I wonder if we need a third dimension — one in addition to relevance and reliability. That would be precision of a measurement.

Anybody else have thoughts?

 The Roundtable is scheduled at 4pm eastern time on Wednesday, February 1. 

 To participate in the Roundtable, please follow these instructions.

 1)  Go to http://intercall.webex.com anytime after 3:00 pm (eastern time) on February 1. 

2)  Type in the following meeting number: 598 823 122 and click “Join Now”.

3)  On the next page, fill in your name, email address, and the password “Fasri001” (case sensitive).  Then click “Join”. 

4)  After joining the meeting, you will be prompted for your telephone number.  Insert your telephone number and click the “Call Me” button.  Your phone will ring, which you can use to hear and speak. 

5) If you experience trouble with the call-back feature, you can dial in yourself using the following numbers: 866-478-6348 or 224-554-0243.

 The FAF’s inaugural review project examined FIN 48, Accounting for Uncertainty in Income Taxes, which was intended to increase relevance and comparability in reporting information about income tax uncertainties.  The final report was released on January 12 and can be accessed via the FAF website.  Academics can play an influential role in the PIR process.  Not only can our research inform regulators about the effects of promulgated standards, but we can become directly involved in the PIR process by reviewing the relevant academic literature, influencing the creation of surveys, and participating in the surveys. 

 Our next Roundtable will feature the FAF’s PIR team, who will explain the process, and Jennifer Blouin from Wharton, who played an important role in the FIN 48 PIR.  Jennifer will explain the academic’s role and the benefits she realized from being directly involved.  Now that the review process on FIN 48 is complete, the FAF is planning on starting over again on two new standards.  Come to the Roundtable to see how academics can influence the process.  One session of this Roundtable will be held during the normal day and time of the week, Wednesday, January 25^th at 4:00 pm (eastern time).  However, to maximize participation, we will also have an identical session on Tuesday, January 24^th at 4:00 pm (eastern time).  Choose the date that is most convenient for your schedule. 

 To participate in the Roundtable, please follow these instructions.

 1)  Go to http://intercall.webex.com anytime after 3:00 pm (New York time) on January 24 or 25. 

2)  Type in the following meeting number that corresponds with the session that you are attending:

Tuesday: 596 479 166

Wednesday: 596-828-391

and click “Join Now”.

3)  On the next page, fill in your name, email address, and the password “Fasri001” (case sensitive – same password for both sessions).  Then click “Join”. 

4)  After joining the meeting, you will be prompted for your telephone number.  Insert your telephone number and click the “Call Me” button.  Your phone will ring, which you can use to hear and speak.  Please remember to put yourself on mute when you are not speaking (can be done by clicking the mic next to your name).

5) If you experience trouble with the call-back feature, you can dial in yourself using the following numbers: 866-478-6348 or 224-554-0243.

To illustrate how this project has taken several turns, here is a brief history.  The project was initially added to the FASB’s agenda in May 2007 as an effort to converge standards with IFRS, which already requires that managers make the going-concern assessment.  The other objective of the initial project was to determine when the liquidation basis of accounting should be adopted.  After being removed as a separate project from the Board’s agenda, it later resurfaced as the Board expanded its scope in mid-2009 to include enhanced disclosures about risks and uncertainties (motivated by events surrounding the financial crisis), and a definition for substantial doubt.  The idea behind the enhanced disclosures was that managers would provide early warning signals to users about conditions and events that indicate the entity will not be able to meet its obligations within the foreseeable future without significant actions taken outside its ordinary course of business.  These requirements require a triggering event, and over the course of further deliberations, the Board determined that the disclosures should escalate as the economic conditions surrounding the entity become more severe.

In a 2011 October meeting, the Board decided that providing early warning signals would not be an objective of the project because identifying the triggering event is problematic, and similar disclosures pertaining to liquidity were being deliberated on another project.  As I wrote here, defining substantial doubt remained a significant challenge and the project’s primary objective was now to determine whether management should be ultimately responsible for the going-concern assessment. 

