Notice: Progress Report of The SEC Advisory Committee On Improvements To Financial Reporting

Thursday,
February 28, 2008
Part III
Securities and
Exchange
Commission
Progress Report of the SEC Advisory
Committee on Improvements to Financial
Reporting; Notice
jlentini on PROD1PC65 with NOTICES2
VerDate Aug<31>2005 19:07 Feb 27, 2008 Jkt 214001 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:\FR\FM\28FEN2.SGM 28FEN2
10898 Federal Register / Vol. 73, No. 40 / Thursday, February 28, 2008 / Notices
SECURITIES AND EXCHANGE (202) 551–5300, Office of the Chief Appendices

COMMISSION Accountant, Securities and Exchange A—Separate Statement of Mr. Wallison
Commission, 100 F Street, NE., B—Examples of Substantive Complexity
[Release Nos. 33–8896; 34–57331; File No. C—Committee Members, Official
Washington, DC 20549–6561.
265–24] Observers, and Staff
SUPPLEMENTARY INFORMATION: At the
Progress Report of the SEC Advisory request of the SEC Advisory Committee SEC Advisory Committee on
Committee on Improvements to on Improvements to Financial Improvements to Financial Reporting,
Financial Reporting. Reporting, the Commission is Washington, DC 20549
publishing this release soliciting public February 14, 2008
AGENCY: Securities and Exchange comment on the Committee’s progress
Commission. report. The full text of this progress The Honorable Christopher Cox
ACTION: Request for comments. report is attached and also may be found Chairman
on the Committee’s web page at http:// Securities and Exchange Commission
SUMMARY: The Advisory Committee is 100 F Street, NE., Washington, DC
www.sec.gov/about/offices/oca/
publishing its progress report and is acifr.shtml. The progress report contains 20549–1070
soliciting public comment. The progress the Committee’s developed proposals, Dear Chairman Cox:
report contains the Committee’s conceptual approaches, and matters for It is my pleasure and privilege to
developed proposals, conceptual future considerations on improving the present to you, and the other
approaches, and matters for future financial reporting system in the United Commissioners, on behalf of the
considerations on improving the States. This progress report has been Advisory Committee on Improvements
financial reporting system in the United approved for issuance by the to Financial Reporting, a progress report
States. Committee. It does not necessarily of the Committee’s developed proposals,
DATES: Comments should be received on reflect any position or regulatory agenda conceptual approaches, and currently
or before March 31, 2008. of the Commission or its staff. identified matters for future
ADDRESSES: Comments may be All interested parties are invited to consideration.
submitted by any of the following comment on the enclosed progress Our Committee has worked diligently
methods: report. Comments on the progress report to provide an interim progress report to
are most helpful if they (1) indicate the you. The developed proposals in our
Electronic Comments specific paragraph and/or page number progress report are proposals that we
• Use the Commission’s Internet to which the comments relate, (2) believe could be implemented by the
comment form (http://www.sec.gov/ contain a clear rationale, and (3) include Commission, its staff, or other bodies, as
rules/other.shtml); or any alternative(s) the Committee should appropriate. These 12 proposals are
• Send an e-mail message to rule- consider. summarized in the executive overview
comments@sec.gov. Please include File Authority: In accordance with section 10(a) of our progress report. Conceptual
Number 265–24 on the subject line. of the Federal Advisory Committee Act, 5 approaches represent our initial views,
U.S.C. App. 1, § 10(a), James L. Kroeker, which are based on discussions on a
Paper Comments
Designated Federal Officer of the Committee, particular subject, but which require
• Send paper comments in triplicate has approved publication of this release at additional vetting before formalization
to Nancy M. Morris, Federal Advisory the request of the Committee. The solicitation into a developed proposal. Matters for
Committee Management Officer, of comments is being made solely by the future consideration are areas in which
Securities and Exchange Commission, Committee and not by the Commission. The
Commission is merely providing its facilities deliberations and research have not yet
100 F Street, NE., Washington, DC to assist the Committee in soliciting public begun. After the conclusion of the
20549–1090. comment from the widest possible audience. Committee’s work later this year, we
All submissions should refer to File No. Dated: February 14, 2008.
will issue a final report with written
265–24. This file number should be recommendations.
Nancy M. Morris,
included on the subject line if e-mail is We commend the Commission for its
Committee Management Officer. initiative in creating the Committee.
used. To help us process and review
your comment more efficiently, please Appendix You have been generous in furnishing
use only one method. The Commission staff and other resources. We would like
Progress Report of the Advisory
will post all comments on its Web site to thank the staff members whose
Committee on Improvements to
(http://www.sec.gov/about/offices/oca/ participation was invaluable during this
Financial Reporting to the United
acifr.shtml). Comments also will be phase of the Committee’s work. These
States Securities and Exchange
available for public inspection and include from the Commission staff:
Commission
copying in the Commission’s Public Conrad Hewitt
Reference Room, 100 F Street, NE., February 14, 2008 John W. White
Washington, DC 20549, on official Progress Report of the Advisory James Daly
business days between the hours of 10 Committee on Improvements to Bert Fox
a.m. and 3 p.m. All comments received Financial Reporting to the United Stephanie Hunsaker
will be posted without change; we do States Securities and Exchange Nili Shah
not edit personal identifying Commission Brett Williams
information from submissions. You James Kroeker
should submit only information that Table of Contents Wayne Carnall
you wish to make available publicly. Transmittal Letter Adam Brown
Executive Overview Todd E. Hardiman

FOR FURTHER INFORMATION CONTACT:
Introduction Shelly Luisi
Questions about this release should be Chapter 1: Substantive Complexity
referred to James L. Kroeker, Deputy Chapter 2: Standards-Setting Process
Amy Starr
Chief Accountant, or Shelly C. Luisi, Chapter 3: Audit Process and Compliance These also include Russell Golden,
Senior Associate Chief Accountant, at Chapter 4: Delivering Financial Information Holly Barker and Christopher Roberge
Federal Register / Vol. 73, No. 40 / Thursday, February 28, 2008 / Notices 10899
from the Financial Accounting the SEC this progress report of the U.S.-based accounting regime to a global
Standards Board and Sharon Virag from Committee’s developed proposals, accounting system.
the Public Company Accounting conceptual approaches, and currently This executive overview highlights
Oversight Board. identified matters for future the key themes that tie together the
We also want to thank our Official consideration and to publish the chapters in this progress report, with a
Observers whose participation and progress report in order to encourage few examples to illustrate each theme.5
counsel have been invaluable to the public feedback. Developed proposals The main themes are:
Committee during this time: are proposals that we believe could be 1. Increasing emphasis on the investor
Robert Herz implemented by the Commission, its perspective in the financial reporting
Kristen Jaconi staff,3 or other bodies, as appropriate; system.
Mark Olson these are summarized in the second part 2. Consolidating the process of setting
Charles Holm of this executive overview. Conceptual and interpreting accounting standards.
Phil Laskawy approaches represent our initial views, 3. Promoting the design of more
which are based on discussions on a uniform and principles-based
We look forward to working with the
particular subject, but which still accounting standards.
Committee staff and Official Observers 4. Creating a disciplined framework
in the coming months as we develop our require additional vetting before
formalization into a developed proposal. for the increased use of professional
final report and recommendations. judgment.
Respectfully submitted on behalf of Matters for future consideration are
5. Taking steps to coordinate
the Committee, areas in which deliberations and
generally accepted accounting
/s/ Robert C. Pozen research have not yet begun.
principles in the U.S. (GAAP) with
lllllllllllllllllll This progress report represents our
international financial reporting
Robert C. Pozen work to date, which has included four
standards (IFRS).
Committee Chairman public meetings where these topics were
cc: Commissioner Paul S. Atkins deliberated by the full Committee. In I. Themes
Commissioner Kathleen L. Casey generating this progress report, we also
I.A. Investor Perspective
Members and Official Observers of the considered all of the public comments
received to date on our work.4 All of the The current system of financial
Committee reporting, including the process by
Conrad Hewitt developed proposals, conceptual
approaches and matters for future which financial reporting standards are
John White
consideration were adopted developed, attempts to balance the
James L. Kroeker
unanimously (except for one dissenting interests of relevant parties such as
Nancy M. Morris
vote on one proposal, as noted herein, preparers, auditors, and investors. In
Executive Overview 1 which resulted in one separate practice, however, the system has
statement from Mr. Wallison, attached sometimes been more responsive to the
In July 2007, the U.S. Securities and interests of preparers and auditors than
Exchange Commission (SEC or as appendix A of this progress report).
We explain each of our developed to the needs of investor groups.
Commission) chartered the Advisory We believe that the financial reporting
Committee on Improvements to proposals, conceptual approaches and
matters for future consideration in the system should give pre-eminence to the
Financial Reporting (Committee). The needs of investors, while not ignoring
Committee’s assigned objective is to body of this progress report. The
progress report is organized by the the interests of other relevant parties. In
examine the U.S. financial reporting this regard, we propose that investors be
system in order to make topics considered by the four
subcommittees that were created in better represented on the Financial
recommendations intended to increase Accounting Standards Board (FASB)
the usefulness of financial information order to research, develop, and propose
preliminary recommendations to the and the Financial Accounting
to investors,2 while reducing the Foundation (FAF). We also propose that
complexity of the financial reporting full Committee for discussion and
decision-making. Thus, chapter one is the determination of how to correct
system to investors, companies, and financial statement errors should be
auditors. on substantive complexity; chapter two
on the standards-setting process; based on the needs of current investors,
After the conclusion of our work, we who should, in any event, be provided
will issue a final report with written chapter three on audit process and
compliance; and chapter four on with more disclosure regarding such
recommendations to the Chairman of errors.
the SEC. In order to maximize our effect, delivery of financial information. Later
in 2008, we will also identify and With regard to the delivery of
we intend to issue a limited number of financial information, we propose that
focused recommendations that address analyze some of the issues involved
with the potential movement from a the SEC clarify certain legal issues
acknowledged problem areas and that related to the use of company websites
we believe can be adopted without as a vehicle for providing useful
3 We note that some of our developed proposals,
legislation, rather than attempting to information to different types of
conceptual approaches, and matters for future
address all perceived shortcomings in considerations may require SEC action, while investors in order to facilitate creative
the financial reporting system. others may be implemented by SEC staff. We have, methods to present such information,
All Committee members present at however, generally adopted a convention of
such as in tiered formats. We also
our February 11, 2008 meeting voted addressing these areas to the SEC for convenience.
We leave the determination of whether the propose a gradual phase-in of
unanimously to issue to the Chairman of proposals require SEC or SEC staff action to the interactive disclosure technology (i.e.,
discretion of the SEC and its staff. XBRL-tagging) to facilitate the ability of
1 This report has been approved by the Committee
4 Comments to the Committee are available at

and reflects the views of a majority of its members.
investors to more easily access
http://www.sec.gov/comments/265-24/265-
It does not necessarily reflect any position or 24.shtml. We have and continue to welcome comparative arrays of company
regulatory agenda of the Commission or its staff. feedback at any time from investors, registrants,
2 The term ‘‘investor(s)’’ is used throughout this auditors, and others on our work. Information on 5 We wish to emphasize that the examples we
progress report to refer to investors, creditors, rating how to submit comments is available at: http:// give are illustrative only. We do not mean to imply
agencies, and other users. www.sec.gov/about/offices/oca/acifr.shtml. any order of priority.
information, while minimizing the of existing accounting standards. The groupings designed to help investors
burdens on preparers (especially smaller FASB should perform these functions better understand the different sources
companies). A phase-in approach would with a high degree of independence, but of changes in a company’s income—for
allow for enhanced understanding of the it should coordinate closely with the example, by separating cash or accrued
technology, proven use of the new SEC, including through the proposed earnings from changes resulting from
XBRL U.S. GAAP Taxonomy, and Agenda Advisory Committee. When it is fluctuations in the fair value of assets
further development of tagging and necessary for the SEC to issue broadly such as publicly-traded bonds.
rendering software. applicable interpretations, we are More broadly, we will consider
considering the manner in which the recommending that the FASB design
I.B. Setting Standards and Interpretative SEC develops and communicates those accounting standards with more general
Process interpretations. Nevertheless, we believe principles and fewer detailed rules in
The current financial reporting system the SEC should continue to provide order to prevent the manipulation of
is characterized by a large volume of comments on registrant-specific matters, technical requirements to reach pre-
standards, including individual but these comments should not be conceived accounting results.
standards that are too long or viewed as broadly applicable. We I.D. Professional Judgment
complicated; interpretations; and propose that the authoritative source of
detailed application guidance from a GAAP should be limited, as much as The preparation and audit of financial
variety of public and private sources. possible, to the contents of the FASB’s statements have always required the use
This volume and complexity have led to codification project, which will be of judgment. The recent evolution of
concerns about whether the FASB is updated on a regular basis. accounting requires even more
following appropriate priorities within a judgment—for example, the more
I.C. Design of Standards frequent use of fair value involves
consistent conceptual framework in
adopting standards, and whether GAAP contains many detailed rules estimates of value that may be less
investors, preparers, and auditors can with several industry-specific objectively determined than historical
efficiently find the complete body of exceptions and alternative accounting cost measures. Similarly, the revised
authoritative literature on an accounting policies for the same transaction. auditing standards recently issued by
issue. Moreover, some of these rules have all- the PCAOB emphasize the need for
While the FASB has made or-nothing results, which stem from professional judgment in taking a risk-
considerable progress in addressing bright line tests. This combination based approach to performing internal
both concerns, we believe that certain allows companies and auditors to reach control audits.
a technically compliant conclusion that As noted above, we are about to study
measures are needed to enhance the
may be inconsistent with the underlying the merits of moving in the direction of
process for adopting new standards and
economic substance of the transaction, more principles and fewer detailed
issuing interpretations of existing
thereby potentially undermining an rules. Also, as mentioned below,
standards.6 For example, we propose
investor’s complete and accurate international accounting standards, as
that the FASB should set explicit
understanding of the transaction. For they exist today, contain less detailed
priorities based on consultation with an
example, transactions involving the guidance and fewer rules than GAAP.
Agenda Advisory Group, which would
right to use an asset for a promise to pay Detailed rules not only increase the
include representatives of the SEC and
a series of payments in the future can be complexity of the financial reporting
the Public Company Accounting
kept off a company’s balance sheet if system, but they also permit the
Oversight Board (PCAOB), as well as
detailed rules are followed. structuring of transactions to achieve a
representatives from the investor, In response, we propose that the particular accounting result, even if the
preparer, and auditor communities. FASB move away from industry-specific results are inconsistent with the
Further, the FASB should fully explain guidance to activity-based guidance economic substance of the transactions
and expose for comment, in documents (e.g., from banking as an industry to or the underlying purposes of the rules.
containing proposed significant new lending as an activity by any company) In recognition of the increasing use of
standards, its process for conducting and strive to reduce the number of accounting judgment, we are making
cost-benefit studies, including field alternative ways available under GAAP two developed proposals. First, we
interviews and testing before finalizing to account for the same transaction. We propose asking the FASB to conduct
any significant new accounting also plan to consider, among other post-adoption reviews of significant
standard. Also, we propose that the possibilities, the feasibility of new standards, generally within one to
FASB, with input from the Agenda proportionate recognition, rather than two years of their effective dates to
Advisory Group, should conduct all-or-nothing results, to better reflect ascertain the degree of diversity in
periodic assessments of existing the rights conveyed by agreements and practice in using judgment when
standards to determine if they are obligations incurred. applying those standards. If that
operating as intended. Some believe an increased use of fair diversity is too broad or otherwise
With the implementation of these value measurements will better portray inappropriate, we would expect the
proposals, we propose that the FASB the current valuation of past FASB to amend the standard or issue
should be, to the extent practicable, the transactions and improve financial interpretative guidance.
sole standards-setter for GAAP and the reporting. Others believe the increased Second, we propose that the SEC and
primary source of broad interpretations use of fair value measurements will PCAOB adopt frameworks for reviewing
6 We recognize that the FASB has processes that
cause unnecessary volatility, will the exercise of judgment. The
are moving in the direction of the objectives
decrease the reliability of financial framework applicable to accounting
statements, and will only increase judgments would require a disciplined
underlying our interim developed proposals. We

look forward to further discussion with the FASB investor confusion. We plan to process, including the identification of
to evaluate whether additional improvements deliberate whether, among other available alternatives, analysis of the
would more effectively achieve the desired
objectives. We plan to consider this dialogue in
approaches, to support the FASB’s relevant literature, review of the
making final recommendations for process project to consider changing the income pertinent facts, and a well-reasoned
enhancements to the U.S. standards-setter. statement format into two or more explanation of the conclusions—all
documented contemporaneously with 1. GAAP should be based on business have pre-eminence. To achieve that pre-
the making of the accounting judgment. activities,7 rather than industries. As eminence in standards-setting, the SEC
We believe adoption of these such, the SEC should recommend that should encourage the following
frameworks would encourage executives any new projects undertaken jointly or improvements:
and auditors to follow a disciplined separately by the FASB be scoped on • Add investors to the FAF to give
process in making judgments, and the basis of business activities rather more weight to the views of different
thereby give investors more confidence than industries. Any new projects types of investors, both large and small.
in the ways in which accounting and should include the elimination of • Give more representation on both
auditing judgments are being exercised. existing industry-specific guidance in the FASB and the FASB staff to
relevant areas as a specific objective of experienced investors who regularly use
I.E. Global Convergence financial statements to make investment
those projects, unless, in rare
At present, U.S. companies follow circumstances, retaining industry decisions to ensure that standards-
GAAP; in most other countries, guidance can be justified on the basis of setting considers fully the usefulness of
publicly-traded companies are cost-benefit considerations (discussed in the resulting information. (Chapter 2—
increasingly following IFRS as adopted section II.A of chapter 1). developed proposal 2.1)
by the International Accounting The SEC should also recommend that, 4. The SEC should assist the FAF with
Standards Board (IASB). We support the in conjunction with its current enhancing its governance of the FASB,
long-term goal of converging GAAP with codification project, the FASB add a as follows:
IFRS in order to reduce accounting costs project to its agenda to remove or • By encouraging the FAF to develop
to investors and others in an minimize existing industry-specific performance metrics to assess the
increasingly global business guidance that conflicts with generalized FASB’s adherence to the goals in its
environment. But we recognize that GAAP, taking into account the pace of mission statement, objectives, and
there are various paths to convergence, convergence efforts.8 (Chapter 1— precepts and to improve its efficiency.
and it may take years for full developed proposal 1.1) • By supporting the FAF’s changes
convergence to be achieved. Therefore, 2. GAAP should be based on a outlined in its Request for Comments on
we believe that it is quite useful to presumption that formally promulgated Proposed Changes to Oversight,
propose enhancements to the financial alternative accounting policies should Structure and Operations of the FAF,
reporting system in the U.S. not exist. The SEC should recommend FASB and GASB, with minor
Later in 2008, we will identify and that any new projects undertaken jointly modifications regarding composition of
analyze some of the issues to be or separately by the FASB not provide the FAF and the FASB, as proposed in
resolved in the move toward global additional optionality, unless, in rare section II of chapter 2, and agenda-
convergence of accounting standards. At circumstances, it can be justified. Any setting, as proposed in section IV of
this time, we note that the principles new projects should include the chapter 2.
elimination of existing alternative • By encouraging the FAF to amend
contained in IFRS are less encumbered
accounting policies in relevant areas as the FASB’s mission statement, stated
by detailed rules than GAAP;
a specific objective of those projects, objectives, and precepts to emphasize
accordingly, GAAP will probably need
unless, in rare circumstances, the that an additional goal should be to
to become less rules-based in order to
optionality can be justified. (Chapter 1— minimize avoidable complexity.
promote the goal of global convergence.
developed proposal 1.2) (Chapter 2—developed proposal 2.2)
We also note that IFRS has little
3. Additional investor representation 5. The SEC should encourage the
industry-specific guidance, and we
on standards-setting bodies is central to FASB to further improve its standards-
encourage the IASB to continue in this
improving financial reporting. Only if setting process and timeliness, as
manner, consistent with our proposal
investor perspectives are properly follows:
that the FASB issue activity-based • Create a formal Agenda Advisory
standards rather than industry-specific considered by all parties will the output
of the financial reporting process meet Group that includes strong
accounting standards. representation from investors, the SEC,
On the other hand, IFRS contains a the needs of those for whom it is
primarily intended to serve. Therefore, the PCAOB, and other constituents,
number of alternative accounting such as preparers or auditors, to make
policies for the same activity, and there the perspectives of investors should
recommendations for actively managing
are political pressures to add exceptions U.S. standards-setting priorities.
7 As discussed in section II.B of chapter 1
in certain countries. As part of the effort regarding management intent, we have not taken a • Refine procedures for issuing new
to promote global convergence, we urge position as to whether intent is an appropriate basis standards by: (1) Implementing investor
the IASB to continue to reduce the of accounting. Similarly, we express no view on pre-reviews designed to assess
number of alternative accounting whether intent provides a meaningful distinction
between business activities.
perceived benefits to investors, (2)
policies currently available and to resist 8 Some constituents understand ‘‘convergence’’ to enhancing cost-benefit analyses, and (3)
the political pressures for country mean that GAAP and IFRS (as published by the requiring improved field visits and field
exceptions. IASB) will eventually be harmonized, at which tests.
II. Summary of Developed Proposals
point no substantive differences will exist between • Improve review processes for new
the two bodies of accounting literature. Others
understand it to mean a discrete transition from standards by conducting post-adoption
Summarized below are our developed GAAP to IFRS at a specified date without respect reviews of every significant new
proposals based on our work to date. to whether the two bodies of literature are standard, generally within one to two
These developed proposals are substantially harmonized. The timing of these two years of its effective date, to address
discussed in greater detail in the approaches may differ, which would likely impact
the prioritization of this proposal to eliminate interpretive questions and reduce the
remainder of this progress report. These diversity of practice in applying the
existing U.S. industry-specific guidance on the

