Financial Reporting

  A staff paper published in May by the SEC’s Office of the Chief Accountant (OCA) presents in detail and solicits comments on the so-called “condorsement” approach to incorporating IFRS into the U.S. financial reporting system.


“The Staff’s discussion in this Staff Paper is not intended to suggest that the Commission has determined to incorporate IFRS,” the paper says, “or that the discussed framework is the preferred approach or would be the only possible approach.”


The paper summarizes other jurisdictions’ approaches and outlines condorsement as another possible option, elaborating on the concept introduced in December by a member of the OCA staff at the AICPA National Conference on Current SEC and PCAOB Developments. The paper was published as an update on the SEC staff’s Work Plan for global accounting standards.


“Importantly, the framework would retain a U.S. standard setter and would facilitate the transition process by incorporating IFRSs into U.S. GAAP over some defined period of time (e.g., five to seven years),” the paper notes. “At the end of this period, the objective would be that a U.S. issuer compliant with U.S. GAAP should also be able to represent that it is compliant with IFRS as issued by the IASB.”


“The focus of this Staff Paper is to outline a possible approach for incorporation of IFRS into the U.S. financial reporting system, if the Commission were to decide that incorporation of IFRS is in the best interest of U.S. investors,” OCA reported. “This [paper] does not provide an extensive discussion of a potential timeline of incorporation.”


The staff paper is available at The SEC Work Plan is available at The SEC is seeking comments by July 31. Comments can be made through the SEC website.



  FASB and the International Accounting Standards Board (IASB) issued guidance on fair value measurement and disclosure requirements that the boards said in a press release is “largely identical” across IFRS and U.S. GAAP.


The guidance, set out in IFRS 13, Fair Value Measurement, and FASB Accounting Standards Update no. 2011-04, Fair Value Measurement (Topic 820)—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, completes a major project of the boards’ joint work to improve IFRS and U.S. GAAP and to bring about their convergence.


The boards said the harmonization of fair value measurement and disclosure requirements internationally also forms an important element of the boards’ response to the global financial crisis.


The requirements do not extend the use of fair value accounting, but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRS or U.S. GAAP.


ASU no. 2011-04 supersedes most of the guidance in Accounting Standards Codification Topic 820 (formerly FASB Statement no. 157), although many of the changes are clarifications of existing guidance or wording changes to align with IFRS 13. It also reflects FASB’s consideration of the different characteristics of public and nonpublic entities and the needs of users of their financial statements. Nonpublic entities will be exempt from a number of the new disclosure requirements.


The amendments in ASU no. 2011-04 change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments include the following:

  1. Those that clarify the board’s intent about the application of existing fair value measurement and disclosure requirements; and
  2. Those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.

In addition, FASB said that to improve consistency in application across jurisdictions, some changes in wording were necessary to ensure that U.S. GAAP and IFRS fair value measurement and disclosure requirements are described in the same way (for example, using the word shall rather than should to describe the requirements in U.S. GAAP).


The IASB said IFRS 13, Fair Value Measurement, will improve consistency and reduce complexity by providing, for the first time, a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS.


“The finalization of this project marks the completion of a major convergence project and is a fundamentally important element of our joint response to the global financial crisis,” IASB Chairman Sir David Tweedie said in a press release. “The result is clearer and more consistent guidance on measuring fair value, where its use is already required.”


“This update represents another positive step toward the shared goal of globally converged accounting standards,” FASB Chairman Leslie Seidman said in the press release. “Having a consistent meaning of the term ‘fair value’ will improve the consistency of financial information around the world.”


The amendments in ASU no. 2011-04 must be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after Dec. 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after Dec. 15, 2011. Early application by public entities is not permitted. Nonpublic entities may apply the amendments early, but no earlier than for interim periods beginning after Dec. 15, 2011.


ASU no. 2011-04 is available at


FASB prepared a “FASB in Focus” summary ( and a podcast ( on the amendments. The IASB prepared a podcast ( and a project summary and feedback statement (, which explains how the IASB responded to feedback received during the consultation process.



