This alert provides a comprehensive overview of important developments that have changed the financial reporting environment this year. Our detailed breakdown covers relevant guidance and rules issued by the Financial Accounting Standards Board (FASB), the Securities Exchange Commission (SEC) and the International Accounting Standards Board (IASB).
Table of Contents
Financial Accounting Standards Board (FASB)
- Final FASB Guidance
- Proposed FASB Guidance
- Other Activities
Securities and Exchange Commission
- Final Rules
- Proposed Rules
- Other Activities
International Accounting Standards Board (IASB)
- Final IASB Guidance
- Proposed IASB Guidance
- Other Activities
Effective Dates of U.S. Accounting Pronouncements
Financial Accounting Standards Board (FASB)
Final FASB Guidance
All final FASB guidance can be accessed on the FASB website at http://www.fasb.org/home, located under the Standards tab, Standards Issued in 2011.
Accounting Standards Update 2011-09 — Compensation—Retirement Benefits—Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan
Issued: September 2011
Summary: The amendments in this Update require that employers provide additional separate disclosures for multiemployer pension plans and multiemployer other postretirement benefit plans. For employers that participate in multiemployer pension plans, the amendments in this Update require an employer to provide additional quantitative and qualitative disclosures. The amended disclosures provide users with more detailed information about an employer’s involvement in multiemployer pension plans, including: significant multiemployer plans in which an employer participates, specifying the plan names and identifying numbers; level of an employer’s participation in the significant multiemployer plans; financial health of the significant multiemployer plans; and nature of the employer commitments to the plan. Using the Employer Identification Number, the plan name and, if applicable, the plan number, users of financial statements would be able to obtain additional information, including the funded status of the plan(s), from sources outside the financial statements such as the plan’s annual report (Form 5500).
For other plans for which users are unable to obtain additional publicly available information outside the employer’s financial statements, the amendments in this Update require the employer to make additional disclosures about the plan, including: a description of the nature of the plan benefits; a qualitative description of the extent to which the employer could be responsible for the obligations of the plan; and other quantitative information, to the extent available, as of the most recent date available, to help users understand the financial information about the plan.
The amendments do not change current recognition and measurement guidance for an employer’s participation in a multiemployer plan.
Effective Date: For public entities, the amendments in this Update are effective for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted. For nonpublic entities, the amendments are effective for annual periods for fiscal years ending after December 15, 2012, with early adoption permitted. The amendments should be applied retrospectively for all prior periods presented.
Accounting Standards Update 2011-08 — Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment
Issued: September 2011
Summary: In the past, companies have calculated a reporting unit’s fair value in the first of two steps for assessing impairment of goodwill. If the fair value of the reporting unit is more than its carrying amount, there is no impairment. If fair value is less, a second step of analysis is performed to determine the amount of impairment, if any. Under the amendments in this Update, companies have a new option to determine first whether it is necessary to apply the traditional two-step goodwill impairment test, based on qualitative factors. If a company elects to use the option, it must assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If so, the existing quantitative calculations in steps one and two continue to apply. However, if after assessing the totality of the qualitative factors, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.
Further, under the amendments in this Update, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period.
The Update includes examples of events and circumstances that, although not all-inclusive, an entity should consider in evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, which supersede the previous examples of events and circumstances that an entity should consider when testing goodwill for impairment between annual tests. An entity having a reporting unit with a zero or negative carrying amount will also consider the revised list of factors in determining whether to perform the second step of the impairment test.
Under the amendments, an entity no longer is permitted to carry forward its detailed calculation of a reporting unit’s fair value from a prior year as previously permitted.
The amendments do not change the current guidance for testing other indefinite lived intangible assets for impairment. However, at the September 7, 2011 board meeting, in response to the feedback received on the goodwill impairment project, the FASB Chairman added a short-term, narrow-scope project to the FASB agenda to simplify the manner in which an entity tests other indefinite lived intangible assets for impairment. The board plans to finalize that project by mid-2012.
For additional information on this Update, refer to MFA’s Alert, FASB’s New Goodwill Impairment Standard.