developed proposals are numbered FASB’s agenda. In either case, we believe industry- standard, if needed.
consecutively in this executive specific guidance should be substantially • Improve processes to keep existing
overview, with a reference in eliminated prior to convergence—either as a
component of the convergence plan, or by
standards current and to reflect changes
parentheses to their position in the body establishing a specified date after which the use of in the business environment by
of the report. industry-specific guidance would be prohibited. conducting periodic assessments of
existing standards. (Chapter 2— materiality. (Chapter 3—developed be given in implementing any

developed proposal 2.3) proposal 3.1) framework to ensure that the framework
6. The number of parties that either 8. The FASB or the SEC, as does not limit the ability of auditors and
formally or informally interprets GAAP appropriate, should issue guidance on regulators to ask appropriate questions
and the volume of interpretative how to correct an error consistent with regarding judgments and take actions to
implementation guidance should the principles outlined below: require correction of unreasonable
continue to be reduced. The SEC should • Prior period financial statements judgments.
coordinate with the FASB to clarify should only be restated for errors that The proposed framework applicable
roles and responsibilities regarding the are material to those prior periods. to accounting-related judgments would
issuance of interpretive implementation • The determination of how to correct include the choice and application of
guidance, as follows: a material error should be based on the accounting principles, as well as the
• The FASB Codification, a draft of needs of current investors. For example, estimates and evaluation of evidence
which was released for verification on a material error that has no relevance to related to the application of an
January 16, 2008, should be completed a current investor’s assessment of the accounting principle. We believe that a
in a timely manner. In order to fully annual financial statements would not framework that is consistent with the
realize the benefits of the FASB’s require restatement of the annual principles outlined in this developed
codification efforts, the SEC should financial statements in which the error proposal to cover judgments made by
ensure that the literature it deems to be occurred, but would need to be auditors based on the application of
authoritative is integrated into the FASB disclosed in an appropriate document, PCAOB auditing standards would be
Codification to the extent possible, or and, to the extent that the error remains very important and would be beneficial
separately re-codified, as necessary. uncorrected in the current period, to investors, preparers, and auditors.
• To the extent practical, going corrected in the current period. Therefore, we propose that the PCAOB
forward, there should be a single • There may be no need for the filing develop a professional judgment
standards-setter for all authoritative of amendments to previously filed framework for the application and
accounting standards and interpretive annual or interim reports to reflect evaluations of judgments made based on
implementation guidance that are restated financial statements, if the next PCAOB auditing standards. (Chapter 3—
applicable to a particular set of annual or interim period report is being developed proposal 3.4)
accounting standards, such as GAAP or filed in the near future and that report 11. The SEC should, over the long-
IFRS. For GAAP, the FASB should will contain all of the relevant term, mandate the filing of XBRL-tagged
continue to serve this function. To that information. financial statements after the
end, the SEC should only issue broadly • Restatements of interim periods do satisfaction of certain preconditions
applicable interpretive implementation not necessarily need to result in a relating to: (1) Successful XBRL U.S.
guidance in limited situations (see restatement of an annual period. GAAP Taxonomy testing, (2) capacity of
section VI of chapter 2). • All errors, other than clearly reporting companies to file XBRL-tagged
• All other sources of interpretive insignificant errors, should be corrected financial statements using the new
implementation guidance should be no later than in the financial statements XBRL U.S. GAAP Taxonomy on the
considered non-authoritative and of the period in which the error is SEC’s EDGAR system, and (3) the ability
should not be required to be given more discovered. All material errors should of the EDGAR system to provide an
credence than any other non- be disclosed when they are corrected. accurately rendered version of all such
authoritative sources that are evaluated • The current disclosure during the tagged information. The SEC should
using well-reasoned, documented period in which the restatement is being phase in XBRL-tagged financial
professional judgments made in good prepared, about the need for a statements as follows:
faith. (Chapter 2—developed proposal restatement and about the restatement • The largest 500 domestic public
2.4) itself, is not consistently adequate for reporting companies based on
7. The FASB or the SEC, as the needs of investors and should be unaffiliated market capitalization
appropriate, should issue guidance enhanced. (Chapter 3—developed (public float) should be required to
reinforcing the following concepts: proposal 3.2) furnish to the SEC, as is the case in the
• Those who evaluate the materiality 9. The FASB or the SEC, as voluntary program today, a document
of an error should make the decision appropriate, should develop and issue prepared separately from the reporting
based upon the perspective of a guidance on applying materiality to companies’ financial statements that are
reasonable investor. errors identified in prior interim periods filed as part of their periodic Exchange
• Materiality should be judged based and how to correct these errors. This Act reports. This document would
on how an error affects the total mix of guidance should reflect the following contain the following:
information available to a reasonable principles: Æ XBRL-tagged face of the financial
investor. • Materiality in interim period statements.9
• Just as qualitative factors may lead financial statements must be assessed Æ Block-tagged footnotes to the
to a conclusion that a quantitatively based on the perspective of the financial statements.10
small error is material, qualitative reasonable investor. • Domestic large accelerated filers (as
factors also may lead to a conclusion • When there is a material error in an defined in SEC rules, which would
that a quantitatively large error is not interim period, the guidance on how to include the initial 500 domestic public
material. The evaluation of errors correct that error should be consistent reporting companies) should be added
should be on a ‘‘sliding scale.’’ with the principles outlined in
The FASB or the SEC, as appropriate, developed proposal 8 above. (Chapter 9 To allow this first phase, the SEC EDGAR
should also conduct both education 3—developed proposal 3.3) system must permit submissions using the new
sessions internally and outreach efforts 10. The SEC should adopt a judgment XBRL U.S. GAAP Taxonomy.
10 We understand that tagging beyond the face of
to financial statement preparers and framework for accounting judgments.
the financial statements and block-tagging of
auditors to raise awareness of these The PCAOB should also adopt a similar footnotes, such as granular tagging of footnotes and
issues and to promote more consistent framework with respect to auditing non-financial data, may require significant effort
application of the concept of judgments. Careful consideration should and would involve a significant number of tags.
to the category of companies, beginning Committee’s assigned objective is to become a burdensome compliance
one year after the start of the first phase, examine the U.S. financial reporting exercise with decreasing relevance to
required to furnish XBRL-tagged system in order to make investors. This effect can be attributed,
financial statements to the SEC. recommendations intended to increase in part, to: (1) The evolution of new
• Once the preconditions noted above the usefulness of financial information business strategies and financing
have been satisfied and the second to investors,13 while reducing the techniques that stretch the limits of
phase-in period has been implemented, complexity of the financial reporting what the traditional reporting
the SEC should evaluate whether and system to investors, companies, and framework can effectively convey, and
when to move from furnishing to the auditors. (2) an overly litigious culture that,
SEC to the official filing of XBRL-tagged More specifically, our charter arguably, results in financial reporting
financial statements with the SEC for identifies the following areas of inquiry: designed as much to protect against
the domestic large accelerated filers, as • The current approach to setting liability as to inform investors. As a
well as the inclusion of all other financial accounting and reporting result, we believe the disconnect
reporting companies, as part of a standards, including: (1) The principles- between current financial reporting and
company’s Exchange Act periodic based versus rules-based standards, (2) the information necessary to make
reports. (Chapter 4—developed proposal the inclusion within standards of sound investment decisions has become
4.1) 11 exceptions, bright lines, and safe more pronounced.
12. The SEC should issue a new harbors, and (3) the process for A key factor often cited as driving this
comprehensive interpretive release providing timely guidance on disconnect is complexity, which has
regarding the use of corporate Web sites implementation issues and emerging rarely been defined in the context of
for disclosures of corporate information, issues. financial reporting. We have developed
which addresses issues such as liability • The current process of regulating and applied the following definition of
for information presented in a summary compliance with accounting and complexity in this context to guide our
format, treatment of hyperlinked reporting standards. deliberations:
information from within or outside a • The current system for delivering
Definition of Complexity
company’s Website, treatment of non- financial information to investors and
GAAP disclosures and GAAP accessing that information. The state of being difficult to
reconciliations, and clarification of the • Other environmental factors that understand and apply. Complexity in
public availability of information drive avoidable complexity, including financial reporting refers primarily to
disclosed on a reporting company’s Web the possibility of being second-guessed, the difficulty for:
site. the structuring of transactions to 1. Investors to understand the
Industry participants should achieve an accounting result, and economic substance of a transaction or
coordinate among themselves to whether there is a hesitance by event and the overall financial position
develop uniform best practices on uses professionals to exercise professional and results of a company.
of corporate websites for delivering judgment in the absence of detailed 2. Preparers to properly apply
corporate information to investors and rules. generally accepted accounting
the market. (Chapter 4—developed • Whether there are current principles in the U.S. (GAAP) and
proposal 4.2) accounting and reporting standards that communicate the economic substance of
* * * * * do not result in useful information to a transaction or event and the overall
We believe publication of this investors, or impose costs that outweigh financial position and results of a
progress report will increase the the resulting benefits. company.
• Whether the growing use of 3. Other constituents to audit,
chances of our recommendations being
international accounting standards has analyze, and regulate a company’s
implemented. The developed proposals
an impact on the relevant issues relating financial reporting.
in this progress report are described
to the complexity of U.S. accounting Complexity can impede effective
with enough detail to enable the SEC
and reporting standards and the communication through financial
and public commentators to evaluate
usefulness of the U.S. financial reporting between a company and its
whether regulatory action in these areas
reporting system. stakeholders. It also creates
is warranted. The description of
inefficiencies in the marketplace (e.g.,
conceptual approaches in this progress II. Our Guiding Principles increased investor, preparer, audit, and
report will hopefully stimulate
We believe that financial reporting regulatory costs) and suboptimal
discussion and debate on these topics so
should provide information that aids allocation of capital.
that we can put forward additional
developed proposals later this year. investors in making investment, credit, Causes of Complexity
and similar resource allocation
Introduction12 decisions.14 However, some argue that, The causes of complexity are many
over time, financial reporting has and varied. We have identified the
I. Our Objective following significant causes of
In July 2007, the U.S. Securities and 13 The term ‘‘investor(s)’’ is used throughout this complexity:
Exchange Commission (SEC or progress report to refer to investors, creditors, rating 1. Complex activities—The
Commission) chartered the Advisory agencies, and other users. increasingly sophisticated nature of
Committee on Improvements to 14 Adapted from the FASB Preliminary Views
business transactions can be difficult to
document and IASB Discussion Paper, Conceptual understand, particularly with respect to
Financial Reporting (Committee). The Framework for Financial Reporting: Objective of
Financial Reporting and Qualitative Characteristics the growing scale and scope of
11 A dissenting vote on developed proposal 4.1 companies with operations that cross
of Decision-Useful Financial Reporting Information

was cast by Peter Wallison. (July 6, 2006), which states, ‘‘The objective of international boundaries and financial
12 This report has been approved by the general purpose external financial reporting is to reporting regimes.
Committee and reflects the views of a majority of provide information that is useful to present and
its members. It does not necessarily reflect any potential investors and creditors and others in
2. Incomparability and
position or regulatory agenda of the Commission or making investment, credit, and similar resource inconsistency—Incomparable reporting
its staff. allocation decisions.’’ of activities within and across entities
arises because of factors such as 7. Information delivery—The need for IV. Our Approach
exceptions to general principles, bright information varies by investor type and After the conclusion of our work, we
lines, and the mixed attribute model. is often driven by a legal, rather than an will issue a final report with written
Some of this guidance permits the investor, perspective. In addition, the recommendations to the Chairman of
structuring of transactions in order to amount and timing of information, as the SEC. In order to maximize our effect,
achieve particular financial reporting well as the method by which it is we intend to issue a limited number of
results. Further, to the extent new transmitted, may result in complex and focused recommendations that address
pronouncements are adopted hard-to-navigate disclosures that cause acknowledged problem areas and that
prospectively, past and present periods investors to sort through material that we believe can be adopted without
of operating results are not comparable. they may not find relevant in order to
legislation, rather than attempting to
This is compounded by the rapid pace identify pieces that are. These factors
address all perceived shortcomings in
at which new accounting make it difficult to distinguish the
the financial reporting system.
pronouncements are being adopted, sustaining elements of an entity from
To facilitate the development of these
which hinders the ability of all non-operating or other influences.
recommendations, we have created
constituents to understand and apply We observe that two types of
substantive complexity exist: (1) subcommittees that report to the full
new guidance in relatively short Committee for discussion and
timeframes. Unavoidable complexity, which is a
function of the underlying transaction deliberation. The subcommittees are:
3. Nature of financial reporting
or item being accounted for, such as the 1. Substantive Complexity.
standards—Standards can be difficult to 2. Standards-Setting Process.
understand and apply for several first cause of complexity noted above,
3. Audit Process and Compliance.
reasons, including: and (2) avoidable complexity, which is
4. Delivering Financial Information.
• The existence of opposing points of introduced from other sources. Our
Matters related to international
view that were taken into account when focus is on avoidable complexity, with
coordination will be addressed, as
developing standards—most an emphasis on improvements that are
appropriate, as part of our deliberations
importantly, the attempts by public feasible in the near-term.
later in 2008.
companies to smooth amounts that vary III. Our Scope The purpose of this progress report is
from period to period, versus the to present our developed proposals,
requests from those who want such We have limited our deliberations to
matters involving SEC registrants. While conceptual approaches, and matters for
amounts marked to market each period. future considerations based on our work
• The challenge of describing financial reporting matters and, more
specifically, GAAP, also apply to private to date. Developed proposals are
accounting principles in simple terms
entities, including nonprofit proposals that we believe could be
(i.e., plain English) for highly
organizations, our focus is consistent implemented by the Commission, its
sophisticated transactions.
• The presence of detailed guidance with our role as an advisory committee staff,15 or other bodies, as appropriate.
for numerous specific fact patterns. to the SEC. Conceptual approaches represent our
• The impact of multiple bodies We have also focused our scope as it initial views, which are based on
setting standards. relates to international matters. The SEC discussions on a particular subject, but
• The development of such standards recently amended its rules to eliminate which still require additional vetting
on the basis of an incomplete and the requirement for a GAAP before formalization into a developed
inconsistent conceptual framework. reconciliation for foreign private issuers proposal. Matters for future
4. Volume—The vast number of reporting under international financial considerations are areas in which
formal and informal accounting reporting standards (IFRS) as issued by deliberations and research have not yet
standards, regulations, and the International Accounting Standards begun.
interpretations, including redundant Board (IASB), and issued a concept Our work to date has included four
requirements, make finding the release to explore a more far-reaching public meetings where these topics were
appropriate standard or interpretation prospect—the possibility of giving deliberated by the full Committee. In
challenging for particular fact patterns. domestic issuers the alternative to generating this progress report, we also
5. Audit and regulatory systems that report using IFRS. We have proceeded considered all of the public comments
challenge the use of professional based on two premises: (1) That, despite received to date on our work.16 All of
judgment—The risk of litigation and the any potential actions by the the developed proposals, conceptual
fear of being ‘‘second-guessed’’ results Commission to permit IFRS reporting by approaches and matters for future
in (1) a greater demand for detailed domestic issuers, GAAP will continue to consideration were adopted
rules on how to apply accounting be utilized by many U.S. public unanimously (except for one dissenting
standards to an ever increasing set of companies for a significant number of vote on one proposal, as noted herein,
specific situations, (2) unnecessary years, and (2) that the convergence which resulted in one separate
restatements that are not meaningful to process between GAAP and IFRS will
investors, and (3) legalistic disclosures continue. As a result, we believe it is 15 We note that some of our developed proposals,
productive to make recommendations conceptual approaches, and matters for future

that are difficult to understand. considerations may require SEC action, while
6. Educational shortcomings— on improving GAAP, as well as the others may be implemented by SEC staff. We have,
Undergraduate and graduate education related processes at the Financial however, generally adopted a convention of
in accounting has traditionally Accounting Standards Board (FASB or addressing these areas to the SEC for convenience.
emphasized the mechanics of double- the Board), the Public Company We leave the determination of whether the
proposals require SEC or SEC staff action to the
entry bookkeeping, which favors the use Accounting Oversight Board (PCAOB), discretion of the SEC and its staff.
of detailed rules rather than the full and the SEC. At the same time, we will
16 Comments to the Committee are available at
understanding of relevant principles. point out how our developed proposals http://www.sec.gov/comments/265-24/265-
The same approach is evident in the can be coordinated with the work of the 24.shtml. We have and continue to welcome
feedback at any time from investors, registrants,
certified public accountant exam, as IASB and the development of IFRS, auditors, and others on our work. Information on
well as continuing professional with the objective of promoting how to submit comments is available at: http://
education requirements. convergence. www.sec.gov/about/offices/oca/acifr.shtml.
statement from Mr. Wallison, attached across most industries.17 Second, complexity in greater depth. It also
as appendix A of this progress report). alternative accounting policies give contains developed proposals or
preparers options among acceptable conceptual approaches to reduce their
Chapter 1: Substantive Complexity
practices, such as whether or not to effects. The sequence in which these
I. Introduction apply hedge accounting,18 which reduce areas are presented does not necessarily
Public companies in the U.S. submit comparability across companies. Third, indicate their relative priority to one
financial statements to the SEC so scope exceptions other than industry- another. Rather, certain areas warrant
investors can monitor their financial specific guidance represent departures additional research and deliberation
performance and make decisions about from a principle and require detailed before reasonable proposals can be fully
capital allocation. Traditionally, those analyses to determine whether they developed, such as those related to the
financial statements are prepared using apply. Fourth, competing models create mixed attribute model and more
a common framework referred to as requirements to apply different meaningful groupings of individual line
GAAP. A casual review of audited accounting models to similar types of items on the financial statements. We
financial statements might create a transactions or events, depending on the intend to pursue these topics during the
perception that amounts reported in a balance sheet or income statement items course of our work later in 2008. Lastly,
balance sheet or income statement are involved. This diversity requires all while deliberations have been
mechanical and precise, when they in constituents to understand assorted conducted primarily in the context of
fact reflect a great deal of choices, implementation methods, even though GAAP, we believe that our analyses and
estimation and judgment. they are based on similar fundamental proposals are similarly applicable under
While ideally GAAP should provide principles. IFRS.
Bright lines are problematic because
clear and consistent guidance for
they create superficial borders along a II. Exceptions to General Principles
preparing financial statements, this is
continuous spectrum of transactions.
not always true. A number of factors II.A. Industry-Specific Guidance
More fundamentally, certain reporting
undermine this ideal, including the
standards require drastically different Developed Proposal 1.1: GAAP
causes of complexity enumerated in the accounting treatments on either side of
Introduction to this progress report. As should be based on business activities,20
a bright line. Lease accounting is often rather than industries. As such, the SEC
a result, certain parts of GAAP may cited as an illustration of bright lines.
actually hinder effective comparison of should recommend that any new
Consider, for example, a lessee’s
financial performance between projects undertaken jointly or separately
accounting for a piece of machinery.
companies. For instance, a large by the FASB be scoped on the basis of
Under current requirements, the lessee
company may purchase a smaller business activities rather than
will account for the lease in one of two
company to acquire a newly-developed industries. Any new projects should
significantly different ways: Either (1)
patent that the smaller company include the elimination of existing
reflect an asset and a liability on its
obtained to protect a promising new balance sheet, as if it owns the leased industry-specific guidance in relevant
product. In that scenario, the purchasing asset or (2) reflect nothing on its balance areas as a specific objective of those
company would record the patent as an sheet. The accounting conclusion projects, unless, in rare circumstances,
asset under GAAP. However, if the depends on the results of two retaining industry guidance can be
smaller company was not purchased, quantitative tests,19 where a mere 1% justified on the basis of cost-benefit
but continued developing the product difference leads to very different considerations (discussed below).
on its own, it would be prohibited by accounting. The SEC should also recommend that,
GAAP from recording an asset to reflect The mixed attribute model results in in conjunction with its current
the patent on its balance sheet. amounts that are a blend of accounting codification project, the FASB add a
This example is just one illustration conventions. Some assets and liabilities project to its agenda to remove or
of the avoidable complexity embedded are measured at historic cost, others at minimize existing industry-specific
in the current substantive standards of lower of cost or market, and still others guidance that conflicts with generalized
GAAP. We have identified what we at fair value. Combinations or subtotals GAAP, taking into account the pace of
consider to be the three most pressing of these numbers thus may not be convergence efforts.21
forms of avoidable substantive intuitively useful to investors. While
complexity that currently exist in some advocate using fair value for the 20 As discussed in section II.B of this chapter
financial reporting: (1) Exceptions to entire balance sheet as a solution, this regarding management intent, we have not taken a
general principles, (2) bright lines, and would exacerbate the existing questions position as to whether intent is an appropriate basis
(3) the mixed attribute model that about relevance and reliability, of accounting. Similarly, we express no view on
blends the use of fair value and whether intent provides a meaningful distinction
including considerable subjectivity in between business activities.
historical cost. the valuation of thinly-traded assets and 21 Some constituents understand ‘‘convergence’’
Exceptions to general principles liabilities. to mean that GAAP and IFRS (as published by the
create complexity because they deviate The remainder of this chapter IASB) will eventually be harmonized, at which
from established standards that are discusses each of these areas and the point no substantive differences will exist between
the two bodies of accounting literature. Others
applicable to most companies. In effect, manner in which they contribute to understand it to mean a discrete transition from
investors and preparers no longer speak GAAP to IFRS at a specified date without respect
a uniform language to communicate 17 See comparison of Statement of Financial to whether the two bodies of literature are
financial information; they must learn Accounting Standard (SFAS) No. 51, Financial substantially harmonized. The timing of these two
Reporting by Cable Television Companies, with approaches may differ, which would likely impact
new dialects. Other constituents in that SEC Staff Accounting Bulletin (SAB) 104, Revenue the prioritization of this proposal to eliminate
communication process are similarly Recognition (as codified in SAB Topic 13), later in
existing U.S. industry-specific guidance on the

impacted. Our work in this area is this chapter. FASB’s agenda. In either case, we believe industry-
18 Hedge accounting guidance is provided in
divided into four categories. First, there specific guidance should be substantially
SFAS No. 133, Accounting for Derivatives and eliminated prior to convergence—either as a
are many examples of industry-specific Hedging Activities. component of the convergence plan, or by
guidance, some of which conflict with 19 See discussion of bright lines below for further establishing a specified date after which the use of
more generalized GAAP that applies details. industry-specific guidance would be prohibited.
Background companies, which may be involved in a unless it is specifically prescribed

