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A roundup of key accounting deadlines, developments, and detours to watch for in 2009.
Alix Stuart, CFO Magazine
January 1, 2009
Molasses gets a bad rap for being slow — particularly in January — but 90 years ago this month more than 2 million gallons of it flooded the city of Boston, killing 21 people. Unbelievable as it sounds, a burst storage tank sent a tidal wave of goop racing through the streets at 35 mph, knocking an elevated train off its tracks and causing several buildings to collapse.
Change goop to GAAP and you've got a good picture of what could happen on the accounting front in 2009 — minus fatalities, presumably. After years of slogging along, big projects like the adoption of international financial reporting standards, the filing of financial statements in XBRL, and others may burst out with new authority, propelled by a number of factors, including the desire of outgoing Securities and Exchange Commission chairman Christopher Cox to solidify his legacy and heightened efforts to merge the Financial Accounting Standards Board with its international counterpart.
It's also possible, however, that many of these developments could move sluggishly or change direction when a new SEC chairman takes the helm and emphasizes different priorities.
How will CFOs know when to run, walk, or stand still? We offer a quick guide to five important accounting issues that finance executives need to watch in the coming year in order to avoid any massively sticky situations.
The only thing that seems certain about the move to international financial reporting standards (IFRS) is its uncertainty. "It's on a tightrope right now," says John Hepp, partner at Grant Thornton. Although the SEC announced a bold transition timetable in August, the formal comment period didn't open until November and won't end until next month, transferring the final say to chairman Cox's successor. That means almost anything could happen with IFRS, from delay to demise.
The currently proposed timetable would allow the largest U.S. companies to begin reporting their 2009 results in IFRS, and then require large accelerated filers to begin using IFRS in 2014, followed by other accelerated filers in 2015 and smaller companies in 2016. Companies would have to provide financial statements from the previous three years in IFRS at those times, as well, for comparability.
Many see delay as inevitable, in part due to IFRS's relative youth and lack of robustness compared with U.S. generally accepted accounting principles (GAAP). "IFRS is not ready and we certainly should not be ready to accept it," says Charles Niemeier, a member of the Public Company Accounting Oversight Board (PCAOB) and one of the leading critics of the currently proposed timeline. "There's too much at stake in the U.S. system to put our regulatory framework at risk."
Among those mounting a grassroots movement to slow the rush to IFRS are Analyst's Accounting Observer newsletter editor Jack Ciesielski, former FASB member Ed Trott, and Bowling Green State University professor David Albrecht (who has compiled the arguments of seven IFRS critics, including Niemeier and himself, on his blog The Summa). Among their arguments: preliminary research from Europe shows that the international "standards" in fact afford investors little comparability among financial statements, one of the key reasons given for U.S. convergence. Niemeier is also leery of letting the International Accounting Standards Board (IASB) be the standards-setter for the world, given its recent capitulation to pressure from European Union authorities to loosen fair-value accounting for banks.
Such critics could end up having a big influence, given that nothing would be finalized until 2011 at the very earliest. According to the currently proposed timeline, SEC commissioners could change their minds at that point and require all companies to revert back to U.S. GAAP — raising the possibility that early adopters of the proposal will have wasted their money and time. Indeed, the SEC has made it clear that the 2011 vote will not be a "rubber stamp," says Danita Ostling, Ernst & Young Americas IFRS technical leader. "It will be a robust decision based on their view of what's best for the capital markets and what's best for investors."
But take the top-down view, and the move toward some type of international standards seems inevitable. FASB and the IASB have already committed to converging their respective standards by 2011, which, if accomplished, would effectively blur the distinctions between the two. "Change is coming to revenue-recognition and leasing standards," for example, regardless of the decision on IFRS, FASB project manager Peter Proestakes said at a November conference in Boston. "If we don't get a mandate, we'll continue to go project by project."
As it stands now, FASB and the IASB are overdue to release a discussion paper for comment on new revenue-recognition rules that would seek to boil down some 25 industry-specific rules into a single general standard. It is also expected to provide thoughts on the timing of booking revenue, and some associated cost issues. As far as lease accounting, the two boards are still working out some differences on how a company should estimate contingencies like options to renew, but at press time they were planning to release a discussion paper next month.
Still, project-by-project convergence could result in a far less radical path than what is currently being touted. The end product could simply be "multiple, different accounting standards that are more alike than different," but not identical, Proestakes said.
Either way, ignoring auditors' clamoring and delaying action is likely to be the best strategy for most companies, since more time should yield more certainty and lower costs. As of now, the SEC estimates, a transition could consume from 0.125 percent to 0.13 percent of a public company's revenue in the first year, including substantial staff time. Martin Headley, CFO of $526 million semiconductor automation firm Brooks Automation, for example, plans to take a minimalist approach to IFRS, training some key individuals on his staff, rather than replacing them or hiring more experts. Still, he said at a recent conference, "I'll be waiting until I'm sure it's actually going to happen."
