Financial Reporting

The SEC’s Advisory Committee on Improvements to Financial Reporting (CIFiR), submitted its final report in August. The report makes 25 recommendations that could be implemented by the SEC, FASB and the PCAOB.

The CIFiR report provides practical proposals to improve financial reporting in five main areas: (1) increasing the usefulness of information in SEC filings; (2) enhancing the accounting standards-setting process; (3) improving the substantive design of new standards; (4) delineating authoritative interpretive guidance; and (5) clarifying guidance on financial restatements and accounting judgments.

Among other things, the committee noted in the first area that many individual investors find company filings with the SEC to be overly complex and detailed. Thus the committee recommended including a short executive summary at the beginning of a company’s annual report that would describe concisely the main aspects of its business and its key performance metrics.

In the second area, the committee called for more investor participation in accounting standard setting by increasing investor representation on the boards of FASB and the Financial Accounting Foundation.

In the third area, the committee noted that the underlying objectives of certain accounting standards are sometimes obscured by dense language, detailed rules and numerous exemptions. The committee recommended another approach to the substantive design of standards. For example, it called for improved rules on off-balancesheet accounting and fewer situations where alternative accounting standards exist for the same transaction. The committee recommended that companies provide better disclosure to investors about what portion of their earnings constitutes cash or accrued income based on historical cost accounting and what portion represents unrealized gains or losses based on fair value estimates.

To reduce the proliferation of U.S. GAAP, the committee said it strongly supports FASB’s efforts to complete the codification of all authoritative accounting literature into one document. The committee said that others such as audit firms may still publish their views on accounting issues, but they should be labeled as nonauthoritative. In this fourth area, the committee also called for a clearer delineation of functions on interpreting accounting standards—with FASB taking the lead on broad issues and the SEC on registrantspecific issues.

In the fifth area, the committee recommended increased correction of accounting errors and more disclosures about those corrections to investors. However, the committee warned that correcting every accounting error should not automatically result in a lengthy process of restating financial statements for several prior years. The committee said that in the “dark period” during restatements when companies generally cease filing current financial reports, companies usually do not provide investors with much information. Thus, the committee said it believes that restatements of prior years should be undertaken for correcting accounting errors that are material to current investors.

The SEC already has taken steps based on two earlier recommendations made by the CIFiR. On May 14, the SEC formally proposed using XBRL technology to get important information to investors faster, more reliably, and at a lower cost by requiring all U.S. companies to provide financial information using XBRL beginning as early as next year. And on July 30, the SEC approved new guidance to public companies to address their concerns about how to comply with the securities laws while developing their Web sites to serve as an effective means for disseminating important information to investors.

To view or download the report, visit

FASB board members support a 2010 adoption date for proposed amendments to FASB Statement no. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and FASB Interpretation no. 46 (revised December 2003), Consolidation of Variable Interest Entities.

The board decided on a single effective date for fiscal years beginning after Nov. 15, 2009. The board also decided to separately issue a FASB Staff Position that would require additional disclosures as soon as possible.

The board clarified that the initial consolidation of a variable-interest entity as a result of the initial application of the proposed amendments to FIN 46(R) would require an enterprise to initially measure all assets and liabilities at fair value, with any difference being recorded as a cumulative effect adjustment to retained earnings that would be recorded as of the beginning of the first fiscal year in which the proposed amendments are initially applied.

Many of the disclosures approved for the proposed amendments to Statement no. 140 and FIN 46(R) at FASB’s June 4, 2008, board meeting will be included in a separate FSP. The proposed FSP will require a non-transferor enterprise that holds a significant variable interest in a qualifying special-purpose entity to make certain disclosures required by the proposed amendments to the FIN 46(R) disclosures. The proposed FSP will be effective as soon as possible, but no later than the first interim reporting period in 2009. It will apply only to public companies.

The purpose of a disclosure-only FSP is to meet financial statement user needs for greater transparency for off-balance-sheet transactions as well as to provide preparers and others with adequate time to consider and implement the other proposed amendments to Statement no. 140 and FIN 46(R).

FASB will defer the development of a new accounting model for lessors. Its leaserelated project will address only lessee accounting. The board also agreed with an overall approach to generally apply the finance lease model in International Accounting Standard (IAS) 17, Leases, adapted where necessary, for all leases.

The board decided to require lessees to include contingent rentals in the measurement of the right-of-use asset and the lease obligation based on their best estimate of expected lease payments. Both the right-of-use asset and the lease obligation should be initially measured at the present value of the best estimate of expected lease payments for all leases. Options to extend or terminate the lease would be included in the measurement of the right-of-use asset and the lease obligation based on the best estimate of the expected lease term. Contractual factors, non-contractual factors and business factors should be considered when determining the lease term, the board concluded.


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