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Big Week on the Convergence Front
In what’s shaping up to be a big week on the convergence front, following last week’s announcement by FASB and the IASB
that they would delay completion of their MOU projects ‘by a few months:’
1. FEI sent a letter to FASB and the IASB
applauding last week’s announcement, and asking that the boards formally re-expose, for a 90-day comment period, the remaining MOU standards;
2. The SEC announced an IFRS roundtable
will take place in July, and
3. FASB and the IASB released their MOU progress report
.Commitment to Convergence, and High Quality Standards
On a podcast posted by FASB today, FASB Chairman Leslie Seidman provided highlights of the MOU progress report (detailed further below), which followed last week's announcement by FASB and the IASB of the decision to take more time to complete the MOU standards. Specifically, Seidman observed:
The primary purpose of [last week’s joint announcement] was to communicate our ongoing commitment to carrying out our robust due process on the convergence projects. Taking a look at the remaining decisions to be made, and our desire to cross-check with stakeholders on any key changes that we are making, we concluded that it was going to take us a few more months to complete our work. We think those changes are necessary to satisfy ourselves that the resulting standards are of high quality…FEI Applauds FASB/IASB Move To Take More Time; Calls For Reexposure of Remaining MOU Standards
In response to last week’s announcement by FASB and the IASB to take a few more months to complete the remaining MOU convergence projects on revenue recognition, financial instruments and leasing (as well as an additional project on insurance contracts), FEI President and CEO Marie N. Hollein stated in an April 19 letter to FASB Chairman Leslie Seidman and IASB Chairman Sir David Tweedie:
FEI applauds the Boards’ joint decision to allow more time to complete these projects...
...[I]t is necessary and appropriate to re-expose the revised standard[s] to ensure that the new guidance achieves the desired result and does not introduce new issues or otherwise create unintended consequences for constituents.
Acknowledging the boards’ outreach efforts to date, and explaining why reexposure of the proposed standards is necessary, Hollein stated:
We understand that members of the Board and staff have engaged in extensive outreach with constituents in face to face meetings and conference calls. We support such interactions as a valuable way to more quickly identify key issues with the Board’s tentative conclusions. However, it is important to remember that the specific language of the proposed standard is what ultimately determines the future path of interpretations, implementation and compliance. ..It is …imperative that ample time and great care …be devoted to ensuring that the literal words of the final standards in each of these areas are capable of high quality application on a consistent and repeatable basis at a reasonable cost.FASB/IASB MOU Progress Report Released
...We therefore recommend that for each of these projects, the Boards issue revised
Exposure Drafts and allow a comment period of 90 days for each. FEI members stand ready to assist the Boards in whatever means are necessary to help identify potential issues with the revised proposed standards and to ensure that these documents are both operational and capable of cost-effective application in the U.S. environment.
...We wish to stress that the quality and thoroughness of the due process, not the adherence to a timetable, is what is most important to the Boards’ constituents. We therefore ask that the Boards to take whatever steps are necessary to ensure that the final standards to be issued meet the specifications we discuss above, even if it means that the revised standards will be issued after December 31, 2011.
The MOU progress report, issued today, references the initial target completion date for the convergence projects under the FASB-IASB Memorandum of Understanding of June 30, 2011, and the more recent announcement of the extension by a few months of that completion date.Rev Rec, Leasing ‘Drafts’ Will Be Posted; Boards Will Consider Whether Re-exposure is Necessary
Seidman, in today's FASB podcast,
provided highlights from the MOU progress report that would be of particular interest to U.S. constituents, regarding the remaining MOU projects, which are: revenue recognition, leasing, and financial instruments, and the additional convergence project added by FASB and the IASB on insurance contracts.
She noted that after the boards complete their consideration of comments received on the Exposure Drafts on revenue recognition and leasing - which the board's estimate will be completed by June, 2011 - that updated ‘drafts’ of those standards will be posted on the FASB and IASB websites, as part of the boards’ efforts to inform constituents and obtain stakeholder input.
However, she stopped short of committing to issuance of a formal exposure draft (re-exposure, technically, as previous exposure drafts were issued). Rather, she emphasized, analogous to the wording in the MOU progress report itself, that:
Before each standard is issued, the boards will consider:
• whether re-exposure is necessary; and
• whether they have undertaken sufficient outreach on the proposed standard to assure the boards that the proposed standard is operational and will bring improvements to financial reporting.
