The $700 billion rescue package for the U.S. financial system approved by lawmakers in October calls on the SEC to study fair value accounting’s impact on recent bank failures and the quality of financial information available to investors. The study will be conducted in consultation with the Treasury secretary and the Board of Governors of the Federal Reserve System.
The rescue package, the Emergency Economic Stabilization Act of 2008, allows the Treasury Department to buy up problem assets in an effort to improve the balance sheets of financial institutions and keep credit flowing. The final version of the plan passed by Congress and signed by President Bush on Oct. 3 also reaffirms the power of the SEC to suspend the use of mark-to-market accounting under FASB Statement no. 157, Fair Value Measurements, for any issuer or any class or category of transactions.
Some financial institutions have said that mark-to-market rules hurt their balance sheets and exacerbated the credit crunch by forcing them to write down certain securities. Others including Federal Reserve Chairman Ben Bernanke have said that suspending mark-to-market accounting would deprive investors of needed information.
On Sept. 30, the day after House lawmakers rejected an earlier version of the economic rescue plan, FASB and the SEC released clarifying guidance on fair value accounting. On Oct. 3, FASB separately released a proposed FASB Staff Position that clarifies the application of Statement no. 157 in an inactive market and provides an illustrative example to demonstrate how the fair value of a financial asset is determined when the market for that financial asset is not active. The proposed FSP is available at www.fasb.org/pdf/fsp_fas157-3.pdf. Although the proposed FSP would amend FASB Statement no. 157 to clarify its application in an inactive market, the principles established by Statement no. 157 for measuring fair value remain unchanged.
The joint SEC/FASB guidance (available at www.sec.gov/news/press/2008/2008-234.htm or www.fasb.org/news/2008-FairValue.pdf) addressed five key points and reinforced the role of clear and transparent disclosures in providing investors with an understanding of the judgments made by management. Among the points was that management’s internal assumptions, such as expected cash flows from an asset, can be used to measure fair value when no relevant market evidence exists.
“In some cases, multiple inputs from different sources may collectively provide the best evidence of fair value,” the joint guidance reads. “In these cases expected cash flows would be considered alongside other relevant information.”
Among its many tax provisions, the Emergency Economic Stabilization Act equalized with that of taxpayers the understatement penalty standard tax preparers must observe for undisclosed items. The provision was originally introduced in the House late last year at the urging of the AICPA to fix the problems created by the “more-likely-than-not” language added in 2007 into IRC § 6694. Prior to the 2007 changes, the undisclosed reporting standard for preparers had been a “realistic possibility of success.”
Now the standard, consistent with section 6662(d)(2) for taxpayers, generally requires that preparers have “substantial authority” for positions taken (and is generally retroactive to the enactment of the more-likely-than-not standard). Section 6694 does retain the increased penalty amounts introduced last year, the higher of $1,000 or 50% of the income derived or expected from the return or claim, and its broadened applicability.
Other tax provisions of the act include:
- Brokers required to file information returns for securities sales under section 6045 must include adjusted basis of the securities if acquired through a transaction in the account in which the securities are held or from another account for which the broker has received a statement pursuant to section 6045A. The information must also include whether gain or loss is short- or long-term. The provision takes effect for most stocks acquired on or after Jan. 1, 2011, and in subsequent years for other securities.
- Financial institutions that held preferred stock of Fannie Mae and Freddie Mac on Sept. 6, 2008, or sold or exchanged it anytime between Jan. 1 and Sept. 7, 2008, are allowed to treat losses arising from it as ordinary, rather than capital.
- “Extender” items include a one-year “patch” of the alternative minimum tax threshold and a two-year extension of the research and development credit and would raise to 14% from 12% the allowable credit for qualified research expenses under the alternative simplified method.
FASB issued FASB Staff Position no. 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161. The guidance is intended to improve disclosures about credit derivatives. Over the past few years, credit default swaps have become the most dominant product of the credit derivatives market, FASB said in a release about the FSP. They also have drawn attention from market participants and regulators because of the turmoil in credit markets during 2007 and 2008. During this period, some sellers of credit derivatives have seen a large number of obligations that are referenced in credit default swaps facing actual or potential defaults, resulting in large liabilities and/or potential credit downgrades.
The FSP addresses concerns of financial statement users that the disclosure requirements in Statement no. 133 do not adequately address the potential adverse effects of changes in credit risk on the financial statements of the sellers of credit derivatives. The FSP also amends FASB Interpretation no. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, to require an additional disclosure about the current status of the payment/performance risk of a guarantee. The amendment reflects the board’s belief that instruments with similar risks should have similar disclosures. The provisions of the FSP that amend Statement no. 133 and Interpretation no. 45 are effective for reporting periods (annual or interim) ending after Nov. 15, 2008.
The FSP also clarifies that the disclosures required by FASB Statement no. 161, Disclosures about Derivative Instruments and Hedging Activities, should be provided for any reporting period (annual or quarterly interim) beginning after Nov. 15, 2008. For example, an entity with a March 31 fiscal year-end should provide the disclosures for its fourth quarter interim period ending March 31, 2009, in its 2009 annual financial statements. The clarification is effective upon issuance of the FSP.
