FASB’s Agenda; New EPS Guidance; More

Companies can expect to see a series of roundtables at the Financial Accounting Standards Board later this year to debate some of the biggest accounting challenges on FASB’s agenda.

During a recent Webcast to update capital markets on the future direction of accounting rules, FASB Technical Director Russ Golden said the Board hopes to hold roundtables before the end of the year to discuss new rule proposals around contingencies, hedge accounting, and consolidation and derecognition related to special purpose entities.

Batavick

Despite a stepped-up pace in the U.S. economy’s migration to international accounting standards, FASB will continue to make improvements to U.S. Generally Accepted Accounting Principles where it sees fit, board member George Batavick said. Projects on FASB’s agenda that are separate from the effort to converge U.S. GAAP to International Financial Reporting Standards “run the gamut of quick fixes and major changes in the way we do accounting today,” Batavick said.

Golden said FASB is planning a roundtable and perhaps even an academic study to consider significant, controversial changes in how companies would be required to account for contingencies or future events, such as a lawsuit where the outcome is uncertain at the time of reporting. The Board has issued an exposure draft to revise Financial Accounting Standard No. 5, Accounting for Contingencies, that would require substantially more disclosure than companies currently provide in financial statements.

“A fairly controversial change would require disclosure of a loss contingency that is severe, even if it is remote and expected to be resolved in one year,” Golden said. “We recognize this proposal will be extremely controversial, and we expect companies will argue they will be unable to defend themselves and will be providing confidential information to plaintiffs.”

FASB’s proposal provides a disclosure exception, where companies can forgo disclosure of confidential information if they claim disclosure would prejudice the outcome of an event. But Golden noted that the proposal is already drawing heat from the user community. “People making current investment decisions do not think this is in the best interest of financial reporting,” he said.

Batavick said FASB also has met with an unspecified legal group for insight into the attorney-client relationship, and how contingencies tend to be reported once resolved. He said that should further inform the redeliberation process.

In hedge accounting, Golden said the Board wants a roundtable on its recent proposal to overhaul FAS 133, Accounting for Derivative Instruments and Hedging Activity. FASB hopes to redeliberate in the fall and issue a final standard by the end of the year. He said the Board expects plenty of debate around the increased use of fair value.

The proposed standard “requires in almost all cases that you fair value the hedge and the hedged item,” he said. “Today we have bifurcation by risk [meaning companies can hedge for specific risks]. In the future, you’d mark the entire hedge and the entire hedged item, which you can imagine would result in more volatility. We expect a lot of comments, and we expect a lot will say this is not an improvement because of the increased volatility.”

In consolidation and derecognition, Golden said FASB expects to issue proposed revisions to FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and Financial Interpretation No. 46R, Consolidation of Variable Interest Entities, in late July. A fourth-quarter roundtable is planned to get direct feedback. The Board is working on amendments that would eliminate the concept of a qualified special purpose entity and shore up the notion of legal isolation, to clarify who has control over and derives the primary benefits of a special-purpose entity.

FASB Offers More EPS Guidance

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he Financial Accounting Standards Board has added another bit of wisdom to the library of U.S. Generally Accepted Accounting Principles regarding how to calculate the prized earnings per share figure—although not without dissension.

FASB published a staff position that answers questions on whether instruments granted under share-based payment arrangements are “participating” securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under FAS 128, Earnings Per Share.

FAS 128 defines EPS as the amount of earnings attributable to each share of common stock. FASB’s Emerging Issues Task Force tried to answer questions about whether share-based payment awards that were not fully vested qualified as “participating” securities for purposes of the EPS calculation.

A participating security, according to FAS 128, is one where the security may participate in dividends with common stock according to a predetermined formula. EITF couldn’t reach an agreement and ultimately asked FASB to make a ruling.

FASB determined that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents— whether paid or unpaid—should be seen as participating securities and should be included in the EPS computation.

Linsmeier

FASB Member Tom Linsmeier, however, did not support the majority view. Linsmeier objected for a number of reasons, including his view that the EPS figure is calculated based on hypothetical assumptions and that current guidance already requires multiple methods with different objectives, leading to a figure of little meaning or use to shareholders.

The new guidance is part of a long string of guidance FASB has provided in response to “seemingly never ending” demand, creating unnecessary complexity, he said in his dissenting view published with the final guidance.

Linsmeier also noted that international accounting rules do not provide nearly the same level of detailed guidance, suggesting the Board’s view represents “a level of detailed guidance not material to capital markets.”

The final guidance is effective for financial statement periods beginning after Dec. 15, with retrospective adjustment required and early adoption prohibited.

GAO Fails Government on Financial Statement Audits

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hether comforting or maddening, CFOs might enjoy knowing the federal government still is doing a lousy job of maintaining proper control over financial reporting.

The Government Accountability Office recently said it found new and recurring deficiencies in the processes the government uses to prepare financial statements in its audit of the government’s 2007 results. The control deficiencies contribute to material weaknesses that lead to improper accounting among federal agencies, non-conformity with accounting principles, and inability to reconcile actual results with the federal deficit.

The GAO report says the problems are evident in documenting a key standard operating procedure for preparing results, reporting in conformity to accounting principles, reconciling distributed offsetting receipts, maintaining control over spreadsheets, using interim financial information, and other areas. The report notes that the GAO offered 81 recommendations in July 2007 for improvements. So far, only 35 of those have been acted on and closed. The current report adds 10 new recommendations to the list of open items that need attention to shore up reporting.