FASB issued a preliminary views document, Financial Instruments With Characteristics of Equity, to solicit feedback on the board’s proposal to simplify and improve financial reporting for such instruments. The proposal is a step in developing a single standard that would replace a 60-plus piece patchwork of existing guidance that often raises application questions and has been a source of many restatements, according to FASB.
The PV describes the board’s preferred “basic ownership” approach, which limits the instruments that can be classified as equity to the lowest residual interests in an entity. “The basic ownership approach would represent a major change to current accounting and reporting,” FASB board member Tom Linsmeier said in a news release. “That change is needed to achieve two key objectives. The first is to provide investors with understandable information about the relative priority of claims on an entity’s net assets and income. The second is to develop a less complex approach, which also should reduce existing opportunities to structure arrangements to achieve a desired accounting result.”
Comments are due May 30. For information, go to www.fasb.org/draft/
The International Accounting Standards Board (IASB) also will publish FASB’s PV in early 2008 for comment by its constituents. FASB and the IASB will use the feedback to determine the best way to develop a common standard.
Members of FASB’s Investors Technical Advisory Committee (ITAC) called on the SEC’s Office of the Chief Accountant to encourage registrants to make more robust disclosures on the fair value hierarchies they’ve used and to make those disclosures when they release their earnings. ITAC also recommended that the Office of the Chief Accountant work with the Center for Audit Quality to establish a best practices document about the reporting of fair value information in conjunction with earnings releases. ITAC members are investment professionals charged with providing independent technical advice to FASB from investors’ perspective.
The reporting of third-quarter earnings for certain consolidated supervised entities “was disappointing for investors and underscored a troubling problem with our earnings reporting system,” ITAC member Jack Ciesielski wrote in a letter to SEC Chief Accountant Conrad Hewitt. Ciesielski noted that while earnings releases and conference calls make some aspects of the income statement visible to investors, there were only “oblique references, if any,” in those communications to the effects of FASB Statement no. 157, Fair Value Measurements, and Statement no. 159, The Fair Value Option for Financial Assets and Financial Liabilities.
“While we realize that the information required by those standards will be contained in the Form 10-Qs when they are filed, the disclosures regarding the fair value effects of the two standards—and the veracity of the figures reported—will be stale by the time they are available to the public,” Ciesielski wrote.
ITAC suggested that firms consider synchronizing the filing of 10-Qs
more closely with their earnings release dates. The ITAC letter is
available at www.fasb.org/investors_technical