No one should doubt as well, that Enron's relationship with its auditors wasn't much cozier than the norm, either. No matter who the client is, and especially if it is a big one, material weakness are generally only reported after an error has occurred; i.e., after a control has obviously failed. Thus, all the machinations to test ICFR, and prevent a control from failing, don't add much beyond the testing of account balances that occurs as part of the regular financial statement audit. So, it remains questionable at best, that S-OX 404(b) has created a safer environment for investors to trade their shares. Auditors, on the other hand have been champing at their bits, waiting for the SEC to throw them some fresh meat: the 6,000-odd smaller public firms (technically, "non-accelerated filers) who are not yet required to pay for an ICFR report.
 * Why S-OX 404(b) is Little More than Chicken Salad for Auditors**

The auditors received some good news on that front a few days ago when the SEC announced that the stay of execution for non-accelerated filers would be extended only until their annual reports for fiscal years ending on or after June 15, 2010. Chair Schapiro and one other commissioner also issued statements to 'assure investors' that no further extensions would be granted.
 * Chicken Salad Days Appear on the Horizon**

Indeed, the SEC's Office of Economic Analysis has completed the last of the SEC's go-through-the-motions machinations to steer S-OX 404(b) through the gauntlet of thousands of irate registrants who resent the additional audit fees imposed upon them -- and the additional hoops they must jump through. And, what did OEA's report have to say? As it turns out, not much at all. Although changes to SEC and PCAOB guidance may have reduced the cost of S-OX 404(b) implementation for companies that currently must comply, OEA did not even address the key question: whether the costs of complying with S-0X 404(b) has been less than the benefits, or whether benefits can be expected to exceed the costs of compliance for the 6,000 companies in line to be plucked. It must surely be the case for non-accelerated filers that initial implementation costs are most onerous, especially in an economic down cycle. But nothing so obvious and significant was to be found in the OEA's report.

If I were writing OEA's report, I might have begun and ended with the following modest, albeit virtually dispositive, back-of-the envelope calculation: The total value of all public traded equities in the U.S. is very approximately $14 trillion, based on information available from indexes published by Wilshire Associates. Let's conservatively assume that each and every non-accelerated filer has a total market cap of $75 million, which is the maximum market cap for a non-accelerated filer. Even under that very conservative assumption, 6,000 non-accelerated filers comprise (at the very most) only 3.2% of aggregate equity values. In the best of worlds (i.e., assuming that there is real information in an auditor's attestation report) can the new fees that auditors will charge these 6,000 smaller companies provide loss protection that will cover the billions of dollars in aggregate fees? Don't bet on it. In fairness, the SEC would say that their hands are tied; S-OX directs the SEC to require ICFR attestation reports from all public companies. So, what should really happen is for Congress to wake up and amend S-OX to permanently exempt non-accelerated filers from the requirements of Section 404(b). Will it happen? Don't bet on that one, either.
 * The Skinny on the Costs and Benefits of Section 404(b)**

What upsets me the most is that chair Schapiro is once again catering to the wishes of the Big Four instead of affecting much needed reform, as she has pledged to do. Schapiro should use her bully pulpit to inform Congress that they have created an obvious case of excess regulation. Notwithstanding the sorry fact that S-OX 404(b) has devolved into a waste of time for all issuers, to extend it to non-accelerated filers would be nothing less than criminal. Instead, of rushing to require ICFR audits, why don't we just sit back and wait to see how many non-accelerated filers will voluntarily submit to an examination of their ICFR – just like Enron did. =CPA Exam to Undergo Transformation=

SEPTEMBER 30, 2009 <span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">The Uniform CPA Examination will be transformed beginning in 2011, with a new structure, format and content and supported by enhanced technology, the AICPA said in a letter Friday to state boards of accountancy.

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">The improvements, designated CBT-e for Computer-Based Testing evolution, will be launched Jan. 1, 2011, simultaneously with exam content updates that include, for the first time, testing on International Financial Reporting Standards (IFRS). IFRS material is part of the new Content and Skill Specification Outlines (CSOs/SSOs) for the CPA Examination. Also to be introduced on the examination Jan. 1, 2011, is a new research task format and a new release of authoritative literature—the FASB Accounting Standards Codification. Examination candidates will begin seeing preparation materials reflecting the new authoritative literature release and research task format when sample tests and a new tutorial are released in the fall of 2010.

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">The AICPA Board of Examiners, after consulting with state accountancy boards and others, determined that exam candidates would be better served if the changes were made all at once rather than over time as originally envisioned, said the letter, signed by Colleen K. Conrad, chair of the Board of Examiners, and Craig N. Mills, vice president–examinations.

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">The AICPA collaborates with NASBA and testing and assessment services company Prometric to assist state boards in their use of the CPA examination in the CPA licensure process.

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">The new CSOs/SSOs are now available in final form on the CPA Examination Web site (www.cpa-exam.org) More information about the impending changes will be made available over the next several months there and in The Uniform CPA Examination Alert//.// // View Comments |  Add Comment |  Share This Article  //

[|G-20 Progress Report - More Detailed than Leaders' Statement - Calls For Convergence by June, 2011]
Updating [|our earlier post]from this weekend on the [|Sept. 25 G-20 Leaders' Statement](which called somewhat generically for convergence by June, 2011), we believe our original interpretation posted on Sept. 26 (i.e. that the G-20 is calling for completion of major convergence projects - such as the [|FASB-IASB MOU] - by June, 2011) was correct, because of wording posted subsequently by the G-20 in an updated Progress Report as detailed below.