Industry-specific guidance refers to: number of different industries. elsewhere (such as SFAS No. 51).25
(1) Exceptions to general accounting Further, industry-specific guidance Therefore, similar activities like upfront
standards for certain industries, (2) unnecessarily increases the volume of fees for gym memberships are not
industry-specific guidance created in accounting literature. This, in turn, adds afforded equal treatment. Third, still
the absence of a single underlying to the costs of implementing such other industry-specific guidance was
standard or principle, and (3) industry literature and maintaining it (e.g., created in the absence of a general
practices not specifically addressed or monitoring it for interaction with other principle that applies across industries.
based in GAAP. Industries covered by new and existing standards and For instance, while there is no
this guidance include, but are not expanding the size and scope of comprehensive revenue recognition
limited to, the insurance, utilities, oil technical resources and databases). standard, SoP 81–1, Accounting for
and gas, mining, cable television, Industry-specific guidance also Performance of Construction-Type and
financial, real estate, casino, increases the cost of training Certain Production-Type Contracts,
broadcasting, and film industries.22 accountants and retaining industry discusses revenue and cost recognition
Industry-specific guidance has experts, while compounding the in areas such as the construction
developed for a number of reasons. complexity that investors experience in industry.
These include multiple standards- understanding the present variety of
accounting and disclosure standards. Discussion
setters issuing guidance without
consistently coordinating their efforts, a Lastly, it hinders more widespread use We generally believe that industry-
desire to enhance uniformity throughout of XBRL by increasing the number of specific guidance should be eliminated
an industry, and efforts to customize data tags that need to be created, to reduce avoidable complexity,
accounting standards for allegedly maintained, and properly used to particularly as generalized GAAP is
‘‘special’’ transactions or investor needs. deliver financial information. developed. However, we acknowledge
In some cases, industries have On the other hand, industry-specific that industry-specific guidance has
developed their own practices in the guidance may alleviate complexity by merit when cost-benefit considerations
absence of applicable authoritative allowing industry reporting to better indicate that the enhanced information
literature. meet the specific investor needs in that investors would receive under
Industry-specific guidance contributes industry and enhancing comparability generalized GAAP is not justified by the
to avoidable complexity by making across entities within an industry. direct costs to preparers and the indirect
financial reports less comparable.23 This Further, it may depict important costs to investors to account for
is evident across industries, when differences in the economics of an activities in that manner. In such cases,
conflicting accounting models are used industry, particularly where application the SEC should encourage the FASB to
for similar or identical transactions. It of a generalized principle may not result work with the relevant industry
may also be used as an improper in accounting that is faithful to a participants to identify long-term ways
analogy to achieve desired results or to transaction’s substance. We also note to improve the benefits and mitigate the
require more conservative accounting that historically, some industry-specific costs of the general standard. After
treatments (e.g., by auditors).24 In guidance has filled a need where GAAP making these changes, the related
addition, the use of an industry to is otherwise lacking, and simplified or industry-specific guidance should be
define an accounting treatment raises reduced the amount of guidance a phased out as efficiently as possible.
serious questions about which preparer in an industry would need to Towards that end, the SEC should
companies are within the scope of consider (even though it might increase encourage the FASB to provide
specific guidance. This issue is complexity across industries generally). sufficient time to allow companies to
especially pronounced for diversified Finally, specialized guidance has been adopt generalized GAAP with minimal
able to address prevalent industry issues transition costs.
22 Refer to appendix B for additional examples. quickly because it was written for a Similarly, we recognize that industry-
23 As noted previously in the Study Pursuant to narrower audience than generalized specific guidance may be helpful in
Section 108(d) of the Sarbanes-Oxley Act of 2002 GAAP. situations in which: (1) It interprets,
on the Adoption by the United States Financial Industry-specific guidance can be rather than contradicts, principles, and
Reporting System of a Principles-Based Accounting broken into three categories. First, some (2) the activities in question are
System (July 2003):
The proliferation of specialized industry
industry-specific guidance is legitimately different, which are
standards creates two problems that can hinder explanatory in nature and consistent expected to be rare. But to the extent
standard setters’ efforts to issue subsequent with generalized GAAP, such as that such guidance interprets principles
standards using a more objectives-oriented regime. portions of AICPA Accounting and (i.e., relates to implementation), we
• The existence of specialized industry practices Auditing Guides that assist preparers generally believe it should not be
may make it more difficult for standard setters to
eliminate scope exceptions in subsequent standards interpret and apply existing, generalized considered authoritative GAAP.26
(e.g., many standards contain exceptions for GAAP. Second, other industry-specific Further, to the extent that it applies to
insurance arrangements subject to specialized guidance is inconsistent with
industry accounting)
generalized GAAP. For example, SFAS 25 SAB Topic 13.
• The specialized standards may create 26 We are aware of constituents, such as the
conflicting GAAP, which makes it more difficult for No. 51, Financial Reporting by Cable
AICPA, that have historically issued industry-
accounting professionals to determine the Television Companies, requires that specific implementation guidance. We generally
appropriate accounting. initial hookup revenue (a type of believe such guidance should not be considered
24 For instance, some auditors may use concepts
nonrefundable upfront fee) is recorded authoritative. Rather, all authoritative guidance
in revenue recognition from the software industry should continue to be issued by designated
(Statement of Position (SoP) 97–2) as a basis for
to the extent of direct selling costs
standards-setters, such as the FASB in the U.S., as
incurred; the remainder is deferred and
postponing the revenue recognition of companies in discussed in chapter 2 of this progress report. If a
other industries without on-point literature. recorded in income over the estimated designated standards-setter issues implementation
Opponents of this practice argue such revenue average period that subscribers are guidance for activities that are prevalent in
deferral is too conservative and does not adequately particular industries, we believe it should be
portray the extent to which a company may have
expected to remain connected to the applicable to all transactions of the type in
satisfied its product or service obligations in a long- system. However, generalized guidance question, regardless of the industry in which a
term or multiple-element contract. indicates this practice is inappropriate company operates.
activities that are legitimately different, Background On the other hand, alternative
such guidance should be scoped and Alternative accounting policies refer accounting policies may alleviate
applied on the basis of business to optionality in GAAP. The following complexity by allowing preparers to
activities, rather than industries. discussion addresses formally- determine the best accounting for
In implementing this proposal, we promulgated options in GAAP, but does particular entities based on cost and
note that the FASB’s codification project not address choices available to economic substance, to the extent that
can be used to sort existing industry- preparers at more of a practice or more than one accounting policy is
specific guidance into one of the three implementation level.27 Examples of conceptually sound. In addition, certain
categories identified above (consistent optionality in GAAP include:28 alternative policies may be developed
with GAAP, inconsistent with GAAP, or • The indirect versus the direct more quickly than a final ‘‘perfect’’
there is no comparable GAAP). We method of presenting operating cash standard to minimize the effect of other
believe efforts to reduce existing flows on the statement of cash flows. unacceptable practices. In other words,
industry-specific guidance should focus • The application of hedge they may function as a short-term fix on
primarily on cases in which it is accounting.29 the road to ideal accounting.
inconsistent with generalized GAAP. • The option to measure certain Management Intent
Further, as the FASB develops new financial assets and liabilities at fair
generalized guidance in areas like value. Some alternative accounting policies
revenue recognition, it should eliminate • The immediate or delayed are based on management intent.30
industry-specific guidance to the recognition of gains/losses associated Management intent is a present
maximum extent feasible. Similarly, the with defined benefit pension and other assertion about management’s plans for
SEC should eliminate its industry- post-retirement employee benefit plans. future courses of action.31
• The successful efforts or full cost We have separately considered the
specific guidance in related areas, if
accounting method followed by oil and merits of alternative accounting policies
any.
gas producers. arising from differences in management
From an international perspective, we intent. Opponents of the use of
Alternative accounting policies arise
note that IFRS currently contains less management intent as a basis for
for a number of reasons. These reasons
industry-specific guidance than GAAP accounting believe that because
include circumstances in which the
and that such guidance focuses more on intentions are subjective, it is difficult to
pros and cons of competing policies
the nature of the business activity (e.g., use intent as a basis for accounting.
may be balanced and thus do not result
agriculture, insurance contracts, Opponents also believe that intent does
in a single, clearly preferable approach.
exploration and evaluation of mineral not change the economics of a
Other causes encompass political
resources). Nonetheless, the SEC should pressure that results in standards-setters transaction and thus, would not be a
encourage the IASB to be mindful of providing for a preferred and an representationally faithful basis of
developed proposal 1.1 as it continues alternative accounting method, high accounting.
to develop a more comprehensive body administrative costs of the preferred Proponents assert that the economics
of standards. The SEC might also alternative to preparers (e.g., cost- of a transaction do, in fact, change based
encourage the IASB to limit future benefit considerations), and a portrayal on the nature of the activity, which is
industry-specific guidance to activities of differences in management intent. driven by management intent.
whose economics are legitimately Alternative accounting policies Proponents also note that, while
different from other business activities. contribute to avoidable complexity by management intent is subjective and
Otherwise, we believe specialized making financial reports less could change, this characteristic is no
accounting for only certain subsets of comparable. This is evident across different from a management estimate,
similar activities will create avoidable companies when identical activities are which is common in financial reporting.
complexity. accounted for differently. Such Proponents further argue that financial
We acknowledge that the elimination alternatives may permit accounting that reporting that ignores management
of existing industry-specific guidance is less reflective of economic substance intent results in irrelevant information
may result in more complexity over the to the extent that they are based on for investors, for instance, reporting the
short-term to the industries losing political pressure, and facilitate fair value of a held-to-maturity security
special treatment. Nonetheless, we differences in accounting policies that will not be settled for 30 years.
believe it is an acceptable cost for a selected by preparers to achieve the Due to the varying levels of
long-term reduction in avoidable most favorable treatment. The management intent throughout GAAP
complexity. unnecessary proliferation of accounting and the merits of the arguments both for
literature to codify these alternatives and against its use, we have determined
II.B. Alternative Accounting Policies that accounting based on management
also adds to avoidable complexity.
Developed Proposal 1.2: GAAP intent is too dependent on facts and
should be based on a presumption that 27 For example, companies are free to choose from circumstances to feasibly address within
formally promulgated alternative among several depreciation methods—straight-line, our timeframe.
double-declining balance, etc.
accounting policies should not exist. 28 Refer to appendix B for additional examples.
30 For example, SFAS No. 115 Accounting for
The SEC should recommend that any 29 We have noted complexities arising from the
Certain Investments in Debt and Equity Securities,
new projects undertaken jointly or application of hedge accounting, which allows allows management to classify certain debt
separately by the FASB not provide entities to mitigate reported volatility over the life instruments as either a held-to-maturity, an
additional optionality, unless, in rare of the hedge relationship. In this regard, we available-for-sale, or a trading security based on the
generally feel that instead of assessing hedge company’s intent and ability with respect to the
circumstances, it can be justified. Any effectiveness to determine whether companies holding period of its investment. The financial
new projects should include the
qualify for this alternative accounting treatment, a statement treatment differs for all three categories.
elimination of existing alternative better policy would be to simply record the 31 The definition of management intent and
accounting policies in relevant areas as ineffective portion of a hedge in earnings (i.e., a certain other concepts in the discussion of
proportionate approach versus an all-or-nothing alternative accounting policies are adapted from a
a specific objective of those projects, approach). We are also aware of the FASB’s FASB Special Report: Future Events: A Conceptual
unless, in rare circumstances, the derivatives project in this area and are generally Study of Their Significance for Recognition and
optionality can be justified. supportive of its progress. Measurement (1994).
Discussion at approximately $40 32 on its balance two quantitative tests,34 where a mere
sheet. Under the current accounting 1% difference in the results of the
Setting aside any consideration of
literature, the lessee would either quantitative tests leads to very different
management intent, we believe recognize the machine at $100 or accounting.
alternative accounting policies should recognize nothing on its balance sheet, With respect to rules-of-thumb,
be eliminated, except in limited depending on the results of certain consolidation guidance 35 generally
circumstances in which they may have bright line tests. requires at least a 10% equity
merit. Possible justifications for • Additional disclosure—We investment in a company (i.e., the
retaining alternative accounting policies recognize that proportionate recognition equity investment expressed as a
include situations in which: (1) is not universally applicable. In those percentage of total assets) to
Multiple accounting alternatives exist cases, enhanced disclosure may be more demonstrate that the investee company
that are consistent with the conceptual appropriate. We have yet to define the is not considered a variable interest
framework, and none are determined to possible scope of proportionate entity (VIE). The determination as to
provide significantly better information recognition and/or enhanced disclosure, whether an entity is a VIE drives who,
to investors than others, and (2) an but it may extend to areas such as if anyone, ultimately consolidates the
alternative or interim treatment can be leases, consolidation policy and off- VIE in its financial statements.
developed more quickly than a final balance sheet activity. However, entities with investments
‘‘perfect’’ standard to minimize the • Rules-of-thumb or presumptions, above and below the 10% level can still
effect of other unacceptable practices. both coupled with additional be considered VIEs, depending on the
If one or both of the justifications considerations—We use rule-of-thumb particular facts and circumstances. That
above apply, we believe that the and presumption to describe a method is, the 10% rule-of-thumb is not
provision of alternative accounting by which an accounting conclusion may determinative in its own right.
principles should be coupled with a be initially favored, subject to the Similarly, the business combination
long-term plan by the FASB to eliminate consideration of additional factors. literature 36 contains an example of a
the alternative(s) through the use of These are less stringent than bright presumption coupled with additional
sunset provisions and that the effect of lines, and may be appropriate where considerations. There are situations in
applying the alternative policy not proportionate recognition may not which selling shareholders of a target
selected by preparers should be clearly apply. company are hired as employees by the
and succinctly communicated to Conceptual Approach 1.B: Further, purchaser. For instance, the purchaser
investors (e.g., through footnote we are considering a recommendation may wish to retain the sellers’ business
disclosure). related to the education of students, as expertise. The payments to the selling
Further, as new guidance is issued, well as to the continuing education of shareholders may either be treated as:
including that which is issued through investors, preparers, and auditors. The (1) Part of the cost of the acquisition,
the convergence process, the SEC recommendation would encourage which means the payments are allocated
should eliminate its alternative understanding of the economic to certain accounts on the purchaser’s
accounting policies in related areas, if substance and business purposes of balance sheet, such as goodwill, or (2)
any. transactions, in contrast to mechanical compensation to the newly-hired
compliance with rules without employees, which are recorded as an
From an international perspective, we
sufficient context. expense in the purchaser’s income
note that IFRS currently permits
numerous alternative accounting Background statement, reducing net income. Some
policies. While we acknowledge the of these payments may be contingent on
Bright lines refer to two main areas: the selling shareholders’ continued
IASB’s efforts in reducing some of these quantified thresholds and pass/fail
alternative treatments, we nonetheless employment with the purchaser, e.g.,
tests.33 the individual must still be employed
believe that the SEC should encourage Quantified thresholds include hard- three years after the acquisition in order
the IASB, like the FASB, to be mindful and-fast cutoffs, as well as rules-of- to maximize the total sales price. GAAP
of this proposal, and seek to eliminate thumb or presumptions—both coupled provides several factors to consider
alternatives as part of its standards- with additional considerations. Lease
setting projects. accounting is often cited as an example 34 Specifically, SFAS No. 13, Accounting for
III. Bright Lines of bright lines in the form of quantified Leases, requires that leases be classified as capital
thresholds. Consider, for example, a leases and recognized on the lessee’s balance sheet
Conceptual Approach 1.A: We are where (1) the lease term is greater than or equal to
lessee’s accounting for a piece of 75% of the estimated economic life of the leased
considering recommending expanded machinery. Under current requirements, property or (2) the present value at the beginning
use of the following, in place of the the lessee will account for the lease in of the lease term of the minimum lease payments
current use of bright lines, to better one of two significantly different ways: equals or exceeds 90% of the fair value of the leased
reflect the economic substance of an property, among other criteria.
Either (1) reflect an asset and a liability 35 FASB Interpretation No. (FIN) 46 (revised
activity: on its balance sheet, as if it owns the December 2003), Consolidation of Variable Interest
• Proportionate recognition—We use leased asset, or (2) reflect nothing on its Entities (FIN 46R).
the term ‘‘proportionate recognition’’ in balance sheet. The accounting 36 Emerging Issues Task Force (EITF) 95–8,
contrast to the current all-or-nothing conclusion depends on the results of Accounting for Contingent Consideration Paid to
the Shareholders of an Acquired Enterprise in a
recognition approach in GAAP. For Purchase Business Combination. We note EITF 95–
example, consider a lease in which the 32 Calculated as (4 year lease/10 year useful life)
8 is nullified by a new FASB standard, SFAS No.
lessee has the right to use a machine, x $100 machine value. The example is only 141 (revised 2007), Business Combinations. SFAS
intended to be illustrative and is not prescriptive. No. 141 (revised 2007) states ‘‘A contingent
valued at $100, for four years. Also For instance, the basis of proportionate recognition
consideration arrangement in which the payments