  FASB issued an Accounting Standards Update (ASU) that it said is intended to improve financial reporting of repurchase agreements (“repos”) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.


The board said the amendments in ASU no. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements (available at, remove from the assessment of effective control the requirement that the transferor have the ability to repurchase or redeem the financial assets, as well as implementation guidance related to that requirement.


“The new guidance improves transparency by eliminating consideration of the transferor’s ability to fulfill its contractual rights and obligations from the criteria in determining effective control,” FASB Chairman Leslie Seidman said in the press release announcing the ASU.


The ASU does not change other criteria applicable to the assessment of effective control. Those criteria indicate that the transferor is deemed to have maintained effective control over the financial assets transferred (and thus must account for the transaction as a secured borrowing) for agreements that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity if all of the following conditions are met:

  1. The financial assets to be repurchased or redeemed are the same or substantially the same as those transferred.
  2. The agreement is to repurchase or redeem them before maturity, at a fixed or determinable price.
  3. The agreement is entered into contemporaneously with, or in contemplation of, the transfer.

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. Accounting Standards Codification 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 ASU is effective for the first interim or annual period beginning on or after Dec. 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted.



  An SEC study of section 404(b) of the Sarbanes-Oxley Act recommends no new exemptions to the requirements. The study by the SEC’s Office of the Chief Accountant was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Its scope was restricted to companies with a market capitalization between $75 million and $250 million.


The findings recommend maintaining existing requirements of section 404(b) for accelerated filers in general. It also calls for actions “that have potential to further improve both effectiveness and efficiency of section 404(b) implementation.”


The 404(b) requirements, which focus on the auditor’s report on internal control over financial reporting (ICFR), have been in place since 2004 for domestic issuers and 2007 for foreign private issuers. In June 2007, the PCAOB issued Auditing Standard no. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements, to address the costs in conducting an effective audit of internal controls and feedback on section 404(b).


Dodd-Frank tasked the SEC with determining how the commission could reduce the burden of complying with section 404(b) for smaller accelerated filers, while maintaining investor protections for such companies. It also required a review of whether a complete exemption for such companies from section 404(b) compliance would encourage companies to list on U.S. exchanges in their initial public offerings (IPOs).


“The staff’s analysis shows that the United States has not lost U.S.-based companies filing IPOs to foreign markets for the range of issuers that would likely be in the $75 (million) to $250 million public float range after the IPO,” according to the study. “While U.S. markets’ share of worldwide IPOs raising $75 (million) to $250 million has declined over the past five years, there is no conclusive evidence from the study linking the requirements of section 404(b) to IPO activity,” the SEC staff concluded.


The study addresses the auditor attestation requirement with respect to an issuer’s ICFR pursuant to section 404(b). It does not address management’s responsibility for reporting on the effectiveness of ICFR pursuant to section 404(a) of the Sarbanes-Oxley Act.


Based on its review of prior academic and other research on section 404, the SEC study drew four conclusions:


  • The cost of compliance with section 404(b), including both total costs and audit fees, has declined since the 2007 reforms under AS5;
  • Research has found no conclusive evidence linking the enactment of section 404(b) to decisions by issuers to exit the reporting requirements of the SEC, including ICFR reporting;
  • Auditor involvement in ICFR is positively correlated with more accurate and reliable disclosure of all ICFR deficiencies, and restatement rates for issuers with the auditor attestation is lower than that for issuers without this attestation; and
  • Disclosure of internal control weaknesses conveys relevant information to investors.


In its recommendations section, the report said that at the request of SEC Chairman Mary Schapiro, the SEC staff “is taking a fresh look at several of the commission’s rules, beyond those related to section 404(b), to develop ideas for the commission about ways to reduce regulatory burdens on small business capital formation in a manner consistent with investor protection. However, the Dodd-Frank Act already exempted approximately 60% of reporting issuers from section 404(b), and the staff does not recommend further extending this exemption.”


