New, Redrafted Accounting Standards; More

In its Jan. 11 inaugural meeting as an advisory group to the Financial Accounting Standards Board, the Investors Technical Advisory Committee has said new accounting rules should require retrospective application and that private companies with public debt should be required to meet the same effective dates as public companies.

ITAC floated the ideas as a way to achieve more comparability among financial statements, according to Rebecca McEnally, an ITAC committee member and director of the Capital Markets Policy Group for the CFA Centre for Financial Market Integrity.

McEnally

McEnally says the committee is concerned about the inconsistency in current accounting rules that often gives companies some leeway to decide how they will implement a rule. In many cases companies can decide for themselves if they will adopt a rule retrospectively, which means restating prior year results to reflect the new rule and consequently making comparisons from year-to-year more meaningful. Or they can adopt “prospectively,” meaning only for the required period and going forward. In some cases, companies also may have some flexibility to smooth numbers over prior and current periods.

Those different approaches create incomparable results, McEnally says, which is precisely the problem users of financial statements face today as they look at figures related to stock-option expensing required by Financial Accounting Standard No. 123R, Share-Based Payment.

“With 123R, they let people do it as they wanted,” McEnally tells Compliance Week. “They could restate for three years, smooth the difference over three years, or adopt this minute. That’s not the way to do things. When everyone is doing things in different ways, we can’t go back and reconstruct how things will look.”

As for a single effective date, McEnally says credit-rating agencies in particular have problems with comparability of financial results when public companies adopt accounting rules on a different timetable than private companies with public debt. “The rating agencies have said it’s a terrific problem to try to rate those companies when they have different information for them,” she says.

McEnally says the issue has been magnified lately because FAS 109, Accounting for Income Taxes, does not allow companies to restate results retroactively. That’s because some figures are based on estimates of deferred tax assets and any hindsight applied by a retrospective accounting change would skew the results.

McEnally says users of financial statements are willing to endure the risk of some restated historical estimates. “We said it would be nice to have both, but if we have to have a choice, there’s no issue for us,” she says. ”We want retroactive restatement. We’re willing to give up that provision in Statement 109.”

Turner

Lynn Turner, managing director of research for Glass, Lewis & Co. and an ITAC member, says FASB deserves accolades for forming a body like ITAC to help guide accounting rulemaking. According to Turner, the committee includes people who have strong resumes both in preparing financial statements and in reading and using them. “This is a unique perspective that in the past has not been present at the FASB,” he says.

ITAC plans to meet again in February or March.

IMA Publishes Statement On Enterprise Risk Management

The Institute of Management Accountants has published a risk-management framework to serve as a guide to help finance professionals understand and manage risk.

Authored by professors William Shenkir and Paul Walker of the University of Virginia, the enterprise risk management framework is embodied in an IMA statement on management accounting titled “Enterprise Risk Management: Frameworks, Elements, and Integration.”

Thomson

IMA Vice President Jeffrey Thomson says the statement springs from the body of knowledge IMA has acquired in advocating for specific policies surrounding Sarbanes-Oxley implementation. Now that the Securities and Exchange Commission and the Public Company Accounting Oversight Board are preparing a significant overhaul of SOX implementation to favor a more top-down, risk-based approach, the IMA wanted to issue its guidance to contribute to the process.

“Although the SEC and PCAOB are making steps towards a risk-based approach in SOX guidance, in our opinion, they have not adequately defined what the term actually means in practice,” Thomson says. “IMA’s Enterprise Risk SMA provides practitioner-level guidance to help fill this gap while improving business performance overall.”

Thomson says the IMA’s approach is “fundamentally the same in terms of basic elements” as the ERM framework published by the Committee of Sponsoring Organizations in September 2004. The IMA approach, however, is “more granular in terms of residual risk,” he says, and is both a framework and a how-to assessment approach to risk. By comparison, “the COSO ERM is fairly broad,” Thomson says.

The IMA plans to introduce another statement on management accounting by the same authors during this spring to cover specific practices and techniques associated with ERM.

FASB Revises Guidance On Embedded Derivatives

The Financial Accounting Standards Board has finished one piece of implementation guidance and revised another related to derivative-accounting rules.

In Statement 133 Implementation Issue No. B40, FASB says some precise conditions exist under which a securitized interest in prepayable financial assets would not necessarily trigger the usual requirements to break it down into its separate inputs for accounting purposes. The Board decided to provide a narrow-scope exception from the requirements of FAS 133, Accounting for Derivative Instruments, that would otherwise have required bifurcation, or breaking down the instrument into its separate inputs.

In Statement 133 Implementation Issue No. B39, FASB changed its view on how mortgage-backed securities should be treated in light of its guidance in Issue No. B40. FASB first published the guidance in June 2005, then revised it in March 2006 and again last week.

Sherman

David Sherman, an accounting professor at Northeastern University, says FASB must check its guidance on derivatives continuously because contracts involving embedded derivatives are complicated and continually changing.

“The embedded derivatives are a bit harder to identify and they can even be overlooked because there is nothing that screams out ‘This is a derivative!’” he says. “Naturally, accounting standards have had to play catch-up to the financial contracts, and there are elaborate rules on identifying these and then valuing them and accounting for fluctuation in their value.”

IAASB Publishes Redrafted Auditing Standards, Seeks Input

The International Auditing and Assurance Standards Board is charting a new course, redrafting auditing standards to make them clearer and seeking input on a new strategic plan.

The IAASB, an independent rule-making body under the International Federation of Accountants, recently published four redrafted standards with a goal of making the rules more consistently applicable to audits around the world.

IAASB says 11 of its 32 auditing standards now are under full revision and are being issued in the new form to enhance clarity; nine others have been revised in the past few years and need only the rewrite to fit the new form. The remaining 12 standards are acceptable with regard to the audit procedures they require, but like the others will be revised to fit the new form.

At the same time, IAASB is circulating a questionnaire looking for views on its stakeholders, its objectives, and its activities as it considers its strategic plan. The results, IAASB says, will assist in writing a strategic plan through 2010.

The PCAOB has named IAASB as one of the rulemakers it tracks as it develops its own auditing standards to apply to U.S. public-company audits.