Small Things Matter

On more than one occasion I have taken the FASB to task in this blog, so when they do something right it is only fair that I express some praise. The FASB has recently issued three exposure drafts that actually simplify accounting rules, disclosures and procedures. I talk briefly about each below.

Simplify Inventory Lower of Cost or Market (LCM) test – the FASB is proposing to change the “market” component to a single net realizable value calculation. They are proposing to get rid of floors and ceilings in the calculation which added complexity with no real benefit. Less calculations is good, eliminating calculations that do not materially change financial results 99.9999% of the time is even better.

Accounting for Cloud Computing costs – there have been rules for years on how sellers of cloud computing services should account for such services. The question is does the service include a separate deliverable of a software license or is the software license so integrated into the service they are considered a single unit of account for revenue recognition purposes. The FASB has essentially said those same rules apply to purchasers of cloud computing services. Some companies already followed this model by analogizing to the seller accounting, but other companies did not follow that accounting resulting in the dreaded “diversity of practice.” By adopting the standard the FASB will eliminate a difference that does not need to exist without adding a ton of work for most preparers of financial statements.

Eliminate Extraordinary Items – I could be cynical and say the FASB is finally facing up to reality. When was the last time you saw a company with an extraordinary item. The reality is the regulators got so picky on what was unusual AND infrequent that nothing seems to meet the definition. Actually I think the regulatory elimination of extraordinary items is why you have seen a proliferation of non-GAAP “adjusted” earnings and “adjusted” EPS numbers. Investors want to understand what is non-recurring and recurring in nature. Extraordinary items were supposed to handle that in the financial statements, but the regulators’ actions eliminated that option for preparers so we went outside GAAP to supply the information investors want. With the elimination of extraordinary items maybe we can then move onto a discussion of splitting the income statement up into something truly useful for investors. A place to start would be to look at non-GAAP disclosures in this area.

So the FASBs new targeted approach to improving GAAP looks to be a winner so far. These three exposure drafts appear to be truly useful improvements to GAAP and I for one want to recognize the FASB’s effort to make things better. Thanks FASB!

No Wonder We Can’t Keep Up

I was reading a publication produced by our auditor, Ernst & Young on all of the standard setting activity for 2012 and I realized I have good reason to feel like I can’t keep up with everything going on.

The FASB only issued 3 final standards (now called ASUs for all of us who grew up with FAS’s for all those years).  Of course, maybe it’s really 4 because they issued separate ASUs for technical corrections to the ASC in general and technical corrections to the SEC portion of the ASC, but who am I to quibble with my auditor on such things. Either way, not too bad so far, but the FASB also issued or worked actively on 12 exposure documents.  Now were starting to get up in the numbers.  Of course 12 documents would not be so bad if they covered specific topics related to different industries so everyone is not impacted by all 12, but that is not the case here.  We’re talking about messing with revenue leases and impairment of customer receivable which means just about every business that exists will be impacted by many of these proposed standards.  Of course it doesn’t stop there, the FASB launched the PCC to look into private company accounting issues and started two other projects on disclosures and going concern.  The EITF was also busy reaching 3 consensus opinions and exposing documents on 4 other issues.

Not to be outdone, the SEC issued 3 final rules including rules on reporting on conflict minerals (if you think you are not impacted, you may need to think again as some reports expect that thousands of companies – public and private – will be impacted by the reporting requirements).  The SEC also issued 16 proposed rules and other releases in 2012 and that doesn’t include any of the work on IFRS, XBRL or work to be done under the JOBS act.  The PCAOB also started to get busy again and issued one final auditing standard as well as one audit practice alert document.  The PCAOB also released 9 other documents outlining proposed rules or asking for input on concept releases.  These include the now infamous release on mandatory auditor rotation as well as an equally important release on potentially significant changes to the auditor report.

Of course the ASB also issued a new standard as well as several other documents and the GASB issued 4 new standards, 2 exposure drafts and at least 3 other significant documents.  The AICPA also issues its proposed framework for private company reporting and COSO issued 2 exposure drafts to revise its Internal Control framework which is the de facto internal control standard for 85% of public companies that have to comply with Sox section 404.

And that’s just the U.S. accounting and auditing standards.  It doesn’t include all of the IRS changes, the new developments in the valuation world (didn’t you know the SEC expects all of you public company preparers to be valuation experts now), and international standards for accounting from the IASB and auditing from the IAASB.  I must admit I have to laugh when people tell me they can’t get enough CPE done to maintain their license.  You could spend 140 hours on CPE and not keep up let alone only the 40 required in most jurisdictions. I want to look at them and ask, then how do you plan to keep your job because you are expected to know about all of these changes and more!