No doubt he'll be in good company. Under one scenario, U.S. companies could reach a state of perfect harmony with IFRS users with the barest effort. "In my mind, you'd never have to prepare for a switch to IFRS, because eventually U.S. GAAP and IFRS would become so closely aligned you'd get the same result by using either method," says the PCAOB's Niemeier.
The promise — or threat, depending on your perspective — of a mandate to file financial statements in a new "interactive data" format has been looming for so long that most CFOs have long since tuned it out. Only about half claimed to be familiar with XBRL in a September survey by Grant Thornton, and a whopping 90 percent reported no plans to use it. While outgoing SEC chairman Cox has been one of its biggest champions, the process of making the language mandatory for financial reports has taken a tortuously slow path, culminating in a rule that hung suspended in proposal state for more than six months last year.
Assuming the SEC finalizes the rule as written before Cox leaves the building, though, companies with market caps of $5 billion and above (as of the end of last year's second quarter) would have to immediately start tagging their 2008 year-end financials with XBRL code and be able to handle the trickier task of coding footnotes in detail for 2009 10-Ks. Other large companies would start the process for 2009 financials, and smaller companies (with market caps of $75 million or less) will follow for 2010 reports.
Considering the myriad concerns expressed in the 50-plus comment letters the proposal generated, the quick turnaround might seem a scary proposition. However, many firms facing the imminent deadline have already started the process and are likely to be well prepared, says David Blaszkowsky, director of interactive data at the SEC. (It helps that they will have an additional 30 days to submit the data-tagged versions after filing their traditional 10-Ks and 10-Qs.)
International Paper is one of those companies. After one day of training and a practice filing, chief accounting officer Fred Bleier expects three of his staff members (a manager of financial reporting, a manager of financial systems, and a staff accounting person) to be able to easily handle XBRL coding going forward. "We don't see this as being hugely difficult for a company to do," Bleier says. He and his colleagues spent a leisurely four months meeting with vendors, and finally decided that buying software and tagging in-house would be more cost-effective than the easy alternative of outsourcing the whole project to a financial filing company. The project "is not a significant cost one way or another," says Bleier, but he sees savings in the second year, when software license fees will decline, versus outsourcing fees that would go up to accommodate the additional time needed to code footnotes in detail.
Even a move to IFRS is unlikely to derail the XBRL initiative. Blaszkowsky says that although none of the countries that have adopted XBRL have also adopted IFRS, tags for the international standards have existed since 2004 and have been updated every year since. "Companies could tag their prime financials in IFRS today," he says. The SEC platform couldn't currently accept them, but Blaszkowsky expects that it will take little effort to upgrade the system with the appropriate data codes.
The short ramp-up time is encouraging news for other companies that may be taking a wait-and-see approach, and Blaszkowsky says XBRL is likely to only get easier as momentum grows. "Clearly there are multiple ways of getting your content tagged, and I think best practices will emerge very quickly," he says. Not to mention he finds it "reasonable to expect" that ERP vendors will bake XBRL tags into their systems once it becomes a mandated language. "This is compelling to anyone engaged in financial markets; anyone who believes in transparency," he says. "It would be hard to see it as a political issue at all."
But are there benefits for the companies that implement it? Not so far, based on an assessment by members of Financial Executives International (FEI) who have been using XBRL as part of the SEC's nearly four-year-old voluntary filing program. "As preparers, we have learned that there are no improvements at this time in our internal processes as a result of creating and providing tagged information, and that preparers do, in fact, experience increased costs and efforts as a result," wrote Arnold Hanish, chairman of the FEI's Committee on Corporate Reporting, in a letter to the SEC's Committee on Improvements to Financial Reporting. Could that improve next year? "We'll have to wait and see how it plays out," Bleier says diplomatically.
Big changes to FASB's controversial standard on fair-value measurements seem unlikely any time soon. Even the representatives of financial-services institutions, until now the fiercest opponents of the FASB standard, SFAS 157, seem wary of calling for replacement or suspension of the measure in the face of the plummeting stock market. Indeed, Bob Traficanti, the head of accounting policy and a deputy controller at Citigroup, who in May publicly objected to the standard's effects on banks during the subprime crisis, fully supported it in November at the SEC's final roundtable on the topic. Traficanti, a former FASB project manager, said both he and Citigroup "believe 157 should be left intact."
