FASB Chairman Leslie Seidman said via webcast in January that FASB and the International Accounting Standards Board (IASB) reached a compromise on a single approach to impairment for financial instruments. She acknowledged, however, that substantial constituent feedback on the boards’ joint proposals for revenue recognition and leases reveals several major issues the boards will need to deal with in the next few months.
The financial instruments impairment compromise released for comment Jan. 31 combines key features of the boards’ separate proposals. The supplementary document containing the proposal is available at tinyurl.com/4jkmuva.
“We’ve decided to ask constituents to provide input on an impairment model for financial assets such as loans that would recognize a portion of the estimated loss over time unless greater losses are expected in the foreseeable future, in which case that larger floor amount would be recognized currently,” Seidman said. “We want to see whether people think this is an improvement to current reporting standards and whether it’s operational before we get too far along.”
On the issue of classification and measurement of financial instruments, Seidman said FASB received “overwhelming feedback” that preparers, auditors and others would prefer to have loans held for collection recorded on the balance sheet at amortized cost with a more robust impairment test.
This limited cost approach aligns more closely with the IASB’s model in IFRS 9 and recommendations made by the AICPA’s Accounting Standards Executive Committee (AcSEC), now known as the Financial Reporting Executive Committee (FinREC).
Seidman said FASB unanimously agreed that at least some assets should qualify for cost accounting and has started its discussion on which ones might qualify.
Regarding the boards’ Revenue Recognition and Leases projects, Seidman said the boards remain committed to completing their priority joint projects (Financial Instruments, Revenue Recognition and Leases) by June. But she added that “these target dates are subject to the nature of constituent feedback received.”
On implementation dates, she said constituents support a single implementation date for all new standards rather than a staggered approach.
FASB and the IASB released a joint proposal that addressed offsetting transactions. The exposure draft (available at tinyurl.com/4k6hhj5) proposes to establish a common approach to offsetting financial assets and financial liabilities on the statement of financial position (balance sheet). The proposal seeks to end a stark difference in reporting between IFRS and U.S. GAAP that IASB Chairman Sir David Tweedie said “is not acceptable in global capital markets.”
In the press release announcing the offsetting proposal, Tweedie said, “The fact that companies can, in some instances, report IFRS balance sheet figures that are double the size of their U.S. GAAP numbers is not acceptable in global capital markets. … The proposals would eliminate the differences in offsetting requirements.”
“This proposal would change U.S. GAAP to require netting in a narrower set of circumstances, but the effect of other forms of credit mitigation would be disclosed in the footnotes,” FASB Chairman Leslie Seidman said in the press release.
Offsetting, otherwise known as netting, takes place when entities present their rights and obligations as a net amount in their statement of financial position. Currently, the circumstances when financial assets and financial liabilities may be presented in an entity’s statement of financial position as a single net amount, or as two gross amounts, differ depending on whether the entity reports in IFRS or U.S. GAAP.
The accounting differences result in the single largest quantitative difference in reported numbers in statements of financial position prepared in accordance with IFRS or U.S. GAAP, the proposal states. This reduces the comparability of financial statements, and is especially prominent in the presentation of derivative assets and derivative liabilities by financial institutions. The boards said users and preparers of financial statements, the G-20 and the Financial Stability Board (FSB) asked them to find a common solution for offsetting those items.
Under the proposal, offsetting would apply only when the right of setoff is enforceable at all times, including in default and bankruptcy, and the ability to exercise this right is unconditional—that is, it does not depend on a future event. The entities involved must intend to settle the amounts due with a single payment, or simultaneously. Provided all of these requirements are met, offsetting would be required. The proposals would amend IFRS and U.S. GAAP and eliminate several industry-specific netting practices.
Comments on the ED, Offsetting Financial Assets and Financial Liabilities [FASB Proposed Accounting Standards Update, Balance Sheet (Topic 210): Offsetting], are due April 28.
New SEC rules on executive compensation under the Dodd-Frank Wall Street Reform and Consumer Protection Act will require new disclosures and shareholder votes. The new rules specify that say-on-pay votes must occur at least once every three years beginning with the first annual shareholders’ meeting taking place on or after Jan. 21, 2011. Companies also are required to hold a “frequency” vote at least once every six years to allow shareholders to decide how often they would like to be presented with the say-on-pay vote. Following the frequency vote, a company must disclose on an SEC Form 8-K how often it will hold the say-on-pay vote. Smaller companies (those with a public float of less than $75 million) are not required to conduct say-on-pay and frequency votes until annual meetings occurring on or after Jan. 21, 2013.
Under the rules, companies are also required to provide additional disclosures regarding executive “golden parachute” arrangements connected to transactions such as mergers, going-private and third-party tender offers.
The rules require companies to provide a separate shareholder advisory vote to approve certain “golden parachute” compensation arrangements in connection with a merger, acquisition, consolidation, proposed sale or other disposition of all or substantially all assets. Shareholder advisory votes and disclosure requirements are effective in proxy statements and other schedules and forms initially filed on or after April 25, 2011. For final versions of the rules, visit sec.gov/rules/final.shtml .
The SEC’s new rules under sections 945 and 943 of the Dodd-Frank Wall Street Reform and Consumer Protection Act require issuers of asset-backed securities to review underlying assets and disclose the history of the requests they received and repurchases they made related to warranties on their outstanding asset-backed securities.
Under the final rule, Issuer Review of Assets in Offerings of Asset-Backed Securities, the review must, at a minimum, provide reasonable assurance that the prospectus disclosure about the assets is accurate in all material respects.
The rule permits issuers to perform the review themselves or hire third parties to perform the review. If an issuer obtains assistance from a third party for purposes of performing the review, and attributes, in the prospectus, the findings and conclusions of the review to the third party, the issuer may rely on the third party’s review to satisfy the requirement provided the third party is named in the registration statement and consents to being named as an “expert” under federal securities laws.
Any registered offering of ABS commencing with an initial offer after Dec. 31, 2011, must comply with the new rules.
The final rule, Disclosure for Asset-Backed Securities Related to Representations, Warranties and Repurchase Histories, requires ABS issuers to file with the SEC, in tabular format on new Form ABS-15G, the history of the requests they received and repurchases they made relating to their outstanding ABS in an initial filing on EDGAR due by Feb. 14, 2012. After the initial filing, the ABS issuer is required to file updated information quarterly.
The disclosure requirements apply to issuers of unregistered ABS, including municipal ABS. However, municipal ABS are provided an additional three-year phase-in period and will be permitted to provide their information on EMMA, the Municipal Securities Rulemaking Board’s centralized public database for information about municipal securities issuers and offerings.
The final rules also provide investors with ready access to the most current information regarding an issuer’s repurchase history by requiring an issuer in a registered ABS offering to include—in the body of a prospectus—repurchase history for the last three years for ABS of the same asset class as the securities being registered. This information must be included in registered offerings in a phase-in period beginning Feb. 14, 2012. In its ongoing reports, an issuer will be required to provide updated repurchase history for the particular, related asset pool beginning with distribution reports required to be filed on Form 10-D after Dec. 31, 2011.
For final versions of both rules, visit sec.gov/rules/final.shtml .
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