assume that the machine has a 10-year may be an asset’s estimated useful life, future cash are automatically forfeited if employment
useful life. Under proportionate flows, or the share of a company’s liabilities in a terminates is compensation* * *’’ However, the
recognition, a lessee would recognize an structured investment vehicle. We are planning guidance in EITF 95–8 is still helpful in describing
additional deliberations in this regard. our approach with respect to the use of
asset for its right to use the machine 33 Refer to appendix B for additional examples presumptions coupled with additional
(rather than for a proportion of the asset) other than those discussed in this section. considerations in GAAP.
when deciding whether these payments financial reporting result (e.g., whole similar activities or assets/liabilities
should be treated as an expense or not, industries have been developed to based on consideration of the trade off
but establishes a presumption that any create structures to work around the between relevance and reliability, and
future payments linked to continued lease accounting rules). Further, bright the various constituents involved in the
employment should be treated as an lines increase the volume of accounting financial reporting process.
expense. It is possible this presumption literature as standards-setters and Conceptual Approach 1.D: Judicious
may be overcome depending on the regulators attempt to curb abusively Use of Fair Value—Due to
circumstances. structured transactions. The extra implementation complexities, as noted
As indicated above, the other area of literature creates demand for additional below, we are considering whether the
bright lines in this section includes expertise to account for certain SEC should request that the FASB be
pass/fail tests, which are similar to transactions. All of these factors add to judicious about issuing new standards
quantitative thresholds because they the total cost of accounting and the risk and interpretations that require the
result in recognition on an all-or- of restatement. expanded use of fair value in areas
nothing basis. However, these types of On the other hand, bright lines may where it is not already required, until
pass/fail tests do not involve alleviate complexity by reducing completion of a measurement
quantification. For example, a software judgment and limiting aggressive framework. Over the long-term, this
sales contract may require delivery of accounting policies. They may also framework would be used to determine
four elements. Revenue may, in certain enhance perceived uniformity across measurement attributes
circumstances, be recognized as each companies, provide convenience as systematically.37 We will also consider
element is delivered. However, if discussed above, and limit the whether improvements related to
appropriate evidence does not exist to application of new accounting guidance certain existing, particularly-complex,
support the allocation of the sales price to a small group of companies, where no standards that incorporate fair value,
to, for example, the second element, underlying standard exists. In these such as SFAS Nos. 133 38 and 140,39 are
software revenue recognition guidance situations, the issuance of narrowly- warranted in the near-term.
requires that the timing of recognition of scoped guidance may allow for issues to Conceptual Approach 1.E: Groupings
all revenue be deferred until such be addressed on a more timely basis. In in Financial Statement Presentation—
evidence exists or all four elements are other words, narrowly-scoped guidance We believe that a more consistently
delivered. and the bright lines that accompany aggregated presentation of financial
Bright lines arise for a number of them may function as a short-term fix statements would alleviate some of the
reasons. These reasons include a drive on the road to ideal accounting. confusion and concerns regarding the
to enhance comparability across use of fair value. Such presentation
companies by making it more Discussion should result in the grouping of
convenient for preparers, auditors, and We are still in the process of debating amounts and line items by nature of
regulators to reduce the amount of effort when, if at all, bright lines are justified activity and measurement attribute
that would otherwise be required in in accounting literature. We note that within and across financial statements.
applying judgment (i.e., debating even if the FASB limits the issuance of We believe such a grouping would be
potential accounting treatments and bright lines, other parties might more understandable to investors,
documenting an analysis to support the continue to create similar non- particularly as it would more clearly
final judgment), and the belief that they authoritative guidance. As such, delineate the nature of changes in
reduce the chance of being second- recommendations to limit bright lines income (e.g., fair value volatility,
guessed. Bright lines are also created in would require a cultural shift towards changes in estimate, and business
response to requests for additional acceptance of more judgment. activity). This presentation might also
guidance on exactly how to apply the Accordingly, any recommendations in help investors assess the degree to
underlying principle. These requests the context of bright lines will which management controls each source
often arise from concern on the part of incorporate our consideration of a of income.
preparers and auditors of using professional judgment framework, as As part of the financial statement
judgment that may be second-guessed discussed in chapter 3, and our presentation project, the FASB has
by inspectors, regulators, and the trial consideration of interpretive tentatively decided to segregate the
bar. Finally, bright lines reflect efforts to implementation guidance and a new financial statements into business
curb abuse by establishing precise rules design approach to accounting (further divided into operating and
to avoid problems that have occurred in standards, as discussed in chapter 2. investing) and financing activities. The
the past. FASB has also tentatively decided to
Bright lines can contribute to IV. Mixed Attribute Model and the
Appropriate Use of Fair Value require a reconciliation of the statement
avoidable complexity by making of cash flows to the statement of
financial reports less comparable. This Conceptual Approach 1.C: comprehensive income. This
is evident in accounting that is not Measurement framework—While we reconciliation would disaggregate
faithful to a transaction’s substance, may not have time to fully address changes in assets and liabilities based
particularly when application of the all- when fair value is the appropriate
or-nothing guidance described above is measurement attribute, we understand 37 We recognize that the joint FASB/IASB
required. Bright lines produce less that the FASB’s joint conceptual conceptual framework project, including the
comparability because two similar framework project includes a measurement phase, is a significant undertaking
that most likely will not be completed in the near-
transactions may be accounted for measurement phase. We intend to study term. Consequently, we may explore whether a
differently. For example, as described this project further and are considering recommendation is warranted for a formal SEC
above, a mere 1% difference in the a recommendation for the SEC to study regarding when fair value is appropriate in
quantitative tests associated with lease endorse that, as part of this project, the financial reporting. The study’s report could then
be incorporated in future standards-setting activity.
accounting could result in very different FASB develop a decision framework to 38 Accounting for Derivatives and Hedging
accounting consequences. Some bright provide a systematic approach for Activities.
lines also permit structuring consistently determining the most 39 Accounting for Transfers and Servicing of
opportunities to achieve a specific appropriate measurement attribute for Financial Assets and Extinguishments of Liabilities.
on cash, accruals, and changes in fair Background certified by auditors, as discussed

value, among others. As previously noted, the mixed above. Such estimates are made even
We intend to study this project further attribute model is one in which the more subjective by the lack of a single
and consider whether it would address carrying amounts of some assets and set of generally accepted valuation
the our leanings in this area and liabilities are measured based on standards and the use of inputs to
sufficiently facilitate investors’ historical cost, others at lower of cost or valuation models that vary from one
understanding of fair value. market, and still others at fair value. company to the next. Likewise,
This complexity is compounded by significant variance exists in the quality,
Conceptual Approach 1.F: Additional
requirements to record some skill, and reports of valuation
Disclosure—We have identified
adjustments to carrying amounts in specialists, which preparers have
potential areas for additional disclosure
limited ability to assess. Finally, there is
to more effectively signal to investors earnings and others in comprehensive
no mechanism to ensure the ongoing
the level of uncertainty associated with income.
Examples of accounting standards quality, training, and oversight of
fair value measurements in financial
that result in mixed attribute valuation specialists. As a result, some
statements.40 Specifically, we note that
measurement include two FASB believe a wholesale transition to fair
in some cases, there is no ‘‘right’’
value would reduce the reliability of
number in a probability distribution of standards related to financial
financial reports to an unacceptable
figures, some of which may be more instruments. SFAS No. 159, The Fair
degree.
fairly representative of fair value than Value Option for Financial Assets and Therefore, we assume that a complete
others. Potential areas to be considered Financial Liabilities, permits the fair move to fair value is most unlikely.
for additional disclosure may include: valuation of certain assets and Within this context, the partial use of
• The valuation model. liabilities. As a result, some assets and fair value increases the volume of
liabilities are measured at fair value,
• Statistical confidence intervals accounting literature. Said differently,
while others are measured at amortized when more than one measurement
associated with certain valuation
cost or some other basis. SFAS No. 115, attribute is used, guidance is required
models.
Accounting for Certain Investments in for each one. In addition, some entities
• Key assumptions, including Debt and Equity Securities, requires
projections. may operate under the impression that
certain investments to be recognized at investors: (1) Are averse to market-
• Sensitivity analyses depending on fair value and others at amortized cost. driven volatility, and as a result, (2)
the selection of key assumptions. In practice, the costs associated with incorporate unfavorable assumptions or
• The entity’s position versus that of (potentially uncertain) fair value discounts within their assessments of a
the entire market. estimates can be considerable. Some company’s financial performance.
Conceptual Approach 1.G: Disclosure preparers’ knowledge of valuation Consequently, entities have demanded
Framework—We seek to balance methodology is limited, requiring the exceptions from the use of fair value in
additional disclosure requirements, use of valuation specialists. Auditors financial reporting, resisted its use, and/
including, if any, those under often require valuation specialists of or entered into transactions that they
conceptual approach 1.F, with: (1) The their own to support the audit. Some otherwise would not have undertaken to
perception that amounts recognized in view the need for these valuation artificially limit earnings volatility.
financial statements are generally specialists as a duplication of efforts, at These actions have resulted in a build
subject to more precise calculations by the expense of the preparer. In addition, up in the volume of accounting
preparers and higher degrees of scrutiny there are recurring concerns about literature. More generally, some believe
by investors compared to merely second-guessing by auditors, regulators, that attempts by companies to smooth
disclosing such amounts in the and courts in light of the many amounts that are not smooth in their
footnotes, and (2) concerns regarding judgments and imprecision involved underlying economics reduce the
disclosure redundancies. To minimize with fair value estimates. Regardless of efficiency and the effectiveness of
the effect of diminishing returns on whether such estimates are prepared capital markets.
potential new disclosure improvements internally or by valuation specialists, Information delivery is made more
identified during the course of our the effort and elapsed time required to difficult by fair value. Investors may not
efforts and future standards-setting implement and maintain mark-to-model understand the uncertainty associated
activity, we are considering fair values is significant. with fair value measurements (i.e., that
recommending: (1) That the SEC request Nevertheless, some have advocated they are merely estimates and in many
the FASB to develop a disclosure mandatory and comprehensive use of instances lack precision), including the
framework that integrates existing fair value as a solution to the quality of unrealized gains and losses in
disclosure requirements into a cohesive complexities arising from the mixed earnings that arise from changes in fair
whole (e.g., eliminate redundant attribute model. However, opponents value. Some question whether the use of
disclosures and provide a single source argue that this would only shift the fair value may lead to counterintuitive
of disclosure guidance across all burden of avoidable complexity from results. For example, an entity that opts
accounting standards), (2) improvement investors to preparers and auditors, to fair value its debt may recognize a
to the piecemeal approach to among others. Specifically, certain gain when its credit rating declines.
establishing disclosures (i.e., standard- investors may find uniform fair value Others question whether the use of fair
by-standard), and (3) that the SEC reporting simpler and more meaningful value for held to maturity investments
develop a process to regularly evaluate than the current mixed attribute model. is meaningful. Finally, preparers may
and, as appropriate, update its But under a full fair value approach, view disclosure of some of the inputs to
some objectivity would be sacrificed the assumptions as sensitive and
disclosure requirements as new FASB

standards are issued. because many amounts that would competitively harmful.
change to fair value are currently Despite these difficulties, the use of
40 We acknowledge uncertainty also exists in reported on a more verifiable basis, such fair value may alleviate some aspects of
other measurement attributes, such as historic cost, as historic cost. These amounts would avoidable complexity. Such information
which may warrant similar disclosure. have to be estimated by preparers and may provide investors with
management’s perspective, to the extent a result, we believe that No. 157, Fair Value Measurements, to
management makes decisions based on recommendations requiring a systematic share-based payment transactions.
fair value, and it may improve the measurement framework and better
Competing Models
relevance of information in many cases, communication of measurement
as historical cost is not meaningful for attributes would more feasibly reduce Competing models are distinguished
certain items. avoidable complexity resulting from the here from alternative accounting
Fair value may enhance consistency mixed attribute model. Such policies. Alternative accounting
by reducing confusion related to communication encompasses footnote policies, as explained above, refer to
measurement mismatches. For example, disclosure of each measurement different accounting treatments that
an entity may enter into a derivative attribute’s characteristics (e.g., preparers are allowed to choose under
instrument to hedge its exposure to uncertainty associated with fair value), existing GAAP (e.g., whether to apply
changes in the fair value of debt as well as a more systematic the direct or indirect method of cash
attributable to changes in the presentation of distinct measurement flows). By contrast, competing models
benchmark interest rate. The derivative attributes on the face of the primary refer to requirements to apply different
instrument is required to be recognized financial statements. accounting models to account for
at fair value, but, assuming no similar types of transactions or events,
application of hedge accounting or the V. Future Considerations depending on the balance sheet or
fair value option, the debt would be As noted in the introduction to this income statement items involved.
measured at amortized cost, resulting in chapter, exceptions to general principles Examples of competing models
measurement mismatches. Fair value create complexity because they deviate include different methods of asset
might also mitigate the need for detailed from established standards that are impairment testing such as inventory,
application guidance explaining which applicable to most companies. Our goodwill, and deferred tax assets, etc.42
instruments must be recorded at fair developed proposals with respect to Other examples include different
value and help prevent some transaction industry-specific guidance and methods of revenue recognition in the
structuring. Specifically, if fair value alternative accounting policies address absence of a general principle, as well
were consistently required for all two forms of this diversity. We intend as the derecognition of most liabilities
similar activities, entities would not be to deliberate two remaining forms of (i.e., removal from the balance sheet) on
able to structure a transaction to achieve such diversity during the course of our the basis of legal extinguishment
a desired measurement attribute. compared to the derecognition of a
work later in 2008.
Fair value also eliminates issues pension or other post-retirement benefit
surrounding management’s intent. For Scope Exceptions in GAAP Other Than obligation via settlement, curtailment,
example, entities are required to Industry-Specific Guidance 41 or negative plan amendment.
evaluate whether investments are Competing models contribute to
As noted previously, scope exceptions
impaired. Under certain impairment avoidable complexity in that they lead
other than industry-specific guidance
models, entities are currently required to inconsistent accounting for similar
represent departures from a principle.
to assess whether they have the intent activities, and they contribute to the
They contribute to avoidable complexity
and ability to hold the investment for a volume of accounting literature. On the
because they result in different
period of time sufficient to allow for any other hand, the value of competing
accounting for similar activities, require models will be considered in light of
anticipated recovery in market value. As detailed analyses to determine whether
discussed in section II.B of this chapter, cost-benefit considerations, practical
or not they apply in particular approaches to issuing guidance in the
management intent is subjective and, situations, and increase the volume of
thus, less auditable. However, use of fair near-term before more principled
accounting literature. On the other standards can be developed, and the
value would generally make hand, the value of scope exceptions will
management intent irrelevant in be considered in light of cost-benefit 42 For instance, inventory is assessed for
assessing the value of an investment. considerations, practical approaches to recoverability (i.e., potential loss of usefulness) and
Discussion issuing guidance in the near-term before remeasured at the lower of cost or market value on
more principled standards can be a periodic basis. To the extent the value of
We acknowledge the view that a inventory recorded on the balance sheet (i.e., its
complete transition to fair value would developed, and the magnitude of change ‘‘cost’’) exceeds a current market value, a loss is
alleviate avoidable complexity resulting that would result from eliminating or recorded. In contrast, goodwill is tested for
from the mixed attribute model. reducing them. impairment annually, unless there are indications
Examples of scope exceptions of loss before the next annual test. To determine the
However, we also recognize that amount of any loss, the fair value of a ‘‘reporting
expanded use of fair value would include: (1) A contract that has the unit’’ (as defined in GAAP) is compared to its
increase avoidable complexity, as characteristics of a guarantee under FIN carrying value on the balance sheet. If fair value is
discussed above, unless numerous 45, Guarantor’s Accounting and greater than carrying value, no impairment exists.
Disclosure Requirements for Guarantees, If fair value is less, then companies are required to
implementation questions related to allocate the fair value to the assets and liabilities
relevance and reliability are addressed, Including Indirect Guarantees of in the reporting unit, similar to a purchase price
which extend beyond the scope of our Indebtedness to Others, but is treated as allocation in a business combination. Any fair value
work. contingent rent under SFAS No. 13, remaining after the allocation represents ‘‘implied’’
Accounting for Leases; (2) the business goodwill. The excess of actual goodwill compared
In light of our limited duration, we to implied goodwill, if any, is recorded as a loss.
recognize that we may not scope exception to the applicability of Deferred tax assets are tested for realizability on the
independently develop a FIN 46R, Consolidation of Variable basis of future expectations. The amount of tax
comprehensive measurement Interest Entities, subject to certain assets is reduced if, based on the weight of available
criteria; and (3) the application of SFAS evidence, it is more likely than not (i.e., greater than
framework, but we plan to provide
50% probability) that some portion or all of the

input to the FASB’s projects in this area deferred tax asset will not be realized. Future
41 We have limited our focus to scope exceptions, realization of a deferred tax asset ultimately
(see conceptual approach 1.C on the
while acknowledging there are other types of depends on the existence of sufficient taxable
measurement framework and exceptions in GAAP. This limited approach was income of the appropriate character (e.g., ordinary
conceptual approach 1.E on groupings considered appropriate in light of our short income or capital gain) within the carryback and
in financial statement presentation). As duration. carryforward periods available under the tax law.
magnitude of change that would result Nevertheless, our proposals are the sources of FAF Trustee nominations,
from eliminating or reducing them. We designed to increase the effectiveness change terms of service, and create
will also explore the relationship and transparency of these processes. flexibility in the size of the FAF itself.
between competing models and the We support these proposals, particularly
II. Investor Representation
FASB’s conceptual framework. the decision to reduce reliance on
Investor representation in standards- constituent-based sponsoring
Chapter 2: Standards-Setting Process setting is critical to maintaining an organizations to put forward FAF
I. Introduction effective system of financial reporting, Trustees. However, we believe
yet the intricacy of certain accounting additional investor representation on
A robust standards-setting process is
matters has sometimes made it difficult the FAF should also be emphasized.
the foundation of an efficient system of
to attract meaningful investor Such representation should strive to
financial accounting and reporting, on
participation. Our proposals are consider differing perspectives in the
which capital providers may rely to
intended to underscore the pre- investing community.
make investment decisions. Although
eminence of investor perspectives in FASB and FASB Staff: Increasing
the U.S. approach to financial reporting
developing and administering a well- direct investor involvement on the
has been quite effective in achieving
designed and effective system of Board would benefit the FASB by
that overarching objective, GAAP has
financial reporting. The current bringing investor perspectives to the
evolved over many years to a point
standards-setting process attempts to forefront of standards-setting and the
whereby some of the basic principles
balance the views of different process of issuing interpretive
are obfuscated by detailed interpretive
stakeholders. However, the financial implementation guidance. We propose
rules, as well as various exceptions and
reporting system would best be served that the composition of the Board
alternatives, which reduce the include no fewer than one, and perhaps
by recognizing that the perspectives of
usefulness of the resulting financial more than one, experienced investor
investors should be pre-eminent when
reporting. Historically, interpretative who regularly uses third-party financial
competing interests cannot be aligned,
rules on how to implement GAAP statements to make investment
because all stakeholders benefit from a
(interpretive implementation guidance) decisions.
system that allocates capital more
have proliferated from a variety of Our proposal assumes that the FAF
efficiently.
sources and, intentionally or not, have will implement its proposed reduction
We acknowledge the FASB’s
become perceived as additional GAAP. in the size of the FASB from seven to
significant recent efforts to increase
This increases the complexity of the five members. If this reduction is made,
investor participation in standards-
financial reporting system and reduces we believe the composition of the Board
setting. Specifically, the FASB leveraged
its transparency for investors, especially should be reconsidered to require that a
a number of existing advisory groups
when questions exist about the preparer, an auditor, and at least one
and created additional advisory groups
authoritative nature of such guidance or experienced investor who regularly uses
to increase investor involvement. Our
conflicts exist between interpretations. third-party financial statements to make
proposal below is intended to provide
This chapter advances developed investment decisions are all
the FASB with more focused, efficient,
proposals, conceptual approaches, and represented. In our view, although
and timely feedback from investors,
matters for future consideration academic representation on the Board
both large and small.
intended to alleviate some of these Developed Proposal 2.1: Additional should be actively sought, it should not
concerns. Specifically, after examining investor representation on standards- be mandated. If the FASB consists of
the U.S. standards-setting process, we setting bodies is central to improving five members, our suggested approach
propose changes in the following areas: financial reporting. Only if investor would increase the influence of
• Increased investor representation in perspectives are properly considered by investors. While we recognize that
standards-setting. all parties will the output of the workload capacity concerns may be
• Enhancements in governance and financial reporting process meet the created by a reduction in the size of the
oversight. needs of those for whom it is primarily Board, we believe that these concerns
• Improvements in the process of may be mitigated by more delegation of
intended to serve. Therefore, the
setting new standards. responsibilities to senior staff members
perspectives of investors should have
• Narrowing the sources of and a possible increase in the size of the
pre-eminence. To achieve that pre-
interpretive implementation guidance. FASB staff. On the other hand, if the
eminence in standards-setting, the SEC
In general, we believe the design of FAF does not reduce the FASB’s size, at
should encourage the following
the U.S. financial reporting system and least two investors should be required
improvements:
the role played by each participant are • Add investors to the Financial on the Board. The remaining at-large
appropriate. However, improvements to Accounting Foundation (FAF) to give Board members should be selected from
the existing standards-setting process, more weight to the views of different the most qualified individuals who
including the process of issuing types of investors, both large and small. possess a breadth of experiences that
interpretive implementation guidance, • Give more representation on both will ensure that the perspectives of
may significantly influence behaviors the FASB and the FASB staff to investors are carefully considered.
and thereby help financial reporting experienced investors who regularly use There may be opportunities to
better serve the needs of investors. financial statements to make investment increase investor representation on the
Some of our proposals may be decisions to ensure that standards- FASB staff as well. The FASB has a few
partially or substantially addressed by setting considers fully the usefulness of staff with professional investing
actions recently taken or in the process the resulting information. experience. The FASB also has had a
of being taken by the FAF, the FASB, fellowship program for many years, but
FAF: Our proposal complements the