Detailing further, Seidman said:
Even if we conclude that a formal re-exposure is not necessary, both boards plan to post a draft of the standard on our websites for people to review. We’ll also use this draft as the basis for additional outreach, and our fatal flaw reviews.Financial Instruments
Based on that feedback, we will then decide how to proceed:
• can we move to a final standard,
• do we have additional work to do, and
• assess again whether we need to re-expose.
So you can see that we’re building in the quality control procedures to make sure that people are aware of these important standards and that we have an opportunity to discuss them with stakeholders before they are issued as final standards.
Regarding financial instruments, Seidman noted on today's podcast:
As you know, the boards approached the financial instruments topics in different ways, so we are not on the same timetable for all of the issues. The progress report [issued today] lays the history of the project in detail. At this point, the FASB and IASB are working side by side on impairment and offsetting, or netting on the balance sheet.
On impairment of financial assets, we received many comments on our supplementary ED; while there was no clear consensus in the comments, we received many helpful suggestions, and we plan to try to decide on a basic impairment approach in the next couple of months. Then, we’ll evaluate what additional outreach we need, and whether re-exposure is necessary, before we finalize a new standard.
About classification and measurement of financial assets and liabilities, the FASB is in the process of redeliberating the key provisions of our ED in light of the comments we received. We’ve decided to make several changes in response to widespread commentary from all of our stakeholders to reaffirm several provisions, and we identified enhanced disclosure as a priority area of focus. The FASB plans to finalize our discussions in the 3rd quarter on the classification and measurement issues. At that point, we’ll have to evaluate whether we need to re-expose our conclusions.
The IASB then plans to expose the modified FASB approach to its constituents, with the goal of developing a converged standard on accounting for financial instruments.
Seidman also provided an update on hedging on today’s podcast:
This is another case where the timing will be different between the two boards… The FASB will be at the table when the IASB discusses the comments it received on its ED, which was basically a new approach to hedge accounting. … If we decide to make more significant changes to hedge accounting, we would need to re-expose those provisions, before the FASB issues a new, final standard. Insurance
Regarding the FASB-IASB insurance project, Seidman said:
Insurance is actually not one of the projects on our MOU. But because it’s a global industry, we did decide to work together with the IASB on this project. The FASB joined the discussions fairly late, and accordingly, we issued a Discussion Paper when the IASB issued its ED. We’re now working through the comments received on both of those documents, and expect to conclude on the central issues on the project by June. However, there are other issues that we won’t get to until this summer; once we finalize our discussions, the FASB will issue an ED for public comment; so, I don’t expect a final insurance standard to be issued in the U.S. until 2012. The boards will then consider any differences that have arisen, and decide how best to address them. Coming Attractions: Guidance on Fair Value Measurements, OCI
Seidman noted some other upcoming standards to be issued by FASB:
We expect to issue some clarifications to the guidance on fair value measurements in the next few weeks. We don’t expect these clarifications to result in major changes in practice in the US, but now we’ll have a completely converged standard on how to develop fair value estimates in cases where another standard requires or permits fair value to be used. That standard will be effective in 2012 for a calendar year company. Other Comprehensive Income (OCI)
Seidman added on today's podcast:
We’re about to issue an amendment to the guidance on how to present Other Comprehensive Income (OCI); this will be a big change for U.S. co’s, because they’ll no longer be able to present OCI as part of the Statement of Changes in Stockholders Equity.
The converged approach would be to present OCI either as part of a single statement
of income, or in a consecutive statement following net income. That change would also go into effect in 2012 for a calendar year company.
Seidman also noted that FASB’s Technical Plan (outlining expected completion dates for various phases of projects on the FASB agenda) has been updated on FASB’s website.Due Process in Focus
Regarding due process (a favorite topic of this blog), today’s MOU progress report also states:
To provide additional assurance, the Trustees of the IFRS Foundation are undertaking an enhanced oversight process between its Due Process OversightSEC Announces IFRS Roundable
Committee and the IASB to ensure that the IASB is meeting its due process requirements. The FASB’s due process is also subject to oversight by its Board of Trustees as well as its Standard-setting Process Oversight Committee.
Rounding out this week's convergence news, running neck-and-neck with issuance of the FASB-IASB's MOU progress report, the SEC announced yesterday that it plans to hold a roundtable on IFRS in July, specifically on the:
benefits or challenges in potentially incorporating International Financial Reporting Standards (IFRS) into the financial reporting system for U.S. issuers.
The SEC's press release
The July 7 event will feature 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,” said SEC Chief Accountant James Kroeker. “This roundtable 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.”