With Wednesday’s decision, the Board has again expressed a preference for providing early warning disclosures such that when a going concern assessment is made by the auditor, users will not be surprised.  Some board members expressed a concern that since substantial doubt is a term used in the auditing and securities law literatures, the FASB should not be trying to define what that term means because developing a definition could potentially be different from the intended meaning.  (My opinion is still that a clear definition for substantial doubt is essential, but it appears that definition will need to be developed by regulators who initially created the term.)

Other opinions expressed by Board members and outreach groups (particularly users) do not appear to be based on empirical evidence and therefore, in my opinion, are great topics for academic research.  The first is the notion that a going concern opinion is a self-fulfilling prophecy and that in expressing the opinion, managers/auditors are leading the charge to the entity’s demise.  However, as I expressed here, there is no strong evidence that I am aware that would support this self-fulfilling prophecy notion and some simple statistics suggest it is a fallacy. 

Second, multiple Board members expressed the opinion that management could not be objective when expressing their opinion.  However, one Board member explicitly rejected that notion on the basis that management is asked to provide objective evidence in several other places within the financial statements.  With management going-concern opinions from IFRS, it would seem that data are available for academics to directly test this notion.

FIN 48 was the initial standard reviewed by the FAF and today, after receiving input from various constituents (including academics), the FAF released its report.  The 12-page report concludes that the standard generally achieves its objective of increasing relevance and comparability in reporting information about income tax uncertainties.  However, it also notes that some stakeholders think it could be improved.

Look for an upcoming FASRI Roundtable that will discuss the post-implementation review process and how academics can get more involved.  Providing ex-ante research to standard-setters has been a challenge for academics (although I think we’ve gotten better at doing this), but we are uniquely suited to provide ex-post research that can inform how standards have affected information environments for financial statement users.

Session 2.3 on Saturday morning looks at disclosure issues, a frequent topic on the blog (I would have mentioned this session even if some of my colleagues were not presenting).  Session 2.5 delves into fair value measurement in financial reporting, and session 2.6 considers international accounting.  The later morning time slot on Saturday includes session 3.1 on accounting measurement for banks.  One paper touches on the other than temporary impairment issue (OTTI) that was the focus of a spirited congressional hearing involving Bob Herz.  Corporate responsibility is the focus of Session 3.6.

After lunch, session 4.2 looks at disclosure in more detail.  Session 4.3 has papers looking at fair value measurements and R&D accounting policy.  Session 5.4 is titled attributes of earnings; one paper looks at comparability of accounting rates of return under historical cost accounting, a subject that came up several times at the FASB/IASB December conference.

Note that my list is not meant to exhaustive – other papers in other sessions probably touch on issues standard setters would like to know.  Nor is it my intention to endorse these sessions to the exclusion of others.  My goal instead is to observe that the conference is providing a venue to researchers to share ideas and information about policy related issues.  I myself will not be able to attend this year.  But I hope those who do attend will have a wonderful and productive time.

The first FASRI Roundtable for 2012 will cover the newly proposed standard on Revenue Recognition.  FASB practice fellows Michael Breen (KPMG) and Heather Harris (General Electric) will lead the discussion.  Michael is a senior manager at KPMG and Heather is an Assistant Controller in the Global Mergers and Acquisitions department at General Electric.  Both Michael and Heather have been active in the Revenue Recognition project over the past several months and can provide answers to how the new proposal is likely to affect revenue recognition practices.  Revenue recognition is one of the most fundamental issues in accounting and affects many of the topics that we teach and research.  I anticipate the session will be informative and very worthwhile.

 The Roundtable is scheduled at 4pm eastern time on Wednesday, January 18. 

 To participate in the Roundtable, please follow these instructions.

 1)  Go to http://intercall.webex.com anytime after 3:00 pm (New York time) on January 18. 

2)  Type in the following meeting number: 594 228 179 and click “Join Now”.

3)  On the next page, fill in your name, email address, and the password “Fasri001” (case sensitive).  Then click “Join”. 

