Help On FAS 157, FIN 48; PCAOB Budget

Speaking at the XBRL International Conference last week in Philadelphia, Chairman Robert Herz told the crowd that Financial Accounting Standard No. 157, Fair-Value Measurement, is meant to be “a new kind of standard … that acts more as a repository for what we mean by fair value,” since the concept crops up in multiple accounting standards. FASB promulgated FAS 157 earlier this year, prompting uncertainty from corporations about exactly how to value intangible assets such as intellectual property, or assets where no market naturally exists to determine a price.

Herz

Herz introduced three levels of disclosure around FAS 157, from a “Level 1” threshold where an asset is worth its book value, to “Level 3” estimates of market value for intangible assets. An example of an asset that needs Level 3 disclosure might be a Class B of stock whose value is derived from the price of a Class A of stock, he said.

Level 3 disclosure, Herz readily admitted, is causing the most consternation among financial executives. He encouraged companies to disclose the valuation methods they use, so regulators and auditors can understand the logic and determine that at least a company’s heart might be in the right place, if not the decimal point.

Herz also reviewed FASB’s joint project with the International Accounting Standards Board to overhaul presentation of financial statements. The ultimate goal of more transparency, he said, can be fostered by restructuring the basic financial documents—balance sheet, income statement, statement of cash flows—to make them as alike as possible.

Investors currently find that “relating one statement to another is hard do to, because they’re so disjointed … We want to come up with a common look and feel.” Herz showed a mock-up of a potential financial statement, where both the balance sheet and the income statement listed assets and liabilities in the same order, along with various sub-categories such as taxes, all using the same names and in approximately the same sequence.

The boards’ project is still in early phases. A discussion paper of their preliminary work is expected sometime in the first half of 2007.

AICPA Offers Help On FIN 48 Compliance

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o help companies implement the requirements of new tax-reporting rules requiring them to disclose uncertain tax positions they are claiming, the audit and tax experts at the American Institute of Certified Public Accountants have teamed up and jointly published a practice aid.

The 13-page guide, titled “AICPA Practice Guide on Accounting for Uncertain Tax Positions Under FIN 48,” focuses on how companies can comply with Financial Interpretation No. 48, Accounting for Uncertain Tax Positions, which was issued by the Financial Accounting Standards Board earlier this year.

Bill Stromsem, a director in the tax division at AICPA, warns that FIN 48 is broad in scope but carries short deadlines and can pose significant reporting risks for those who don’t understand the rule. “There’s a lot of work that needs to be done and people have to learn how this works and get their ducks into order now,” he says.

The AICPA practice guide includes highlights of FIN 48, as well as its implications for in-house accountants, auditors, and tax advisers. The AICPA stresses that the document is not authoritative guidance, but is meant to assist members in getting a quick grasp of the scope of FIN 48.

FIN 48 requires companies to take a fresh look at the tax benefits they claim on their tax returns and report them on their financial statements only if the company deems the position “more likely than not” to be recognized by tax authorities. The market has defined that threshold as greater than 51 percent certain.

For positions that are less than 100 percent certain of being sustained by tax authorities, companies are required to estimate with a percentage figure how likely the position is to survive the tax-reporting process and any challenge, then book a tax benefit proportional only to that level of certainty. For example, if a company believes it is 70 percent certain that a particular tax credit will be recognized and allowed by the Internal Revenue Service, it can book only a 70 percent benefit related to that tax credit until the position ultimately is recognized and supported in the full amount.

Noll

FASB adopted FIN 48 to give investors a more transparent view of where risks associated with tax positions might crop up. Opponents say it simply gives tax authorities an auditing roadmap, pointing out areas of weakness in a company’s tax positions.

To be sure, it gives companies new pause to consider the tax positions they plan to take. “What’s good for tax return may not be good for financial statements,” says Dan Noll, AICPA’s director of accounting standards.

PCAOB Approves 2007 Budget; Goes Recruiting

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he regulatory agency charged with overseeing auditors is caught in the same bind as the rest of the marketplace these days: how to attract and retain good audit talent.

RELATED RESOURCES

Text Of The PCAOB’s 2007 Budget

SEC’s Release Announcing Budget Approval (Dec. 4, 2006)

To combat the problem, the Public Company Accounting Oversight Board has won approval from the Securities and Exchange Commission to increase its spending to $136.4 million in 2007. The 4.2 percent increase primarily will go to recruitment, salaries, benefits, and related personnel costs.

The Board’s accounting-support fee—the amount public companies will pay based on their respective market capitalizations to support the PCAOB—is $122.4 million for 2007. The difference will be covered by a carry-over of excess funds from 2006.

Olson

Mark Olson, chairman of the PCAOB, said the biggest spending category in the budget is related to personnel, with half of the Board’s staff dedicated to carrying out audit inspections. “We would like to hire 20 highly skilled accountants during 2007 to sustain the current program,” Olson told the SEC as it gathered recently to review and approve the budget. “And we are reassessing our recruiting and retention programs, as well as our compensation structure, to ensure that they properly support the Board’s attainment of its statutory objectives.”

The PCAOB wants a total employee headcount of 519 by the end of 2007, of which 250 would be devoted to the inspection process. The regulator expects to end 2006 with 480 total employees, with 230 of those focused on inspections.

Cox

Olson told the SEC that the Board is working on a long-range strategic plan that will focus on attracting and retaining audit talent and on developing risk-analysis tools, among other areas. The plan should be ready for SEC review in January, a PCAOB spokesman said. SEC Chairman Christopher Cox welcomed the idea.

“It will help provide the Board and the Commission with a common vision of the medium- and long-term goals of the PCAOB,” Cox told commissioners and Olson. “And it will give us a roadmap for evaluating the budgets that will be necessary to achieve those goals.”

EITF Issues Draft Positions On Insurance, Option Benefits

FASB’s Emerging Issues Task Force has issued two draft positions on which it will accept comment through Jan. 22, 2007.

The first issue, No. 06-10, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignments in Split-Dollar Life Insurance Arrangements,” addresses whether a company should record a liability for the post-retirement benefit associated with such insurance plans. The EITF studied whether the benefit would qualify for treatment as a post-retirement benefit plan or a deferred-compensation contract.

The second issue, No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards,” looks at how a company should recognize the income tax benefits received on dividends paid to employees holding equity-classified, nonvested shares; equity-classified nonvested share units; or equity-classified outstanding share options. It also looks at how to address benefits on dividends charged to retained earnings under Financial Accounting Standard No. 123R, Share-Based Payments.