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Financial reporting

 

March 2014

  FASB took what appears to be two steps back from convergence with the International Accounting Standards Board (IASB) with a pair of major tentative decisions in its project on accounting for financial instruments.

In the classification and measurement portion of the project, the board decided not to continue to pursue its proposed “solely payment of principal and interest (SPPI)” model to determine the classification and measurement of financial assets. The fundamental principles of FASB’s proposed SPPI model were aligned with the IASB’s model, although the boards already differed in other areas on classification and measurement.

FASB instead decided to retain the bifurcation requirements for embedded derivative features in hybrid financial assets in current U.S. GAAP. Board members said that although the current guidance is complex, the SPPI model also was complex.

The board directed the staff to perform additional analysis of whether FASB should develop a new approach for using a cash flow characteristics test for financial assets.

Decisions made also keep FASB’s proposed model separated from the IASB’s proposed model on impairment in the accounting for financial instruments project. FASB voted to continue refining its proposed current expected credit loss model for impairment.

FASB’s proposed current expected credit loss model calls for more upfront recognition of loan losses than the IASB’s proposed model. FASB and the IASB have struggled to reach common ground in the financial instruments project despite international pressure to bring their standards together.


  The rules for providing alternative financial reporting guidance for private companies were formally established when FASB and the Private Company Council (PCC) issued their Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies.

FASB also issued its definition of a public business entity, clarifying which entities are eligible for alternative guidance for private companies.

The framework will assist FASB, the PCC, and the Emerging Issues Task Force in determining whether and when to provide alternative recognition, measurement, disclosure, display, effective date, or transition guidance for private companies. The framework is available at tinyurl.com/k8ehk7u.

Meanwhile, Accounting Standards Update No. 2013-012, Definition of a Public Business Entity: An Addition to the Master Glossary, gives one definition of “public business entity” for use in future standard setting. Existing requirements are not affected by the definition.

An entity is a public business entity if it meets any of the following criteria:

  • It files or is required to file financial statements with the SEC (including voluntary filers).
  • It is required to file financial statements with a foreign or domestic regulator in preparation for selling or issuing securities that are not subject to contractual restrictions on transfer.
  • It has securities that are traded, listed, or quoted on an exchange or over-the-counter market.
  • It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis.


Employee benefit plans and not-for-profits are not considered business entities under the standard. The standards update is available at tinyurl.com/pndqps8.


  SEC Chairman Mary Jo White directed the commission’s staff to develop recommendations for updating the rules for what a company must disclose in its public filings, according to an SEC news release.

The SEC staff issued a report to Congress recommending that the commission’s disclosure requirements be reevaluated to ensure that investors are provided with meaningful, nonduplicative information. The report is available at tinyurl.com/qbnvnv3.   

Congress mandated the report in the Jumpstart Our Business Startups (JOBS) Act of 2012, P.L. 112-106. The report offers an overview of SEC Regulation S-K, which governs public-company disclosures.

The SEC’s Office of the Chief Accountant will coordinate with FASB to identify ways to improve effectiveness of disclosures and eliminate duplication.

Keith Higgins, director of the SEC’s Division of Corporation Finance, said in a statement that updating the SEC’s rules is just one step in improving company disclosures.

“For their part, companies should examine how they can improve the quality and effectiveness of their disclosures and how our rules can be improved to facilitate clear and effective communications to investors,” Higgins said. “Better disclosure benefits everyone in the marketplace.”


  Rule-making duties related to federal legislation have prevented the SEC from devoting time to deciding on the future of IFRS in the United States, SEC Chief Accountant Paul Beswick said.

“I think from my perspective, everyone in the commission thinks about the decision on IFRS and what the next steps are and thinks it’s very important,” Beswick said during the AICPA Conference on Current SEC and PCAOB Developments in December. “What many people have to realize is, with the passage of Dodd-Frank and the JOBS Act, the commission had a number of issues that were presented that were very complex and taking a lot of time.”

There has been little public discussion of IFRS by the SEC since the SEC staff issued a report in July 2012 that discussed the pros and cons of allowing or requiring U.S. public companies to use IFRS for their financial reporting.

The report did not make a recommendation on whether the SEC should allow or require U.S. companies to use IFRS for their financial reporting. A decision on IFRS now rests in the hands of the SEC commissioners.

The AICPA has been a consistent advocate for one set of high-quality, globally accepted accounting standards.

Beswick did not provide a timeline for the SEC’s further consideration of IFRS.


  The Federal Accounting Standards Advisory Board (FASAB) issued its Annual Report for Fiscal Year 2013 and Three-Year Plan.

The report, available at tinyurl.com/pk7n7hh, highlights the board’s efforts and accomplishments for fiscal year 2013, provides information about current projects, and describes research projects the board hopes to address soon. The document also identifies potential projects considered by the board, but which are not rated a priority. The board asked for comments on the report by Jan. 31, 2014, and plans to consider the feedback in its agenda-setting discussion in early March.

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