Compare the wording in [|Item 87 of the Progress Report on the Actions of the London and Washington G20 Summits - 5 Septmeber 2009], which states: "Accounting standard setters should take action to make significant progress //towards a single set of high quality global accounting standards// ** by the end of 2009 **//," - to the wording in Item [|53 in the Progress Report on the Actions to Promote Financial Regulatory Reform Issued by the U.S. Chair of the Pittsburgh G-20 Summit - 25 September 2009,] which states: "We call on our international accounting bodies to redouble their efforts to// ** achieve **//a single set of high quality, global accounting standards within the context of their independent standard setting process; and// ** complete their convergence project by June 2011 **//."// (emphasis added)

//The operative change in wording between the G-20's Sept. 5 Progress report with respect to convergence (generally), and the Sept. 25 Progress Report noted above, is that the G-20 has accelerated its call for global accounting standards convergence from a call for accounting bodies to "make significant progress ... by the end of 2009" to a call for them to "complete their convergence project by June 2011."//

//The [|G-20's Sept. 25 Progress Report]discusses the matters of financial instruments, off-balance sheet items, provisioning (including loan loss provisions), valuation and impairment under separate items shown in the Progress report - Items 49, 50, 51 and 52 - for which the G-20's request of accounting standard-setters is still stated as requesting completion "by the end of 2009."//

//I'd like to emphasize this is my interpretation (and I remind you of the disclaimer posted on the right margin of our blog at []).//

//Some other personal observations: The [|FASB-IASB MOU]appears to have a generic date of 2011 as the goal for major convergence projects to be completed (without specifying a particular month in 2011) so some observers may interpret the G-20's Sept. 25 Progress Report as putting an earlier target completion date in 2011 (June, 2011) than others may have assumed the [|FASB-IASB MOU] was aiming at (i.e., in theory, 2011 in the FASB-IASB MOU could have been interpreted by some to mean Dec. 31, 2011).//

//Is the June, 2011 target completion date for convergence being specified by the G-20 to provide more breathing room for the SEC to potentially reach a decision in 2011 on its IFRS Roadmap? The proposed IFRS Roadmap that was issued for public comment by the SEC last fall, as noted in [|SEC's Aug. 27, 2008 press release] (the date the Commission voted in favor of issuing the proposed IFRS Roadmap for public comment) noted that under the proposal: "The Commission would make a decision in 2011 on whether adoption of IFRS is in the public interest and would benefit investors."//

//As we noted in an earlier post, various news sources have reported that in the Q&A session following her prepared remarks at Georgetown University on September 18, SEC Chairman Mary L. Schapiro indicated the SEC would formally revisit its proposed IFRS roadmap 'this fall.' More specifically, according to Sarah Lynch of Dow Jones Newswire, in her article, [|Schapiro Says SEC Will Discuss Transition to IFRS This Fall]://

//Schapiro signaled Friday [Sept. 18] the issue of switching from using U.S. generally accepted accounting principles to a global standard, however, is still very much on her agenda. "It would be ideal if we can have a single set of high-quality accounting standards that worked globally. The reason for that is it would allow for comparability for very large companies in particular and give investors the ability to make comparisons around the world," she said. "I expect we will speak a little later this fall about what our expectations are with respect to IFRS," she added.//

//I have reached out to various parties for comment/confirmation of my understanding of the various G-20 reports; while the information in the G-20 Leaders Statement was generic, the information in the Progress reports appears to be more specific. If I receive further information I will add it to this post or a subsequent post.//

//[|Print this article] | [|Return to Article] | [|Return to CFO.com]// =Global Standards Alive and Kicking, SEC Accounting Chief Says= Rather than sidetracking international financial reporting standards, the economic crisis may have underscored their importance, Kroeker says. [|Marie Leone], CFO.com | US September 17, 2009 The roadmap to the convergence of U.S. and global accounting standards is alive and well and a Securities and Exchange Commission priority, says James Kroeker, the commission's chief accountant. The roadmap is a loose time line for the transition of U.S.-based public companies to the use of international financial reporting standards proposed by the SEC in 2008. The effort seems to have been on hiatus since new SEC chair Mary Schapiro took the reins from Christopher Cox, who introduced the roadmap. But Thursday morning, Kroeker assured a roomful of accounting experts that the roadmap is on track. "Don't read anything into the deferral" to extend the comment period for the time line, he said at a meeting in New York City sponsored by the New York State Society of Certified Public Accountants. The end of the comment period was extended 60 days, from February 19 to April 20, 2009, after the proposed roadmap was released in November 2008. All told, the SEC received 200 comment letters on the pros and cons of moving away from U.S. generally accepted accounting principles to international financial reporting standards. Half of the comments came from corporations, with about 30% of those companies from the Fortune //100. About 25% were outside the// Fortune //500.// //Most observers agree that the current financial crisis diverted the SEC's attention from the IFRS project. But Kroeker noted that the crisis may have, in fact, underscored the importance of IFRS. That's because the discussions related to the credit crunch were global in scope, as were the responses and potential solutions, he added. For example, the Financial Stability Forum, a group of 26 finance and economic organizations from around the world including central banks and national treasury departments, has debated such issues as global banking regulation, accounting standards, and corporate governance.// //Further, addressing such issues as off-balance-sheet accounting from a national perspective rather than an international one doesn't make sense because of the interconnections among multinational companies and their investments, said Kroeker. "Turning back to the roadmap will be a priority" for the SEC, he added.// //To be sure, Kroeker did hint that one aspect of the proposed roadmap might be scrapped because of a lack of support from most constituents. A handful of large multinationals should be able to convert to IFRS by 2011, even though most companies wouldn't be required to convert until 2016 at the earliest.// //Issues still in play include the idea of allowing U.S. and international standard-setters to proceed with converging accounting rules and requiring U.S. companies to report in IFRS after that project is complete. Critics of that approach say the wait would be too long and that companies that want to convert should be able to do so before the two regulatory systems fully converge. Another school of thought among the comment letters holds that companies should not be required to file in IFRS until after the Financial Accounting Standards Board and the International Accounting Standards Board complete projects on such complex issues as revenue recognition, pensions, and leases. At issue, says Kroeker, is whether standard-setters should agree on core principles like fair value first, and then work through rule making.//

