Financial Reporting

  FASB issued an exposure draft that contains clarifying guidance intended to improve consistency and transparency in financial reporting about troubled debt restructurings.


“Investors, regulators and practitioners asked the board to clarify what types of loan modifications should be considered troubled debt restructurings for accounting and disclosure purposes,” FASB’s Acting Chairman Leslie F. Seidman said in a press release.


FASB said there is diversity in practice in identifying loan modifications that constitute troubled debt restructurings. The Proposed Accounting Standards Update (ASU), Receivables (Topic 310)—Clarifications to Accounting for Troubled Debt Restructurings by Creditors (, sets forth proposed guidance to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment and for disclosure of troubled debt restructurings. The amendments would apply to all creditors, both public and nonpublic, that restructure receivables that fall within the scope of FASB Accounting Standards Codification (ASC) Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors.


The amendments would preclude a creditor from using the borrower’s effective rate test in ASC paragraph 470-60-55-10 in its evaluation of whether a restructuring constitutes a troubled debt restructuring.


Guidance would be clarified to indicate the following:


  • If a debtor does not otherwise have access to funds at a market rate for debt with similar risk characteristics as the restructured debt, the restructuring would be considered to be below a market rate and, therefore, should be considered a troubled debt restructuring.
  • A restructuring that results in a temporary or permanent increase in the contractual interest rate cannot be presumed to be at a rate that is at or above market.
  • A borrower that is not currently in default may still be considered to be experiencing financial difficulty when payment default is considered “probable in the foreseeable future.”
  • A restructuring that results in an insignificant delay in contractual cash flows may still be considered a troubled debt restructuring. That is, that factor should be considered along with other terms of a restructuring to determine whether a troubled debt restructuring exists.


If approved, the proposed clarifications would be effective for interim and annual periods ending after June 15, 2011, and would be applied retrospectively to restructurings occurring on or after the beginning of the earliest period presented. The comment period closed Dec. 13.



  The IASB issued requirements on the accounting for financial liabilities that address the problem of volatility in profit and loss (P&L) arising when an issuer measures its own debt at fair value—often referred to as the “own credit” problem.


According to a news release, the requirements will be added to IFRS 9, Financial Instruments, and complete the classification and measurement phase of the IASB’s project to replace IAS 39, Financial Instruments: Recognition and Measurement. They follow the IASB’s November 2009 issuance of IFRS 9, which prescribed the classification and measurement of financial assets.


In response to feedback received during its consultation process, the IASB decided to maintain the existing amortized cost measurement for most liabilities, limiting change to that required to address the own credit problem. The ED, Fair Value Option for Financial Liabilities, issued in July 2009, proposed a two-step approach, which required the own credit amount to be shown first in P&L and then, as a second step, as a transfer to other comprehensive income (OCI).


With the new requirements, an entity choosing to measure a liability at fair value will present the portion of the change in its fair value due to changes in the entity’s own credit risk directly in the OCI section of the income statement, rather than within P&L.


“The new additions to IFRS 9 address the counterintuitive way a company in severe financial trouble can book a large profit based on its theoretical ability to buy back its own debt at a reduced cost,” said IASB Chairman Sir David Tweedie in the news release.


IFRS 9 applies to financial statements for annual periods beginning on or after Jan. 1, 2013. Entities may apply the new requirements in earlier periods, however, if they do, they must also apply the requirements in IFRS 9 that relate to financial assets.


The second and third phases of the IFRS 9 project deal with accounting for the impairment of financial assets and hedge accounting. The IASB is aiming to complete those phases by June 30, 2011, by adding the impairment and hedge accounting requirements to IFRS 9 and, therefore, replacing IAS 39 in its entirety.


The IASB’s project summary and feedback statement ( outlines how the board responded to views received in its consultation process.



  In a report released Oct. 29, the SEC staff detailed its progress and remaining research and analysis to be done as the commission considers whether, when and how to allow domestic issuers in the U.S. to use IFRS.


The SEC staff’s first update draws no major conclusions. It highlights concerns among regulators that now rely on U.S. GAAP as a basis for their reporting regimes about the impact of a shift to IFRS and worries over the funding mechanism for the IASB. The 44-page report details staff efforts and its list of to-do’s across six major areas the commission is weighing:


  • Development of IFRS for the U.S. domestic reporting system.
  • Independence of standard setting.
  • Investor understanding and education regarding IFRS.
  • Examination of the U.S. regulatory environment that would be affected by a change in accounting standards.
  • The impact on issuers, such as changes to accounting systems and contractual arrangements.
  • Human capital readiness.