The report suggests that the PCAOB consider publishing observations, beyond those previously published in September 2009, on the performance of audits conducted in accordance with AS5. These observations could help auditors in performing top-down, risk-based audits of ICFR, the report states, and could highlight lessons that can be learned from internal control deficiencies identified through PCAOB inspections.


The SEC staff is also monitoring the work of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to review and update its internal control framework, which “is the most common framework used by management and the auditor alike in performing assessments of ICFR,” the report said.


The study’s analysis of prior research found, among other things, that:


  • More internal control weaknesses were discovered by the auditor (or auditor and client jointly) and by control tests rather than substantive tests.
  • Disclosures of material weaknesses under section 302 were more likely in the fourth quarter when auditors were on-site at the client’s office most frequently and when the audit firm or office had experience with section 404 audits.
  • The majority of internal control deficiencies that were classified by the auditor as a significant deficiency or a material weakness were initially classified by the issuer as less severe.



  FASB issued an exposure draft of a proposed Accounting Standards Update intended to simplify how businesses are required to test goodwill for impairment.


“Nonpublic companies have expressed concerns to the board about the cost and complexity of performing the goodwill impairment test,” FASB member Daryl Buck said in a press release. “The proposals contained in this Update are intended to address those concerns and to simplify and improve the process for public and nonpublic entities alike.” The amendments would allow an entity to first assess qualitative factors, what FASB describes in a primer (available at on the proposal as events and circumstances, to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.


Current guidance requires an entity to test goodwill for impairment at least annually by first comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the amount of impairment loss, if any.


Under the proposed amendments, an entity would not be required to calculate the fair value of a reporting unit unless it determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The proposals include a number of factors to consider in conducting the qualitative assessment.


The proposal, which is available at, would allow an entity to opt to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step test. If approved, the changes would be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after Dec. 15, 2011, and early adoption would be permitted.



  FASB and the IASB in April published a progress report on their joint convergence projects (find the report at Since their previous report in November, the boards had:


  • Completed five projects. In the next few weeks, the IASB said it would issue new standards on consolidated financial statements (including disclosure of interests in other entities), joint arrangements and postemployment benefits. Both boards also said they would issue new requirements in relation to fair value measurement and the presentation of other comprehensive income.
  • Made progress on the three remaining Memorandum of Understanding (MoU) projects—covering financial instruments accounting, leasing and revenue recognition—as well as insurance accounting.
  • Provided for further time to finalize their convergence work. The boards agreed to extend the timetable for the remaining priority convergence projects beyond June to permit further work and consultation with stakeholders. The convergence projects are targeted for completion in the second half of this year. However, the U.S. insurance standard, which has not yet been exposed for comment, is targeted for the first half of 2012.


The progress report highlights several developments relating to pending projects:


Financial instruments. After reviewing the feedback received, FASB tentatively decided to consider three categories for financial assets: (a) fair value measurement with all changes in fair value recognized in net income (trading or holding for sale); (b) fair value measurement with changes in fair value recognized in other comprehensive income (investing with a focus on managing risk exposures or maximizing total return); and (c) amortized cost, subject to an improved impairment approach (customer financing with ability to manage credit risk by renegotiating cash flows with customers) and enhanced disclosures.


When FASB has made its decisions about classification and measurement, which it expects to do in the third quarter of 2011, the IASB will seek views from its constituents about FASB’s conclusions.


A supplement released by the standard setters in January presented an impairment model that reflected the differing objectives for impairment accounting while proposing a common solution to impairment. It outlined a model in which the amount and timing of recognition would vary according to the credit characteristics of the financial asset, specifically the degree of uncertainty about the collectibility of cash flows.


In April the boards considered the feedback from comment letters and the boards’ outreach activities. There was no clear consensus among respondents. The boards are working through the issues and suggestions and are determined to reach a consensus on a basic approach by the end of June. Once the boards have reached consensus, they will need to assess what additional steps, such as potential re-exposure or outreach, are necessary to allow the new requirements to be finalized.