The FSP is available at www.fasb.org/pdf/fsp_fas133-1&fin45-4.pdf.
FASB issued three related exposure drafts on proposed changes to Statement no. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and FASB Interpretation no. 46(R), Consolidation of Variable Interest Entities .
A draft on amendments to Statement no. 140 includes proposals intended to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial statements about transfers of financial assets, including through securitization transactions. A proposed statement to amend FIN 46(R) outlines amendments to the guidance for determining whether an enterprise must consolidate a special-purpose entity, including those previously considered qualifying special-purpose entities. The deadline for comments on the two proposed statements is Nov. 14.
The third proposal, a FASB Staff Position, would amend Statement no. 140 to require public entities to provide additional disclosures about transfers of financial assets and also amend FIN 46(R) to require public enterprises to provide additional disclosures about their involvement with variable interest entities. The effective date would be the first reporting period (interim and annual) that ends after issuance of the FSP. Comments on the proposal were due Oct. 15 and the board expects to issue the FSP in the fourth quarter of 2008, which means that it would be effective for financial statements issued as of Dec. 31, 2008, for calendar year-end, public entities.
FASB’s goal with the FSP is to quickly improve disclosures by public entities and enterprises until the pending amendments to Statement no. 140 and FIN 46(R) are effective. As proposed in the drafts, the FASB statements would be effective at the beginning of each reporting entity’s first fiscal year that begins after Nov. 15, 2009. The drafts are available at www.fasb.org/draft/index.shtml.
FASB members favor shifting to international rules for an auditor’s evaluation of an entity’s ability to function as a going concern. The rules under U.S. GAAP would converge with the International Accounting Standards Board’s International Accounting Standard (IAS) 1, Presentation of Financial Statements, and IAS 10, Events after the Balance Sheet Date, supplemented by the disclosure requirements in Statement on Auditing Standards no. 1, Codification of Auditing Standards and Procedures, and AU section 341, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.
The board also decided that the guidance should converge with IAS literature with respect to the time horizon for the going concern assessment. FASB will issue exposure drafts of the new guidance with a 60-day comment period. For information, visit www.fasb.org.
The Federal Accounting Standards Advisory Board released an exposure draft, Reporting Comprehensive Long-Term Fiscal Projections for the U.S. Government. One of FASAB’s federal financial reporting objectives—the stewardship objective—includes enabling readers to determine whether future budgetary resources will likely be sufficient to sustain public services and to meet obligations as they come due.
“The question of the long-term fiscal sustainability of U.S. government services may be among the most important questions of our time,” FASAB Chairman Tom Allen said in a news release. “The board believes that fully meeting the stewardship objective requires nontraditional approaches to complement and enrich the information from the federal government’s balance sheets and operating statements.”The proposed reporting would include information about projected trends in the federal budget deficit or surplus and the federal debt and how these amounts relate to the national economy.
FASAB said the objective of the proposed reporting is not only to provide information that is useful and necessary in assessing fiscal sustainability but also to effectively communicate that information in a way that is meaningful and understandable to readers.
The ED is available at www.fasab.gov/exposure.html. Comments are due Jan. 5, and a public hearing will be held on Feb. 25.
GASB proposed transferring accounting and financial reporting guidance contained in AICPA auditing literature into GASB’s accounting and financial reporting literature for state and local governments. The proposals are intended to make it easier for preparers of state and local government financial statements to identify and apply guidance on related-party transactions, going-concern considerations, subsequent events, and GAAP hierarchy for state and local governments.
The EDs—Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards and The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments—would move the relevant parts of the AICPA’s Statements on Auditing Standards (SASs) to the GASB literature without substantive changes, although some editing has been proposed to make the guidance specific to state and local governments. The GASB proposal does not reconsider the guidance provided in the SASs.
The EDs are available at www.gasb.org.
The International Accounting Standards Board (IASB) and FASB published an update to their 2006 memorandum of understanding (MOU). The update reports the progress they have made since 2006 and sets the goal of completing their major joint projects by 2011.
“This update outlines a plan and projected timeline for completing the remaining joint major projects included in the MOU,” said IASB Chairman Sir David Tweedie, in a joint news release.
“We will continue our dual objectives of working toward global convergence while addressing reporting issues of critical importance to U.S. investors and financial markets,” said FASB Chairman Robert Herz, in the same news release.
For a copy of the new timetable, visit http://tinyurl.com/4oqm4h.
The CPA profession created an accounting doctoral scholars program to help reverse a shortage of accounting faculty in U.S. colleges and universities. The new program was spearheaded by the largest accounting firms and will be administered by the AICPA Foundation. More than 70 large CPA firms, along with several state CPA societies, have committed a total of more than $15 million to the program. The firms will help recruit top employees for the program and encourage them to become accounting professors in the audit and tax disciplines. The program will provide funding for up to 30 new candidates each year for four years for a total of 120 additional Ph.D.s in audit and tax. Applicants must have recent and proven performance in audit or tax in a public accounting firm and be U.S. citizens or permanent residents committed to a career as an accounting faculty member at a U.S. university accredited in business by AACSB International.