Capital Markets

The Week Ahead: Regulators Thinking Globally

The SEC, FASB, and the PCAOB pack the final week of spring with meetings to hash out plans and rules for international reporting standards, fair va...
Alan RappeportJune 18, 2007

Securities and accounting regulators will be keeping busy schedules during the last week before summer officially begins.

The action begins on Tuesday morning when the Financial Accounting Standards Board (FASB) will discuss the latest developments for the eXtensible business reporting language (XBRL). Together with the Securities and Exchange Commission, FASB is working to establish taxonomies for the U.S. GAAP regulations. A “beta” version of the taxonomy is slated to be ready by July 24 and will be subject to a public field test. The test will be telling, as one of the main concerns regarding XBRL has been the potential complexity of managing taxonomies — the data-labeling information needed to run XBRL — for American and international financial reporting standards.

Later on Tuesday, the Financial Accounting Standards Advisory Council (FASAC) will address international convergence issues, such as the possibility of the SEC allowing companies registering in the U.S. the option of complying with U.S. GAAP or the International Financial Reporting Standards (IFRS). At the meeting, FASAC will consider the best way to reach a common global reporting language and look at some of the possible ramifications of eliminating the “reconciliation” requirement between GAAP and IFRS.

The SEC will consider the same issue at an open meeting on Wednesday, when the Commission discusses whether to accept financial statements prepared by foreign private issuers in accordance with IFRS without U.S. GAAP reconciliation. And not to be left out, Henry Paulson, Secretary of the Treasury, will face off against Rep. Barney Frank, the chairman of the House Committee on Financial Services on Wednesday to discuss the state of the international financial system.

Also on Wednesday, FASB’s Small Business Advisory Committee will convene to discuss whether the concept and description of a reporting “entity” must be defined more precisely. The board is tentatively considering defining such an entity as a “circumscribed area of economic interest,” which could include a person, company, trust, partnership or association. FASB is working with the International Accounting Standards Board (IASB) to hammer out a clear definition on this and is exploring the implications for small businesses.

FASB will reconvene on Thursday for a morning discussion of business combinations. This ongoing project is intended to build upon FAS 141, which governs accounting for mergers and acquisitions. The project is reconsidering the purchase method of accounting for business combinations in hopes of developing an international standard that can handle domestic and cross-border financial reporting. Working with the IASB, the FASB is looking to clarify which assets and liabilities need to be recognized in the initial accounting for a business combination, to require that those assets and liabilities are measured consistently, and to ensure that similar “economic events” are accounted for in a similar fashion.

Later on Thursday, FASB will visit the issue of financial statement presentation. It will discuss how to classify a single transaction with multiple assets (basket transactions) and transactions with multiple assets and liabilities. Then it will address adjustments to foreign currency translation and consider which types of changes in assets and liabilities should be separated from financial statements and re-presented.

Also on Thursday, the Public Company Accounting Oversight Board’s (PCAOB) advisory group will explore whether the regulator should make changes to its fair-value auditing standards. As more companies may expand their use of the fair value method of accounting later this year, PCAOB chairman Mark Olson has expressed concern that auditors won’t be able to keep up with the various valuation tools. In its briefing paper for the day-long meeting, the PCAOB’s staff notes that the increased use of estimates based on market value — rather than historical cost — adds uncertainty and subjectivity to financial reporting and an added risk of material misstatements.

The regulator’s Standing Advisory Group will also discuss whether the PCAOB should get more involved in the level of expertise audit firms send to companies. Current auditing standards do not provide specifics on which members of an audit firm’s engagement team are responsible for performing procedures. For example, the SAG will debate whether the PCAOB should specify in their rules that senior members or members of the engagement team should be directly involved in the highest risk areas of an audit.

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