Eleven Principles of Effective Reporting

I was at the Professional Accountants in Business Committee (PAIB) of the International Federation of Accountants meeting last week.  The PAIB has a number of task forces providing help to PAIBs in areas like risk management and internal control, governance and ethics and performance management , but today I want to talk about a good practice guide on principles of business reporting that is under development.  An exposure draft of the report was issued last May with comments due last month.   While the comments will result in some changes to the guide, the eleven principles outlined in the exposure draft will remain intact.  The eleven principles are

  1. Committing to Effective Reporting Processes
  2. Determining Roles and Responsibilities
  3. Planning and Controlling the Reporting Process
  4. Engaging Stakeholders
  5. Defining the Reporting Content
  6. Selecting Frameworks and Standards
  7. Determining Reporting Processes
  8. Using Reporting Technology
  9. Analyzing and Interpreting Reported Information
  10. Obtaining Assurance and Providing for Accountability and Transparency
  11. Evaluating and Improving Reporting Processes

I can hear many of you saying; well those are all very obvious, tell me something I don’t know.  My answer to that is; if it is so obvious, why to so many of us and our companies violate these principles every day. 

How many of you are still producing critical reports via excel spreadsheets? Are you really using reporting technology appropriately?   How many of you have put together a project plan or a business case to improve reporting so critical decisions can be made with more accurate and timely information just to be told there are bigger priorities?  Is your company really committed to effective reporting processes?  When was the last time you actually asked the users of your reports what they really need?  Are you really engaging the stakeholders?

My point is that I think we can all use a reminder every now and then of what it really takes to do reporting – external and internal – right.  The eleven principles is a good place to start with that refresher.  If you are interested in this guide or any of the others that IFAC produces, they can be found at . Check it out, you might be surprised at the quality of the resources available to you.

Liquidity Disclosures

The FASB is at it again, issuing an Exposure Draft on potential new Liquidity Disclosures. Normally when I see such topics from the standard setters, my heart goes out to my colleagues in the banking and financial services sector, but this time the FASB is hitting up every business with new disclosure requirements.  The requirements for all business include a new “available funds table” that shows all liquid funds available to the entity and an “expected cash flow obligations table” that shows cash flow payment obligations including recorded and off-balance sheet commitments.     

I found the timing of this ED interesting for two reasons.  First, this ED is really part of the overall Financial Instruments project, but for some reason the Boards (the IASB is also working on the Financial Instruments project) decided to go ahead and release an exposure draft covering only these disclosure requirements and not wait to issue a more comprehensive document on the entire Financial Instruments project.  Second, the FASB had just initiated work on a Financial Statement Disclosure project which, if complete, would provide valuable insight into the benefit and cost of yet more disclosures.

In fact, looking at these disclosures, one has to wonder what is being gained.  Public companies are already required to give similar information as part of the SEC contractual obligations table and MD&A discussions on liquidity. Most companies, public or private already disclose information on the timing of recorded long-term debt payments in their footnotes, and the most significant off-balance sheet obligation – leases – already has requirements about disclosing future minimum lease payment obligations by year.  The FASB even appears to acknowledge these potential overlaps by specifically asking about it in the questions they ask respondents to address in their comment letters. 

On first blush, the difference may be that the FASB wants management to base the disclosures on “expected maturities” rather than “contractual maturities.”  To put that in simple terms think of debt with a December, 2015 contractual payoff date.  Currently any reporting would be based on this hard and fast contractual date.  Under the proposed approach, management needs to take into account any potential plans to refinance the debt and possible defer the payment period.  It is also possible management will redeem the debt early and that would need to be reflected as well.  Can you imagine the fun we preparers will have debating the expected maturity timing with our auditors? 

Whether the FASB should have waited until it completed its Disclosure project before issuing a proposal for yet more disclosures is a mute point now that the document has been issued.  You have until September 25 to let the FASB know your feelings on this one.  I doubt it will get the number of letters that Revenue Recognition and Leases generated, but maybe that is the problem.  Everyone complains about disclosure overload, but when it comes time to make a point to the very institution causing the overload, no one seems to want to take the time to let them know enough is enough.

CPA New Year’s Resolutions

It’s the time of year that everyone is making New Year’s resolutions so I thought it would be appropriate to come up with a list of resolutions for CPAs in Business and Industry to make for the New Year.

10. Stop distributing at least one report currently produced and see who notices.

9. Read at least one business related book during the year.  You can’t advance your career if you don’t advance your knowledge.

