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Just two short years ago, the chief accountant of the SEC laid out a “road map to convergence” for the melding of United States FASB accounting standards with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board. Don Nicolaisen’s road map ultimately called for the elimination of the IFRS-to-GAAP reconciliation in SEC filings by the year 2009 or sooner. “Sooner” is looking like “now:” in July, the Commission issued a proposal for the reconciliation’s current elimination. In August, the Commission issued a Concept Release to test the merits of allowing U.S. registrants to choose between FASB standards and IASB standards in preparing their financial statements - a more extensive proposal that could eventually put all accounting standards under one roof, but create surprising costs and inefficiencies along the way.
Should these two proposals become reality, the main benefit to shareholders would be an increase in investment choices on the United States exchanges: conversion to United States-style reporting, a long-standing barrier to foreign filers, would be removed. The exchanges would likely be flooded with new registrants. The question: are more choices always worth the cost? This report presents the highlights of the two proposals. It also compares 129 IFRS-to-GAAP reconciliations by foreign registrants to see if the two reporting systems currently produce similar results. The short answer: there are still plenty of major differences between them. More Info |
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Last September, the Securities & Exchange Commission’s Office of the Chief Accountant issued Staff Accounting Bulletin No. 108 to provide guidance to companies in considering the materiality of known errors in financial statements issued in prior years.
In most walks of adult life, it’s understood: you make a mistake, you ’fess up and learn from it. Sticking with a mistake only seems to compound the consequences. So - why the need for regulatory “guidance” in deciding whether or not a financial reporting error needs a correction? Simple: after cultivating an aura of invincibility and precision (“earnings came in as targeted”), companies are loathe to admit an error for fear of looking dumb to investors. Another reason: when it comes to the plaintiff’s bar, managers don’t want to look like a pork chop waved in front of a coyote. Taking blame for flawed financial reporting can do that. The SEC has a ground-level view of what’s under the financial statements; they know that companies have harbored errors in balance sheets for years. Issuing a Staff Accounting Bulletin on error corrections gets them aired, and gives companies some cover to get their sins cleansed “because they had to do it.”
SAB No. 108 has been little-noticed by investors, largely because in certain circumstances it permits the correction of errors by adjusting beginning-of-year retained earnings. It’s not often that investors prowl the statement of changes in stockholders’ equity, so they’ll miss SAB 108 adjustments unless they notice their mention in the footnotes. There are some real differences in the way large companies and small companies have handled past errors and their corrections under SAB 108. Furthermore, investors who look at return on equity as a measure of operating performance can be misled by the SAB 108 “catch-up” treatment: error corrections that decrease equity can improve return on equity, perversely making companies with flawed reporting look like they’re doing a better More Info |
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A few years ago, pensions were foremost in the minds of most investors as the oft-cited “perfect storm” of low interest rates and miserable asset performance swelled the unfunded obligations of pension plans. Other postemployment benefit (OPEB) plans didn’t generate nearly the same level of investor concern, despite the fact that they were also negatively affected by lower interest rates. Because OPEB plans are rarely funded, there was little cause for concern from the falling stock markets - and because OPEB plans put more discretion in the hands of the employer/sponsor than pension plans, investors shrugged. If things got bad enough, managers could always take a hard line on the plans and terminate them.
Since those dark days for benefit plans, the accounting for them has changed - neatly slicing $152 billion from the stockholders’ equity of 309 S&P 500 companies, and mostly increasing their stated leverage. The new accounting - Statement 158 - did nothing to change the way a benefit plan’s funded status would be counted; it merely put that funded status on the sponsor’s balance sheet, whether overfunded or underfunded. That funded status improved again at year end 2006 - despite declining contributions to the plans. As share buybacks increased in popularity, benefit plan contributions decreased. What might give investors pause right now: many plans have significant asset allocations to alternative investments, which might be getting rocked in the current market tumult, prompting the question of renewed contribution increases later. More Info |
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Plenty of ink has been spilled in the financial press about the coming implementation of Statement 157, "Fair Value Measurements." Most of that coverage is negative: companies have been pushing back on the standard, petitioning the FASB to delay its implementation for one more year. "Level 3" has worked its way into investment jargon, synonymous with the already-cliched "mark-to-myth" designation.
What casual observers miss: Statement 157 doesn’t appreciably expand the use of fair value measurements. What it expands, however, is the amount of disclosures surrounding fair value reporting. Without those disclosures, nobody could make clever "mark-to-myth" remarks about Level 3 assets. Another miss: fair value reporting is nothing new. In fact, before the controversial Statement 157 was issued, the FASB’s two previous statements actually expanded the use of fair value measurements - and their arrival went unheralded. That may be due to the fact that Statements 155 and 156 were elective, rather than required to be adopted by companies. Statement 159, issued after the Statement 157 demonification began, was also elective - and it’s come in for its share of criticism ever since.
This report looks at the implementation of "Statements 627" in the real world. (That’s 155 + 156 + 157 + 159.) Lessons: you don’t hear gripes about fair value reporting when firms want it. And for all the clamor about Statement 157 at the large investment banks, there’s been surprising level of adoption among the small firms.
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Issued last February, Statement 159 gave companies immediate and unprecedented flexibility in changing the way they account for a whole slew of financial instruments - from equity method investments to debt issued by the firm itself. The standard allowed quick-footed chief financial officers to take advantage of early implementation if they adopted the standard as of the beginning of the fiscal year beginning on or before 11/15/07, hadn’t issued financial statements for their first quarter, and completed the adoption within 120 days of the beginning of the fiscal year.
Very unusual implementation criteria, indeed. That first criteria made it possible for the “multitude” of companies with November fiscal year ends to early adopt. The only companies with November fiscal year ends adopting the standard were the banking monoliths, however.
A search of first quarter 10-Qs produced only sixty firms that adopted Statement 159. Out of those who chose the fair value option, some companies found good use for the standard: better balance sheet presentation, easier hedging, and simpler accounting for investments. Others managed to find the bad parts of the standard: they gamed the transition provisions in order to bury impairment charges. The ugly upshot: Statement 159 brings good and bad reporting to the investors’ table, and it’s up to them to figure out whether a company is using or abusing the standard. Investors need to understand Statement 159 pitfalls before its wider application in 2008.
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