The Financial Accounting Standards Board is planning—without much enthusiasm—to amend its definition of “fair value” to provide an exception strictly for purposes of lease accounting.
FASB staff asked the Board last week to consider an exception to its definition of fair value in Financial Accounting Standard No. 157, Fair Value Measurements, based on feedback since FAS 157 was adopted in September 2006. FAS 157 describes fair value as the amount that would change hands in an everyday transaction between market participants, not necessarily the amount that actually changes hands in a given transaction.
FASB staff told the Board that third-party lessors, such as banks or independent finance companies, now are worried about the language in FAS 13, Accounting for Leases, and its interplay with the definition of fair value in FAS 157. They fear it precludes any lease from ever being classified as a direct financing, or “leveraged” lease, which would represent a significant change in existing practices. “Among other things, a change in classification raises issues about the timing of revenue recognition,” the staff wrote in notes to board members.
The staff’s solution was to exclude lease transactions from the definition of fair value with an amendment to FAS 157, which the Board agreed to pursue. That will leave lease transactions to be recorded based on actual transaction figures, not based on market observations as required by FAS 157.
Linsmeier
Still, board members were not thrilled with granting an exception. “I’m concerned that we’re putting codified literature together saying this is what fair value means, but it isn’t for these particular circumstances” in FAS 13, FASB member Tom Linsmeier said at the meeting.
The Board reminded the staff that changing the accounting for lease transactions was not part of the objective in defining fair value. Instead, that is reserved for a long-term project to overhaul lease accounting rules.
“I won’t object to the scope out conclusion,” said Linsmeier, following a long pause awaiting his vote. “I do believe that we have a responsibility when we define fair value as an exit price, and if it’s not an exit price in other parts of the literature, that we should fix that and make it clear.”
Seidman
FASB member Leslie Seidman reminded Linsmeier that the problems will be addressed as the Board considers new accounting rules more broadly for revenue recognition and leasing. “We will fix it,” she said.
“In about five years,” he quipped, referring to the long timeframe typically associated with such rule changes.
AICPA Proposes New Accounting Guide for Airlines
The American Institute of Certified Public Accountants has published a proposed new accounting and audit guide specifically for the airline industry.
The existing guide, published in 1981, hasn’t been revised or amended in any substantive way since it was first issued, according to Yelena Mishkevich, technical manager of accounting standards at the AICPA. “A number of new transactions and issues have emerged over the years that are not addressed in the old guide,” she says. These include accounting conundrums like frequent flyer programs and electronic ticketing that can complicate revenue recognition.
The proposed new guide—295 pages in length—was drafted by the AICPA’s accounting standards executive committee and includes summaries of 26 specific issues that are addressed in some new way. Among them: unused tickets and travel vouchers, ticket change fees, manufacturer purchase incentives, performance credits, late delivery fees, depreciation of long-lived assets, lease return conditions, maintenance deposits and expenses, amortization of leasehold improvements, power-by-the-hour maintenance arrangements, retroactive pay adjustments, and airport operating rights.
Overall the guide addresses how to account for newer and emerging business practices within U.S. Generally Accepted Accounting Principles, but does not establish new accounting rules, Mishkevich says. “It may change accounting by changing the way things are interpreted, but it doesn’t change GAAP.”
The guide also deletes a popular method of accounting for planned major maintenance events such as an engine overhaul. Previously, airlines—and many other industries, taking their cues from the airline guidance—could use an accrue-in-advance method of accounting for the maintenance liability. The Financial Accounting Standards Board issued a staff position last year prohibiting that practice, and Mishkevich says the AICPA guide now follows suit.
The AICPA is accepting comments on the proposed new guide for airlines through Dec. 15.
Study: More Accountants on Audit Committees
The number of accountants running audit committees has doubled in the past five years, and the number of audit committees with at least one accountant serving on the committee has risen, according to recent data from Huron Consulting.
Based on a study of audit committee composition at 164 public companies, the number of accountants who chair the audit committee has jumped from 6 percent in 2002 to 12 percent in 2006, Huron says. The study notes an increase in the number of audit committees with at least one accountant serving, from 21 percent in 2002 to 40 percent in 2006.
Loftus
The majority of companies in the sampling, however, still have no accountant on the audit committee, the report says. “The news is still mixed for accountants, as they are three times less likely than finance professionals to sit on an audit committee at all,” says Maureen Loftus, managing director at Huron. “This shows the importance of having this background or expertise on the audit committee.”
The Securities and Exchange Commission requires audit committees to have someone on the committee with a designated expertise in finance or accounting. Although the rules do not require an accountant specifically, “it’s natural to look to accountants for that expertise,” she says.
Huron’s research analyzes audit committee compensation over a five-year period using information from corporate proxy statements and Form 10-K disclosures. The study found that although the number of audit committee members considered to be accountants or finance professionals increased from 34 to 47 percent over the five-year period, the majority of committee members still hold some other expertise outside of accounting or finance.
The study also notes that the average number of audit committee meetings doubled, from five meetings a year in 2002 to 10 in 2006. Only 3 percent of the companies in the study held four or fewer audit committee meetings in 2006.
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