Highlights


 The SEC released preliminary details on its study on “mark-to-market” accounting, as authorized in October by section 133 of the Emergency Economic Stabilization Act of 2008 (EESA). The study is to be completed by Jan. 2 in consultation with the Treasury secretary and the Board of Governors of the Federal Reserve System. Under the terms of the EESA, the study will focus on:

  • The effects of such accounting standards on a financial institution’s balance sheet.
  • The impacts of such accounting on bank failures in 2008.
  • The impact of such standards on the quality of financial information available to investors.
  • The process used by FASB in developing accounting standards.
  • The advisability and feasibility of modifications to such standards.
  • Alternative accounting standards to those provided in FASB Statement no. 157, Fair Value Measurements.


For more information on the study, visit www.sec.gov/spotlight/fairvalue.htm.

 In response to the global financial crisis, the International Accounting Standards Board (IASB) amended two of its standards to more closely align with U.S. GAAP. The amendments to IAS 39, Financial Instruments: Recognition and Measurement, and IFRS 7, Financial Instruments: Disclosures, permit the reclassification of some financial instruments. The amendments to IAS 39 introduce the possibility of reclassifications for companies applying International Financial Reporting Standards (IFRS), which were already permitted under U.S. GAAP in rare circumstances. Companies can implement the reclassification amendments to IFRS from July 1, 2008.

The European Union (EU) adopted the IASB’s amendments to IAS 39 and IFRS 7 on Oct. 15, just two days after their release by the IASB.

In addition, the IASB said it would undertake the following:

  • Continue to ensure that any IFRS guidance on fair value measurement of financial instruments in markets that are no longer active is consistent with U.S. GAAP.
  • Work closely with FASB to develop a common approach to issues related to the valuation of financial assets and liabilities resulting from purchases made through the U.S. Emergency Economic Stabilization Act of 2008 and any other similar programs internationally, if and when these programs are implemented.


For more information about the IASB’s response to the credit crisis, see www.iasb.org/credit+crisis.htm.

 The Treasury Department outlined details of its plan to purchase up to $250 billion of senior preferred shares in financial institutions. Under the Capital Purchase Program, the minimum subscription amount available to a participating institution is 1% of risk-weighted assets, while the maximum is the lesser of $25 billion or 3% of risk-weighted assets.

The senior preferred shares will qualify as Tier 1 capital, will rank senior to common stock, will pay a cumulative dividend rate of 5% annually for the first five years, and will reset to an annual rate of 9% after year five. The shares will be nonvoting, other than class voting rights on matters that could adversely affect the shares.

The shares will be callable at par after three years. The Treasury Department can also transfer the senior preferred shares to a third party at any time. In conjunction with the purchase of senior preferred shares, the Treasury Department will receive warrants to purchase common stock with an aggregate market price equal to 15% of the senior preferred investment.

Companies participating in the program must adopt the Treasury Department’s standards for executive compensation and corporate governance for the period during which the department holds equity issued under the program. These standards generally apply to the CEO, CFO and the next three most highly compensated executive officers. Participants must meet certain standards regarding senior executive compensation, including the requirement of a clawback of any bonus or incentive compensation paid based on inaccurate statements and prohibitions against golden parachutes.

The program is available to qualifying U.S.-controlled banks, savings associations, and certain bank and savings and loan holding companies engaged only in financial activities that elect to participate by Nov. 14. The Treasury Department will fund the senior preferred shares purchased under the program by the end of 2008 after consultation with the appropriate federal banking agency. A term sheet is available here.

 The Department of the Treasury’s Advisory Committee on the Auditing Profession voted to approve a slate of more than 30 recommendations for enhancing the profession’s sustainability. The committee’s work marked the first major study of the public company auditing profession since the passage of the Sarbanes-Oxley Act in 2002. AICPA President and CEO Barry Melancon was a member of the advisory committee, along with 20 other business and academic thought leaders.

The recommendations were contained in three sections. The human capital recommendations include:

  • Implement market-driven curricula and content for accounting students.
  • Improve the representation and retention of minorities in the auditing profession by, among other things, recruiting minorities from other disciplines and careers, and emphasizing the role of community colleges as a career starting point.
  • Ensure a supply of qualified financial accounting, audit and tax faculty to meet demand for the future.
  • Develop and maintain consistent demographic and higher education program profile data.
  • Encourage the AICPA and the American Accounting Association to form a commission to provide a study of the possible future structure of higher education for the accounting profession.


