The rule defines the category of financial information subject to the regulation, and it mandates that companies must include comparable GAAP calculations when they submit non-GAAP measures in their SEC filings. Teresa Iannaconi, CPA, a former SEC staffer and now a practice leader with KPMG, says that for the most part Regulation G mirrors the proposal submitted in November, adding that it "does nothing more than make a rule out of 10 years of staff policy." She adds that the regulation grants limited exceptions to foreign companies that don't use GAAP to file their primary financial statements.
The major departure from the proposal, declares Iannaconi, concerns the commission's final adoption of amendments to a related regulation — specifically, Item 10 of Regulation S-K. This amended item applies to the same categories of non-GAAP financial measures as does Regulation G, but it specifies more-detailed restrictions.
In addition to requiring reconciliation with non-GAAP measures and presentation of comparable GAAP measures, says Iannaconi, the SEC now also requires a "statement of purpose" from a company, explaining why a non-GAAP measure is useful to investors. She adds that the commission has also established important prohibitions for SEC filings, forbidding companies from excluding non-GAAP items that require cash settlement or that are likely to recur.
The SEC's Form 8-K
Brow-beaten once more by public comment, the SEC adopted amendments to Form 8-K with one major change — a new Item 12. This item replaces the originally proposed "filing" requirement for earnings releases with a requirement that companies "furnish" the SEC with earnings releases or similar information within 48 hours of the original public statement. (The final rule for Regulation G also covers the amendment to Form 8-K.)
In "SEC speak," points out Iannaconi, "furnish" carries a lower level of liability; such information is not held to the same rigorous requirements as SEC filings.
The amendment, which applies to earning releases disseminated by hard copy, E-mail, teleconference, or webcast, is in better alignment with Regulation FD than the original proposal, adds Iannaconi.
FASB's Rules on Consolidation of VIEs
On January 16 the accounting rulemaker finalized new rules for what it now calls variable interest entities, the vehicles typically used to remove assets and debt from company balance sheets. Interpretation No. 46, Consolidation of Variable Interest Entities, aims to shore up the definition of a VIE and to rein in abuse of structured-finance vehicles. (You may download the full text of the interpretation by visiting FASB's web site.)
"The old rules were very loose and ill-defined," notes Robert Dyson, CPA, director of quality control for New York accountancy Friedman Alpren & Green and vice chair of the Financial Accounting Standards Committee for the New York State Society of CPAs. The vagueness, says Dyson, made it difficult to convince clients not to stretch the limits of the rule.
The new interpretation redefines ownership in a VIE by redrawing the lines of equity interest, thereby altering — in some cases — who must consolidate it. In short, the old bright-line standard of 3 percent equity has been replaced by a principle-based standard of ownership control.
The key to the interpretation is found in paragraph 14, says Dyson: A company must consolidate a VIE onto its balance sheet if that company is exposed to a majority of the entity's losses, if losses should occur. Appendix A of the interpretation explains the calculations for figuring the entity's expected gains and losses, and the company's exposure. The "expected losses" are equivalent to the equity position the company holds in the VIE. That equity position — and the application of other tests detailed in the rule — determines ownership of the VIE and where it should be consolidated.
The interpretation probably won't dampen structured-finance activity in the long term, says CRESA's Sweeney, who advises companies on synthetic leases and other real-estate monetization alternatives. She anticipates a temporary slowdown in the use of VIEs, however, until the new rule is sorted out and CFOs can be sure that they won't end up as "guinea pigs."
John Park, CFO of New York-based real-estate company W.P. Carey & Co., says that the new FASB rule won't change the way his company deals with off-balance-sheet transactions because the disclosure requirements have never driven his company's use of VIEs. "We will continue to use them," maintains Park, if there are "legitimate business reasons" to do so.
Don't get too comfortable with the interpretation, says Dyson, who thinks that its lengthiness (43 pages) and complexity are not a good sign. "An accounting pronouncement is just like the law," says Dyson. "The ink isn't even dry before a small army is looking for loopholes."
FASB's Interpretation on Loan Guarantees
Passed on November 25, 2002, this new interpretation tightens disclosure rules for loan guarantees and requires companies to record certain liabilities before they are incurred.
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