and the SEC, which we reference where FAF’s recently proposed governance
applicable. Other aspects of our reforms.43 The FAF proposes to expand the FAF, FASB and GASB (December 18, 2007). Our
proposals are already in place or occur deliberation of the FAF request for comments
focused on the FAF and FASB proposals, as the
informally in practice, but may not be 43 FAF, Request for Comments on Proposed Governmental Accounting Standards Board (GASB)
fully effective or well understood. Changes to Oversight, Structure and Operations of is outside of our scope.
fellows usually come from the auditor Rather, they would improve IV. Standards-Setting Process
and preparer communities. The FASB accountability in standards-setting. Improvements
has approached investor groups about Proposed FAF Governance Changes:
The U.S. standards-setting process
the possibility of sponsoring fellows, We support the FAF’s governance
requires significant due process. The
but, thus far, has had limited success. proposals as outlined below, with minor
FASB’s activities are open to public
Investors should promote the fellowship modifications regarding composition of
participation and observation, and the
positions and encourage qualified the FAF and the FASB, as proposed in
FASB actively solicits the views of its
applicants to join the FASB staff to help section II of this chapter, and agenda-
various constituents on accounting
enhance investor input in standards- setting, as proposed in section IV of this
issues. We believe the FASB’s approach
setting. chapter:
FAF Oversight: The FAF proposes to to obtaining significant input through its
In addition, the FAF should consider open due process is fitting, although
staffing alternatives that make greater increase its active oversight of the
FASB. We support this proposal, but we there is a difficult trade-off between a
use of part-time Board members or part- transparent due process and
time senior staff for particular projects note that the FAF has not described how
it intends to implement it. Many of the expediency.
or purposes. However, we recognize that We believe the FASB’s processes need
conflict of interest and independence developed proposals and conceptual
approaches in this chapter provide improvement. Critics argue that it may
issues would have to be resolved. take too long for the issuance of new
input regarding how and in what areas
III. FAF and FASB Governance to strengthen such oversight. accounting standards or interpretive
FASB Voting: The FAF proposal implementation guidance in response to
The FAF Board of Trustees is changes in business practices or the
responsible for the oversight, funding, maintains the FASB’s current simple
majority voting requirement. We economic environment. They point to
and appointment of Board members of projects that have been on the FASB’s
the FASB and the GASB. While the FAF support simple majority rather than
supermajority voting to promote the agenda for years to illustrate that
Board of Trustees does not direct the fundamental issues are routinely given
timeliness of standards-setting.
standards-setting activities of the FASB, low priorities. They further argue that
Mission and Objectives: The FASB’s
it does have a responsibility to new standards are not always consistent
mission statement, objectives, and
periodically review the FASB’s precepts acknowledge that efficient and may be based on several different,
structure and governance to assess its capital markets rely on credible, or even conflicting, principles. This may
effectiveness and efficiency. The FAF concise, and understandable financial be due to a number of reasons,
has always maintained oversight of the information. They also recognize the including the lack of a completed
FASB as one of its main priorities. Our importance of the following: conceptual framework, competing
proposal below is designed to promote • Improving the usefulness of priorities placed on the Board, or the
more active FAF oversight of the financial information by focusing on evolutionary nature of standards-setting
FASB—in order to shorten the time relevance, reliability, comparability, and in the U.S.
taken to develop standards, as well as to consistency. Due to its practice of being
improve their quality: • Keeping standards current. continually open to constituent input,
Developed Proposal 2.2: The SEC • Considering promptly significant the FASB may receive conflicting advice
should assist the FAF with enhancing areas of deficiency that need regarding its agenda. Projects are
its governance of the FASB, as follows: improvement. frequently added to the agenda in
• By encouraging the FAF to develop • Promoting international response to requests from constituents,
performance metrics to assess the convergence. but projects not being actively
FASB’s adherence to the goals in its • Improving the understanding of the considered are seldom removed. The
mission statement, objectives, and nature and purpose of information in FASB may be working on projects that
precepts and to improve its efficiency. financial reports. could be better addressed in other ways,
• By supporting the FAF’s changes • Being objective in decision-making
or not at all. In either case, such projects
outlined in its ‘‘Request for Comments and promoting neutrality of
divert resources from other important
on Proposed Changes to Oversight, information.
• Weighing carefully the views of agenda items. Further, even though the
Structure and Operations of the FAF, FASB has a transparent due process,
FASB and GASB,’’ with minor constituents.
• Satisfying the cost-benefit new standards are often met with
modifications regarding composition of requests for interpretive implementation
constraint.
the FAF and the FASB, as proposed in • Minimizing disruption by providing guidance, implementation deferral, or
section II of this chapter, and agenda- reasonable effective dates and transition amendment.
setting, as proposed in section IV of this provisions. Our proposal below is designed to
chapter. • Reviewing the effects of past further enhance the U.S. standards-
• By encouraging the FAF to amend decisions in a timely fashion to setting process and its timeliness.
the FASB’s mission statement, stated interpret, amend, or replace standards, Developed Proposal 2.3: The SEC
objectives, and precepts to emphasize when necessary. should encourage the FASB to further
that an additional goal should be to • Following an open, orderly process improve its standards-setting process
minimize avoidable complexity. for standards-setting. and timeliness, as follows:
Performance Metrics: The FAF should We believe minimizing avoidable • Create a formal Agenda Advisory
develop performance metrics to assess complexity should be added to this list. Group that includes strong
the FASB’s adherence to the goals in its Although we do not believe the FASB representation from investors, the SEC,
mission statement, objectives, and sets out to issue complex standards, the PCAOB, and other constituents,
precepts. These metrics should track the amending the mission statement, stated such as preparers or auditors, to make
timeliness and effectiveness of the objectives, and precepts may promote recommendations for actively managing
FASB’s standards-setting process. Such more explicit consideration of less U.S. standards-setting priorities.
metrics would not have a detrimental complex accounting alternatives during • Refine procedures for issuing new
impact on the FASB’s independence. standards-setting. standards by: (1) Implementing investor
pre-reviews designed to assess the SEC) and in what form, the Agenda before the FASB does. In addition,
perceived benefits to investors, (2) Advisory Group would give immediate active involvement by the SEC will
enhancing cost-benefit analyses, and (3) input about how best to prioritize near- allow coordination of how and by
requiring improved field visits and field term versus long-term priorities. The whom guidance should be issued,
tests. main goals of such a group would be to: thereby reducing the impetus for the
• Improve review processes for new • Help standards-setting become SEC to issue interpretive
standards by conducting post-adoption more nimble. implementation guidance separately
reviews of every significant new • Assist the FASB is setting an from the codified version of GAAP (see
standard, generally within one to two achievable, strategic agenda, rather than section VI of this chapter).
years of its effective date, to address one that includes projects proposed for • Involvement of the FASB. All Board
interpretive questions and reduce the many years with little progress. members should be invited as official
diversity of practice in applying the • Recommend when it is appropriate observers.
standard, if needed. for the SEC or other parties to issue • Involvement of the PCAOB. A
• Improve processes to keep existing interpretive implementation guidance senior representative from the PCAOB
standards current and to reflect changes related to emerging issues and issues should be invited as an official observer,
in the business environment by observed by the SEC in its registrant as actions taken by the PCAOB
conducting periodic assessments of reviews. significantly impact behavior of
existing standards. • Help the FASB maintain the participants in the U.S. financial
Some of our proposed process usefulness of its authoritative guidance reporting community.
improvements call for formalizing or by recommending areas that need to be • Involvement of others. Constituents
improving existing processes, or kept current. otherwise not represented should be
implementing new processes to improve • Shield the FASB from influence by able to submit agenda requests and track
standards-setting outputs. Our proposed any single group of constituents, thereby agenda decisions, similar to the way in
Agenda Advisory Group would help the protecting its independence. which the EITF functions.
FASB, the SEC, and other participants • Inject accountability into agenda- Formulating and Proposing New
in the financial reporting community setting for all involved parties. Standards: The FASB has an elaborate
focus efforts on the most meaningful Our proposal complements the FAF’s process for formulating and proposing
activities and centralize constituent proposed changes to the FASB’s agenda- new standards. This process is designed
input to improve the timeliness of setting process in which the FAF would to ensure that proposed standards
standards-setting. give the FASB Chairman control over properly address significant issues, are
Agenda Advisory Group: The first the FASB’s agenda. We believe instilling consistent with business practices and
step in standards-setting is agenda- more decision-making authority in the economics, and have benefits that
setting. The FASB receives many FASB Chairman, combined with a justify accounting changes. It involves
requests to act on various topics from requirement to consult with the staff preparation of a draft proposal,
many constituents, including the SEC. proposed Agenda Advisory Group, publication of the proposal with an
The FASB also needs to fulfill its would be a positive step toward opportunity for public comment, and
obligations under the Memo of increasing the FASB’s efficiency. approval of the final standard.
Understanding with the IASB regarding In creating such an Agenda Advisory Throughout the process, the FASB
international convergence. Requests for Group, the SEC and the FASB should consults with and receives input from a
interpretations or amendments divert consider ways to implement the diverse group of constituents. This
attention from other critical agenda following objectives: process is time consuming, often taking
items. FASB agenda decisions often add • Timeliness. The Agenda Advisory many years, and could be made more
rather than delete projects. Further, Group should be convened both on a efficient. The Board’s outreach to
given the volume of activity on the regular schedule and on short notice certain constituents sometimes seeks
FASB agenda, Board and staff telephonically to deal with urgent advice only on detailed issues rather
prioritization conclusions are not matters, as necessary. than the scope of projects and broad
always clear to constituents. What may • Accountability. The Agenda matters. Our proposal would increase
result is that projects being addressed Advisory Group should vote on certain the efficiency and effectiveness of
may not be responsive to widely aspects of the standards-setting agenda standards-setting by obtaining more
acknowledged needs, or projects may and provide that information in an focused inputs at an earlier stage
not have sufficiently-defined scopes to advisory capacity to the FASB through investor pre-reviews, enhanced
address these needs in a timely fashion. Chairman, who would then make the cost-benefit analyses, and more field
The FASB has a number of existing final agenda decision. Part of the visits and field testing.
advisory groups and committees that it rationale for calling a vote would be to Investor Pre-Reviews: Although the
consults about issues that may affect its increase accountability of the FASB FASB regularly consults with a number
agenda and project priorities; however, Chairman to the FAF regarding agenda- of standing investor advisory groups, we
we believe there needs to be increased setting effectiveness. believe that there may be opportunities
accountability to the FAF on agenda- • Active involvement of key groups of to both increase and more effectively
setting and project priorities. investors. Key investor groups should be manage investor involvement, so that
An Agenda Advisory Group that actively involved in agenda-setting to interested parties know when and how
includes strong representation from maintain an appropriate focus on to engage the FASB and its staff to assist
investors, the SEC, the FASB, and the investor needs. in standards-setting. Specifically, the
PCAOB, as well as other interested • Involvement of the SEC. Due to the FASB should implement a scalable
parties such as preparers and auditors, SEC’s oversight responsibility for investor pre-review to assess perceived
should be created to provide advice on standards-setting, one or more senior investor benefits prior to exposing new
agenda-setting. By identifying emerging representatives from the SEC Office of standards for public comment. The
issues and building consensus about the Chief Accountant (OCA) should be FASB should consider the following
which group is best positioned to deal on the Agenda Advisory Group, as the attributes when designing such a pre-
with them (e.g., the FASB, the EITF, or SEC typically identifies practice issues review:
• Seek detailed comments from a rather than omitting the data. The FASB receiving constituent input. Although
diverse panel of investors (e.g., buy-side should request a cost estimate and robust field testing and field visits
analysts, sell-side analysts, and rating underlying methodology from require resources and time, combining
agencies), all of whom should have constituents who claim that costs are these efforts will make efficient use of
strong interests in the outcome. excessive. the Board’s and its staff’s time.
• Ask investors to consider the • Use information collected in the Moreover, by researching
accounting guidance through the eyes of investor pre-review to supplement the implementation questions prior to
a serious retail investor to determine assessment of the benefits. issuing a new standard, the FASB
whether the new information provided • Refrain from discussing costs and would reduce the amount of time spent
would be decision-useful (whether it benefits on a net basis, as this considering possible interpretive
will provide better information than sometimes creates opacity around the implementation guidance,
what is currently available). This should data underlying such conclusions. The implementation deferral, or amendment.
entail an evaluation of the costs and analyses of costs and benefits should be The FASB also should leverage work
benefits of updating data analysis prepared separately, with an indication already being done by preparers,
models with the new or improved of how the Board weighed the evidence auditors, and investors to assess the
information, as necessary. in its conclusion. costs, benefits, operationality, and
• Revisit or even discontinue • Add auxiliary information to put auditability of proposed standards.
standards-setting projects based on the the accounting standard or interpretive Requesting assistance from preparers,
feedback received. implementation guidance in context auditors, and investors, either directly
Cost-Benefit Analyses: The FASB (e.g., include an expectation of the or through task forces and resource
evaluates whether the benefits of a number of companies to be impacted by groups (perhaps on more of a rotational
proposed standard justify its costs prior the standard, their overall market basis than is done in practice today),
to exposing it for public comment. capitalization, or other metrics). would bring additional subject matter
However, participants in standards- • Improve the documentation of the expertise and recent business
setting have long acknowledged that cost-benefit conclusions in new experience to each field visit and field
reliable, quantitative cost-benefit standards so that they may be referred test.
calculations are seldom feasible, in large to over time. Post-Adoption Reviews of New
part because of the lack of available • Consider hiring an economist to Standards: We acknowledge that it is
information on the costs and the assist in preparing and reviewing cost- difficult to identify and address all
difficulty in quantifying the benefits. benefit analyses. possible implementation issues in a new
Further, the magnitude of the benefits Field Visits and Field Testing: standard prior to it being issued and
and costs is difficult to assess prior to Throughout the deliberation process, adopted. Issues and questions are often
actual implementation of the standard. the FASB meets with a number of identified during the initial
As a result, cost-benefit considerations interested constituents regarding implementation phase as preparers and
are often based on anecdotal evidence proposed standards (referred to as ‘‘field auditors begin to apply a new standard
and do not always include useful input visits’’). Once the proposed standard is in practice. Preparers, auditors, and
from preparers, auditors, investors, and exposed for public comment, the FASB others often monitor and take measures
regulators. Cost-benefit analyses should at its discretion may conduct field tests, to reduce diversity in practice when
be a more rigorous, essential part of in which the implementation of a implementing new standards by
standards-setting and should be given proposed standard is beta tested so that conferring amongst themselves and
more weight than they are today. issues may be identified and resolved issuing non-authoritative interpretive
The FASB is currently considering prior to final issuance of the new implementation guidance. During this
new initiatives to improve its cost- standard. However, as a practical initial period, requests are often made of
benefit analyses. We support these matter, and because of resource the FASB and the SEC to provide
efforts and, to complement them, the constraints, robust field testing has not interpretive implementation guidance
FASB should consider the following been part of the process for setting many for new standards.
enhancements to its cost-benefit recent standards. As a result, new In the current financial reporting
procedures: standards are often met with requests environment, preparers and auditors are
• Select preparers, auditors, for interpretive implementation sometimes viewed as being penalized
investors, and regulators to be involved guidance, implementation deferral, or for implementing their understanding of
based on their interest in the standard amendment. new accounting standards immediately
or interpretive implementation guidance Whenever possible, scalable field after adoption. This is because any
being developed. Such participants visits and field tests should be a ambiguity or substantial gaps identified
should be involved in the process of required part of standards-setting for all in the implementation period may lead
assessing costs and benefits, as well as significant new standards to identify the regulators to issue interpretive
performing field visits and field testing, and resolve as many conceptual and implementation guidance that differs
to the extent feasible. implementation issues as practicable from conclusions originally reached by
• Expose the entire cost-benefit prior to issuance. These procedures may the preparers and auditors.
analysis for public comment (rather also identify less costly alternative The FASB should improve existing
than a summary or abstract), thereby accounting treatments. The rigor processes to consistently ensure timely
enhancing the ability of interested required for these procedures should be consideration of implementation issues
constituents to comment on the scaled based on the difficulty and length for new accounting standards. The goal
conclusions reached and the basis for of time required to implement and the of post-adoption reviews of new
these conclusions. magnitude of the impact of the standard standards would be to determine if the
• Attempt to better quantify the costs or interpretive implementation new standard is accomplishing its
(in addition to providing qualitative guidance. In addition, whenever intended purpose or whether it has
assessments). If there is concern about possible, field visits and field testing unintended consequences that need to
the accuracy or reliability of the data, should occur contemporaneously, to be resolved. The FASB currently does
frame these concerns in the analysis improve the focus and efficiency of address questions that arise after new
standards are issued—it regularly in which there were ambiguities or gaps Further, when evaluating the feedback
receives input from various constituents in the new standards that could be received from constituents and the
and periodically revisits some subject to more than one reasonable results of its own research, the FASB
standards. However, the process of interpretation. For example, it may be should seek advice from the Agenda
completing post-adoption reviews inappropriate for the SEC to bring an Advisory Group to help prioritize its
should be formalized in policy, be more SEC enforcement proceeding based on a agenda.
systematic, involve input from a broader new accounting standard if, after careful V. Interpretive Implementation
range of constituents, and be monitored analysis and due diligence made in Guidance
using relevant performance metrics. good faith, the registrant took a
Specifically, the FASB should reasonable and supportable view of that We believe that there are too many
perform a post-adoption review for standard, which was subsequently sources of interpretive implementation
every significant new standard. The changed by formal amendment or guidance. Historically, this guidance
review should be completed no more published interpretation. proliferated from a variety of sources,
than one to two years after the effective Periodic Assessment of Existing which intentionally or not, has been
date of the standard, with completion Standards: After a new accounting viewed as additional GAAP. In other
sooner if the scale of the new standard standard has been in place for a words, interpretive implementation
is narrow or a large number of reasonable period, more data is likely to guidance that is not formally
implementation questions arise. At the be available to evaluate its benefits and authoritative often is erroneously
end of the review period, the FASB costs. Further, over time economic perceived by participants in the
should reach a formal conclusion on conditions and business practices may financial reporting and legal
each new standard to determine if change, such that older accounting communities to be quasi-authoritative.
interpretive implementation guidance standards may lose their relevance and The key risks associated with a
would serve the needs of investors by effectiveness. Some participants in the proliferation of interpretive
reducing diversity in practice or financial reporting community have implementation guidance are that: (1)
otherwise improving the application of commented that numerous accounting The appropriate rule may not be
the standard (e.g., by resolving standards or models need immediate identified and considered, and (2) it
ambiguities in the wording or filling-in reevaluation. In today’s economic may conflict with authoritative
unintended gaps in the standard). environment, the accounting for guidance, as well as with other non-
We believe that, when necessary, securitizations and structured products authoritative guidance, causing
interpretive implementation guidance uncertainty in application and legal
with off-balance sheet risk are cited as
for new standards is best given by the risk.
needing reevaluation.44 The accounting
FASB using: Over the past few years, the FASB and
for financial guarantees, convertible
• A transparent due process with the SEC have taken steps intended to
debt, and derivatives and hedging reduce the proliferation of interpretive
public comment.
• Appropriate transition guidance activities are also frequently cited areas implementation guidance from different
and required disclosures that will for improvement. authoritative bodies. For example, the
provide investors with useful The process by which the FASB SEC recognized the standards of the
information regarding possible changes receives, evaluates, and addresses FASB as generally-accepted, and the
in accounting. concerns about the usefulness of FASB limited the ability of other bodies
• The codified version of GAAP. standards in a timely fashion is critical to create authoritative guidance without
Understandably, some interpretive to the proper functioning of the U.S. FASB ratification. Nevertheless, the SEC
implementation guidance may be of capital markets. The FASB should staff continues to be a source of
such an urgent nature that a transparent improve and formalize this process to interpretive implementation guidance in
due process would not be responsive to ensure that standards continue to be its own right, through such vehicles as
the needs of market participants. useful in the current economic and comment letters, staff speeches, SABs,
Therefore, we envision that the SEC or business environment. This should be and other forms of exchange that,
other parties, through representation on done by formalizing the process of although typically non-authoritative, are
the Agenda Advisory Group, could periodically requesting feedback from perceived as quasi-authoritative.
assist by agreeing to issue interpretive investors, preparers, auditors, and Similarly, actions taken by the FASB
implementation guidance in such regulators regarding what areas of GAAP and the SEC have not sufficiently
situations (see section VI of this need reevaluation because they create curbed the creation of other non-
chapter). practice problems or are unnecessarily authoritative interpretive
Under our proposal, it is not complex. In addition, to identify other implementation guidance, such as that
contemplated that preparers would have specific areas of GAAP in need of from audit firms, preparer and industry
the flexibility to implement new review, the FASB should consider the groups, academia, the Center for Audit
standards at different times nor have the following: Quality (CAQ), and other regulators.
ability to adopt early or late. Following • Restatement activity. Our proposal below, which should be
the recent policy decision by the FASB • Emerging issues and the amount of read in conjunction with conceptual
precluding early adoption of new interpretive implementation guidance approach 2.A, is designed to recognize
standards, our proposal contemplates issued on particular standards. recent accomplishments in this area,
transition guidance for a new standard • Changes in business practices and clarify what guidance is authoritative
with a stated, required implementation the economy. and non-authoritative, and further
date. Similarly, this proposal is not a • New cost-benefit information as it influence the behaviors that have led to
safe harbor. Violations of GAAP will becomes available. the desire for more guidance:
continue to be dealt with by the SEC Developed Proposal 2.4: The number
44 SEC Staff, Report and Recommendations
through the review, comment, of parties that either formally or
Pursuant to Section 401(c) of the Sarbanes-Oxley
restatement, and enforcement processes. Act of 2002 On Arrangements with Off-Balance
informally interprets GAAP and the
However, the SEC should give Sheet Implications, Special Purpose Entities, and volume of interpretative
appropriate consideration to situations Transparency of Filings by Issuers (June 2005). implementation guidance should
continue to be reduced. The SEC should into the FASB Codification.45 Similarly, responsibilities, to mitigate the risk of
coordinate with the FASB to clarify the FASB Codification does not deal its actions unintentionally driving
roles and responsibilities regarding the with either the root causes of the behavior by market participants, as
issuance of interpretive implementation proliferation of interpretive follows:
guidance, as follows: implementation guidance or the • The SEC should clarify that
• The FASB Codification, a draft of behavior of participants in the U.S. registrant-specific matters are not
which was released for verification on financial reporting community that authoritative forms of interpretive
January 16, 2008, should be completed caused the complexity. Notwithstanding implementation guidance under GAAP
in a timely manner. In order to fully these concerns, we support the FASB’s and, accordingly, registrants other than
realize the benefits of the FASB’s efforts to verify the Codification. To the specific registrant in question are
codification efforts, the SEC should further improve the Codification, the not required to take into account such
ensure that the literature it deems to be SEC should re-codify its guidance using registrant-specific matters.
authoritative is integrated into the FASB a consistent format, and the FASB and • The SEC staff should refrain from
Codification to the extent possible, or the SEC should consider a second phase informally communicating broadly
separately re-codified, as necessary. of the codification project that would applicable interpretive implementation
systematically revisit GAAP, as guidance (e.g., staff speeches) that are
• To the extent practical, going likely to be perceived as changing the
forward, there should be a single discussed in section VI of this chapter.
Non-Authoritative Guidance: application of GAAP. Rather, such
standards-setter for all authoritative communications should be used to
accounting standards and interpretive Although the FASB Codification will
help clarify the roles of authoritative highlight authoritative interpretive
implementation guidance that are implementation guidance that has
applicable to a particular set of and non-authoritative guidance,
meaningful improvements in financial already been issued.
accounting standards, such as GAAP or • In instances in which the SEC staff
IFRS. For GAAP, the FASB should reporting will be difficult if non-
authoritative interpretive identifies registrant-specific accounting
continue to serve this function. To that matters that it believes may result in the
end, the SEC should only issue broadly implementation guidance continues to
be perceived, as it is today, as having need for broader interpretive
applicable interpretive implementation implementation guidance or a
guidance in limited situations (see quasi-authority in the marketplace. Our
proposal is intended to foster clarification of an accounting standard
section VI). under GAAP, the SEC staff should refer
acceptance of reasonable professional
• All other sources of interpretive these items to the FASB as part of the
judgments made in good faith when
implementation guidance should be Agenda Advisory Group.
they are supportable under GAAP.
considered non-authoritative and • When it is necessary for the SEC or
Specifically, non-authoritative
should not be required to be given more its staff to issue broadly applicable
interpretive implementation guidance
credence than any other non- interpretive implementation guidance, it
should not be used to force restatements should try to provide such guidance: (1)
authoritative sources that are evaluated
when other reasonable views exist that In a clear communication identified as
using well-reasoned, documented
are supportable under GAAP. authoritative, (2) so that it can easily
professional judgments made in good
We recognize there is often a need for
faith. and immediately be integrated into a
interpretive implementation guidance
FASB Codification: The FASB has codification of SEC literature (as
and that such guidance can serve an
undertaken a significant project to proposed in section V of this chapter),
important purpose. The volume of
develop a comprehensive, integrated and (3) when expected to significantly
interpretative implementation guidance
Codification of existing accounting change the application of GAAP, only
should be reduced, and it should be
literature organized by subject matter after transparent due process and public
clearly identified as non-authoritative.
that is intended to become an easily comment to the extent practicable.
retrievable single source of GAAP. To VI. Conceptual Approaches and Future • The SEC staff should revisit internal
that end, on January 16, 2008, the FASB Considerations procedures and take further steps
released a draft of the FASB As discussed more fully below, we are necessary to improve the consistency of
Codification that will be subject to a considering a number of conceptual its views on the application of GAAP.
one-year verification period. We The SEC sometimes issues rules and
approaches and matters for future
applaud the FASB’s foresight on such a interpretations that comprise part of
consideration to improve standards-
project and recognize the significant authoritative GAAP. The SEC’s rule-
setting:
effort the project has entailed. The making activities are generally open to
Conceptual Approach 2.A: To further
FASB Codification: public participation and observation.
reduce interpretive implementation
• Brings together all GAAP from all However, other activities of the SEC and
guidance associated with GAAP, we are
authoritative sources except the SEC its staff do not occur with the same level
considering proposing that the SEC
and classifies it by topic into a single, of transparent due process and public
further clarify its role vis-à-vis the
searchable database so that it may be comment. As discussed below,
FASB, as well as its internal roles and
more easily researched. registrant-specific guidance is published
in the form of comment letters, but
• Clarifies what guidance is 45 Two of the benefits of the FASB Codification
appropriately does not need to be
are its search feature and decimal system, which
authoritative versus non-authoritative. consistently organizes topics and subtopics within proposed in advance or subject to public
• Puts accounting standards into a GAAP. No SEC guidance is currently included in comment. On the other hand, to the
consistent format, to the extent possible. the FASB Codification. To improve its usability in
extent the SEC promulgates interpretive
the future, the Codification will include
Although the FASB Codification does implementation guidance that is broadly
authoritative content issued by the SEC, as well as