Earlier this year, the commission signaled that it would make a determination in 2011 about the use of global standards by U.S. public companies following completion of the SEC’s IFRS work plan and the convergence projects agreed to by FASB and the IASB.


The SEC has stressed the importance of having a well-funded standard setter with a governance structure to support the independent development of global standards for the “ultimate benefit of investors.” According to the progress report, the SEC staff is analyzing how the IASB and its parent organization, the IFRS Foundation, are funded through review of “publicly available data and outreach to foreign regulators.” The assessment will involve current, planned and proposed funding mechanisms. The staff is also in the process of considering a range of possibilities with respect to contributions to the IFRS Foundation and the IASB from the United States.


“Based on current existing funding commitments, the IFRS Foundation has indicated that it could be in an operating deficit for fiscal year 2010,” the progress report states. “In addition, the IFRS Foundation indicated it could expect a $4 million funding ‘gap’ with respect to its self-determined contribution target for the United States.”


The SEC staff estimates that just 25% of jurisdictions that use IFRS as part of their financial reporting system contribute to the IFRS Foundation, while two of the largest contributors in 2009 were the U.S. and Japan, neither of which has formally incorporated IFRS for domestic issuers. Voluntary contributions from the U.S., primarily from large American companies, have been the largest country-specific source of funds to the foundation, the report says.


Regarding potential changes to the regulatory environment, the report says the staff “has identified a consistent area of concern and focus for many regulators. That is, the method of any incorporation of IFRS is exceedingly important due to the prominence of ‘U.S. GAAP’ references currently in U.S. laws, contractual documents, regulatory requirements and guidelines, and similar documents. Therefore, regulators have expressed that if U.S. GAAP is the mechanism used for incorporation of IFRS into the financial reporting system for U.S. issuers, this would resolve a number of the more significant issues currently identified in the Staff’s outreach.”


Industry regulators are, among other things, concerned about the general lack of industry-specific standards and practices in IFRS, according to the report. Work is also being done to analyze federal and state tax impacts, audit regulation and standard setting and broker-dealer and investment company reporting.


The staff will analyze the potential effects on U.S. private companies of IFRS becoming part of the U.S. financial reporting system by, among other things, studying how other jurisdictions have handled the private company impact and reviewing existing studies that have assessed whether there should be separate standards for private companies, the report said.


The staff will meet with members of accounting firms of all sizes to “discuss their expectations regarding availability and cost of audit services and understand how they intend to address client concerns in this regard,” the staff reported. “Also important in this assessment is an understanding of how the firms have incorporated IFRS into their quality control systems, including hiring, staffing of audits, professional advancement, and any changes in these areas that are planned for the future.”


According to the report, the staff is evaluating the role of national standard setters in jurisdictions using IFRS, in part to identify potential future roles for FASB if the commission decides to incorporate IFRS into the U.S. financial system. It is also studying the approaches other countries have used to incorporate IFRS.


For more on the report, go to


The SEC has said the reports will be made periodically. If the commission next year decides to incorporate IFRS into the U.S. financial reporting system, the first time that U.S. companies would be required to report under such a system would be no earlier than 2015.



  FASB issued an exposure draft that seeks to improve the accounting for repurchase agreements (“repos”) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments address concerns raised during the global economic crisis regarding the necessity and usefulness of the collateral maintenance guidance when determining whether a repo should be accounted for as a sale or as a secured borrowing.


In a typical repo transaction, an entity transfers financial assets to a counterparty in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future. ASC Topic 860, Transfers and Servicing, prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repo agreements. That determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets.


The amendments in the Proposed ASU, Transfers and Servicing (Topic 860)—Reconsideration of Effective Control for Repurchase Agreements, are intended to simplify the accounting for these transactions by removing from the assessment of effective control:


  • The requirement that the transferor have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee; and
  • Implementation guidance related to that requirement.


The amendments would be effective for new transfers and existing transactions that are modified as of the beginning of the first interim or annual period after the final ASU’s issuance, which is expected to occur in the first quarter of 2011. An entity would apply the amendments prospectively to transfers that occur after the effective date and existing transactions that are modified after the effective date.


Comments are due Jan. 15, 2011. The ED is available at


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