Financial Accounting Standards Board

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Financial Accounting Standards Board

• FASB Update
• MSNA 2008 Audit and Accounting Conference
• Jeffrey T. Nickell
• FASB Practice Fellow

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Disclaimer
The views expressed in this presentation are my
own and do not represent positions of the
Financial Accounting Standards Board. Positions
of the FASB are arrived at only after extensive
due process and deliberations.
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Change is in the Air

• Who is the FASB
• SEC Advisory Committee
• How to Stay Current
• International Convergence
• New Guidance in the Works
• What You Need to Know Now
• Codification Project
• Questions

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Who Is the FASB

• Private-sector standard setter that provides
  guidance for accounting and financial reporting
  by public and non-public entities.
• Not an Auditor Oversight Body no enforcement
  power.
• Formed in 1973 and recognized by the SEC and the
  AICPA as the creator of GAAP.
• Public entities
• Private Entities
• Not-for-Profit Entities

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Organization
FAF (Primary Oversight Body)
FASB (5 Board Members and 75-80 Staff)
EITF (10-15 experts that create Guidance for
FASB Clearance)

• Advisory Groups
• FASAC representatives from all constituents
• UAC representatives from various types of users
• ITAC accounting experts from user community
• SBAC representatives from all constituents
  involved with small public and private entities
• PCFRC representatives from all constituents
  involved with private entities

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How Does the FASB Operate?

• Open decision-making process sunshine.
• Limits to the number of Board members that can
  meet together outside a public meeting.
• Extensive due process before a final document is
  issued.
• Standards are to be Neutral and based on
  guidance in Concept Statements.

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SEC Advisory Committee

• Committee Members
• Recommendations to SEC, PCAOB, FASB
• Increasing Usefulness of Information in SEC
  Reports
• Enhancing the Accounting Standards-Setting
  Process
• Improving the Substantive Design of New
  Accounting Standards
• Delineating Authoritative Interpretative Guidance
• Clarifying Guidance on Financial Restatements and
  Accounting Judgments

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Staying Current

• Best ways to stay current
• www.fasb.org
• Sign up for electronic Action Alert
• Key tabs on left of home page
• Project Activities
• Exposure Documents
• Effective Dates
• Pronouncements and EITF Abstracts

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International ConvergenceMajor Milestones

• April 2001 IASB Formed (replaced IASC)
• September 2002 Norwalk Agreement
• January 2005 European Union/other countries adopt
  IFRS
• February 2006 FASB/IASB MOU
• December 2007 SEC eliminates reconciliation for
  foreign filers
• August 2007 SEC Concepts Release re voluntary
  IFRS adoption
• June 2008 International Forum on convergence
• September 2008 SEC release on IFRS adoption
• September 2008 FASB/IASB update to MOU
• 2011 Other major economies (Japan, China,
  Korea, Canada) plan to adopt IFRS

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International ConvergenceFinancial Reporting
System Requirements

• Single independent global accounting standard
  setter and interpretative body
• No endorsement processes for accounting standards
• Cooperative international regulatory,
  enforcement, corporate governance regimes focused
  on investors
• High-quality auditing standards and auditor
  independence requirements
• Due consideration to effects on private and
  not-for-profit entities

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International Convergence Significant Hurdles

• Training and educating all capital market
  participants
• LIFO
• Banking and Insurance Regulations
• Implementation Guidance
• Industry GAAP

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International Financial Reporting
StandardsUpdate of MOU

• Joint Projects
• Revenue Recognition
• Financial Statement Presentation
• Lease Accounting
• FASB-Only Projects
• Statement 140/FIN 46(R)
• Statement 133 Hedging
• FAS 5 Contingency Disclosures

• Conceptual Framework
• Liabilities and Equity
• Not for Profit Combinations
• Disclosure of Plan Assets

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Conceptual Framework
OBJECTIVE Develop a Converged, Improved, and
Complete Framework for Standard Setting

• MAJOR DECISIONS TO DATE
• Joint phased project with initial focus on
  private sector
• Objective of financial reporting focuses on
  general purpose financial statements to provide
  information to present/potential investors,
  creditors, and others in making decisions,
  including stewardship
• New definitions for qualitative characteristics
• New definitions for assets and liabilities
• Inventory of measurement bases
• Series of discussion documents

