SEC Officials Detail Reporting Red Flags, Status of IFRS

Don't expect a decision any time soon on whether or not U.S regulators will head toward adopting International Financial Reporting Standards for U.S. companies. Officials from the Securities and Exchange Commission say the status of that issue is unchanged and there is no further timeline for making a decision.

Representatives from the SEC headed a panel at last week's Compliance Week 2013 conference in Washington, D.C., to offer an update on financial reporting challenges for the months ahead.

John Vanosdall, professional accounting fellow for the SEC's Office of the Chief Accountant, explained that consideration of an implementation work plan, mandated by a 2010 “Commission Statement in Support of Convergence and Global Accounting Standards” is ongoing. His office serves as principal advisor to the Commission on accounting and auditing matters and provides oversight of standard setting.

The work plan, ordered by former SEC Chair Mary Schapiro, was “intended to be the beginning of the discussion, not the end,” said Vanosdall, as the Commission works toward a goal of improving U.S. financial reporting and reducing country-by-country disparities. The analysis has since carried over to a new regime, headed by a new chairman, Mary Jo White.  

“The Commission has yet to make a decision on whether to incorporate IFRS,” Vanosdall said. “The discussion continues.”

The work plan, he said, was intended to inform Commission staff and was not “designed to answer the threshold questions of whether IFRS should be incorporated for U.S. issuers.”

Among those issues, Vanosdall said, are investor understanding and education regarding IFRS, the impact on the U.S. regulatory environment and issuers, and “human capital readiness.” The SEC is considering several aspects of other questions that the IFRS decision raises as well, such as: what timeframe will be allowed for transition and how might that be done? Will there be an adoption phase-in? How will disclosures look in the period leading up to implementation? Will IFRS ultimately have less industry-specific guidance than U.S. Generally Accepted Accounting Principles (GAAP), and could regulators be left without specific standards to enforce?

“There is an awful lot happening with financial reporting today,” he said. “When you think about the projects that FASB and the International Accounting Standards Board are jointly working on—revenue recognition, leasing, and financial instruments—it is important to think about the approach of a managed transition vs. a flick of the switch.”

Vanosdall said that SEC staff recognizes that “there is a significant burden on issuers today, given the volume of change.” Given the strain on resources, IFRS preparedness varies between large and small companies, domestic vs. international, and even within audit firms. “That's certainly a consideration that needs to be debated,” he said. “Companies may have to develop additional expertise in-house and acquire additional resources.”

Financial Reporting Red Flags

Less amorphous are the current issues that present red flags to the SEC's accounting personnel. Tricia Armelin, associate chief accountant for the SEC's Division of Corporation Finance, detailed the topics that most commonly appear in staff comment letters and offered suggestions for dealing with Commission scrutiny.

“The Commission has yet to make a decision on whether to incorporate IFRS. The discussion continues.”

—John Vanosdall,

Professional Accounting Fellow,

SEC

CorpFin selectively reviews the disclosure documents filed by public companies, including initial registrations, in addition to providing interpretive assistance on SEC rules.

Armelin's advice for best practices when a company must respond to the SEC include, first, fully understanding the issues flagged in a comment letter. It is also important, she said, to respond promptly, and document relevant decision making. Any uncertainties should prompt a formal or informal consultation with SEC staff.

OCA's guidance expands upon those recommendations, with suggestions for information that will allow its staff to more efficiently answers company queries and concerns. Among them:

John Vanosdall, professional accounting fellow, office of the chief accountant for the SEC, talks to the crowd at CW 2013 about updates to financial reporting. At left is Tricia Armelin, SEC associate chief accountant.

·         Providing an overview of the nature of the company's business, together with condensed financial information including assets, stockholders' equity, revenues, gross margin, pretax income, and other relevant measures.

·         Presenting timing considerations, such as pending filing deadlines or registration efforts.

·         Detailing information regarding the specific facts and circumstances giving rise to an issue.

·         Outlining possible alternative answers that were considered and rejected.

·         An analysis of the current and future financial statement impact of the alternatives considered.

·         What they specifically intend to disclose about the proposed accounting, and where this will be disclosed.

·         The audit committee's views on the proposed accounting treatment or auditor independence issue.

·         Whether the company or its auditors are aware of any prior SEC staff position related to the issue.

Among the matters that can trigger a review: segment disclosure; realization of deferred tax assets; loss contingencies; pension accounting and disclosures; revenue recognition; non-GAAP measures; and goodwill.

Given the importance to investors, reporting on industry segments is a focus for SEC staff, Armelin said. Recurring problems are companies disclosing too few reporting segments. “We might find companies that have one or two reporting segments when, in reality, if they had done their aggregating properly they should have four or five reporting segments.”

“To the extent that companies have multiple reporting segments, it is really helpful for an investor to understand the specific results of each reporting segment in the context of the overall company,” she added. “You might have one reporting segment that isn't doing so well and another that is doing very well. If you are looking at the consolidated results of the company that really wouldn't tell you the full story behind a company. You really need to go to the segment disclosures.”

KEY AREAS OF IFRS WORK PLAN

Below is an excerpt from the SEC's presentation at CW's annual conference regarding key areas of the IFRS work plan.

Whether to incorporate IFRS for U.S. issuers

Sufficient development and application of IFRS for

the U.S. domestic reporting system

Independent standard setting for the benefit of

investors

How to incorporate IFRS for U.S. issuers (transition)

Investor understanding and education regarding IFRS

Impact on the U.S. regulatory environment

Impact on issuers

Human capital readiness

Source: SEC.

The proper valuation of deferred tax assets also requires suitable scrutiny, Armelin said, especially as companies rebound from a rough economy. The disclosure of these relevant assets must be “very specific and on-point.”

“We are looking for people to disclose the range of recent possible losses and the amount accrued,” she said. “The estimates don't need to be precise, but it's hard for us to believe that you've been down this road for a few years and still can't make an estimate. But, if you can't, come in and talk to us. We are happy to hear you out.”

Investment decisions that affect pension plans may also attract a closer look.  “If the change was material to you, we might ask you to better explain what the impact was and how it affected plan assets,” Armelin said. “If you are changing from equity to debt, and a lower rate of return, we want you to explain that.”