not change the substance of GAAP, it selected SEC staff interpretations. However, the applicable and is expected to
should make its application easier. inclusion of SEC guidance will be for significantly change the application of
However, SEC literature, which has administrative convenience and will not supersede
such guidance in its current form. Further, the SEC
GAAP, we are considering whether it
developed through different guidance will not follow the same organizational should do so only after public notice
mechanisms, is not as easily integrated structure as the rest of GAAP. and comment, whenever practicable.
Registrant-Specific Guidance: The announcements, and training manuals. likely to be perceived as interpretative
SEC Division of Corporation Finance In addition, Corp Fin publishes and implementation guidance.
(Corp Fin) reviews and comments on maintains interpretive implementation Referral of Issues to the FASB: As
financial reports filed by registrants that guidance on the SEC’s Web site. While discussed in section IV of this chapter,
are not investment companies. Corp Fin all of these publications contain there were a number of standards that
has a process for facilitating the public disclaimers as to their non-authoritative were communicated to the FASB that
availability of comment letters and nature, many participants in the were in need of improvement that have
registrant responses to these comment financial reporting community consider yet to be improved. The SEC should
letters on the SEC’s Web site upon these disclaimers to be boilerplate and formalize the mechanism by which it
completion of the review process. Corp regard such interpretive implementation refers issues to the FASB, and one of the
Fin also receives letters from specific guidance as quasi-authoritative. goals of SEC representation on the
registrants requesting concurrence on These publications are typically proposed Agenda Advisory Group
various reporting and disclosure issues. viewed by the SEC staff as would be to strengthen such a referral
Similarly, OCA and Corp Fin receive confirmations of existing accounting mechanism. This will permit the FASB
requests from specific registrants for standards, rather than as supplemental to address the need for authoritative
concurrence on specific interpretative interpretive implementation guidance. interpretive implementation guidance
implementation issues. These letters are However, many of these publications that is broadly applicable in a codified
commonly referred to in the have and continue to influence market form, thereby reducing the need for the
marketplace as ‘‘pre-clearance’’ letters. behavior because they sometimes SEC to do so. It will also give the SEC
Preparers and auditors may include SEC staff views that do, in fact, greater insight into when the FASB and
misconstrue registrant-specific supplement existing GAAP. The SEC the EITF do not intend to issue
accounting outcomes as quasi- staff sometimes refers registrants to interpretive implementation guidance,
authoritative. However, registrant- these publications to support their which will allow the SEC to be more
specific matters are appropriately not views on registrant-specific matters. As responsive by issuing guidance, in the
subject to the same public deliberation such, many argue that these documents limited circumstances when necessary.
and comment as SEC rule-making, Consistency: We are considering
exemplify the SEC staff effectively
because they are registrant-specific and whether there is a need for more
setting standards without transparent
are not intended to be applied more coordination between the various offices
due process and public comment and
broadly. Nevertheless, preparers and and divisions within the SEC to
point to restatements sometimes
auditors may overreact by applying improve the consistency of accounting
following the release of these
these outcomes to similar, yet different, advice given by the SEC staff. Although
documents as evidence of their quasi-
transactions, sometimes believing that there are processes in place to build
authoritative nature in practice.
restatement is required. consensus on accounting matters within
We are deliberating whether the SEC In addition, other individual sources the SEC, there may be room for
should make clear that comments of non-authoritative implementation improvement.
provided to a specific registrant are not guidance (e.g., audit firms and the CAQ) The possibility of inconsistent
binding on other registrants. Clarifying often publish their own guidance to accounting advice emanating from the
that such comments are non- broadly communicate what they SEC staff creates confusion in the
authoritative would help: perceive to be SEC staff’s views and to marketplace.
• Prevent preparers and auditors from drive consistency in practice. However, Two processes exist (one in Corp Fin
giving undue significance to SEC staff as discussed below, if the SEC were to and one in OCA) for registrants to
comments made to individual increase its formal referral of broadly request reconsideration of conclusions
registrants. applicable interpretive matters to the expressed in either comment letters or
• Reduce the need for other parties to FASB, which could issue guidance in an in pre-clearance letters when registrants
issue interpretive implementation authoritative, timely fashion, the overall disagree with staff guidance or believe
guidance. volume of interpretive implementation they are receiving inconsistent advice
• Support our proposal to refer guidance would be reduced, as would compared to other registrants. However,
broadly applicable accounting matters conflicts between interpretations from registrants may not always use these
that require interpretive implementation different sources. We believe this would processes for a number of reasons, such
guidance to the FASB. further influence behaviors that have as: (1) To avoid additional delays and
Broadly Applicable Guidance: To led to the desire for more guidance. missed market opportunities, (2) to
inform the public about broadly We recognize that the SEC staff avoid the risk of opening other
applicable interpretive implementation publishes guidance to address issues accounting conclusions to
guidance, the SEC uses various forms of other than the application of GAAP. reconsideration, and (3) fear of possible
communication, including SABs,46 This conceptual approach is not retribution (misguided or not).
letters to industry, staff speeches, public directed towards such publications. We Therefore, although the SEC staff has
also recognize that the SEC staff, based created checks-and-balances in the form
46 The SEC authorized the use of SABs in 1975
on its review of thousands of filings of reconsideration processes, they may
to achieve a wider dissemination of the
administrative interpretations and practices utilized
each year, is in a unique position to not be utilized as anticipated.
by the SEC staff in reviewing financial statements. publish its comment letters. Such We do not intend to limit the ability
There had been concern that smaller audit firms publications are intended to reduce of the SEC staff to carry out its
and issuers would be disadvantaged because there comments that each registrant receives regulatory responsibilities in a timely
had previously been no formal dissemination of
staff practices. SABs were also designed to provide
in the review process by promoting a fashion. That is why we have not yet
high degree of compliance with GAAP. proposed a specific course of action. We
a means by which new or revised interpretations

and practices could be quickly and easily We continue to consider what proposals understand the SEC staff is reviewing its
communicated to registrants and their advisors. As to make in this area, but believe that the procedures in many of these areas and
they are designed to disseminate staff
administration practices on a timely basis to the
SEC staff should be diligent when expects to unveil a number of changes
broader public, SABs are generally not exposed for preparing this information not to in the coming months, including new
public comment before release. present comments in a manner that is procedures to enhance the consistency
of registrant-specific accounting improve the quality of the financial As we continue to deliberate this and
interpretations during filing reviews and reporting upon which investors rely. other work, we are considering
increasing the understanding and The question of how to design supporting the increased use of
usefulness of its reconsideration standards going forward is at the center objectives-oriented standards.
processes. We support these efforts and of a decade-long principles-based versus Future Considerations: We also plan
plan to review progress with the SEC rules-based accounting standards to deliberate what optimal transition
staff in the coming months as we debate. There has been much discussion provisions should be in the future and
continue our deliberations. in the marketplace on this topic, and whether new standards should be
Conceptual Approach 2.B: We are there are differing views. The SEC has applied prospectively or retrospectively.
considering proposing that the SEC been a frequent participant in the debate The goal of such deliberations will be to
continue to encourage improvement in and has long been supportive of balance the investor need for consistent
the way standards are written, as principles-based (or objectives-oriented) information with preparer and auditor
follows: standards.47 The question of how concerns about feasibility and the costs
• By supporting the writing of standards should be designed going of recasting historical information.
accounting standards according to an forward is a critical aspect of the Conceptual Approach 2.C: In addition
agreed-upon framework of what standards-setting process. to considering the other proposals in
constitutes an optimal standard. Such Rather than engaging in a debate over this report (and subject to the
standards should not strive to answer terms such as ‘‘principles-based,’’ conclusions reached in our future
every question and close every ‘‘objectives-oriented,’’ or ‘‘rules-based,’’ deliberations of international
loophole, but should be written with we prefer to think of the design of considerations), we are considering
more clearly stated objectives and accounting standards in terms of the proposing that the SEC encourage a re-
principles that may be applied to broad characteristics they should possess. We prioritization of the standards-setting
categories of transactions. are considering various suggestions for agenda that balances the need for
the optimal design of standards, international convergence,
• By supporting the writing of
including the work of the CEOs of the improvements to the conceptual
accounting standards in a manner that
World’s Six Largest Audit Networks. framework, and maintaining existing
promotes trust and confidence in
These CEOs are attempting to build GAAP. Further, we are deliberating
efficient markets by encouraging the use
consensus in the financial reporting whether the FASB and the SEC should
of professional judgments made in good
community about what optimal add to their agendas a second phase of
faith. Specifically, preparers and
accounting standards should look like the codification project to consider
auditors should apply the standards systematically revisiting GAAP to:
faithfully, and regulators should in the future and whether a framework
could be created that the standards- • Be more coherent after codification.
monitor and address abusive • Remove conflicts between
application of the standards. setters may refer to over time to ensure
standards or with the conceptual
Optimal Design of Standards: Some that these characteristics are optimized.
framework.
Their proposed framework was
participants in the U.S. financial • Be less complex, where possible.
reporting community believe that presented at the Global Public Policy • Be designed more optimally as
certain accounting standards do not Symposium in January 2008, which discussed above.
clearly articulate the objectives and recommends that optimal accounting • Readdress frequent practice
principles upon which they are based, standards have the following problems (as identified by restatement
because they are sometimes obscured by characteristics: volumes, input from the SEC,
detailed rules, examples, scope • Faithful presentation of economic implementation guidance issued, or
exceptions, safe harbors, cliffs, reality. frequently asked questions).
thresholds, and bright lines. In addition, • Responsive to investors’ needs for • Remove redundancies between SEC
GAAP is often not written in plain clarity and transparency. disclosure requirements and other
English. This can create uncertainty in • Consistency with a clear conceptual sources of GAAP.
the application of GAAP, as rules framework. • Amend, replace, or remove
• Based on an appropriately-defined outdated standards.
cannot cover all possibilities and the
scope that addresses a broad area of As part of our deliberation of the
underlying principles and objectives
accounting. Agenda Advisory Group proposed in
may not be clear.
• Written in clear, concise, and plain section IV of this chapter, we are also
Another significant concern about the language.
current system of accounting standards deliberating a conceptual approach
• Allows for the use of reasonable regarding immediate standards-setting
is that the proliferation of accounting judgment.48
rules fosters accounting-motivated priorities in the current environment.
structured transactions. As discussed We plan to finalize a proposal after
47 For example, the SEC issued Policy Statement:
further in chapter 1, standards that have completing deliberations on
Reaffirming the Status of the FASB as a Designated
international considerations later in
scope exceptions, safe harbors, cliffs, Private-Sector Standard Setter (April 2003), which
included numerous recommendations for the FAF 2008, which may significantly affect our
thresholds, and bright lines are
and FASB to consider, including greater use of approach. In fact, some participants in
vulnerable to manipulation by those principles-based accounting standards whenever the U.S. financial reporting community
seeking to avoid accounting for the reasonable to do so. The SEC staff also issued Study
have indicated that a full-scale adoption
substance of transactions using Pursuant to Section 108(d) of the Sarbanes-Oxley
Act of 2002 on the Adoption by the United States of IFRS in the U.S. may be the most
structured transactions that are designed
Financial Reporting System of a Principles-Based expeditious way to shorten the lengthy
to achieve a particular accounting Accounting System (July 2003), which further timeline that would be required to
result. This ultimately hurts investors, lauded the benefits of objectives-oriented standards.
complete such a list of priorities.

because it reduces comparability and 48 In his testimony before the U.S. Senate
Second Phase of Codification: As
the usefulness of the resulting financial Subcommittee on Securities, Insurance and
Investment (October 24, 2007), the Chairman of the noted above, the Codification does not
information. Therefore, a move toward IASB, Sir David Tweedie, noted a similar set of four
more objectives-oriented (or principles- characteristics, two of which augment the be explained simply in a matter of a minute or so,
based) standards may ultimately aforementioned six, including whether they: (1) Can and (2) make intuitive sense.
change the substance of GAAP, which material are found in a financial confusion that reduces the efficiency of
continues to be encumbered by detailed statement previously provided to the investor analysis. This portion of this
rules, bright lines, scope exceptions, public. Therefore, the increase in chapter describes our proposals
industry guidance, accounting restatements appears to be due to an regarding: (1) Additional guidance on
alternatives, and other forms of increase in the identification of errors the concept and application regarding
complexity. Because of the evolutionary that were determined to be material. materiality, and (2) the process for and
nature of U.S. standards-setting, the The increase in restatements has been disclosure of the correction of errors.
Codification does not read consistently attributed to various causes. These
include more rigorous interpretations of Our Research
in all parts. Further, even after any
needed re-codification of SEC literature accounting and reporting standards by We have considered several publicly-
proposed in section V of this chapter, preparers, outside auditors, the SEC, available studies on restatements.53 We
there will be opportunities to remove and the PCAOB; the considerable are also aware that the Treasury
redundancies between SEC and FASB amount of work done by companies to Department has recently selected
disclosure requirements and make other prepare for and improve internal University of Kansas Professor Susan
simplifications. Therefore, we are controls in applying the provisions of Scholz to conduct an examination of the
deliberating whether and when the section 404 of the Sarbanes-Oxley Act; impact of and the reasons for
FASB and the SEC should perform a and the existence of control weaknesses restatements of public company
second phase of the codification project, that companies failed to identify or financial statements. We will review the
which would involve a comprehensive remediate. Some have also asserted that Treasury Department’s study and
periodic assessment of existing the increase in restatements is the result consider its findings as they are made
accounting standards like the one we of an overly broad application of the available.
proposed previously in this chapter. concept of materiality and discussions The restatement studies we have
regarding materiality in SAB 99, reviewed all indicate that the total
Chapter 3: Audit Process and Materiality (as codified in SAB Topic number of restatements has increased in
Compliance 1M)—that is, resulting in errors being recent years. Market reaction to
I. Introduction deemed to be material when an investor restatements may be one indicator as to
We have concentrated our efforts to may not consider them to be important. whether restatements contain
date regarding audit process and It is essential that companies, information considered by investors to
compliance on the subjects of financial auditors, and regulators strive to reduce be material. While there are
restatements, including the potential the frequency and magnitude of errors limitations 54 to using market reaction as
benefits from providing guidance with in financial reporting. However, the goal a proxy for materiality, based on these
respect to the materiality 49 and is not to reduce the number of studies, it would appear to us that there
correction of errors; and professional restatements per se. Indeed, companies may be restatements occurring that
judgment: Specifically, whether a should restate their financial statements investors may not consider important
judgment framework would enhance the to correct errors that are important to due to a lack of a statistically significant
quality of judgments and the current investors. Investors need market reaction. We, therefore, believe
willingness of others to respect accurate and comparable data and additional guidance on determining
judgments made. restatement is the only means to achieve whether an error is material and
those goals when previously filed whether a restatement is necessary
II. Financial Restatements financial statements contain material would be beneficial in reducing the
II.A. Background errors. Efforts to improve company frequency of unnecessary restatements.
controls and audit quality in recent We have also considered input from
Likely Causes of Restatements years should reduce errors, and there is equity and credit analysts and others
The number of financial evidence this is currently occurring.52 about investors’ views on materiality
restatements 50 in the U.S. financial We believe that public companies and how restatements are viewed in the
markets has been increasing should focus on reducing errors in
significantly over recent years, reaching financial statements. At the same time, 53 Studies considered include the GAO study,
approximately 1,600 companies in we believe that some of our developed Financial Restatements: Update of Public Company
proposals in the areas of substantive Trends, Market Impacts, and Regulatory
2006.51 Restatements generally occur Enforcement Updates (March 2007); Glass Lewis &
because errors that are determined to be complexity, as discussed in chapter 1, Co. study, The Errors of Their Ways (February
and the standards-setting process, as 2007); and two Audit Analytics studies, 2006
49 A fact is material if there is a substantial discussed in chapter 2, will also be Financial Restatements A Six Year Comparison
likelihood that a reasonable investor in making an helpful in reducing some of the (February 2007) and Financial Restatements and
investment decision would consider it as having Market Reactions (October 2007). We have also
frequency of errors in financial considered findings from the PCAOB’s Office of
significantly altered the total mix of information
available. Basic, Inc. v. Levinson, 485 U.S. 224, statements. Research and Analysis’s (ORA) working paper,
231–32 (1988); TSC Industries, Inc. v. Northway, While reducing errors is the primary Changes in Market Responses to Financial
Inc., 426 U.S. 438, 449 (1976). goal, it is also important to reduce the Statement Restatement Announcements in the
50 For the purposes of this chapter, a restatement Sarbanes-Oxley Era (October 18, 2007),
number of unnecessary restatements understanding that ORA’s findings are still
is the process of revising previously issued
financial statements to reflect the correction of a
(i.e., those that do not provide important preliminary in nature as the study is still going
material error in those financial statements. An information to current investors). through a peer review process.
amendment is the process of filing a document with Unnecessary restatements can be costly 54 Examples of the limitations in using market
revised financial statements with the SEC to replace for companies and auditors, may reduce reaction as a proxy for materiality include (1) the
a previously filed document. A restatement could difficultly of measuring market reaction because of
occur without an amendment, such as when prior confidence in reporting, and may create the length of time between when the market
periods are revised in a current filing with the SEC. becomes aware of a potential restatement and the
51 U.S. Government Accountability Office (GAO) 52 A Glass Lewis & Co. report, Brief Alert Weekly ultimate resolution of the matter, (2) the impact on
study, Financial Restatements: Update of Public Trend (December 17, 2007), shows that restatements the market price of factors other than the
Company Trends, Market Impacts, and Regulatory in companies subject to section 404 of the Sarbanes restatement, and (3) the disclosure at the time of the
Enforcement Updates (March 2007), and Audit Oxley Act have declined for two consecutive years, restatement of other information, such as an
Analytics study, 2006 Financial Restatements A Six although the total number of restatements has been earnings release, that may have an offsetting
Year Comparison (February 2007). increasing. positive market reaction.
marketplace. Feedback we have • Those who evaluate the materiality evaluating errors. On this scale, the
received included: of an error should make the decision higher the quantitative significance of
• Bright lines are not really useful in based upon the perspective of a an error, the stronger the qualitative
making materiality judgments. Both reasonable investor. factors must be to result in a judgment
qualitative and quantitative factors • Materiality should be judged based that the error is not material.
should be considered in determining if on how an error affects the total mix of Conversely, the lower the quantitative
an error is material. information available to a reasonable significance of an error, the stronger the
• Companies often provide the investor. qualitative factors must be to result in
market with little financial data during • Just as qualitative factors may lead a judgment that the error is material.
the time between a restatement to a conclusion that a quantitatively The following are examples of some
announcement and the final resolution small error is material, qualitative of the qualitative factors that could
of the restatement. Limited information factors also may lead to a conclusion result in a conclusion that a large error
seriously undermines the quality of that a quantitatively large error is not is not material. (Note that this is not an
investor analysis, and sometimes material. The evaluation of errors exhaustive list of factors, nor should
triggers potential loan default should be on a ‘‘sliding scale.’’ this list be considered a ‘‘checklist’’
conditions or potential delisting of the The FASB or the SEC, as appropriate, whereby the presence of any one of
company’s stock. should also conduct both education these items would make an error not
• The disclosure provided in sessions internally and outreach efforts material. Companies and their auditors
connection with restatements is not to financial statement preparers and should continue to look at the totality of
consistently adequate to allow an auditors to raise awareness of these all factors when making a materiality
investor to evaluate the likelihood of issues and to promote more consistent judgment):
errors in the future. Notably, disclosures application of the concept of • The error impacts metrics that do
often do not provide enough materiality. not drive reasonable investor
We believe that those who judge the conclusions or are not important to
information about the nature and impact
materiality of a financial statement error reasonable investor models.
of the error, and the resulting actions
should make the decision based upon • The error is a one time item and
the company is taking.
the interests, and the viewpoint, of a does not alter investors’ perceptions of
• Interim periods should be viewed
reasonable investor and based upon key trends affecting the company.
as more than just a component of an how that error impacts the total mix of
annual financial statement for purposes • The error does not impact a
information available to a reasonable business segment or other portion of the
of making materiality judgments. investor. One must ‘‘step into the shoes’’ registrant’s business that investors
II.B. Developed Proposals of a reasonable investor when making regard as driving valuation or risks.
these judgments. We believe that too • The error relates to financial
Based on our work to date, we believe
many materiality judgments are being statement items whose measurement is
that, in attempting to eliminate
made in practice without full inherently highly imprecise.
unnecessary restatements, it is helpful
consideration of how a reasonable Education and outreach efforts can be
to consider two sequential questions: (1)
investor would evaluate the error. When instrumental in increasing the
Was the error in the financial statement
looking at how an error impacts the total awareness of these concepts and
material to those financial statements mix of information, one must consider
when originally filed? and (2) How ensuring more consistent application of
all of the qualitative factors that would materiality. Many of the issues with
should a material error in previously impact the evaluation of the error. This
issued financial statements be materiality in practice are caused by
is why bright lines or purely misunderstandings by preparers,
corrected? We believe that framing the quantitative methods are not
principles necessary to evaluate these auditors and regulators. Elimination of
appropriate in determining the these misunderstandings would be a
questions would be helpful. We also materiality of an error to annual
believe that in many circumstances significant step toward reducing
financial statements. It is possible that unnecessary restatements.
investors could benefit from an error that results in a Developed Proposal 3.2: The FASB or
improvements in the nature and misclassification on the income the SEC, as appropriate, should issue
timeliness of disclosure in the period statement (without a change in net guidance on how to correct an error
between identifying an error and filing income) may not be deemed to be consistent with the principles outlined
restated financial statements. material, while an error of the same below:
With this context, we have developed magnitude that impacts net income may • Prior period financial statements
the following proposals regarding the be deemed material based on the effect should only be restated for errors that
assessment of the materiality of errors to of the error on the total mix of are material to those prior periods.
financial statements and the correction information available to a reasonable • The determination of how to correct
of financial statements for errors.55 investor. a material error should be based on the
Developed Proposal 3.1: The FASB or We believe that, in current practice, needs of current investors. For example,
the SEC, as appropriate, should issue materiality guidance such as SAB Topic a material error that has no relevance to
guidance reinforcing the following 1M is interpreted as being one- a current investor’s assessment of the
concepts: directional in that qualitative annual financial statements would not
considerations can make a require restatement of the annual
55 We have developed principles that we believe
quantitatively small error material, but a financial statements in which the error
will be helpful in reducing unnecessary
restatements. In developing these principles, we
quantitatively large error is material occurred, but would need to be
without regard to qualitative factors. We disclosed in an appropriate document,
have not determined if the principles are