8. Volunteer to help out a not-for-profit.  They could really use your financial expertise.

7. See to it that your company comments on at least 2 exposure drafts. There are plenty to choose from in the coming year with FASB exposure drafts on revenue recognition and leasing, FAF’s proposal to (barely) change the process for private company standard setting, PCAOB exposure drafts on auditor’s reports and independence, the COSO exposure draft on the Internal Control Integrated Framework and potential SEC exposure drafts on the incorporation of IFRS.

6. Change at least one accounting process – automate it, streamline it or just plain eliminate it!

5. Vote in November or don’t complain about the results.

4. Volunteer for at least one position in a professional organization, committee or task force.  This is your profession.  The only way it will continue to be your profession is if you get involved.

3. Get involved in at least one social media outlet – be it Twitter, LinkedIn or your own blog – do something!

2. Do one thing to go green, and I don’t mean heading to Savannah on St. Patrick’s Day.

1. Take all your required CPE before December and make sure that it will help you do your job better.

COSO IC Framework Revision Update

The COSO Advisory Committee met again earlier this month. At this meeting we covered the final pre-exposure draft of the Internal Control Integrated Framework and the first draft of the Guidance document over Internal Control over External Financial Reporting .

The Internal Control Integrated Framework exposure draft was released last week and is now open for comment.  You can access the exposure draft at  The document is lengthy, but it will be well worth your time.  Proper controls are critical to a well functioning organization and the framework update should help you ensure your organization has a proper control structure in place. 

You can submit comments in two ways.  Traditional letters will be accepted and published on the COSO website.  You will also be able to access an online tool to submit your comments.  All of the online comments will be summarized and published as a single document so there will be some level of anonymity if that is what you are looking for in submitting comments.  The comment period runs through March 31 so, while it is a busy time of year, you have plenty of time to get your comments in.

The second document the COSO Advisory Committee is working on is a guidance document on how to implement the Internal Control Integrated Framework over External Financial Reporting.  This document is based on the 2006 guidance document on implementing the Internal Control Framework over financial reporting for small entities, but now it will cover all sizes of companies. 

As the team reviewed the 2006 guidance we realized that even though the document was designed with small companies in mind, much of the guidance was applicable to entities of all sizes.  The major reason for this is that the guidance focuses on the entire Internal control process as well as the point of internal control which is managing risk.  The small versus large entity differences are most often highlighted in control activities which is often view by many CPAs as “internal control.”  The reality is that is only a part of an internal control system is composed of control activities.  Other critical components include Control Environment, Risk Assessment, Information and Communications and Monitoring Activities.

The guidance document will include a general guidance section as well as illustrative approaches and examples covering all five of the Internal Control Components.  As such it should just as useful to someone updating an entire Internal Control Process as to someone who wants to focus on just one area to make improvements.  The Guidance document will also be released for public exposure during the summer of 2012 with both documents being finalized by the end of the year. 

I often hear comments from people about how the FASB, SEC and now COSO are doing things that to them that don’t make sense.  This is your opportunity to make sure that doesn’t happen.  Get involved in the comment process.  Your comments will be reviewed and considered.  It’s the only way to make sure the best possible document comes out in the end.

A Week Off–Not Really

If you have kids you’ve probably heard the statement, “I can’t wait until I’m done with school and won’t have any homework any more.”  I’m sure there are some of you in college thinking that once you are done your studies, you’ll get to do your 9-5 and then the rest of the time is yours.  That will work if you want to be a staff accountant the rest of your life, but if you want to go further than that, it takes a little more than the simple 9-5.

According to my official time record, I was on vacation all of last week.  Indeed, I didn’t set foot in the office and I did travel 870 miles with my family back to Athens to spend Thanksgiving with my Dad and my sister’s family.  We had a great time eating turkey, watching football and going out at midnight to hit those early sales and pick up a few bargains. But having fun with the family wasn’t the only thing I did. 

First off, I had two conference calls early in the week that I had to attend, including one, while I was in the middle of Mississippi on I-20.  Fortunately, I didn’t have any follow up work from those calls.  More time was spent reading two large exposure drafts.  The first was the revised revenue recognition exposure draft from the FASB.  At 218 pages, it took several hours to get through the document and list some initial thoughts about what works and what doesn’t.  The second document was the preliminary draft of the Internal Control over External Financial Reporting guidance document. 

The guidance document is the second of two documents that will be issued by COSO in the coming months.  It’s a companion document to the revised Internal Control Integrated Framework which will be issued as an exposure draft in December.  At 171 pages it was a shorter than the revenue recognition exposure draft, but it still took a long time to read considering I was providing editorial comments throughout the document as well.   

Fortunately I made it through both documents, but as I looked up from my review and saw my daughter working on her U.S. History homework, I realized that the homework never really ends.  It just changes form.