Effective Date: The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.
Accounting Standards Update 2011-07 — Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities (a consensus of the FASB Emerging Issues Task Force)
Issued: July 2011
Summary: The amendments in this Update require certain health care entities to change the presentation of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, the amendments expand disclosure requirements for those health care entities regarding their policies for recognizing revenue and assessing bad debts.
The amendments also require disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts.
Effective Date: This Update will be effective for public entities for fiscal years beginning after December 15, 2011, and interim periods within those fiscal years. For nonpublic entities, this Update will be effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. Early adoption is permitted. Entities must apply the presentation requirements retrospectively; however, the qualitative and quantitative disclosures are only required to be provided prospectively.
Accounting Standards Update 2011-06 — Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers (a consensus of the FASB Emerging Issues Task Force)
Issued: July 2011
Summary: In March 2010, President Obama signed into law The Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act. The acts impose an annual fee on certain health insurers for each calendar year beginning after 2013. The amendments in this Update specify that the liability for the fee should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable.
Additionally, this Update indicates that the fee would not meet the definition of an acquisition cost; that definition was amended by FASB ASU No. 2010-26, Financial Services—Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.
Effective Date: The amendments in this Update are effective for calendar years beginning after December 31, 2013, when the fee initially becomes effective.
Proposed FASB Guidance
The following is a summary of all proposed guidance that was issued or remained open for comment during the quarter. All proposed FASB guidance can be accessed on the FASB website at http://www.fasb.org/home located under the Exposure Documents tab.
Proposed Accounting Standards Update — Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate—a Scope Clarification (a consensus of the FASB Emerging Issues Task Force)
Issued: July 20, 2011
Comment Deadline: October 3, 2011
Summary: Accounting Standards Codification (ASC) Subtopic 810-10, Consolidation—Overall, requires that a parent deconsolidate a subsidiary if the parent ceases to have a controlling financial interest in the subsidiary. However, differing views exist in practice on whether the parent of an in substance real estate subsidiary must satisfy the criteria in Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales, in order to derecognize the real estate.
When a reporting entity ceases to have a controlling financial interest (as described in Subtopic 810-10) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, this proposed Update would require a reporting entity to apply the guidance in Subtopic 360-20 to determine whether it should derecognize the assets (including real estate) and liabilities (including the related nonrecourse debt) in the in substance real estate entity. In addition, the entity should apply the measurement provisions in Subtopic 360-20.
Effective Date: The amendments in this proposed Update would be applied on a prospective basis to deconsolidation events occurring after the effective date. Prior periods would not be adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. The effective date will be determined after the Task Force considers feedback on the proposed Update.
Other FASB Activities
The following section provides high level summaries of other relevant FASB publications and activities, with particular focus on the recent developments and prioritization of the FASB and IASB’s joint efforts to work towards convergence of U.S. GAAP and IFRS.
Update on International Convergence
For current status of joint FASB/IASB projects, refer to the FASB’s Current Technical Plan and Project Updates page.
Update on Standard Setting for Private Companies
Summary of Current Developments: In a July 2011 FASB In Focus article, the board announced that it has begun developing a so-called “differential framework” that would help provide a short-term solution for creating distinct standards or exceptions for private companies. The article describes a recently completed initial assessment of the differences in the way that private company financial statements are used by lenders, investors and others. The staff’s initial findings are described in the context of six significant factors that differentiate the financial reporting considerations of private companies from public companies (types of users, access to management, investment strategies, ownership structures, accounting resources and education). The staff assessment is the first stage in an effort by the FASB to develop this differential framework for deciding whether and when to adjust the requirements for recognition, measurement, presentation, disclosure, effective dates and transition methods for financial accounting standards that apply to private companies.