inconsistent with existing GAAP, such as SFAS No. believe that qualitative factors not only and, to the extent that the error remains
154, Accounting Changes and Error Corrections, or can increase, but also can decrease, the uncorrected in the current period,
APB Opinion No. 28, Interim Financial Reporting.
To the extent that the implementation of our
importance of an error to the reasonable corrected in the current period.
proposals would require a change to GAAP, the SEC investor. Specifically, we believe that • There may be no need for the filing
should work with the FASB to revise GAAP. there should be a ‘‘sliding scale’’ for of amendments to previously filed
annual or interim reports to reflect based on the facts and circumstances of Nevertheless, all material errors should
restated financial statements, if the next each error. For example, an error that be disclosed during the period in which
annual or interim period report is being does not affect the annual financial they are corrected.
filed in the near future and that report statements included within a company’s Typically, the restatement process
will contain all of the relevant most recent filing with the SEC may be involves three primary reporting stages:
information. determined to not be relevant to current 1. The initial notification to the SEC
• Restatements of interim periods do investors. For errors that do not require and investors that there is a material
not necessarily need to result in a restatement but were material in the error and that the financial statements
restatement of an annual period. annual period in which they occurred, previously filed with the SEC can no
• All errors, other than clearly companies could be required to provide longer be relied upon;
insignificant errors, should be corrected appropriate disclosure about the error 2. The ‘‘dark period’’ or the period
no later than in the financial statements and the periods impacted. between the initial notification to the
of the period in which the error is For material errors that are discovered SEC and the time restated financial
discovered. All material errors should within a very short time period prior to statements are filed with the SEC; and
be disclosed when they are corrected. a company’s next regularly scheduled 3. The filing of restated financial
• The current disclosure during the reporting date, it may be appropriate in statements with the SEC.
period in which the restatement is being We believe that a major effect on
certain instances to report the
prepared, about the need for a investors due to restatements is the lack
restatement in the next filing with
restatement and about the restatement of information when companies are
appropriate disclosure of the error and
itself, is not consistently adequate for silent during stage 2, or the ‘‘dark
its impact on prior periods, instead of
the needs of investors and should be period.’’ This silence creates significant
amending previous filings with the SEC.
enhanced. uncertainty regarding the size and
This option should be further studied
The current guidance that is detailed nature of the effects on the company of
with regard to the possibility of abuse the issues leading to the restatement.
in SAB 108 (as codified in SAB Topic and, if appropriate, should be included
1N) may result in the correction of prior This uncertainty often results in
in the overall guidance on how to decreases in the company’s stock price.
annual periods for immaterial errors correct errors.
occurring in those periods because the In addition, delays in filing restated
Assuming that there is an error in an financial statements may create default
cumulative effect of these prior period interim period within an annual period
errors would be material to the current conditions in loan covenants; these
for which financial statements have delays may adversely affect the
annual period, if the prior period errors previously been filed with the SEC, the
were corrected in the current annual company’s liquidity. We understand
following guidance should be utilized: that, in the current legal environment,
period. In the process of reflecting these • If the error is not material to either
immaterial corrections to prior annual companies are often unwilling to
the previously issued interim period or provide disclosure of uncertain
periods, some believe that the prior to the previously issued annual period,
annual period financial statements information. However, we believe that
the previously issued financial when companies are going through the
should indicate that they have been statements should not be restated.
restated. There is diversity in practice restatement process, they should be
• If the prior period error is encouraged to continue to provide any
on this issue, and clarification is needed determined to be material only to the
from the SEC on the intent of SAB Topic reasonably reliable financial
previously issued interim period, but information that they can, accompanied
1N. We believe that prior annual period not the previously issued annual period,
financial statements should not be by appropriate explanations of ways in
then only the previously issued interim which the information could be affected
restated or corrected for errors that are period should be restated (i.e., the
immaterial to the prior annual period. by the restatement. Consequently,
annual period that is already filed regulators should evaluate the
Instead of the approach specified in should not be restated and the Form
Topic 1N, we believe that, where errors company’s disclosures during the ‘‘dark
10–K should not be amended). period’’ taking into account the
are not material to the prior annual However, there should be appropriate
periods in which they occurred but difficulties of generating reasonably
disclosure in the company’s next Form reliable information before a restatement
would be material if corrected in the 10–K to explain the discrepancy in the
current annual period, the error could is completed.
results for the interim periods during We believe that the current disclosure
be corrected in the current annual the previous annual period on an
period 56 with appropriate disclosure at surrounding a restatement is often not
aggregate basis and the reported results adequate to allow investors to evaluate
the time the current annual period for that annual period.
financial statements are filed with the the company’s operations and the
We believe that all errors, excluding likelihood that such errors could occur
SEC. clearly insignificant errors, should be
We believe that the determination of in the future. Specifically, we believe
corrected no later than in the financial that all companies that have a
how errors should be corrected should statements of the annual or interim
be based on the needs of current restatement should be required to
period in which the error is discovered. disclose information related to: (1) The
investors. This determination should be That being said, there should be a nature of the error, (2) the impact of the
56 We are focused on the principle that prior
practicality exception for immaterial
periods should not be restated for errors that are not errors discovered shortly before the financial statements are issued. These differences
material to those periods. Correction in the current issuance of the financial statements, but might or might not be errors, and may require
period for errors that are not material to prior in this case, the errors should be additional work to determine the nature and actual
periods could be accomplished through an corrected in the next annual or interim amount of the error. This additional work is not
adjustment to equity or to current period income necessary for the preparer or the auditor to agree
(which might potentially require an amendment to period being reported upon.57 to release the financial statements. Due care should
GAAP). We believe that there are merits in both be taken in developing any guidance in this area to
approaches and that the FASB and the SEC, as 57 We understand that sometimes there may be provide an exception for these legitimate
appropriate, should carefully weigh both immaterial differences between a preparer’s differences of opinion, and to ensure that any
approaches before determining the actual approach estimate of an amount and the independent requirement to correct all ‘‘errors’’ would not result
to utilize. auditor’s estimate of an amount that exist when in unnecessary work for preparers or auditors.
error, and (3) management’s response to and issue guidance on applying guidance in assessing and correcting
the error, to the extent known, during materiality to errors identified in prior interim period errors. We believe that
all three stages of the restatement interim periods and how to correct these while these principles would assist in
process. Some suggestions of errors. This guidance should reflect the developing guidance related to interim
disclosures that would be made by following principles: periods, additional work should also be
companies include the following: • Materiality in interim period performed to fully develop robust
financial statements must be assessed guidance regarding errors identified in
Nature of Error based on the perspective of the interim periods.
• Description of the error. reasonable investor. We believe that the determination of
• Periods affected and under review. • When there is a material error in an whether an interim period error is
• Material items in each of the interim period, the guidance on how to material should be made based on the
financial statements subject to the error correct that error should be consistent perspective of a reasonable investor, not
and pending restatement. with the principles outlined in whether an interim period is a discrete
• For each financial statement line developed proposal 3.2. period, an integral part of an annual
item, the amount of the error or range Based on prior restatement studies, period, or some combination of both. An
of potential error. approximately one-third of all interim period is part of a larger mix of
• Identity of business units/locations/ restatements involved only interim information available to a reasonable
segments/subsidiaries affected. periods. Authoritative accounting investor. As one example, a reasonable
guidance on assessing materiality with investor would use interim financial
Impact of Error respect to interim periods is currently statements to assess the sustainability of
• Updated analysis on trends limited to paragraph 29 of APB Opinion a company’s operations and cash flows.
affecting the business if the error No. 28, Interim Financial Reporting.58 In this example, if an error in interim
impacted key trends. Differences in interpretation of this financial statements did not impact the
• Loan covenant violations, ability to paragraph have resulted in variations in sustainability of a company’s operations
pay dividends, and other effects on practice that have increased the and cash flows, the interim period error
liquidity or access to capital resources. complexity of financial reporting. This may very well not be material given the
• Other areas, such as loss of material increased complexity impacts preparers total mix of information available.
customers or suppliers. and auditors, who struggle with Similarly, just as a large error in annual
determining how to evaluate the financial statements does not determine
Management Response
materiality of an error to an interim by itself whether an error is material,
• Nature of the control weakness that period, and also impacts investors, who the size of an error in interim financial
led to the restatement and corrective can be confused by the inconsistency statements should also not be
actions, if any, taken by the company to between how companies evaluate and necessarily determinative as to whether
prevent the error from occurring in the report errors. We believe that guidance an error in interim financial statements
future. as to how to evaluate errors related to is material.
• Actions taken in response to interim periods would be beneficial to We believe that applying the
covenant violations, loss of access to preparers, auditors and investors. principles set forth above would reduce
capital markets, loss of customers, and We have observed that a large part of restatements by providing a company
other consequences of the restatement. the dialogue about interim materiality the ability to correct in the current
If there are material developments has focused on whether an interim period immaterial errors in previously
related to the restatement, companies period should be viewed as a discrete issued financial statements and as a
should update this disclosure on a period or an integral part of an annual practical matter obviate the need to
periodic basis during the restatement period. Consistent with the view debate whether the interim period is a
process, particularly when quarterly or expressed at the outset of this section, discrete period, an integral part of an
annual reports are required to be filed, we believe that the interim materiality annual period, or some combination of
and provide full and complete dialogue could be greatly simplified if both.
disclosure within the filing with the that dialogue were refocused to address We also note that these principles will
SEC that includes the restated financial two sequential questions: (1) What provide a mechanism, other than
statements. principles should be considered in restatement, to correct through the
We believe that the issuance by the determining the materiality of an error current period a particular error that has
FASB or the SEC, as appropriate, of in interim period financial statements? often been at the center of the interim
guidance on how to correct and disclose and (2) How should errors in previously materiality debate—a newly discovered
errors in previously issued financial issued interim financial statements be error that has accumulated over one or
statements will provide to investors corrected? We believe that additional more annual or interim periods, but was
higher quality information (e.g., prior guidance on these questions, which are not material to any of those prior
periods would not be restated for extensions of the basic principles periods.
immaterial items and for errors that outlined in developed proposals 3.1 and
have no relevance to current investors, 3.2 above, would provide useful III. Professional Judgment
and more consistently good disclosure III.A. Background
would be made during and about the 58 Paragraph 29 of APB Opinion No. 28, Interim
restatement process) and reduce the Financial Reporting, states the following: Overview
burdens on companies related to In determining materiality for the purpose of Professional judgment is not new to
reporting the cumulative effect of an accounting
unnecessary restatements. In addition, change or correction of an error, amounts should be
the areas of accounting, auditing, or
since our proposals would require that securities regulation—the criteria for
related to the estimated income for the full fiscal

all material errors be disclosed, relevant year and also to the effect on the trend of earnings. making and evaluating professional
information about such errors would be Changes that are material with respect to an interim judgment have been a topic of
period but not material with respect to the
communicated to investors. estimated income for the full fiscal year or to the
discussion for many years. The recent
Developed Proposal 3.3: The FASB or trend of earnings should be separately disclosed in increased focus on professional
the SEC, as appropriate, should develop the interim period. judgment, however, comes from several
different developments, including c. Lack of agreement in principle on Implementation judgments can be

changes in the regulation of auditors the criteria for evaluating judgments— assisted by implementation guidance
and a focus on more ‘‘principles-based’’ The criteria for evaluating reasonable issued by standards-setters, regulators,
standards—for example, FASB judgment, including the appropriate and other bodies; however, this
standards on fair value and IASB role of hindsight in the evaluation, may guidance could increase the complexity
standards. Investors will benefit from not be clearly defined and thus may of selecting the correct accounting
more emphasis on ‘‘principles-based’’ lead to increased uncertainty. standard, as demonstrated by the
standards, since ‘‘rules-based’’ d. Concern over increased use of guidance issued on accounting for
standards (as discussed in chapters 1 ‘‘principles-based’’ standards— derivatives.
and 2) may provide a method, such as Companies, auditors and investors may Further, many accounting standards
through exceptions and bright-line tests, be less comfortable in their ability to use wording such as ‘‘substantially all’’
to avoid the accounting objectives implement more ‘‘principles-based’’ or ‘‘generally.’’ The use of such
underlying the standards. If properly standards if there is a concern over how qualifying language can increase the
implemented, ‘‘principles-based’’ reasonable judgments are reached and amount of judgment required to
standards should improve the how they will be assessed. implement an accounting standard. In
information provided to investors while addition, some standards may have
reducing the investor’s concern about Categories of Judgments That Are Made
potentially conflicting statements.
‘‘financial engineering’’ by companies in Preparing Financial Statements
using the ‘‘rules’’ to avoid accounting There are many categories of 3. Lack of Applicable Accounting
for the substance of a transaction. While accounting and auditing judgments that Standards
both auditors and issuers appear are made in preparing financial There are some transactions that may
supportive of a move to less prescriptive statements, and a framework should not readily fit into a particular
guidance, they have expressed concern encompass all of these categories, if accounting standard. Dealing with these
regarding the perception that current practicable. Some of the categories of ‘‘gray’’ areas of GAAP is typically highly
practice by auditors and regulators in accounting judgment are as follows: complex and requires a great deal of
evaluating judgments does not provide judgment and accounting expertise. In
1. Selection of Accounting Standard
an environment in which such particular, many of these judgments use
judgments may be generally respected. In many cases, the selection of the analogies from existing standards that
This, in turn, can lead to repeated calls appropriate accounting standard under require a careful consideration of the
for more rules, so that the standards can GAAP is not a highly complex judgment facts and circumstances involved in the
be comfortably implemented. (e.g., leases would be accounted for judgment.
Many regulators also appear to using lease accounting standards and
encourage a system in which pensions would be accounted for using 4. Financial Statement Presentation
professionals can use their judgment to pension accounting standards). The appropriate method to present,
determine the most appropriate However, there are cases in which the classify and disclose the accounting for
accounting and disclosure for a selection of the appropriate accounting a transaction in a financial statement
particular transaction. Regulators assert standard can be highly complex. can be highly subjective and can require
that they do respect judgments, but may For example, the standards on a great deal of judgment.
also express concerns that some accounting for derivatives contain a
companies and auditors may attempt to definition of a derivative and provide 5. Estimating the Actual Amount to
inappropriately defend certain errors as scope exceptions that limit the Record
‘‘reasonable judgments.’’ Identifying applicability of the standard to certain Even when there is little debate as to
standard processes for making types of derivatives. To evaluate how to which accounting standard to apply to
professional judgments and criteria for account for a contract that has at least a transaction, there can be significant
evaluating those judgments, after the some characteristics of a derivative, one judgments that need to be made in
fact, may provide an environment that would first have to determine if the estimating the actual amount to record.
promotes the use of judgment and contract met the definition of a For example, opinions on the
encourages consistent evaluation derivative in the accounting standard appropriate standard to account for loan
practices among regulators. and then determine if the contract losses or to measure impairments of
would meet any of the scope exceptions assets typically do not differ. However,
Goals of a Framework that limited the applicability of the the assumptions and methodology used
The following are several issues that standard. Depending on the nature and by management to actually determine
a potential framework may help terms of the contract, this could be a the allowance for loan losses or to
address: complex judgment to make, and one on determine an impairment of an asset can
a. Investors’ lack of confidence in the which experienced accounting be a highly judgmental area.
use of judgment—A professional professionals can have legitimate
judgment framework may provide 6. Evaluating the Sufficiency of
differing, yet acceptable, opinions. Evidence
investors with greater comfort that there
is an acceptable rigor that companies 2. Implementation of an Accounting Not only must one make a judgment
follow in exercising reasonable Standard about how to account for a transaction,
professional judgment. After the correct accounting standard the sufficiency of the evidence used to
b. Preparers’ and auditors’ concern is identified, there are judgments to be support the conclusion must be
regarding whether reasonable judgments made during its implementation. evaluated. In practice, this is typically
are respected—In the current Examples of implementation one of the most subjective and difficult
environment, preparers and auditors judgments include determining if a judgments to make.