// © CFO Publishing Corporation 2009. All rights reserved. // //[|Print this article] | [|Return to Article] | [|Return to CFO.com]// =New Revenue-Recognition Rules: The Apple of Apple's Eye?= The computer company and other tech outfits are likely to cash in on revenue-recognition changes if the new regs take on an international flavor. [|Marie Leone], CFO.com | US September 16, 2009 While Steve Jobs was preparing to introduce the new Apple iPod nano last week, the company's chief accountant, Betsy Rafael, was sending off a second letter to the Financial Accounting Standards Board related to revenue recognition. At issue: how FASB might rework the rules related to recognizing revenue for software that's bundled into a product and never sold separately. The rule is especially important to Apple because it affects the revenue related to two of the company's most successful products — the iPod and the iPhone. If FASB's time line holds to form, and the rules are recast in 2011 the way Apple hopes they will be, the company could be able to book revenue faster, yielding less time between product launches and associated revenue gains. In theory, a successful launch — and its attendant revenue — would drive up Apple's earnings, and possibly stock price, in the same quarter the product is introduced, according to several news reports that came out earlier this week. Apple and other tech companies have been lobbying for a rewrite of the so-called multiple deliverables, or bundling, rule for quite some time. They argue that current U.S. generally accepted accounting principles make it hard for product makers to reap the full reward of successful products quickly. That's mainly because U.S. GAAP is stringent about when and how companies recognize revenue generated by software sales. "The requirements are that when you sell more than one product or service at one time, you have to break down the total sale value in[to] individual pieces. Establishing the individual values under U.S. GAAP is solely a function of how the company prices those products and services over time," PricewaterhouseCoopers's Dean Petracca told CFO //in an earlier interview. Contracts typically include such multiple "deliverables" as hardware, software, professional services, maintenance, and support — all of which are valued and accounted for differently.// //The complex accounting rule has left many product makers waiting for a chance to voice their displeasure at the standards, and the most recent comment period saw such giants as Xerox, IBM, Dell, and Hewlett-Packard — as well as relative newcomers like Palm and Tivo — make their case to FASB. In all, 34 companies wrote to FASB during the month-long comment period that ended in August to register their opinions on the accounting treatment of multiple elements.// //A broader revenue-recognition discussion paper was issued by FASB and the International Accounting Standards Board in December 2008 for a six-month comment period. The boards are currently reviewing the comments, and an exposure draft on revenue recognition, which is the penultimate step to a new global rule, is expected out next year.// //Regarding the issue of multiple deliverables, most technology companies would like to see FASB move closer to international standards with regard to bundled software, and drop the requirement for vendor-specific objective evidence. Under GAAP, VSOE of fair value is preferable when available, according to Sal Collemi, a senior manager at accounting and audit firm Rothstein Kass.// //Basically, VSOE is equivalent to the price charged by the vendor when a deliverable is sold separately — or if not sold separately, the price established by management for a separate transaction that is not likely to change, explains Collemi. Third-party evidence of fair value, such as prices charged by competitors, is acceptable if vendor-specific evidence is unavailable. Many technology companies argue that it is sometimes impossible to measure the fair value of a component that is not sold separately, but rather is an integral part of the product — as is the Apple software for the iPod series of products.// //At the same time, international financial reporting standards require companies to use the price regularly charged when an item is sold as the best evidence of fair value. The alternative approach, under IFRS, is the cost-plus margin, says Collemi. That is, the IFRS puts the onus on management to value a product component based on what it costs to manufacture the piece plus the profit-margin share built into the item. Management usually bases its valuation on historic sales as well as current market-established sale prices. The cost-plus margin is not allowed under GAAP.// //With respect to bundled components, the IFRS focuses on "the substance of the transaction and the thought process and ingredients that go into the transaction," contends Collemi, who says the standard's objective is to make economic sense out of the transaction. FASB's take on the subject is more conservative: the U.S. rule maker calls for objective evidence to establish value.// //Some critics say the IFRS approach invites abuse, because it's based on management assumptions. But Collemi contends that GAAP accounting is filled with rules and interpretations that require management estimates, and that the burden is on management to produce the correct numbers. What's more, auditors are in place to act as a backstop to verify the processes used to arrive at management estimates. "If management is following the spirit of the transaction and doing the right thing," adds Collemi, "then it is up to auditors to challenge the estimates."//