Leasing. The boards published a joint exposure draft in August 2010. The proposals would bring lease obligations and the related assets onto the balance sheets of lessees. The proposals for lessors were designed to ensure that an entity that retains significant risks or benefits of the leased asset would recognize that asset and an associated obligation to allow the lessee to use the asset. In other cases, when the significant risks or benefits of the leased asset are transferred to the lessee, the lessor would derecognize the portion of the asset that is transferred by the lease agreement.


The boards have been considering the feedback received from comment letters and outreach activities and are close to completing their deliberations. In light of that feedback, the boards have made tentative decisions that mean that the standard they are working toward will reflect changes from the ED.


Once the boards have completed those redeliberations, they will consider whether re-exposure of the proposal is needed. If the boards conclude that re-exposure is unnecessary, they intend to develop a draft of the new standard, which will be posted on the boards’ websites, used as the basis for outreach with parties that are most affected by the proposed new requirements; and “subjected to a detailed drafting review with selected parties, as part of the fatal flaw review process each board is required to undertake.”


Revenue recognition. The IASB and FASB published a joint discussion paper in December 2008 that proposed a single revenue recognition model built on the principle that an entity should recognize revenue when it satisfies its performance obligations in a contract by transferring control of goods or services to a customer.


U.S. GAAP includes a wide range of detailed, industry-specific requirements regarding revenue recognition. IFRS has general requirements that cause preparers to rely on U.S. GAAP for specific guidance. This project is intended to reduce FASB’s detailed guidance to consistent principles and to remove the need for IFRS users to refer to GAAP.


The boards have been considering the feedback received from comment letters and outreach activities and are close to completing their redeliberations on revenue recognition.


Similar to the leasing project, once the boards have completed their redeliberations, they will consider whether re-exposure is needed. If they opt to go directly to developing a draft of the new standard, it will be posted on the boards’ websites, used as the basis for outreach with affected parties and “subjected to a detailed drafting review with selected parties, as part of the fatal flaw review process each board is required to undertake.”


Insurance. The boards aim to complete their deliberations on major issues by the end of June, but are unlikely to complete all discussions until the second half of 2011. Once the boards have done that, they will prepare their next due-process documents. For FASB, this will be an ED and, for the IASB, this will be a final IFRS. Before an insurance contracts standard is finalized, the boards will follow the same procedures described for the revenue recognition and leases projects, including assessing whether the proposals should be re-exposed and making a draft widely available as the basis for performing additional outreach.


The IASB is working to issue a new standard on insurance accounting by the end of 2011. FASB will consider the feedback received on its ED with a view to finalizing a standard in 2012. The boards then will consider any differences that may have arisen and how best to address them.



  The SEC is hosting a round-table meeting July 7 to discuss benefits or challenges in potentially incorporating IFRS into the financial reporting system for U.S. issuers.


The SEC said in a press release that the meeting will include three panels representing investors, smaller public companies, and regulators. The panel discussions will focus on topics such as investor understanding of IFRS and the impact on smaller public companies and on the regulatory environment of incorporating IFRS.


“We must carefully consider and deliberate whether incorporating IFRS into our financial reporting system is in the best interest of U.S. investors and markets,” SEC Chief Accountant James Kroeker said in the press release. “This round table will provide an excellent opportunity for investors, preparers and regulators to provide the SEC staff with valuable information that will help the commission in its ongoing consideration of incorporating IFRS.”


FASB and the IASB are engaged in numerous projects to converge U.S. GAAP with IFRS. After a meeting in mid-April, the boards announced that they would take “a few additional months” beyond their June target date to complete priority joint convergence projects on revenue recognition, leases, financial instruments and insurance (see, “FASB, IASB Announce Delay on Priority Projects,”


The SEC event will be held at the SEC’s headquarters in Washington. The SEC will publish a final agenda including a list of participants and moderators closer to the event date. The event will be open to the public with seating on a first-come, first-served basis, and will be available via webcast on the SEC website.


The SEC is seeking feedback on the topics to address and suggestions for potential round-table participants. Submissions may be made using the SEC’s Internet comment form at or sending an email to with File Number 4-600 in the subject line. Paper submissions must be sent in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549-1090. All submissions should refer to File Number 4-600.


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