Financial reporting

November 1, 2012

  The SEC approved disclosure rules designed to increase transparency around companies’ use of so-called “conflict minerals” and payments to governments for access to natural resources for extraction purposes.

The rules, advocated by certain human rights groups, will implement two sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, P.L. 111-203. But they contain disclosure provisions that divided the SEC commissioners’ votes and have been criticized by some business groups as being unworkable, in the case of conflict minerals, and likely to put U.S. companies at a competitive disadvantage, in the case of the natural resource payment reporting requirements.

Section 1502 of the Dodd-Frank Act requires yearly reporting on whether U.S. public companies use conflict minerals originating in the Democratic Republic of the Congo (DRC) or neighboring countries. Section 1504 requires U.S. public companies that extract resources to disclose in an annual report how much they pay the U.S. and foreign governments around the world for access to oil, natural gas, and minerals.

The conflict minerals statute was included in the Dodd-Frank Act with the intent of cutting off funding for armed groups in the DRC accused of atrocities against local populations and funding their activities by using forced labor to mine for gold and other minerals used in products ranging from jewelry to cellphones.

By requiring companies that use conflict minerals to document their chain of custody, the statute aims to choke off the market for raw materials produced in mines using forced labor. The regulation intends to use transparency to prompt companies to shun conflict minerals.

Businesses will be required to determine if the products they manufacture or contract to manufacture contain “conflict minerals,” including tin, tantalum, tungsten, or gold. If they use such minerals, they will need to determine whether they financed armed groups in the DRC or its adjoining countries.

Due diligence requires an independent private-sector audit of a conflict minerals report companies will file with the SEC. The audit must be conducted in accordance with standards set by the Government Accountability Office (GAO), according to testimony SEC Special Counsel John Fieldsend gave at an open meeting.

Fieldsend said that for the required audit of conflict mineral reporting, the GAO staff has indicated that it plans to refer issuers to its existing government auditing standards (commonly referred to as the Yellow Book) so that the auditor can perform either an attestation engagement or a performance audit.

The audit’s objective will be to express an opinion or conclusion as to whether the design of the company’s due-diligence measures conforms with the criteria set forth in the nationally or internationally recognized due-diligence framework, and whether the company’s description of the due diligence performed is consistent with the process it undertook.

According to Fieldsend, the only due-diligence framework currently available for conflict minerals reporting is provided by the Organisation for Economic Co-operation and Development.

Companies will file their first specialized disclosure report on May 31, 2014, for the 2013 calendar year. Companies will be required to file for a calendar year regardless of when their fiscal year ends.

Section 1504 of the Dodd-Frank Act was structured to increase accountability of leaders in resource-rich countries with high poverty rates by requiring companies to disclose how much they are paying for access to those resources.

Companies that extract resources will be required to comply with the new rules for fiscal years ending after Sept. 30, 2013. The form must be filed with the SEC no later than 150 days after the end of a company’s fiscal year.


  A new FASB proposal would require preparers of financial statements to present in one place information about the amounts reclassified out of accumulated other comprehensive income (OCI).

FASB issued a Proposed Accounting Standards Update (ASU), Comprehensive Income (Topic 220): Presentation of Items Reclassified Out of Accumulated Other Comprehensive Income, for public comment. The board proposed a plan to require a tabular disclosure that would present information in one place about the amounts reclassified out of accumulated OCI and provide a road map to related financial disclosures.

The proposal is available at tinyurl.com/bmdywga. Its purpose is to improve presentation for users of financial statements without creating significant costs to preparers. U.S. GAAP currently requires information about amounts reclassified out of accumulated OCI to be presented throughout the financial statements, so FASB does not expect preparers to incur significant costs if the Proposed ASU is approved.

OCI includes gains and losses that initially are excluded from net income for an accounting period. Those gains and losses later are reclassified out of accumulated OCI into net income.

FASB plans to decide on an effective date for the Proposed ASU after reviewing public comments. The comment period ended Oct. 15.


  FASB began crafting a new expected credit loss impairment model in hopes of moving forward again in the joint accounting for financial instruments project the board is pursuing with the International Accounting Standards Board (IASB).

In July, IASB Chairman Hans Hoogervorst reacted with consternation when informed that FASB intended to take a step back from the so-called “three-bucket” impairment model in the project and address stakeholder concerns.

FASB Chairman Leslie Seidman vowed to move quickly to prevent the project from stalling. During an Aug. 22 board meeting, FASB made key decisions on an alternative impairment model, according to a summary of FASB decisions posted to the board’s website. FASB has invited the IASB to monitor the deliberations on the alternative model and planned to share its progress with the IASB early in the fall, a FASB document shows.

IASB spokesman Chris Welsh told the JofA that the IASB is continuing to work on the model that has been developed jointly with FASB, but will be following the progress of FASB’s additional analysis with interest. The IASB has targeted the fourth quarter of 2012 for publication of an exposure draft.

Although FASB had tentatively agreed to the “three-bucket” model with the IASB, stakeholder concerns about the understandability, operability, and auditability of that model, as well as whether it would measure risk appropriately, caused FASB to seek a different model.

The alternative approach is called the “Current Expected Credit Loss” (CECL) model, according to FASB’s summary. It retains several key concepts that have been jointly agreed upon with the IASB. These include the main concept of expected credit loss, and the current recognition of the effects of credit deterioration on collectibility expectations.

But there are differences, too, between the models. The CECL model uses a single-measurement objective—current estimate of expected credit losses—rather than the three-bucket model’s dual-measurement approach, FASB’s summary says. The dual-measurement approach, as described by FASB, requires a “transfer notion” to distinguish between financial assets that are required to use a credit impairment measurement objective of “12 months of expected credit losses” and those that are required to use a credit impairment measurement objective of “lifetime expected credit losses.”

Under the CECL model, an entity at each reporting date would reflect a credit impairment allowance for its current estimate of the expected credit losses on financial assets held. The estimate of expected credit losses is neither a “worst case” nor a “best case” scenario, but it reflects management’s estimate of the contractual cash flows that the entity does not expect to collect, according to FASB’s summary.

The credit deterioration or improvement reflected in the income statement under the CECL model described in FASB’s summary would include changes in the estimate of expected credit losses resulting from, but not limited to:

  • Changes in the credit risk of assets held by the entity.
  • Changes in historical loss experience for assets like those held at the reporting date.
  • Changes in conditions since the previous reporting date.
  • Changes in reasonable and supportable forecasts about the future.


The aim of these requirements described in FASB’s summary is to have the balance sheet reflect the current estimate of expected credit losses at the reporting date, while the income statement reflects the effects of credit deterioration or improvement that has taken place during the period.

Because the basic estimation objective is consistent from period to period, there is no need in the CECL model to describe a “transfer notion” that determines the measurement objective in each period as the three-bucket model does, according to FASB’s summary.

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