// © CFO Publishing Corporation 2009. All rights reserved. // //From: []//

//**Blankfein’s Handelsblatt remarks**// //Published: September 9 2009 16:13 | Last updated: September 9 2009 16:13// //Good afternoon. Thank you for the opportunity to be with you today. I thought I would take a few minutes to attempt to frame some of the core policy and regulatory issues that all of us are trying to come to consensus around in the next few months.// //In the wake of the financial crisis, there has been no shortage of approaches to regulatory reform, both here in Germany and globally. In a relatively brief period, we have witnessed a number of proposed changes to the rules and regulations that govern our industry and markets more broadly.// //Driving these are several common themes, but I want to touch on three that seem particularly prevalent: a backlash against complexity in financial products and markets, the need for macro-prudential regulation to address systemic risk and re-working compensation practices to dis-incentivize excessive risk taking.// //First, the industry let the growth and complexity in new instruments outstrip their economic and social utility as well as the operational capacity to manage them. As a result, operational risk increased dramatically and this had a direct effect on the overall stability of the financial system.// //That is one reason why Goldman Sachs supports the broad move to central clearing houses and exchange trading of standardized derivatives. Clearly, there is general agreement on the necessity of central clearing for derivatives. A central clearing house with strong operational and financial integrity will reduce bi-lateral credit risk, increase liquidity and enhance the level of transparency through enforced margin requirements and verified and recorded trades. This will do more to enhance price discovery and reduce systemic risk than perhaps any specific rule or regulation.// //The debate gets harder when defining what should be traded on or off an exchange. We believe that all liquid OTC derivatives should be centrally cleared. And, where trading volumes are high enough and price discovery mechanisms can be established, regulators should strongly encourage exchange trading. In less liquid markets, prompt reporting of aggregated pricing and clearing is necessary to improve transparency.// //More generally, it is incumbent upon financial institutions to recognize that we have a responsibility to the financial system which demands that we should not favor non-standard products when a client’s objective and the market’s interests can be met through a standardized product traded on an exchange.// //But, we should also recognize that underlying the development of the derivatives markets was client demand for individually-tailored solutions. During the financial crisis, credit-default swaps, many of them customized, actually worked as they were intended to. They increased the ability of market participants to diversify their credit exposure in companies -- some that were financially strained or ultimately went bankrupt -- by swapping default risk with others. In that vein, these instruments represent an important economic and social purpose.// //If we simply ban customized derivatives to satisfy the perception that everything associated with these markets is bad, we run the risk of limiting risk capital, ultimately reducing capital expenditures, business investment and, ultimately, economic growth.// //I believe the public policy goal is to retain the economically valuable attributes of these markets, while mitigating the systemic risk they pose through the right infrastructure and incentives to manage it.// //To me, the right incentives should be at the heart of reform and this is particularly true with respect to how non-standard derivatives are managed. Customized derivatives should entail more rigorous capital requirements, for instance. The pros and cons of buying and selling derivatives on or off an exchange should be immediate and clear to all market participants.// //The second theme that is attracting a lot of focus is macro-prudential oversight.. I know many are focused on who in Europe and the US may ultimately be tasked as the systemic regulator. But the more important question is how will they systemically manage risk?// //As I look back prior to and at the beginning of the crisis, I never knew if we were right or the market was wrong with respect to what assets, if any, would deteriorate, and, if so, when. But I believe we had enough timely information that provoked us to be a bit paranoid about the market signs.// //I think this informs a larger issue for systemic regulation: How can we expect those responsible for systemic risk to effectively discharge their responsibilities if they have a limited ability to spot changes in asset values and the associated risks of those developments?// //I see four areas that, I believe, are fundamental to effective systemic regulation.// //First, all of the exposures of a financial institution should be reflected through the P&L. Consider Structured Investment Vehicles or SIVs and other off-balance sheet vehicles that represented significant sources of funding for financial institutions around the world. Unfortunately, risk models failed to capture the risk inherent in these activities. Post Enron, that is quite amazing. If contingent liabilities and stand-by credit commitments don’t flow through the P&L, how can risk managers and regulators see the risks that a bank is exposed to?// //Second, in addition to requiring that all risk flow through the P&L, all assets across a systemically important financial institution should be valued correctly. I’ve heard some argue that fair value accounting is one of the major reasons for exacerbating the credit crisis. I see it differently. If more large institutions had to recognize their exposures promptly and value them correctly, they would have been much more likely to reduce their exposures. Instead, positions were not visible, so they were often ignored -- as were the risks -- until the losses grew to a point that solvency became an issue.// //At Goldman Sachs, we mark-to-market every day, not because we are required to, but because we wouldn’t know how to assess or manage risk if market prices were not reflected on our books. This approach provides an essential early warning system that is critical for risk managers – and, I would think, regulators.// //If we want to reduce the market and public policy challenges associated with financial institutions that are supposedly “too big to fail,” I am hard pressed to think of anything more powerful and necessary than the discipline imposed by fair value accounting.// //This type of visibility would be particularly important for a resolution authority that allows regulators to intervene early instead of focusing solely on the unwinding of an institution after it already failed. For instance, fair value accounting facilitates a fast trigger, based on the real-time health of an institution that would force any significant shortfalls in capital to be immediately addressed by reducing risk or raising capital.// //Third, regulators need to more regularly and proactively engage market participants. We should get more questions from regulators like, “Where are standards slipping or policies being stretched? Where are pressures building up? And, where are you seeing concentrations in risk?” Our industry lives and breathes on numbers. But that shouldn’t overwhelm the value of examples and instances that may very well isolate potential trouble before the black and white of accumulated numbers.// //And fourth, coordination among regulatory agencies should improve -- not just between countries but within them.. No one can predict the future. Regulators’ predictive power isn’t better than anyone else’s. But it shouldn’t be inferior either. One way to guard against that is through the robust sharing of information. There is every reason for different regulators right now to be establishing comprehensive and detailed information on exposures, sources of funding and a host of other key data.// //The creation of the Financial Stability Board, formerly the Financial Stability Forum, may be extremely helpful in this regard. Turf battles between regulators shouldn’t be allowed to overwhelm a focus on what’s in the system’s best interest.// //Finally, compensation continues to generate controversy and anger. And, in many respects, much of it is understandable and appropriate. There is little justification for the payment of outsized discretionary compensation when a financial institution lost money for the year.// //That is why we believe we should apply basic standards to how we compensate people in our industry. In April, our firm made public a set of detail principles of compensation, which can be found on our website. We expect our shareholders to hold us to account on how we carry through these principles.// //In short, we believe:// //oThe percentage of compensation awarded in equity should increase significantly as an employee’s total compensation increases.// //oFor senior people, most of the compensation should be in deferred equity. Only the firm’s junior people should receive the majority of their compensation in cash.// //oAs I mentioned above, an individual’s performance should be evaluated over time so as to avoid excessive risk taking and allow for a “clawback” effect. To ensure this, all equity awards should be subject to future delivery and/or deferred exercise over at least a three-year period.// //oNo one should get compensated with reference to only his or her own P&L. Compensation should encourage real teamwork and discourage selfish behavior, including excessive risk taking, which hurts the longer term interests of the firm and its shareholders.// //oTo avoid misaligning compensation and performance, multi-year guaranteed employment contracts should be banned entirely. The use of these contracts, unfortunately, is a common practice in our industry. We should all recognize that they are bad for the long-term interests of our industry and the financial system.// //oAnd, senior executive officers should be required to retain the bulk of the equity they receive until they retire. In addition, equity delivery schedules should continue to apply after the individual has left the firm.// //We believe attracting and retaining the best people is vital to our effectiveness and that incentives are an important element in that process. But we also recognize that, misapplied, they can also encourage excess. As an industry, we need to do a better job of understanding when incentives begin to work against the public interest rather than for it and take action to redress the balance.// //I do think it is important to recognize that while incentive structures should be improved across our industry, that is no panacea for poor risk management. More than a few financial institutions kept billions of dollars of assets on their books. Often, they kept those assets because they didn’t know they were bad or toxic. Those institutions and the people that worked there – particularly at banks that failed -- suffered as a result. Thousands of professionals went down with the ship and lost much of their net-wealth as a result.// //After the shocks of recent months and the associated economic pain, there is a natural and appropriate desire for wholesale reform of our regulatory regime.. We should resist a response, however, that is solely designed around protecting us from the 100-year storm. Taking risk completely out of the system will be at the cost of economic growth. We know from economic history that innovation – and the new industries and new jobs that result from it -- require risk taking.// //Similarly, if we abandon, as opposed to regulate, market mechanisms created decades ago, such as derivatives, we may end up constraining access to capital and the efficient hedging and distribution of risk, when we do come through this crisis.// //Most of the past century was defined by markets and instruments that fund innovation, reward entrepreneurial risk-taking and act as an important catalyst for economic growth. History has shown that a vibrant, dynamic financial system is at the heart of a vibrant, dynamic economy.// //We have to safeguard the value of risk capital, which is at the heart of market capitalism, while enhancing investor confidence through meaningful transparency, effective oversight and strong governance. If we fail to achieve this balance, we not only constrain our ability to finance ourselves out of the downturn, we weaken the elements of our financial system that, over the long-term, have contributed significantly to systemic growth and investment.// //And that is why Goldman Sachs is committed to continuing to play a constructive role in regulatory reform in Europe and the United States. Thank you.// //Copyright The Financial Times Limited 2009//

