Financial Executive: January 2012

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From the President

FEI President & CEO’s Top Challenges for Financial Executives for 2012

While a major restructuring of the tax code is unlikely prior to the election, it’s clear that everything is on the table.

This year’s list of top challenges for financial executives has many elements similar to last year’s, as there was much gridlock in our nation’s capital and decisions that we expected from accounting standard setters are taking longer than expected. It’s clear that the senior-level financial executive’s role is a key one in helping organizations meet their 2012 challenges.


Controlling the U.S. Deficit
The United States is continuing to face a debt and deficit crisis on a level that it has not seen in generations. The unemployment rate has hovered at 9 percent for most of the year and the U.S. had its credit rating downgraded to AA+ by Standard & Poor’s for the first time in history. Near the end of 2011, rating agency Fitch reaffirmed its rating of AAA but classified the outlook on U.S. debt as “negative.”

The Fitch announcement came days after the Joint Committee on Deficit Reduction, known as the “super committee,” failed to come to an agreement on the deficit. This failure on both sides of the political aisle is an example of the difficult climb the U.S. faces in reclaiming its stable financial footing.

The 2012 elections will likely be fought on the topics of the debt and deficit and much election year politicking will be more about finger pointing than any new ideas on how to best tackle the issues.

While there have been rare instances of bipartisan support in recent months, the Republican unwillingness to consider tax increases and the Democrats’ refusal to touch entitlement programs are examples of why uncertainty is likely to continue for months and potentially years to come.


Tax Reform                                                            
With taxation a hot topic during the 2010 elections, members of Congress have honored their pledge of making sure that tax reform is prominent on the legislative calendar. House Ways and Means Chairman Dave Camp (R-Mich.) has held numerous hearings on related subjects, including what a move to a territorial tax system would mean for American businesses.

Senate Finance Committee Chairman Max Baucus (D-Mont.) has also held numerous hearings on tax reform, including a retrospective analysis of the 1986 reforms.

While a major restructuring of the tax code is unlikely prior to the election, it’s clear that everything is on the table. Though the specifics are still in doubt, tax reform will likely include lower corporate and individual tax rates, less itemized deductions and other tax benefits and a potential move to a territorial system of taxation.


Health Care Uncertainty
Much of the Patient Protection and Affordable Care Act of 2010 will not be implemented until 2014, but this year will provide more clarity regarding the law’s future. As senior financial executives continue to evaluate the options set forth in the law — including the requirement for companies with 50 or more employees to offer adequate health coverage or face penalties — the U.S. Supreme Court is expected to rule on the law’s constitutionality.

In addition, the Court will consider if finding the individual mandate unconstitutional would prevent the advance of the rest of the law’s requirements, since no severability provisions were written into the law that would have upheld the remaining provisions even if a portion was found unconstitutional. Oral arguments are expected to begin in March, and a decision could be reached by June 2012, just in time for the elections, which will also impact the law’s future.

Republican presidential candidates have pledged to have the law repealed if elected.


Dodd-Frank Act Implementation And Revision
Regulatory agencies operating under strained budgets missed numerous rulemaking deadlines in 2011 to carry out the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and, as a result, agencies will continue working into 2012 to implement the law.

Though many aspects of the Dodd-Frank Act create uncertainty — from the Volcker rule to the capital requirements on banks — senior financial executives whose organizations employ swaps to hedge business risk must pay careful attention to the final derivatives rules that impact corporate end users and are expected to be issued in 2012.

Though lawmakers explicitly exempted end users from central clearing requirements in Dodd-Frank, regulators have interpreted the law’s implicit exemption from margin requirements as providing the authority to impose margins on end users. As we wait for the final rules to be issued, FEI along with the Coalition for Derivatives End-Users, has worked with Congress in support of legislation that would clarify the margin exemption. Without such clarification, companies may have to divert critical resources away from business investment and job creation and sideline capital into margin accounts in order to hedge their risk.

The House of Representatives has actively worked to move end-user legislation, but the divided Senate has resisted legislation that would re-open provisions of Dodd-Frank. This year will give financial executives a better sense of the what they will face as the final rules are issued, but if the requirements are overly burdensome, a legislative fix may be the only solution — and one that may not be possible until after the 2012 elections.


Employer-Provided Retirement Plans
Retirement benefits are a vital part of many employer-provided plans. Recent findings from the Bureau of Labor Statistics found that employer-provided retirement plans were available to more than 70 percent of full-time employees. Yet, the ability to offer these — whether defined benefit pension plans or defined contribution plans (such as a 401(k) — may pose challenges this year.

Though historically low interest rates have been a necessary response to address the economic downturn, the low rates place pressures on pension plans and result in higher calculated plan liabilities. Adding further anxiety for organizations that continue to offer pension plans to their employees are proposals to significantly increase Pension Benefit Guaranty Corporation (PBGC) premiums.

Currently, Congress sets the amount PBGC charges to employers, but the Obama administration has proposed that PBGC be allowed to set its own premiums, and to a level high enough to raise $16 billion over the next 10 years. Though Congress has not yet signaled a desire to give up its jurisdiction to PBGC, it is likely that it may agree to raise premiums by several billion dollars.

Before completely losing hope on company pension plans, it is important to note that changes may be on the horizon for defined contribution plans as well. Various deficit reduction panels, including the president’s fiscal commission, have proposed to limit contributions to defined contribution retirement plans or to change the tax incentives that support these plans.

 
XBRL
In 2011, all companies that file financial statements with the U.S. Securities and Exchange Commission were required to use eXtensible Business Reporting Language tags. The SEC’s mandate started in 2009, when large accelerated filers (companies with public float greater than or equal to $5 billion) were required to tag their face financials with XBRL.

The XBRL mandate has been phased in over several years. With more than 10,000 additional companies starting their detailed tagging in 2012, CFOs will have to be diligent in ensuring that third-party vendors can handle the load and not jeopardize their SEC filing timelines.


Convergence of US GAAP And IFRS

FEI remains a consistent supporter of convergence to high-quality global standards achieved through robust due process. The SEC had indicated that by the end of 2011 it would make a determination on whether or not it will permit International Financial Reporting Standards for U.S. publicly held companies.

Near the end of 2011, SEC staff announced that a few additional months would be needed to finalize the report on findings they would be giving the commissioners to help them make the decision. The boards [Financial Accounting Standards Board and International Accounting Standards Board] continue to work together on convergence projects and hope to be finished with four major ones — Revenue Recognition, Leases, Financial Instruments and Insurance — by year end.


Private Company Accounting
In the fourth quarter of 2011, the Board of Trustees of the Financial Accounting Foundation released for public comment a new plan that was in response to the blue ribbon panel’s recommendations. Now, private companies await FAF’s decision on the direction of private company accounting. Comments on FAF’s proposal to create a Private Company Standards Improvement Council (PCSIC) are due Jan. 14, 2012.

Such a council would address the need for differential standards that would be more relevant and cost effective for private companies and provide more insight into the standard-setting process. Under the proposal, PCSIC would identify, propose, deliberate and formally vote on specific exceptions or modifications to U.S. generally accepted accounting principles for private companies.

Throughout the deliberative process, PCSIC would work closely with the FASB board, which would ratify proposed changes and integrate them into U.S. GAAP.
 

 
Marie N Hollein, President & CEO