4)  After joining the meeting, you will be prompted for your telephone number.  Insert your telephone number and click the “Call Me” button.  Your phone will ring, which you can use to hear and speak.  Please remember to put yourself on mute when you are not speaking (can be done by clicking the mic next to your name).

5) If you experience trouble with the call-back feature, you can dial in yourself using the following numbers: 866-478-6348 or 224-554-0243.

At a minimum, an entity is to disclose (separately for financial assets and liabilities, including derivatives):

 (a) The gross amounts of recognized financial assets and liabilities;

 (b) The amounts offset under current U.S. GAAP;

 (c) The net amounts presented in the balance sheet;

 (d) The amounts subject to an enforceable master netting arrangement or similar agreement that were not included in (b); and

 (e) The net amount (i.e., the difference between (c) and (d)).

These disclosures will have the greatest impact on institutions that hold derivatives, repurchase and reverse repurchase agreements, and securities lending and borrowing arrangements. 

The outcome represents an interesting case where the Boards set out to converge on a topic, but ultimately could not agree.  An implication might be that this experience reinforces the notion that the US must retain full authority over US GAAP and any attempts to integrate IFRS will be doomed to failure.  After all, if we can’t agree on offsetting, how can we expect to agree on more substantive issues that come up down the road?  On the other hand, this outcome might merely serve as an example of how the FASB would retain its role in standard-setting after the integration of IFRS.  The FASB can actively voice its opinion with the IASB during deliberations, and establish different requirements in cases where there is disagreement – consistent with the SEC’s “condorsement” model.  However, does this mean that if the SEC does decide on IFRS integration, we can expect carve-outs from IFRS to the extent where the potential benefits from adopting IFRS are mitigated, or even eliminated?

For the upcoming semester, I hope to organize a set of Roundtables that will be of interest to all FASRI readers.  So far, I have finalized two Roundtables.  On January 18, Mike Breen and Heather Harris, two FASB practice fellows, will discuss the new exposure draft on Revenue Recognition.  They will highlight areas within the proposed standard that are most likely to have a significant impact on practice.  Revenue recognition is one of the most fundamental and critical aspects of accounting, and a topic that probably everyone talks about sometime during their courses.  I expect many of you will benefit from the Roundtable. 

On February 1, Denise Jones and Kim Smith will discuss their paper recently published in The Accounting Review on Other Comprehensive Income (OCI).  The FASB and IASB are very interested in the topic of OCI, which was discussed extensively at the most recent FASB/IASB Issues Conference that was held in Norwalk in December.  Several fundamental issues surround the reporting of OCI, many of which are addressed in Denise’s and Kim’s article.  I suspect Roundtable participants can have a productive discussion on this topic. 

Roundtables will be held on Wednesday afternoons during the upcoming semester beginning at 4:00 PM eastern time.  I hope you look for the upcoming announcements and decide to join us.  Also, if any of you have suggestions for future topics that would be helpful to standard setters and you’d like to hear about, let me know.

Who knew that reclassifying AOCI into income could be so complicated for preparers?  As it turns out, some AOCI items can flow through multiple income statement line items when recycled (cost of goods sold, depreciation/amortization, and virtually all SG&A expenses), and information in a decentralized system is not always gathered in a manner that companies can readily allocate the amount to different line items.  The requirement seems particularly costly when recycled items are capitalized.  For example, the problem is articulated in a comment letter from Gregg Nelson, a VP from IBM, as follows:

“… certain pension-related costs reclassified out of OCI are included in cost pools and subsequently capitalized as inventory or PP&E. These amounts immediately lose their nature, and the OCI portion related to capitalization is not tracked. Thus, when inventory is subsequently sold or PP&E is depreciated, a portion of the cost of sales / depreciation would include amounts previously reclassified from OCI. We are uncertain whether the intent of ASU 2011-05 … was for entities to track such amounts. If this is a requirement, we would certainly question the usefulness of this information and the cost/benefit of identifying and tracking this information. This capability does not exist in our financial systems today.”