The Results Are in on First XBRL Filings
By Melissa Klein Aguilar — September 15, 2009 orporate America has finally begun filing financial statements tagged in XBRL technology—and the mandate once hailed by the Securities and Exchange Commission as a transformational event in financial reporting has passed with little fanfare. The SEC’s mandate formally went into effect this summer, ordering the nation’s largest public registrants to start using XBRL technology for periodic reports filed after June 15. By now almost that entire group has submitted at least one XBRL-tagged filing, and the experience “was better than most people felt it would be,” says Mike Schlanger, vice president of business development and strategy at Merrill Corp. and an XBRL U.S. board member. XBRL, also dubbed “interactive data,” is a technology that tags individual pieces of financial data so they can be more easily found and displayed by computer programs. That, in turn, would allow investors and analysts to sift through financial information more quickly or to construct more penetrating analyses of the data. The SEC’s mandate applied only to the roughly 500 largest filers on U.S. exchanges today; as of early September, 442 filers submitted XBRL-tagged statements. Other large filers will follow suit in 2010, non-accelerated filers in 2011. Blaszkowsky “There have been questions and some concerns, but we’re pleased with the first round of XBRL filing submissions under the new rule,” says David Blaszkowsky, director of the SEC’s Office of Interactive Disclosure and the agency’s point-man for all matters XBRL. His staff will now study the filings’ technical quality, tagging practices and so forth to see how the process can be improved as it expands. “We’re focused on understanding the overall quality and also on how to provide feedback to everyone so the filings in the upcoming period and the second phase of filings will benefit from the learning of the first filers,” he says. According to an analysis by consulting firm XBRL Cloud, which tested the submissions against the validation criteria in the SEC’s EDGAR Manual, 71 percent contained validation errors. None of those submissions were rejected, however, because the SEC hasn’t yet activated all the Edgar Filer Manual validation rules. Experts say companies will need to clean up those errors before their next quarterly reports, since the SEC will add additional validation tests to EDGAR on Sept. 28. Pryde “The errors we’re seeing are not critical, but there are some things companies are doing wrong that have to be fixed,” says Campbell Pryde, chief standards officer for XBRL U.S., which publishes the XBRL definitions companies must use. He described the glitches as “fairly low-grade errors,” such as tags being slightly mislabeled or reporting items like dividends payable with a negative number rather than positive. “The errors we’re seeing are not critical, but there are some things companies are doing wrong that have to be fixed.” —Campbell Pryde, Chief Standards Officer, XBRL U.S. Cliff Binstock, CEO of XBRL Cloud, agrees that many errors are easy to fix, but adds that others require some level of human judgment that will make them tougher to spot and correct. “There will be more work for companies to do as time goes on and the tools get better, and it becomes more obvious where XBRL isn’t meaningful or is incorrect,” he says. Larger Contexts

=
Neal Hannon, a senior XBRL strategy consultant at the Gilbane Group, says the SEC seemed to need more time to prepare for its mandate rather than the filers. He points to several mis-steps, such as changes to the EDGAR filing manual the SEC made in the middle of the filing season, and EDGAR’s inability to accept submissions based on the 2009 XBRL taxonomy until late July.More confusion arose when the Financial Accounting Standards Board finally replaced its cannon of U.S. Generally Accepted Accounting Principles with the Accounting Standards Codification, which took effect for interim and annual periods this month. The 2009 taxonomy of XBRL terms relies on the older GAAP structure, so XBRL U.S. had to publish updated guidance that agreed with the Codification. (Future taxonomies will be in full accordance with the Codification, so this problem won’t happen again.)=====

//Purnhagen// //Another criticism: the rendering of XBRL-tagged statements—that is, how they appear to investors when viewed in XBRL reader programs, such as the one on the SEC’s Website. “Companies are hung up on the fact that it doesn’t look exactly like the PDF version of their financials,” says Gary Purnhagen, an XBRL consultant in New York.// //Purnhagen and others say issuers are tweaking their XBRL to make it look better in the SEC’s rendering tool. **But attempts to make the XBRL “look pretty” in the viewer can stray from correct XBRL tagging or otherwise send “different signals to the market than [companies] intended,” Hannon says. He cautions companies to “create the tightest fit with what the accounting intention is” when choosing elements, since “people will be looking at your accounting choices and drawing conclusions based on the XBRL elements chosen.”**//

