The Financial Accounting Foundation is targeting its next review of accounting standards for public companies toward business combinations and operating segments.

FAF, which oversees the Financial Accounting Standards Board, plans to perform post-implementation reviews on FASB Statement No. 141R Business Combinations and FASB Statement No. 131 Disclosures About Segments of an Enterprise and Related Information. FAF began its post-implementation review process with a study of Financial Interpretation No. 48: Accounting for Uncertainty in Income Taxes, to get a sense for how effectively the standard met its objective after it was implemented. FAF, which also oversees the Governmental Accounting Standards Board, also plans to review deposit and investment disclosures required for governmental entities.

FAS 141R, issued by FASB in 2007, introduced a new, fair-value-based approach to accounting for mergers and acquisitions. It required companies to book acquisitions based on the fair value of the assets and liabilities acquired rather than purchase price, and it required companies to expense immediately through earnings any professional fees paid to consummate a deal rather than capitalizing such costs as part of the purchase price.

Issued much earlier in 1997, FAS 131 established standards for how public companies would report information about operating segments in their annual and interim financial statements, as well as disclosure requirements for products, services, geographic areas, and major customers. Segment reporting is an often-cited trouble spot in financial reporting when staff members at the Securities and Exchange Commission discuss areas of greatest concern.

FAF spokesman John Pappas says FAF chose to focus on these particular standards because they were significant and important changes to accounting standards when they were issued. "There were questions from stakeholders about the standards' operationality -- how to understand, apply and obtain useful information from them," says Pappas. FAF also chose the projects to coordinate with similar reviews on standards that are converged with FAS 131 and FAS 141R at the International Accounting Standards Board.

FAF's initial review under its new post-implementation review process found that FIN 48 generally achieves the objective of requiring companies to explain to investors where they may have uncertainty in their financial statements based on tax positions that might not hold up under review by the Internal Revenue Service or Tax Court. FAF provided recommendations to FASB, including improving user input in the early stages of standard setting and including discussion in each new standard about the need for the guidance that is being adopted as well as the rationale for the chosen solution if the board selected from alternative approaches. FAF is awaiting FASB's response to the report.

FAF has indicated it will take what it has learned in its augural review and apply it to future reviews. The review process is meant to focus on accounting standards that focused on critical new accounting requirements to see how effective the standard-setting process is in producing effective accounting standards.

Topics