In August 2011, the FASB announced that it will again host two public roundtable meetings this fall to discuss issues relating to existing private company accounting and reporting standards, after determining the two roundtables held in the fall of 2010 were valuable forums for hearing first hand from private company constituents about their concerns with existing GAAP. Topics to be discussed at this year’s roundtables are expected to include, but will not be limited to, accounting and disclosure requirements relating to variable interest entities, interest rate swaps and level 3 fair value measurements. The roundtable meetings will take place on Tuesday, October 11, 2011 and Monday, October 17, 2011. More information and registration for the meetings are available here.
Background: A Blue Ribbon Panel charged with making recommendations on the future of standard setting for private companies was launched by the AICPA and the Financial Accounting Foundation (“FAF” – the FASB’s parent organization) in 2009 and in January 2011 issued a report of its recommendations to the FAF Board of Trustees. The report calls for fundamental changes to the system of standard setting, including the creation of a new board, to be overseen by the FAF, that would focus on making exceptions and modifications to U.S. GAAP for private companies that better respond to the needs of the private company sector. The report also recommends the creation of a differential framework—a set of decision criteria—to facilitate a standard setter’s ability to make appropriate, justifiable exceptions and modifications. The report does not advocate a move toward a separate, self-contained GAAP for private companies or a comprehensive reorganization of GAAP. For more information, refer to the January 26, 2011 FAF News Release.
In March 2011, the FAF Board of Trustees announced the formation of a 10-member Private Company Resource Group, which includes users, preparers and auditors of private company financial statements, to evaluate the staff assessment and advise the Board in developing a differential decision-making framework.
Securities and Exchange Commission (SEC)
Final SEC Rules
All SEC Final Rules can be accessed on the SEC website, located under the Regulatory Actions section, Final Rules.
(Note: The following pertains to significant accounting and reporting SEC releases. For a complete listing of SEC rules, please refer to the SEC website.)
Final Rule — Facilitating Shareholder Director Nominations (Notice of Effective Date)
Release: 33-9259
Issued: September 2011
Summary: In July 2011, the U.S. Court of Appeals for the District of Columbia vacated Exchange Act Rule 14a-11, which would have required companies to facilitate the rights of shareholders to nominate directors to a company’s board, and in September the SEC confirmed that it would not seek rehearing of the decision. On September 15, 2011 the SEC issued a Final Rule, Facilitating Shareholder Director Nominations, (http://www.sec.gov/rules/final/2011/33-9259.pdf) that eliminated the stay on the amendments to Exchange Act Rule 14a-8 that the SEC had in place while the Court considered Rule 14a-11 (http://www.sec.gov/rules/final/2010/33-9136.pdf). Rule 14a-8 will require companies to include in their proxy materials, under certain circumstances, shareholder proposals that seek to establish a procedure in the company’s governing documents for the inclusion of one or more shareholder director nominees in the company’s proxy materials. This release provides notice that the amendments to Rule 14a-8 and related rule changes become effective upon publication of Release 33-9259 in the Federal Register.
Effective Date: This rule became effective on September 20, 2011.
SEC Approves PCAOB Rules on Audits of Broker-Dealers
Release: 34-65163 and 34-65162
Issued: August 2011
Summary: On August 18, 2011 the SEC issued the following orders approving proposed interim inspection and funding rules:
- Order Approving Proposed Temporary Rule for Interim Program of Inspection Related to Audits of Brokers and Dealers (Inspection Order); and
- Order Approving Proposed Board Funding Final Rules for Allocation of the Board’s Accounting Support Fee Among Issuers, Brokers and Dealers, and Other Amendments to the Board’s Funding Rules (Funding Order).
Effective Date: These rules became effective upon approval by the SEC pursuant to Section 107 of the Sarbanes-Oxley Act of 2002.
Proposed SEC Rules
All SEC Final Rules can be accessed on the SEC website, located under the Regulatory Actions section, Final Rules.
(Note: The following pertains to significant accounting and reporting SEC releases. For a complete listing of SEC rules, please refer to the SEC website.)
There were no significant SEC Proposed Rules in the third quarter.
Other SEC Activities
The following section provides high level summaries of other relevant SEC and PCAOB publications and activities, with particular focus on the recent developments and prioritization of the Work Plan for Global Accounting Standards.