During the brief comment period, the FASB received 37 comment letters.  The letters can be categorized as coming from the following groups:

A)     Companies, Preparers, or Preparer Organizations – 25 letters

B)      Audit firms – 8 letters

C)      CPA organizations or Societies – 2 letters

D)     User Organizations – 1 letter

E)      Individual with no affiliation – 1 letter

It’s interesting to note how few letters come from financial statement users.  This lack of user input is typical and a reason why the FASB has established various user groups to get more feedback from this important stakeholder.  Also, academics are relatively under-represented.  One might believe that academics could provide a unique and unbiased perspective on many issues faced by the Board. 

The ED posed three questions for respondents to answer.  The first question was whether respondents agreed with the proposal to defer the effective date for OCI reclassification presentation.  Of the 37 letters, 36 stated they agreed with the deferral.  The one letter that expressed disagreement was from the CFA Institute – the only user group that responded – but even this was only a partial dissent, as I’ll explain later. 

Questions 2 and 3 asked for alternatives that the Board should consider for presenting reclassified OCI that would be more cost effective and if so, how these alternatives would serve the needs of users.  Only two of the letters indicated that the FASB should continue to require that firms prominently display the effects of recycling on the face of the income statement.  Thirty-two letters strongly opposed the requirement and generally indicated that footnote disclosure would be adequate (3 letters expressed no opinion). 

Besides the significant cost of tracking the AOCI amounts to earnings, respondents who disagreed with the requirement indicated that the reclassifications are almost always immaterial (further suggesting that costs exceed benefits), the income statement would be complicated with greater clutter, and the requirement diverges from IFRS.  In addition, many respondents questioned the demand for such reporting because they are not asked for this information by investors and analysts. 

The only outlier from this predominant view comes from the CFA Institute and its Corporate Disclosure Policy Council.  Kurt Schacht and Gerald White lay out a well-reasoned response to the ED that includes several interesting points (the entire letter can be read here).  The first point made in the letter is somewhat flawed, which is that they disagreed with the deferral of the effective date because they interpreted the ED to mean that the FASB would simply delay and never revisit the presentation requirement.  However, Board deliberations clearly indicate that the Board never intended that the deferral would be permanent.  They then proceed to provide support for the deferral if it is limited to a one year time frame.  Other than this misinterpretation, however, I believe Messiers Schacht and White make many interesting, and valid, arguments.  They point out that OCI reporting in the first place is a concession to preparers, and if preparers are unable to provide information on reclassifications, then perhaps we should do away with it entirely.  Second, they articulate frustration with interpreting economic events that are initially presented in OCI when they occur and allocated in piecemeal to net income in subsequent periods when they do not occur.  They argue against the position that prominent display of OCI reclassification would confuse investors with clutter but rather, claim that the disclosures result in greater transparency and that, like every other standard, immaterial items would not need to be presented. 

What struck me when reading these letters is that we still don’t really know what we want to accomplish with OCI reporting and recycling.  This was a topic at the most recent FASB/IASB Issues Conference.  A comment letter from Richard D. Levy, Executive VP and Controller for Well Fargo, stated the issue succinctly as follows:

“The first step in evaluating how to present reclassification adjustments should be to understand what the balances are intended to represent and to define a principle or characteristics for items qualifying for inclusion in OCI. The FASB has not provided a formal definition of what OCI is intended to represent, and instead relies on existing guidance, which was created over many years and through several independent projects. We believe that questions raised in the deliberations related to the classification and measurement component of the Financial Instruments ED and through ongoing international convergence efforts have increased the focus on the importance of clarity regarding the intended purpose of OCI. These issues are fundamental to understanding comprehensive income and should be resolved before the issuance of further guidance.”

As the statement above indicates, the fundamental issue with what OCI reporting is supposed to accomplish continually crops up across other projects, like Financial Instruments and Insurance Contracts.  The issue of reclassification presentation is related to the broader issue of the overall objective of OCI reporting and recycling.  Although not explicitly asked for in the ED, several comment letters urged the FASB to take on this more fundamental issue (Ford, E&Y, Wells Fargo, Allstate Insurance, Grant Thornton, and CFA Institute).