//A new standard, Inline XBRL, should resolve most of the worries about proper rendering. The standard will allow companies to embed XBRL directly into their HTML documents (the ones published on Websites for years); Pryde says XBRL International is reviewing the standard now, and that software is already available that can read it and create Inline XBRL documents.// //XBRL extensions—tags companies write themselves, because the formal XBRL taxonomy doesn’t exactly fit their accounting needs—are another concern. Some filers did create “an excessive” number of extensions, Pryde says, but on average only 11 percent of the tags a filer used were extensions, “which seems reasonable.” XBRL U.S. is analyzing those extensions and will add them to the 2010 XBRL taxonomy as necessary.// //Pryde says new tools are coming that should help improve the consistency of XBRL data and provide guidance on creating extensions. To that end, he says, the SEC is developing a “compliance suite” to make sure all validation software interprets the rules the same way, and XBRL U.S. will beta-test new tools this fall to help preparers working with the U.S. GAAP Taxonomy.// //Devil in the Details// //Meanwhile, many say companies’ biggest XBRL-related challenge still lies ahead: the detail tagging of the footnotes, required during their second year under the SEC rule.// //“That’s a far bigger deal than the tagging required in the first year,” Schlanger says, since companies must tag their footnotes and all the numbers within them, including any tables.// //That can mean as much as a tenfold increase in the amount of work for the same report, says Rob Blake, senior director of interactive services at Bowne & Co. “It’s like riding a moped versus riding a Harley,” he says. “They’re both motorized and have two wheels, but it’s a totally different experience.”// //Further complicating matters is issuers’ habit of changing their financials until the last minute before filing, Schlanger says. Any changes to a number in a table, for example, would require corresponding change to the other levels of tagging, much of which is still manual.// //“Even though they may want to celebrate having gotten through their first filing, [companies] ought to be focusing on that,” Blake says. He warns that the task will be especially onerous for financial services companies, since their financial statements tend to be more numerically complex than most commercial and industrial companies.// //Schlanger likens the pain of the move to XBRL to the pain of the move from paper to the EDGAR system in the 1980s. “People came screaming to the altar … but years later, they wondered how we ever could have lived without it,” he says. “XBRL is difficult, but 15 years from now, we’ll say, ‘How did we ever live without it?’”// //YOUR QUESTIONS ANSWERED// //Frequently Asked Questions About FASB’s Codification:// //How do I use the codification files?// //The zip files are for information purposes only—the FASB codification references are available to preparers, along with the label and definition, to help preparers choose the best elements to match up with their financial statement captions. They are also used by consumers of XBRL data to better understand the information they receive.// //What Zip Files should I use?// //The file you use depends on whether the XBRL creation tool you are using is Web-based or on your own local file system. Use the relative reference files if the 2009 taxonomy is located on a local file system. Use the absolute reference file if the 2009 taxonomy used is located at [].// //Do I need to submit the codification file to the SEC?// //No, you refer to them to give you more information when you’re selecting which elements you want to use, but they are not needed for submission of your SEC XBRL filing. Simply submit your XBRL documents that reference the 2009 taxonomy as defined by the SEC filing manual.// //If I submit a copy of the FASB codification extension file with my XBRL submission to the SEC, will it be rejected?// //Yes, the EDGAR system will not accept it. You simply need to submit your XBRL-formatted financial statements that reference the relative components of the 2009 U.S. GAAP Taxonomy including any company-specific extension files you have created. This is the same process you will follow in 2010.// //How do I use the codification files when I’m creating XBRL-formatted financials working with the U.S. GAAP 2009 Release?// //First, download the codification files from the XBRL U.S. Website, then open up your XBRL creation software tool and download the 2009 US GAAP Release. When you select an element in the tool, you will see a URL to the FASB codification reference for that element. You can use that URL to go directly to the FASB codification site and view the reference. When you submit your completed XBRL document to the SEC’s EDGAR system, only submit your instance file and your company extension file (if extensions were created). This is the same process you will file in 2010 with the 2010 release of the U.S. GAAP Taxonomy.// //How do I view the Codification References?// //You can view the Codification either by accessing it from the URL link in your XBRL creation tool (as noted above) or use the XBRL US Taxonomy viewer located at [|http://viewer.xbrl.us]. The figure below [See figure on Website] shows the Codification references as they appear in the viewer. The Codification URI or link can be followed to the FASB Accounting Standards Codification. To link to the Codification you will need to set up a Codification account on the FASB Website at [|http://asc.fasb.org]. You can sign up for either professional or basic access to the FASB site. Once you have a username and account you will be able to link directly to the FASB Codification from the 2009 taxonomy.// //How will this change in 2010?// //In 2010, companies will not need to download the codification files from the XBRL U.S. Website. They will simply open their software tool and download the 2010 taxonomy release. The codification will be embedded within the 2010 taxonomy. As they do with the 2009 Release, when the preparer selects an element in the tool, they will see a URL to the FASB codification reference for that element. They can use that URL to go directly to the FASB codification site and view the reference. They will still be required to log in to the FASB site to access the codification references. The only change from 2009 is that they will no longer need to download the codification files from the XBRL US web site.// //Why didn’t XBRL U.S. just publish a new release of the U.S. GAAP Taxonomy that includes the FASB codification?// //XBRL U.S. releases one new taxonomy each year to ensure (1) that preparers are not confused about which taxonomy should be used, and (2) that data produced from XBRL submissions is consistent and comparable. The FASB and XBRL U.S. have an agreed-upon process such that when new accounting standards are promulgated, they are released as a set of extensions that can be used by those preparers that need them.// //Source XBRL U.S. FASB Codification FAQ.// //RELATED RESOURCES// //XBRL Cloud Report EDGAR Dashboard (Sept. 7, 2009)// //XBRL U.S. FASB Codification FAQ// //SEC: EDGAR Release 9.17 and XBRL Validation (Aug. 21, 2009)// //SEC Final Rule on Interactive Data (Jan. 3-0, 2009)// //Related Coverage// //Required Reading for the XBRL Mandate (June 16, 2009)// //XBRL: More Plans, Still Little Enthusiasm (June 2, 2009)// //Filing in XBRL Using the New Codification (Aug. 11, 2009)// //Related Blog Entries// //Commission Posts XBRL FAQs (June 2, 2009)// //New Staff Interpretations on XBRL (June 1, 2009)// //Temporary Answer to XBRL’s Collision With Codification (July 30, 2009)// //XBRL Guidance for Internal Audit Available (June 26, 2009)// //SEC Is Losing Steam on XBRL (May 29, 2009)// //XBRL Rule Requires Changes in Q and K Filings (April 29, 2009)// //Updated U.S. GAAP Taxonomies Published (April 23, 2009)// //SEC Posts XBRL Compliance Guide (April 6, 2009)// //© 2009 Haymarket Media, Inc. All Rights Reserved. "Compliance Week" is a registered mark of Haymarket Media, Inc.// //Compliance Week provides general information only and does not constitute legal or financial guidance or advice.// //Compliance Week is a registered mark of Haymarket Media, Inc. Compliance Week provides general information only and does not constitute legal or financial guidance or advice. This e-mail and any files transmitted with it are confidential and intended solely for the use of the individual or entity to whom they are addressed. If you have received this email in error please notify the sender by replying to this e-mail. Replies to this email may be monitored by the Haymarket Group for operational or business reasons. While every endeavor is taken to ensure that e-mails are free from viruses, no liability can be accepted and the recipient is requested to use his or her own virus-checking software.// //// //#|Print this article | Return to Article | Return to CFO.com// =The Power of the Balance Sheet= Power company Duke Energy outperformed the utility index despite a drop in sales volume and a pending regulatory approval. CFO Lynn Good preaches the virtues of a strong balance sheet during a downturn. Marie Leone, CFO.com | US September 11, 2009 During the second quarter, sell-side analysts noted, the stock of Duke Energy Corporation, the third-largest electric power company in the United States, outperformed the utility index. Yet in that quarter, Duke reported flat earnings before interest and taxes compared to the same period last year, while sales volumes slumped 6%.

