FASB Revamped; Bankruptcy Accounting; More

The Financial Accounting Foundation has charged ahead with major changes to the operation of the Financial Accounting Standards Board, including reducing the board from seven to five members and giving the chairman full authority to set the technical agenda, despite questions about and criticisms of the plan.

The FAF issued a proposal in December to act on the recommendations of a special committee that said it was time for a governance overhaul for the FAF, FASB, and the Governmental Accounting Standards Board, to enable a more efficient movement toward global accounting standards. Most notably, the proposal called for a reduction in the number of FASB members to make the board “more nimble and responsive” and a change in the agenda-setting process to give the chairman sole authority to determine what projects FASB will pursue. Currently, those decisions are made by board vote.

Denham

The decision “demonstrates the Trustees’ strong commitment to enhance the efficiency, effectiveness, and independence of our standard-setting boards in a rapidly changing economic environment,” said Robert Denham, chairman of the FAF board of trustees in a written statement. “The Board’s adoption of these proposals is a thoughtful and well-considered action necessary to ensure FAF’s continued and enhanced ability to meet its responsibilities to the public through the development of transparent, high-quality financial reporting standards. As the FAF moves forward with these changes, constituents will be regularly informed of all implementation plans so that they may continue to provide input.”

Leisenring

FAF received 59 comment letters to its proposal, many objecting to the changes or saying the trustees didn’t make an adequate case for why the changes were warranted. For example, Jim Leisenring, a former FASB member and a current member of the International Accounting Standards Board, says the board needs more resources, not less, to deal with convergence issues. “It is most inopportune to propose this when pressures have increased on Board members to much more extensively deal with outside constituents,” he said.

In its comment letter, Grant Thornton says the changes should be studied and further explained before undertaken. “To the extent that some of the changes may be in anticipation of changes in the role or function of FASB, we believe that the proposal may be premature until those changes are further specified,” the firm wrote.

Selling

Financial reporting consultant Tom Selling called the proposal “a model of obfuscation” in a post to his financial reporting blog. “It's obvious to me that the real goal is not a convergence to benefit U.S. investors, for that would require careful study, thinking, and time,” Selling said. “The real goal is quick-and-dirty convergence, so that the big audit firms can get on with the business of charging large fees for the accounting changeovers while at the same time lowering their long-term audit risk, so that their clients can manage earnings with less fear of interference by the SEC.”

Palacky

Georgene Palacky, director for the CFA Institute Centre’s Financial Reporting Policy group, said the group is supportive of many of the changes, but not the two key provisions regarding reduction in FASB members and the new authority for its chairman. “The CFA Institute Centre encourages the FAF to monitor the effectiveness of these changes to ensure that communication with its constituents is transparent and collaborative and supports the FASB’s ability to address investors’ needs,” she said in a statement.

FASB Guidance on Linking Asset Transfers

FASB has issued a final staff position directing when to view certain asset transfers and repurchase financing agreements as linked rather than separate transactions.

The staff position, FSP No. FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions, says four specific conditions must be met for the two parts of an otherwise seemingly linked transaction to be viewed as separate and therefore eligible for separate accounting treatment.

Trott

Although compliance with FAS 140 has come under scrutiny in relation to bad debts and devalued securities, former FASB member Ed Trott says the new guidance is not related to current turbulence in credit markets.

Jim Johnson, a partner and national director of accounting standards for Deloitte & Touche, says the current focus on linking the two sides of the transaction predates the current credit crisis and doesn’t have any implications for current accounting challenges related to the credit crisis.

Instead, Johnson says the problem emerged when a Big 4 accounting firm examined more closely the accounting of a real estate investment trust (REIT) client and saw a case to be made for linked accounting treatment. “Depending on how you analyze these transactions, you would reach different conclusions about what really happened when the dust settled and the transactions were over,” Johnson says.

Johnson

Johnson says REITs generally are motivated to keep a certain percentage of their assets in mortgages or mortgage-backed assets to protect their eligibility for pass-through taxation—meaning the REIT’s income is not taxed at the entity level, but instead is taxed when it is paid as income to the REIT’s investors. It gives REITs, in a complicated series of transactions, the ability to “bulk up the balance sheet without tying up a lot of capital,” he says.

“When you really strip it all away, it gets at a different accounting question, and that’s when a preparer or an auditor of financial statements should look at two legally separate transactions as linked or as one,” Johnson says. “It’s often tough to tell when two legally separate transactions need to be combined.”

Bankruptcy Accounting Revisited

FASB plans to tweak a nearly 20-year-old bankruptcy accounting rule from the American Institute of Certified Public Accountants to change the way it applies to the adoption of emerging accounting standards.

AICPA issued Statement of Position 90-7 in 1990 to establish a standardized accounting method for companies in Chapter 11 bankruptcy proceedings. The statement requires entities adopting a fresh start to financial reporting following a Chapter 11 reorganization to adopt any changes in accounting standards within 12 months.

When the position was issued in 1990, it was common for companies to adopt new accounting pronouncements early or ahead of the required effective date, says Fred Gill, a technical manager on the AICPA Accounting Standards Team. “Now the thinking at FASB has changed, and frequently they’re prohibiting early adoption,” he says.

Ron Maples, project manager at FASB, says the early adoption requirements in SOP 90-7 have run into conflict with recently adopted accounting standards that prohibit early adoption, most notably Financial Accounting Statement No. 141R: Business Combinations. “If you adopt 141R early (as SOP 90-7 would require), your accounting could be significantly different than if you were reporting under FAS 141,” he says. “That got everyone looking heavily at this.”

Prior to SOP 90-7 there was a great deal of diversity among companies emerging from Chapter 11 in terms of how they accounted for professional fees and other expenses related to the bankruptcy, according to the AICPA. One of the significant new provisions of FAS 141R is its requirement that all professional fees associated with a merger or acquisition be treated as expenses deducted directly from earnings, not as part of the acquisition cost to be capitalized over time.

Maples said FASB hopes to complete its guidance in April.

Audit Board Begins Redraft of Standards

The Auditing Standards Board plans to issue two exposure drafts of existing auditing standards redrafted following a new approach to make audit standards easier to read, understand, and implement.

The drafts will be the first in a long trail of revisions and exposure drafts to revise the entire library of AICPA auditing standards according to the new drafting approach, says Ahava Goldman, a technical manager on the AICPA Audit and Attest Standards Team. The first two standards to be issued in exposure draft form will be Statement on Auditing Standards (SAS) 103, Audit Documentation, and SAS 114, The Auditor’s Communication with Those Charged with Governance, she says.

In the case of these first two standards, the redrafting did not alter any significant requirements or provisions of the standards themselves, she says. The entire redrafting project is expected to be completed by the end of 2010, and none of the redrafted standards will become effective until the entire project is complete, she adds.

In addition to clarity, convergence with the international approach to writing audit rules is another objective of the redrafting project, Goldman says. The International Auditing and Assurance Standards Board is putting the finishing touches on its project to redraft its auditing standards as well. “We found that the more we worked with the ISA format, the easier it was,” she says.