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Liabilities and Equity
OBJECTIVE To Develop a Comprehensive Standard of
Accounting for Financial Instruments with
Characteristics of Equity, Liabilities, or Both,
and Assets

• Three approaches included in a 4Q 2007
  Preliminary Views, comments due by May 30, 2008.
• Basic Ownership (focus on nature of the
  return)preferred approach
• Most subordinated interests
• Entitles holder to a share of entitys net assets
  after all higher priority claims are settled
• Ownership Settlement (focus on nature of return,
  settlement features, and consideration used to
  settle)
• Reassessed expected outcome (reflects
  probability-based outcomes)

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Financial Statement Presentation
OBJECTIVE To Improve the Presentation of
Information in Financial Statements to Help
Investors Fully Understand an Entitys Financial
Position and Activities to Assess Future Cash
Flows

• MAJOR DECISIONS TO DATE
• Strive toward cohesiveness, comparability,
  liquidity/solvency assessment, separation of
  business from investing, financing and other
  activities, information on measurement and
  estimation uncertainty, and a meaningful
  disaggregation
• What constitutes a full set of financial
  statements
• Single statement of earnings and comprehensive
  income
• Potential new statement/disclosure on changes in
  assets/liabilities
• Target is fall 2008 discussion paper

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Financial Statement Presentation
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Accounting for Leases
OBJECTIVE To Comprehensively Reconsider Lease
Accounting to Insure that Financial Statement
Users are Provided Useful and Complete Information

• MAJOR DECISIONS TO DATE
• Scope was originally lessee and lessor
  accounting. Immediate project scope has changed
  to include lessee accounting only.
• Joint international working group established
• Primary accounting model being considered is one
  reflecting a right to use the asset and
  obligation to make payment
• Many scope, measurement, recognition/derecognition
  issues to be addressed
• Target is 2008 discussion paper

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Revenue Recognition
OBJECTIVES Converge, Eliminate Inconsistencies
in Conceptual Guidance and Standards, Fill Voids,
and Establish a Single Comprehensive Standard on
Revenue Recognition PREMISE Rights and
performance obligations in a revenue arrangement
give rise to assets and liabilities for the seller

• Identify all rights and performance obligations
• Determine when performance obligations are
  satisfied
• Decide if pre-arrangement activities produce
  revenue
• Decide how to account for returns and promotional
  promises

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Accounting for Hedging Activities
OBJECTIVES Resolve Practice Issues, Simplify
Accounting, Improve Financial Reporting by Making
Accounting Model and Disclosures Easier to
Understand

• MAJOR DECISIONS TO DATE
• Scope is FAS 133 hedging activities
• Fair value approach which eliminates
  bifurcation-by-risk, shortcut method, critical
  terms match, and quantitative effectiveness
  testing
• Requires independently measuring the hedging
  instrument and hedged item for all changes in
  fair value each reporting period
• Modified cash flow hedging to continue
• Exceptions for own debt

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Statement 140 and Fin 46(R) Improvements

• MAJOR DECISIONS TO DATE
• Eliminate QSPEs
• Vehicles used to hold assets in a 140 sale will
  thereby be subject to Fin 46(R)
• Legal isolation requirements must consider all
  arrangements including those of consolidated
  affiliates
• Linked presentation concept rejected
• First use qualitative assessment of control
  attributes to determine primary beneficiary
  under Fin 46(R). Use expected loss calculation if
  qualitative assessment does not result in
  deciding who, or if no PB
• Continuous assessment of reconsideration events
  for determining if an entity is a vie and who is
  the PB

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Improvements to FAS 5 Disclosures
OBJECTIVES Enhance disclosures about
contingencies to provide users of financial
statements with useful, transparent, and timely
information.

• MAJOR DECISIONS TO DATE
• Description of the nature and risk of loss,
  factors likely to affect the outcome, and
  management assessment of the most likely outcome
• Amount of claim
• Detailed reconciliation of changes in estimate is
  required
• Required disclosure if loss contingency is severe
  and expected to occur in one year
• Prejudicial exception
• Prospective for periods ending after 12/15/08

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Disclosure of Plan Assets
OBJECTIVES Enhance the plan asset disclosures
currently required by FASB Statement No. 132
(revised 2003), to provide users of financial
statements with useful, transparent, and timely
information about the asset portfolios of
postretirement benefit plans.