Why does the market like Duke? Great execution of the finance strategy and a strong balance sheet, says its new CFO Lynn Good, who was named to the position in July.

As an electric power company — with 75% of its business regulated — Duke Energy has strong cash flow, but significant capital requirements. So the challenge is raising capital during a recession, and working to offset the recent decline in sales volume. To that end, CEO Jim Rogers and Good have announced some cost-cutting measures, and explained the company's strategy of separating its capital needs for the next five years into three buckets: committed capital, so-called ongoing capital, and discretionary capital. According to Good, the bucket strategy keeps the company nimble.

Ongoing capital, which includes maintenance and programs to add customers, provides Duke some flexibility as to when it can be spent. Discretionary capital, which affords the company even more flexibility in terms of timing expenditures, "allows us to respond to trends in our businesses by either delaying or not spending the dollars," noted Good in a recent earnings call.

As a power-industry veteran, Good, 50, knows quite well which capital levers to pull and when, and no doubt a slow economic recovery will put her to the test, although her background could not have better prepared her for the task. Before being named finance chief at Duke Energy, she spent 18 months as president of the company's non-regulated business, which includes power generation in the United States and Latin America as well as the telecommunications and renewable energy units.

Good's electric-power roots can be traced back to the early days of her career. After graduating from Ohio's Miami University, Good signed on as an auditor with Arthur Andersen, and was soon assigned to electric power company clients. She was named partner at Andersen, and moved to Deloitte & Touche in 2002, before making the leap into industry as vice president of financial project strategy for Cincinnati-based Cinergy. She quickly was named controller, and in two year's time, was appointed CFO of Cinergy. "In this environment, the reductions are prudent. Costs are the one thing we can control. We don't control the weather. We don't control the economy. But we can be good stewards of our resources." — Duke Energy CFO Lynn Good// Within a year, everything changed. In April 2006, Cinergy merged with Duke, and Good was tapped to be treasurer, paving the way for her recent appointment as finance chief. Today, Duke generates $13 billion in annual revenues, and at the end of 2008 reported net income of $1.4 billion with a profit margin of 39%.

Good talked with CFO.com recently about how Duke is handling the sluggish economy, her thoughts on capital-raising efforts, and whether the "safe" utility stock will flourish when the market returns. In the midst of a recession, Duke managed to raise $1.65 billion in fixed-rate debt during the first half of the year, with a weighted average rate of 6.1%. What's your capital-raising secret? We came into the crisis with a very strong balance sheet. We are rated A-minus by Standard & Poor's, and BBB plus by Moody's. Our debt-to-cash ratio at the start of this crisis was probably in the 40% range. So we had some stability with regard to the balance sheet that enabled us to move through the crisis. And although we've seen deterioration in our sales volumes, we're still profitable, and we're still generating cash flow. Duke has had an extraordinary track record during this period of financial upheaval. By that I mean we've had access to the market almost every day — we've had no problems issuing our commercial paper — and there's been a lot of appetite for our long-term debt. We are a capital-intensive business, so we finance some spending through the debt markets. We also have debt maturities that we've refinanced, which is a combination of both, maturities [coming due], and new issues. It was a routine issuance; it's just ongoing capital raising. Because we are financing long-term assets [like power plants], we are not interest-rate speculators. We have a targeted mix in our portfolio of fixed- and floating-rate debt — year in and year out. And we have not changed our view of that in light of current conditions. I would say the reductions are two-fold. We are trying to size the cuts in our spending consistently with the shortfall in volume sales that we've seen in 2009. [Year over year, Duke's sales volume for the second quarter was down 6%, or $45 million, mostly due to a slowdown in industrial customer operations.] So we're trying to keep pace with that in some measure.
 * Was the new capital earmarked for specific projects?**
 * Would you consider taking advantage of low floating rates?**
 * You predict some further cost cutting, such as an additional reduction in capital expenditures of between $200 million and $300 million this year, as well as a $150 million cut in operation and maintenance costs. Is the belt-tightening to offset the current "softness" in sales volume, or to better prepare for future shortfalls?**