PCAOB Issues Concept Releases on Auditor Independence and Audit Reports
Summary: The PCAOB recently issued two concept releases:
- Possible Revisions to PCAOB Standards Related to Reports on Audited Financial Statements (Docket No. 034); and
- Auditor Independence and Audit Firm Rotation (Docket No. 037)
These concept releases can be accessed on the PCAOB’s website at: http://pcaobus.org/Standards/Pages/CurrentStatus.aspx
Webcasts and podcasts of the PCAOB Open Board Meetings, where these matters are discussed prior to issuance of the concept releases, can also be accessed on the PCAOB’s website and are helpful in understanding the issues involved and views of the Board. These recordings can be accessed here.
The concept release relating to reports on audited financial statements discusses alternatives for changing the auditor’s reporting model. Several alternatives for changing the auditor’s reporting model are presented and the PCAOB is seeking specific comment on these or other alternatives that could provide investors with more transparency in the audit process and more insight into the company’s financial statements or other information outside the financial statements.
The alternatives considered in the release include:
- An auditor’s discussion and analysis (AD&A);
- Required and expanded use of emphasis of matter paragraphs;
- Auditor assurance on other information outside the financial statements, such as MD&A; and
- Clarification of language in the standard auditor’s report.
Comments on this release were due September 30, 2011.
The concept release relating to auditor independence and firm rotation discusses ways that auditor independence, objectivity and professional skepticism can be enhanced, including through mandatory rotation of audit firms. Mandatory audit firm rotation would limit the number of consecutive years for which a registered public accounting firm could serve as the auditor of a public company.
SEC Hosts Roundtable on International Financial Reporting Standards
Summary: On July 7, 2011, the SEC held roundtable discussions with representatives from investors, smaller public companies and regulators to discuss benefits and challenges related to potentially incorporating IFRS in the United States financial reporting system. The investor panel discussion was supportive of a single set of globally accepted accounting standards. However, the investor panelists were concerned about the IASB’s governance and funding, especially regarding the fact that in some countries, financial reporting may serve public policy interests rather than those of investors. Further concerns were raised on the uniform application of principles-based accounting standards and the IASB’s interpretative mechanisms. Investors stressed the importance of the IASB’s having a responsive interpretative mechanism subject to a formal standard-setting process, and they noted that local interpretation of IFRS could lead to diverse application of IFRS globally.
The smaller public companies panelists were concerned about the lack of resources and the potential implementation costs. Some panelists viewed little or no benefits of implementing IFRS. The panelists mostly supported a “big bang approach” versus a staggered approach for incorporating IFRS into the U.S. system. A staggered transition was perceived as more costly. They also stressed the importance of the FASB and IASB completing its current convergence projects before the SEC sets the date for IFRS incorporation. There were also different views expressed on whether to allow for early adoption.
The regulatory panelists discussed the current use of U.S. GAAP financial information in the various regulatory activities they undertake, the steps required and potential timing to make changes in regulations and costs and benefits of potential IFRS incorporation. The panelists believe that sufficient time should be provided for the transition to IFRS and that the needs of U.S. investors should be carefully considered.
International Accounting Standard Board (IASB)
Final IASB Guidance
All final IASB guidance can be accessed on the IASB website, located under the IFRS tab, Standards and Interpretations.
The IASB did not issue any final standards in the third quarter.
Proposed IASB Guidance
The following is a summary of all proposed guidance that was issued or remained open for comment during the quarter. All proposed IASB guidance can be accessed on the IASB website, located under the Get Involved tab, Comment on a Proposal.
Exposure Draft — Investment Entities
Issued: August 2011
Comment Deadline: January 5, 2012
Summary: This exposure draft addresses whether an investment entity would be required to consolidate a controlled investment or carry the investment at fair value with changes through profit or loss. The IASB received a number of comments on its recently issued pronouncement, IFRS 10 Consolidated Financial Statements, related to the usefulness from an investor’s perspective of presenting consolidated financial statement for investments that an investment entity controls compared to presenting the investment at fair value. This exposure draft proposes criteria for an entity to qualify as an investment entity and guidance for making this assessment. The proposals would require an investment entity to measure its investments in controlled entities at fair value through profit or loss in accordance with IFRS 9 Financial Instruments (as issued in October 2010) and to provide additional disclosures to enable users of its financial statements to evaluate the nature and financial effects of its investment activities.