Many agree that it doesn't make sense to tamper with the rule now and risk losing whatever investor confidence still remains. "From everything I hear, I don't think anyone is going to be suspending fair value, or anything like that," says Robert Kueppers, deputy CEO of Deloitte USA. Thus, the study on SFAS 157 that the SEC is presenting to Congress this month seems unlikely to recommend a radical change in mark-to-market regimes.
Financial Statement Presentation Project
This once-radical effort to have companies reorganize their financial statements in ways that would potentially change how Wall Street views them has been toned down to a large extent. In the original draft version, for example, companies would have eliminated the net-income line from their reports; in FASB and the IASB's current joint proposal (out for comment until April 14), net income still exists as a subtotal on the statement of comprehensive income. Still, "it's a very ambitious project and a very different presentation," says Grant Thornton's John Hepp.
The proposed new format calls for companies to reconfigure the balance sheet and the income statement to follow the lines of the current cash-flow statement. Each one would separate data into at least the following four categories: business (or operating) items, financing items, income taxes, and discontinued operations. The proposal provides broad guidelines for classifying business and finance terms that permit some flexibility in communicating the unique aspects of each business. The flexibility does not extend to income taxes, discontinued operations, and equity, however. Companies would also be required to provide a new statement that reconciles income to cash flows as part of their notes section.
Still, "it's very important to understand this is a much-longer-term thing," says Kueppers. "We might see some discussion of it in 2009, but I don't think any decisions will be made before 2010," at the earliest.
Like so many issues, the future of the Financial Statement Presentation project "will depend on how enthusiastic [investor] response is," says Hepp. Assuming it happens, though, the door would be open for the implementation of those original radical ideas. A joint statement from the two boards affirmed that they would retain the notion of net income for now, but that "a future standard on financial-statement presentation would replace existing guidance in both U.S. GAAP and IFRS."
FAS 5: Accounting for Contingent Liabilities
Last summer, FASB ignited the ire of the business community with its proposal to require companies to disclose "specific quantitative and qualitative information" about loss contingencies such as securities litigation. The changes would "add uncertainty, complexity, new liability, and a great deal of cost while compelling companies to provide potentially unreliable, and often immaterial, information about pending litigation," said a comment letter from the U.S. Chamber of Commerce. Up against dozens of similarly scornful letters, FASB beat a hasty retreat and directed its staff to develop an alternative model, which was to be field-tested (along with the original controversial version) last fall. FASB could not confirm any specific dates.
This quarter, public roundtable discussions about FAS 5 are on the docket, with a final decision expected to take place sometime this spring. The revision, should it occur, would not be effective until after December 15, 2008, according to the board.
Alix Stuart is a senior writer at CFO. Additional reporting was provided by Sarah Johnson, David Katz, Marie Leone, and David McCann.
Will IFRS provide the "little GAAP" that companies want, or pose too large a burden?
While the largest U.S. companies are getting invitations from the Securities and Exchange Commission to be first-movers on international financial reporting standards, private companies could, in fact, steal some of their thunder. That's because the American Institute of Certified Public Accountants, which governs private-company auditing, has recognized the International Accounting Standards Board as a valid standards-setter. Once the IASB finalizes its "IFRS for Private Entities," due to happen this quarter, U.S. private firms could, in theory, immediately embrace the "little GAAP" they have been seeking for so long.
Mark Ellis, CFO of privately held Michael C. Fina, believes that would be a good move. Right now, nearly every accounting change requires a team of auditors to implement, he notes, whereas the new set of principles-based standards would be easier to apply internally. "I see this as a way for CFOs to do more, and for accounting firms...to not charge as much," says Ellis.
However, others caution private-company CFOs to beware. "Many are assuming that [IFRS for Private Entities] will simplify things for private companies. I totally disagree," says Andy Thrower, a partner at NaviscentGroup, which provides part-time CFO services to private companies.
Thrower outlines 12 points of contention in a recent paper, including stock-option accounting. The proposed standard may be only 3 pages long, compared to GAAP's 286 pages, but Thrower argues that the IFRS approach is no simpler, because it incorporates by reference IFRS 2 — virtually the same as FAS 123R, the current standard that requires companies to calculate the cost of shares based on market valuations, not an easy prospect for non–publicly traded firms.
Continuing to have private companies hew to fair-value standards, which the IASB is likely to do, is also overkill, says Thrower. "The primary users of private-company financial statements are bank lenders, and they are trying to predict cash-flow coverage," which doesn't necessarily hinge on asset valuations, he says. "If the bank wants to know the fair value of your assets, it will just ask you to get an appraisal."
For better or worse, how quickly private companies adopt IFRS will likely depend on how readily bankers, auditors, and others accept such a move, says John Hepp, partner at Grant Thornton, and that remains a "wild card." — Alix Stuart and Tim Reason