The recommendations on firm structure and finances include:

  • Urge the PCAOB and the SEC, in conjunction with other stakeholders, to explore the feasibility of firms appointing independent members with full voting power to firm boards and/or advisory boards to improve governance and transparency at public company auditing firms.
  • Urge the SEC and Congress to provide for the PCAOB’s creation of a national center focused on fraud prevention and detection experiences, practices, methodologies and technologies and commissioning research and other fact-finding.
  • Encourage greater regulatory cooperation and oversight of the public company auditing profession to improve the quality of the audit process and enhance confidence in the profession and financial reporting.That includes encouraging states to substantially adopt the mobility provisions of the Uniform Accountancy Act by stating that if states have failed to adopt the mobility provisions of the UAA by Dec. 31, 2010, Congress should pass a federal provision requiring those states to adopt these provisions.
  • Urge the SEC to amend Form 8-K disclosure requirements to characterize appropriately and report every public company auditor change and to require auditing firms to notify the PCAOB of any premature engagement partner changes on public company audit clients.
  • Urge the PCAOB to undertake a standard-setting initiative to consider improvements to the auditor’s standard reporting model.
  • Urge the PCAOB to undertake a standard-setting initiative to consider mandating the engagement partner’s signature on the auditor’s report.
  • Urge the PCAOB to require that, beginning in 2010, larger auditing firms produce a public annual report incorporating information required by the EU’s Eighth Directive, Article 40 Transparency Report deemed appropriate by the PCAOB and key indicators of audit quality and effectiveness as determined by the PCAOB. Further, urge the PCAOB to require that, beginning in 2011, the larger auditing firms file with the PCAOB on a confidential basis audited financial statements.


Recommendation on firm concentration and competition include:

  • Promote the growth of smaller auditing firms. The recommendation includes requiring disclosure by public companies in proxy reports of any provisions in material agreements with third parties limiting auditor choice.
  • Monitor potential sources of catastrophic risk faced by public company auditing firms and create a mechanism for the preservation and rehabilitation of troubled larger public company auditing firms.
  • Recommend the PCAOB, in consultation with other stakeholders, determine the feasibility of developing key indicators of audit quality and effectiveness and requiring auditing firms to publicly disclose these indicators. Assuming development and disclosure of indicators of audit quality are feasible; require the PCAOB to monitor these indicators.
  • Promote compliance with auditor independence requirements by, among other steps, compiling the SEC and PCAOB independence requirements into one document and making it accessible online.
  • Adopt annual shareholder ratification of public company auditors by all public companies.
  • Enhance regulatory collaboration and coordination between the PCAOB and its foreign counterparts.


More information about the recommendationsis available at www.treas.gov/offices/domestic-finance/acap/.

 FASB and the IASB published for public comment a discussion paper on financial statement presentation. The paper, Preliminary Views on Financial Statement Presentation, contains an analysis of issues in financial statement presentation and presents the boards’ initial thinking on addressing those issues.

International Financial Reporting Standards and U.S. GAAP provide only limited presentation guidance. In addition, presentation guidelines in GAAP are dispersed across standards. (See “Shaking Up Financial Statement Presentation,” JofA, Nov. 08, page 56.) To address these issues, as part of their joint project on financial statements, the boards propose to introduce cohesiveness and disaggregation as the two main objectives for financial statement presentation and have developed a principles- based format to achieve that goal. Cohesiveness would ensure that a user can follow the flow of information through the different statements of an entity; disaggregation would ensure that items that respond differently to economic events are shown separately.

“The credit crisis has highlighted the need for clear presentation of financial information that is often complex,” IASB Chairman Sir David Tweedie said in a press  release. The paper is available in the “Open for Comment” section of www.iasb.org or at www.fasb.org/draft/index.shtml. Comments are due April 14, 2009.

 FASB issued exposure drafts of proposed statements on going concern and subsequent events. The proposals converge U.S. GAAP and IFRS and incorporate accounting guidance related to determining the viability of entities.

The proposed statement on Going Concern, available at www.fasb.org/draft/ed_going_concern.pdf, would require management to consider all available information about the future when assessing whether a going concern assumption is appropriate. The time horizon is defined as at least, but not limited to, 12 months from the end of the reporting period, rather than the current limit of one year beyond the date of the financial statements. The proposal also would require disclosures when there is substantial doubt about an entity’s ability to continue as a going concern. The guidance originated as auditing standards. FASB believes the guidance belongs in the accounting literature because it is management’s responsibility to assess the ongoing viability of the reporting entity, according to a FASB press release.

The proposed statement on Subsequent Events, available at www.fasb.org/draft/ed_subsequent_events.pdf, establishes general accounting and disclosure standards for events that occur subsequent to the balance sheet due date but before financial statements are issued or available to be issued. The proposed statement also would require disclosure of the date through which management has evaluated subsequent events, which would alert financial statement users that management has not evaluated subsequent events after that date. Comments are due by Dec. 8.

 GASB released a fact sheet to explain its project to develop service efforts and accomplishments (SEA) reporting by governments. According to the GASB release, Basic Facts about Service Efforts and Accomplishments Reporting, the public reporting of key service performance indicators provides decision-useful information about the government’s actual accomplishments in pursuit of its goals and objectives.

The board says SEA performance information is necessary to explain the efficiency and effectiveness of government services. The Financial Accounting Foundation, which oversees GASB and FASB, declared in November 2006 that SEA reporting should be included within “general purpos financial reporting.”

GASB is reviewing public comments received on a proposed update to Concepts Statement no. 2, Service Efforts and Accomplishments Reporting. More information on the SEA reporting project is available at www.gasb.org and www.seagov.org.

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