This exposure draft also proposes that in its consolidated financial statements, a parent of an investment entity should not retain the fair value accounting that is applied by its investment entity subsidiary to controlled entities, unless the parent qualifies as an investment entity itself. As a consequence, a parent of an investment entity should consolidate all entities it controls, including those that are controlled by an investment entity subsidiary, unless the parent is an investment entity itself. When consolidating, a parent of an investment entity would, however, retain the fair value accounting applied by the investment entity to investments in associates and joint ventures and other non-controlled entities.
For consistency within IFRS, the exposure draft also proposes to amend the relevant paragraphs of IAS 28 Investments in Associates and Joint Ventures: (a) to replace references to ‘venture capital organization, mutual fund, unit trust and similar entities’ with ‘investment entity’; and (b) to require an investment entity to measure its investments in associates and joint ventures at fair value through profit or loss in accordance with IFRS 9.
To ensure comparability among entities, the exposure draft would require that entities applying this guidance early also apply all aspects of IFRS 10, IFRS 11 Joint Arrangements, IFRS 12 and IAS 28 (as amended in 2011).
Effective Date: The amendments in this proposed IFRS would be applied on a prospective basis for annual periods beginning on or after a date to be determined. If an entity applies this proposed IFRS in its financial statements early, it shall also apply IFRS 10, IFRS 11, IFRS 12 and IAS 28 (as amended in 2011).
Exposure Draft — Mandatory Effective Date of IFRS 9 (proposed amendment to IFRS 9 (November 2009) and IFRS 9 (October 2010))
Issued: August 2011
Comment Deadline: October 21, 2011
Summary: The IASB has published this exposure draft of proposed amendments to IFRS 9 Financial Instruments (issued November 2009) and IFRS 9 Financial Instruments (issued October 2010) so that entities would be required to apply them for annual periods beginning on or after January 1, 2015 rather than being required to apply them for annual periods beginning on or after January 1, 2013. Early application of both would continue to be permitted.
Exposure Draft — Improvements to IFRSs
Issued: June 2011
Comment Deadline: October 21, 2011
Summary: The IASB has published this exposure draft of proposed amendments to IFRS as part of its annual improvements project. The following table shows the topics addressed by these amendments.
Other IASB Activities
The following section provides high level summaries of other relevant IASB publications and activities, with particular focus on the recent developments and prioritization of the FASB and IASB’s joint efforts to work towards convergence of U.S. GAAP and IFRS.
IASB Publishes Effect Analyses for IFRS 10 and IFRS 11
Summary: The effect analyses for IFRS 10 Consolidated Financial Statements, which also includes the effect analysis for IFRS 12 Disclosure of Interests in Other Entities, and the effect analysis IFRS 11 Joint Arrangements, are now available for download on the project pages. The effect analyses provide detailed insights into the potential impacts of the new requirements using case studies and other quantitative and qualitative material, as appropriate. The effect analyses can be accessed here.
IASB Launches a Public Consultation on Future Work Program
Summary: In July 2011, the IASB launched a public consultation to seek broad public input on the strategic direction and overall balance of its future work program. The consultation document published asks deliberately open questions to gather views on the IASB’s future work program from all those involved in or affected by financial reporting. In particular, the IASB is seeking feedback on how it should balance the development of financial reporting with the maintenance of IFRSs and—with consideration of our time and resource constraints—those areas of financial reporting that should be given the highest priority for further improvement. The consultation period on the future work program of the IASB closes on November 30, 2011. The Agenda Consultation 2011—Request For Views document may be accessed here.
Update on International Convergence
For a summary of international convergence efforts, please refer to the FASB: Other Activities section above.
Effective Dates of U.S. Accounting Pronouncements