• MAJOR DECISIONS TO DATE
• Disclose separately each major category of plan
  assets
• Disclose nature and amount of concentration of
  risk
• Disclose valuation techniques and inputs used
• For recurring measurements with significant
  unobservable inputs disclose the effect on the
  measurement of plan assets
• Effective for years ending after 12/15/08

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Guidance Effective in 2008/2009 Major Standards

• FAS 157 Fair Value Measurements
• FAS 141R Business Combinations
• FAS 160 Noncontrolling Interests in Consolidated
  Financial Statements
• FAS 161 Disclosure about Derivative Instruments
  and Hedging Activities

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Statement 141R, Business Combinations

• Extensive changes to prior GAAP have been made in
  141R, including
• Scope of a Business
• Transaction Costs
• Contingencies
• Contingent Consideration
• Disclosures

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Noncontrolling Interest in Consolidated Financial
Statements

• Effective for public and nonpublic enterprises
  for 2009.
• A noncontrolling interest is the portion of
  equity (net assets) in a consolidated subsidiary
  not attributable directly, or indirectly to the
  parent.
• Noncontrolling interest is part of Equity and
  not a liability.
• New Disclosures

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Statement 161, Disclosures aboutDerivative
Instruments and Hedging Activities

• Effective for ALL enterprises for 2009. Early
  application is encouraged.
• FAS 161 requires disclosures to answer the
  following
• How and why an enterprise uses derivative
  instruments.
• How derivative instruments and related hedged
  items are being accounted for.
• How derivative instruments and related hedged
  items affect an enterprises balance sheet,
  income statement and cash flows.
• Examples of tabular presentations that include
  many of the required disclosures are provided in
  FAS 161.

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Guidance Effective in 2008Major Implementation
Guidance

• FAS 142-3 Determination of the Useful Life of
  Intangible Assets
• FAS 157-1 Application of Statement 157 to Leases
• FAS 157-2 Partial Deferral of Effective Date of
  FAS 157
• FIN 48-2 Deferral of the Effective Date of FIN 48
  for Nonpublic Entities
• FSP APB 14 Convertible Debt Instruments that May
  Be Settled in Cash Upon Conversion (including
  Partial Cash Settlement)

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Guidance Effective in 2008Major Implementation
Guidance

• DIG E-23 Issues Involving the Application of the
  Short-Cut Method
• EITF 07-5 Determining Whether an Instrument is
  Indexed to Your Own Stock
• FAS 117 Endowments for Not For Profit
  Organizations

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Codification and Retrieval Project

• OBJECTIVES
• Develop a single, authoritative, timely,
  comprehensive, integrated codification of all
  relevant U.S. accounting and financial reporting
  literature
• Develop a single, fully functional, online,
  real-time database with easy retrievability
• PROGRESS TO DATE
• Software developed and master index of topics
  complete
• Mapping of existing literature/authoring
  completed
• Released in January 2008 for verification for
  one year
• Over 23,000 registered users
• Goal is to become GAAP in 2009

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Codification and Retrieval Project
Topic Structure 340 Inventory .10 Overall 340.
10.00 Status (References to standards affecting
the subtopic) 340.10.05 Overview and
Background 340.10.10 Objectives 340.10.15 Sc
ope and Scope Exceptions 340.10.20 Topical
Definitions/Glossary 340.10.25 XRBL
Definitions 340.10.30 Recognition 340.10.35
Initial Measurement 340.10.40 Subsequent
Measurement 340.10.45 De-recognition 340.10.
50 Other presentation matters (B/S
classification, cash flow, EPS, taxes,
etc.) 340.10.55 Disclosure 340.10.60 Impleme
ntation guidance and illustrations 340.10.65 Re
lationships 340.10.70 Transition and Open
Effective Date Information 340.10.75 Links to
Granfathered Material 340 Inventory .20 LIFO 3
40.20.ZZ Same section structure as shown
above 340 Inventory .30 Agriculture 340.30.ZZ
Same section structure as shown above
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• Questions