But we also launched an initiative at the beginning of 2009 to really look at our cost structure across the board, and to institute a level of capital and cost reduction into the future that's sustainable. So that piece of it is longer term. In this environment, the reductions are prudent. Costs are the one thing we can control. We don't control the weather. We don't control the economy. But we can be good stewards of our resources. Well, certainly insurance. And then our risk management function really looks at risk throughout the business — from macroeconomic risks to more specific risks related to commodities, such as coal, gas, and electricity. It's a routine process. [Regarding our Latin American operations], we do not hedge our foreign exchange risks. We typically finance in the currency of the country, so again we have a capital structure that's balanced. [Duke also has] a captive insurance company that insures a variety of things, and we make a judgment call on whether to self-insure versus buy a policy. Those decisions are made based on market conditions and other factors. I wouldn't say we've changed credit policies, but we are monitoring payments very closely. We have long-established credit policies related to how we deal with vendors, suppliers, and customers. We have seen some increase in delinquencies and bad debts from customers, but it hasn't been material. The impact wasn't significant. During our earnings call, one analyst posed a hypothetical question about what would be the impact on EBIT if we had a full year of customer switching at the rate that occurred as of June 30. The answer to that hypothetical question was $0.02 to $0.03 per share — but that is without any mitigation. By that I mean, we have the ability to compete in Ohio through our retail services affiliate to win some of the customers back. So the two to three cents would assume that we would lose all of them. Industrial tariffs usually have a component of fixed demand charges, as well as a component of variable costs. So the impact to margin would be less than the impact of the 19%. In the first quarter, we disclosed that even though we had a 19% decline in industrial sales, and 5% overall decline, our margins were only down 2%. So that's the order of magnitude of the impact. Margins just don't sink as rapidly as volume because there is a demand component, a fixed charge, that industrial customers pay without regard to the amount of energy they actually take. The variability in the mark-to-market impact was primarily driven by coal positions. Coal prices were increasing quite rapidly last year, and decreasing this year. So we had mark-to-market gains in one year, and mark-to-market losses in another, creating a large delta, or a large difference between years. The only thing the item had in common with the banks is that it is called mark-to-market. [The contracts are related to] commodities — a coal contract — used to purchase coal. We are not marking-to-market on a portfolio of mortgages [like the banks]. We slide out contracts for a four-year period so we are fully contracted up, then some roll off, and we put in new contracts, every year. Prices were up last year and they're pretty much down this year. Coal markets tanked, basically. We don't think of it as winning the rate case. We think of it as part of the process of being a regulated company. You serve, you deliver power, you upgrade your system, you upgrade your generation, and then — through regulation — you have an opportunity to earn a return on those investments. You secure that return through a rate case. We have two rate cases that we filed in North Carolina and South Carolina. They are cases where the increase in revenue is based upon the fact that we have deployed and spent capital to serve our customers in both states. So it's power generation, it's upgrades to transmission and distribution. What we are looking for in a rate case is a fair return on our investment — investments that are directly related to serving customers.
 * Other than cost-cutting, what risk management tactics do you use?**
 * With respect to the financial health of your customers, have you had to tighten your credit policies to protect your receivables?**
 * During the second quarter, an increase in competition from other power companies operating in Ohio put pressure on your unregulated business unit. As a result, about 10% of your retail customers in Ohio switched to another company. During a recent conference call, you addressed the impact of the switching. Would you talk about that?**
 * In the second quarter, Duke experienced a 19% drop in industrial sales volumes. (Industrial sales account for 24% of the company's 2009 sales.) Why weren't industrial margins hit with the same percentage decline?**
 * Duke's non-regulated generation business reported second quarter EBIT from continuing operations of $79 million, compared to $235 million year-over-year Q2 2008. Among the causes for the decline, the company cited mark-to-market losses on economic hedges as compared to gains reported last year. Were these the same kind of fair-value accounting losses banks complained about earlier this year?**
 * There are certain costs a regulated utility can recover by increasing rates if the expenditures are approved by state regulators. What does winning a rate case mean to your bottom line?**

We look at return on equity. We look at return on invested capital. We also look closely at cash-flow generation in both our regulated and non-regulated businesses. When you look at renewables and wind, in particular, you have to look at the cash flow, because those are investments that turn cash flow quite rapidly. We finance our business and working capital through the commercial paper markets routinely. I'm paying a very low rate, 0.7%. On the long-term debt instrument, it's going to be in the 5% range. I wouldn't characterize it as having changed. We have very good relationships with our bankers. I think in a capital-intensive business, and as active as we are in the capital markets, we need to maintain those relationships and we focus very strongly on them. As we look at renewing our credit facility, we would expect pricing to go up — the cost of liquidity is more expensive. But we haven't seen anything remarkable in terms of covenants becoming more stringent. I think most of the investors in Duke are going to be influenced by the dividends. It's a big part of our valuation story, although we do have a growth story to go with that. We've talked about a 5% to 7% growth rate, assuming that over a five-year period we see some rebound in the economy. So if you are going to attract certain investors by talking about a higher risk profile, they're going to be looking at the growth part of the story. At any point in time, we have a mix of investors, but we've rarely moved away from those who are interested in the dividends. About 40% of our stock is held by retail investors — that's where you see the interest in the dividends. Some of our institutional investors also hold for the dividends.
 * As a regulated utility, what performance metrics do you track?**
 * In the short term, how do you put your cash to work?**
 * Since the start of the credit crisis, have the relationships with your bankers changed?**
 * Utility stocks have traditionally been a "widows and orphans" investment — always safe with exceptionally strong dividends — which is very attractive during a recession. How do you keep investors interested when the economy turns around?**

© CFO Publishing Corporation 2009. All rights reserved.