may be afraid to exercise judgment for hedge is effective, if a lease is an Examples include determining if there
fear of having their judgments operating or a capital lease, and what is sufficient evidence to estimate sales
overruled, after the fact, by auditors, inputs and methodology should be returns or to support the collectability of
regulators and legal claimants. utilized in a fair value calculation. a loan.
Levels of Judgment the facts reasonably available at the time substance of a transaction or be a
There are many levels of judgment the annual or interim financial standard of selecting the ‘‘high road’’ in
that occur related to accounting and statements were issued. accounting for a transaction. We agree
auditing. Preparers must make initial Form of Framework that qualitative standards for GAAP
judgments about uncertain accounting such as these would be desirable and we
Some have proposed that a ‘‘safe encourage regulators and standards-
issues; the preparer’s judgment may
harbor’’ be developed that protects the setters to move financial reporting in
then be evaluated or challenged by
exercise of judgment in accordance with this direction. However, such standards
auditors, investors, regulators, legal
a specified framework. That approach are not always present in financial
claimants, and even others, such as the
would seem to provide greater support reporting today and we cannot
media. Similarly, planning and
to auditors and preparers than a
performing an audit requires numerous recommend the adoption of such
statement of policy. However, it is
judgments. These judgments are also standards in a professional judgment
unclear to us whether a legal or
potentially subject to evaluation and framework without anticipating a
regulatory safe harbor (i.e., an effective
challenge by investors, regulators, legal fundamental long-term revision of
legal or regulatory defense based on
claimants and others, especially when, GAAP—a change that would be beyond
conformity with the framework) could
in hindsight, it has become clear that our purview and one that would not be
be adopted by the SEC or whether it
the auditor failed to detect material would require changes to existing doable in the near- or intermediate-term.
errors in the financial statements. statutes. For example, there is general
Therefore, in developing a potential Another approach is for the SEC and agreement that accounting should
framework, differences in role and the PCAOB to issue policy statements follow the substance and not just the
perspective between those who make a that describe a framework for the form of a transaction or event. Many
judgment and those who evaluate a exercise of professional judgment and believe that this fundamental principle
judgment should be carefully state that auditors, the SEC or the should be extended to require that all
considered. A framework should not PCAOB, as applicable, would take into GAAP judgments should reflect
make those who evaluate a judgment account the implementation of the
(auditors, regulators, and others) re- economic substance. However,
framework in evaluating a judgment reasonable people disagree on what
perform the judgment according to the made by a registrant or an auditor. The
framework. Instead, a framework should economic substance actually is, and
SEC has utilized similar frameworks in many would conclude that significant
provide guidance to those who would the past with success. Examples of
evaluate a judgment on factors to parts of current GAAP do not require
previous frameworks by the SEC and do not purport to measure
consider while making that evaluation. include the ‘‘Seaboard’’ report (October economic substance (e.g., accounting for
Hindsight 23, 2001) on the relationship of leases, pensions, certain financial
cooperation by a company to taking instruments and internally developed
One appropriate tool used in auditing
action in an enforcement case and the intangible assets are often cited as
is hindsight—the ability of the auditor
SEC’s framework for assessing the examples of items reported in
to use facts that are available through
appropriateness of corporate penalties accordance with GAAP that would not
the completion of the audit work to
(January 4, 2006).
evaluate the sufficiency of meet many reasonable definitions of
While not an automatic defense of the
management’s estimates and economic substance).
registrant’s or auditor’s judgment, a
assumptions based on actual facts that Similarly, some would like financial
framework would provide more support
become available after those estimates reporting to be based on the ‘‘high
to registrants and auditors that the
are made. road’’—a requirement to use the most
applicable regulator would be likely to
For example, auditors will frequently
accept a judgment made if the registrant preferable principle in all instances.
test the accuracy of the company’s
or the auditor had fully implemented Unfortunately, today a preparer is free
accounts payable balance at period-end
the framework. The framework is likely to select from a variety of acceptable
by looking at cash disbursements made
to enhance the quality of judgments by methods allowed by GAAP (e.g., costing
after the period-end. This evidence
providing incentives to follow a inventory, measuring depreciation, and
allows the auditor to determine whether
rigorous process for making accounting electing to apply hedge accounting are
the accrual for unpaid expenses at year-
and auditing judgments. The increased just some of the many varied methods
end is adequate.
However, the use of hindsight to use of this rigorous process should, in allowed by GAAP) without any
evaluate a judgment where the relevant turn, provide more comfort to investors qualitative standard required in the
facts were not available at the time of about the quality of accounting selection process. In fact, a preferable
the initial release of the financial judgments made in connection with method is required to be followed only
statements (including interim financial financial statements. when a change in accounting principle
It is unclear to us whether, as a matter is made, and a less preferable alternative
statements) is not appropriate.
of regulatory strategy, this judgment is fully acceptable absent such a change.
Determining at what point the relevant
framework should be implemented
facts were known to management or the We believe that adopting a
through a safe harbor or policy
auditor, or should have been known,59 requirement that accounting judgments
statement. We leave to the SEC and its
can be difficult, particularly for reflect economic substance or the ‘‘high
staff the resolution of these difficult
regulators who are often evaluating road’’ would require a revolutionary
issues.
these circumstances after substantial change not achievable in the foreseeable
time has passed. Therefore, the use of The Nature and Limitations of GAAP future. Our suggested judgment
hindsight should only be used based on Some have suggested that the framework could and, we believe,
standard in a potential professional would enhance adherence to GAAP, but
59 We believe that those making a judgment
should be expected to exercise due care in gathering

judgment framework for the selection it cannot be expected to correct inherent
all of the relevant facts prior to making the and implementation of GAAP be a weaknesses in the standards to which it
judgment. requirement to reflect the economic would be applied.
III.B. Developed Proposals principles of this framework, the mere 3. A thorough review and analysis of
We have developed the following completion of the process outlined in relevant literature, including the
proposal: the framework in making a judgment relevant underlying principles.
Developed Proposal 3.4: The SEC would not prevent an auditor and/or 4. Alternative views or estimates,
should adopt a judgment framework for regulator from asking appropriate including pros and cons for reasonable
accounting judgments. The PCAOB questions about the judgment or asking alternatives.
should also adopt a similar framework companies to correct unreasonable 5. The rationale for the choice
with respect to auditing judgments. judgments. A judgment framework selected, including reasons for the
Careful consideration should be given in would not eliminate debate, nor should alternative or estimate selected and
implementing any framework to ensure it attempt to do so. Rather, it organizes linkage of the rationale to investors’
that the framework does not limit the analysis and focuses preparers and information needs and the judgments of
ability of auditors and regulators to ask others on areas to be addressed thereby competent external parties.
appropriate questions regarding improving the quality of the judgment 6. Linkage of the alternative or
judgments and take actions to require and likelihood that auditors 60 and estimate selected to the substance and
correction of unreasonable judgments. regulators will accept the judgment. business purpose of the transaction or
The proposed framework applicable Conversely, not following the issue being evaluated.
to accounting-related judgments would framework would not imply that the 7. Known diversity in practice
include the choice and application of judgment is unreasonable. regarding the alternatives or estimates.62
accounting principles, as well as the This framework reflects the fact that 8. The consistency of application of
estimates and evaluation of evidence GAAP does not always reflect the alternatives or estimates to similar
related to the application of an economic substance of a transaction and transactions.
accounting principle. We believe that a that it may be difficult to determine how 9. The appropriateness and reliability
framework that is consistent with the the accounting would meet the needs of of the assumptions and data used.
principles outlined in this developed investors. In addition, this framework The critical thought process should
proposal to cover judgments made by would be applicable to accounting include input from personnel with an
auditors based on the application of matters only to the extent that appropriate level of professional
PCAOB auditing standards would be judgments were required in the choice expertise and should include a
very important and would be beneficial or application of accounting principles, sufficient amount of time and effort to
to investors, preparers, and auditors. in estimating the amount to record, or properly consider the judgment.
Therefore, we propose that the PCAOB in evaluating the sufficiency of the Material issues or transactions that
develop a professional judgment evidence. were analyzed pursuant to the
framework for the application and In applying the components of the application of the framework should be
evaluations of judgments made based on framework, it would be expected that disclosed in accordance with existing
PCAOB auditing standards. the amount of documentation, disclosure requirements. This disclosure
We propose that the framework for disclosure, input from professional should be transparent so that the
accounting judgments be consistent experts,61 and level of effort in making investor understands the transaction
with the following concepts: a professional judgment would vary and assumptions that were critical to
Framework for Professional Judgment in based on the complexity, nature (routine the judgment. When evaluating
Accounting versus non-routine) and materiality of a professional judgment, auditors, and/or
transaction or issue requiring judgment. regulators should take into account the
The Concept of Professional Judgment disclosure relevant to the judgment.
Components of a Framework
Professional judgment, with respect to Documentation—The alternatives
accounting matters, should be the Critical and Good Faith Thought considered and the conclusions reached
outcome of a process in which a person Process—Professional judgment should should be documented
or persons with the appropriate level of be based on a critical and reasoned contemporaneously. The lack of
knowledge, experience, and objectivity evaluation made in good faith, prior to contemporaneous documentation may
form an opinion based on the relevant the exercise of the judgment, of an not mean that a judgment was incorrect,
facts and circumstances within the identified issue, including the nature but would complicate an explanation of
context provided by applicable and scope of the issue based on: the nature and propriety of a judgment
accounting standards. Professional 1. An analysis of the transaction, made at the time of the release of the
judgments could differ between including the substance and business financial statements.
knowledgeable, experienced, and purpose of the transaction.
objective persons. Such differences IV. Future Considerations
2. The material facts reasonably
between reasonable professional available at the time that the financial We intend to examine the area of
judgments do not, in themselves, statements are issued. regulation and compliance for issues
suggest that one judgment is wrong and that create avoidable complexity in
the other is correct. Therefore, those 60 It should be noted that, while auditors should financial reporting. Some of the areas
who evaluate judgments should be using the framework to evaluate a client’s that we intend to focus on include: (1)
evaluate the reasonableness of the judgments and should respect reasonable The interaction between companies and
judgment, and should not base their judgments, they still have a requirement to follow their auditors, the SEC, and the PCAOB,
PCAOB auditing standards, which would include
evaluation on whether the judgment is expressing an opinion regarding whether the
(2) the interaction between audit firms
different from the opinion that would client’s financial statements are fairly presented, in and the SEC and PCAOB, and (3) the
have been reached by the evaluator. all material respects, in accordance with GAAP. levels of enforcement and regulation of
This framework would serve as the Therefore, this framework would not require standards in other developed markets
primary, though not exclusive, approach auditors to issue an unqualified audit opinion when
they disagree with a judgment.
around the world.
to evaluating the process of making 61 In many cases, input from professional experts
professional judgments. While would include consultation with a preparer’s 62 If there is not diversity in practice, it would be
regulators would strongly support the independent auditors. significantly harder to select a different alternative.
Chapter 4: Delivering Financial II. Tagging of Financial Information risk and return taxonomy developed by
Information (XBRL) the Investment Company Institute.
On December 5, 2007, XBRL-US
I. Introduction II.A. Background
published a draft XBRL U.S. GAAP
We have been evaluating the Description of XBRL Taxonomy and draft preparer’s guide for
information needs of investors, methods XBRL is an international information public testing and comment. The XBRL
by which financial information is format standard designed to help U.S. GAAP Taxonomy includes tags for
provided to investors, and means to investors and analysts find, understand, a company’s financial statements and
improve delivery of financial and compare financial and non- notes. Public review currently is
information to all market constituencies. financial information by making this scheduled to end April 5, 2008, and
information machine-readable. It XBRL-US has stated that it anticipates
In evaluating the information needs of
enables companies to better control how that the final XBRL U.S. GAAP
investors, we have recognized that the
their financial or non-financial Taxonomy and preparer guidance will
information needs of different types of
information is presented and be issued in spring 2008. After the final
investors are not always the same. We
disseminated and reduce reporting costs XBRL U.S. GAAP Taxonomy and
have agreed that information must be preparer guidance is issued, the SEC
delivered in a manner that is efficient, by integrating their operating data with
their financial reporting disclosure. EDGAR system must be modified to
reliable, and cost-effective for each of accept submissions tagged using the
XBRL is a computer language which
the relevant investor groups and will XBRL U.S. GAAP Taxonomy.
uses standardized XML (eXtensible
not significantly increase burdens on The SEC has stated that it will use the
Markup Language) technology and
reporting companies. permits the automation of what are now initial financial statements prepared
We have determined that we will largely manual steps for access, using the new XBRL U.S. GAAP
focus our efforts on financial validation, analysis, and reporting of Taxonomy to help it further update its
information provided by reporting disclosure. For example, an investor or EDGAR system so that it will be able to
companies in their periodic and current analyst who wants to compare the sales ‘‘seamlessly accept and render the
reports under the Securities Exchange of all pharmaceutical companies will be filings.’’ We understand that currently,
Act of 1934 (‘‘Exchange Act’’) and other able to use software applications to take the SEC’s EDGAR system does not yet
ongoing disclosures provided by the XBRL-tagged information, extract accept and render financial statements
reporting companies to investors and the sales numbers and download them with XBRL tags based on the newly-
the market.63 We believe that we can directly to a spreadsheet. developed XBRL U.S. GAAP Taxonomy.
make some useful proposals to enhance XBRL uses standardized definitions of In addition, we understand that the
ongoing reporting that will enable terms, like a dictionary. The software industry has been engaged in
investors to better understand reporting standardized terms are then arranged in developing tagging and rendering
companies. a logical structure called a taxonomy. A (turning the XBRL-tagged information
GAAP financial statement itself, in that into a human readable format) software
Based on the above, we have analyzed its underlying details are summarized in for XBRL-tagged financial statements.
two ways to improve the delivery of the line items of a balance sheet or Companies generally use two methods
financial information to investors and income statement, is a kind of to tag their financial statements using
the market. These are: taxonomy. There are taxonomies for XBRL. The first method, called a ‘‘bolt-
• Tagging of financial information different kinds of businesses. For on’’ approach, involves developing the
(XBRL). example, the banking industry sector XBRL reports after the filed financial
taxonomy differs from that of a software statements are developed—a process
• Improving corporate website use.
industry sector company. known as ‘‘mapping.’’ Companies also
We also intend to look at the may use XBRL as part of an integrated
following in the future: Status of XBRL-Tagged Financial
Statements in SEC Reports approach to financial reporting. In an
• Use of executive summaries as an integrated approach, companies
integral part of Exchange Act periodic The SEC has adopted a voluntary incorporate XBRL into their internal
reports. pilot program for the use of XBRL in company financial systems which
which participants submit voluntarily allows financial reports to be created
• Disclosures of key performance supplemental tagged financial from the XBRL-tagged financial systems,
indicators (KPIs) and other metrics to information using the XBRL format as without first preparing such financial
enhance business reporting. exhibits to specified EDGAR filings.64 statements in ‘‘human readable format.’’
• Improved quarterly press release Voluntary pilot participants may use XBRL-tagging using a ‘‘bolt-on’’
disclosures and timing. existing standard XBRL taxonomies. approach may involve somewhat more
Over four dozen companies are effort than using an integrated approach.
• Continued need for improvements
participating in the pilot program and Currently, there is software that allows
in the management discussion and
have agreed to voluntarily submit their companies to XBRL-tag their financial
analysis (MD&A) and other public annual, quarterly and other reports with
company financial disclosures. statements using the ‘‘bolt-on’’
interactive data for a period of one year. approach.65 At this time it is unknown
The SEC recently expanded the how many companies have begun
63 We have determined that we will not address
voluntary filing program to include integrating XBRL-tagging into their
information delivery in registered offerings under
the Securities Act of 1933 for two primary reasons. mutual funds which will file using a internal financial reporting systems and,
First, the SEC already has addressed information therefore, it is not clear when a
delivery in registered securities offerings when it 64 The SEC’s voluntary XBRL rules specify the
adopted new communication rules in 2005 for form, content, and format of XBRL submissions,
significant number of companies would
registered offerings by issuers other than registered description of XBRL data, timing of XBRL
investment companies. Second, we view submissions, and use of Taxonomies. For example, 65 Using the ‘‘bolt-on’’ method, companies can
information delivery relating to ongoing company the rules require the tagged data to be described prepare their financial statements (including notes)
reporting by public companies as the area needing either as ‘‘unaudited’’ or, for quarterly financial in a number of formats, such as Adobe (pdf), Word,
greater focus. statements, ‘‘unreviewed.’’ and HTML.
move from a ‘‘bolt-on’’ to an integrated tagging process for most items).66 For rates in reporting and inputting of
approach to XBRL-tagging of their preparers also tagging the notes to their corporate data by aggregators.
financial statements. financial statements using a ‘‘block’’ tag, Second, XBRL has the potential to
the number of hours increased slightly. improve the integration of company
Time and Costs Involved in XBRL-
The costs to tag the face of the financial operating and reporting data. Using
Tagging
statements using standardized software
We understand that while the XBRL XBRL, operating data can be accessed in
were not significant. Additional time
U.S. GAAP Taxonomy has a significant the internal enterprise applications
and cost was spent by at least one
number of individual tags or elements, preparer to validate the tags that were where it is regularly stored, and thus
it contains all of the terms or concepts used. In these cases, there was no will be used for financial reporting
commonly used in financial statements auditor involvement in the process. purposes without the necessity of
prepared in accordance with GAAP. We downloading to paper or manual search.
understand that reporting companies Smaller Public Company Reactions to The same electronically accessible data
would use only a limited number of tags XBRL-Tagging can be used for other purposes beyond
or elements. For example, one large Smaller public company those of financial statements, including
voluntary filer uses approximately 192 representatives recognize the benefits tax, industrial filings, audit,
tags (it tags its notes as blocks rather that XBRL offers their companies over benchmarking, performance reporting,
than at a granular level) to tag its Form the long-term, but are concerned about internal management, and
10–Q. We understand that there may be initial implementation costs, which sustainability. We believe that the full
the need for customized ‘‘extensions’’ if could be alleviated with the economic benefits of XBRL will most
the XBRL U.S. GAAP Taxonomy does development of improved tagging and likely come when companies
not include a tag for the particular item verification software. The incorporate XBRL into their internal
in the company’s financial statements. representatives strongly support a reporting, instead of using it as a ‘‘bolt-
Because the XBRL U.S. GAAP phase-in approach in which such
Taxonomy currently out for public on’’ after their financial reports are
smaller public companies would be prepared.
comment tracks GAAP, we believe that included at the end, once larger public
there likely will be less need for Finally, XBRL-tagged financial
companies had worked through any
customized extension elements. One of significant implementation issues, statements can provide a number of
the purposes of the comment period on including use of company resources benefits to investors, including both
the XBRL U.S. GAAP Taxonomy and retail investors and the ‘‘model builder/
involved in tagging and verification of
preparer guidance is to identify research analyst.’’ Investors can benefit
XBRL tags.
additional tags or elements that should from, among other things, a reduced
be added to the XBRL U.S. GAAP Potential Benefits of XBRL cost of locating and inputting data into
Taxonomy, reducing the need for analytical frameworks, elimination of
We see a number of potential benefits
customized extensions. The draft manual input thereby reducing the
of XBRL for reporting companies and
preparer guidance out for public likelihood of input error by an investor
investors of financial and non-financial
comment also will be evaluated by or data aggregator, reduced investor
information. First, XBRL-tagging could
preparers, investors, and others to
benefit reporting companies by dependence on proprietary and
determine whether it provides adequate
guidance for determining when an permitting improved communications inconsistent data sources, increased
extension should be used by preparers. with analysts and investors. Released likelihood of more investors utilizing
The type of information that is tagged corporate data could be instantaneously primary data sources, and reduced cost
also is relevant to understanding XBRL- and immediately usable by analysts in of and improved company comparisons.
tagged financial statements. Companies their models without the need for them The XBRL-tagged financial statements
participating in the voluntary program to wait for third party aggregators or should enable investors and
have been tagging the face of their staff to input the data into their own experienced analysts at research
financial statements using existing format. There would be a reduction in organizations to spend more time
taxonomies and software. As to the search costs. Further, such reduced analyzing data than data gathering.
notes to the financial statements, search costs could potentially increase
coverage of companies, especially mid- We recognize, however, that
additional effort may be involved. While notwithstanding the potential benefits,
the notes to the financial statements size and smaller companies, by sell-side
and buy-side analysts, and at both major many company officers may not
may easily be tagged as a block of text, understand how XBRL works or what
unlike preparation of notes to the brokerage and independent research
firms. XBRL-tagging also would likely improvements it could bring to both
financial statements in a paper-based
improve the quality of data 67 and the their financial reporting and their costs
format, tagging the individual
ability of a company to control the of reporting. In addition, there currently
information in each note will involve
additional tags and, therefore, more presentation of its financial information. is limited acceptance of XBRL due, in
work than block-tagging the text. The elimination or reduction of the part, to companies needing greater
Certain preparers participating in the manual input would likely reduce error certainty that XBRL will be adopted
SEC’s voluntary program have indicated before they will expend the necessary
that the initial number of hours it took 66 For example, one S&P 500 company resources to understand it and its
to tag the face of their financial participating in the voluntary pilot spent 80 hours benefits. Companies may have other
learning the tagging tool, understanding SEC concerns about potential start-up costs
statements using existing standard requirements, creating extensions for tags, and
taxonomies (not the new XBRL U.S. creating a process for ongoing tagging and future in adopting XBRL, including purchase
GAAP Taxonomy) and a ‘‘bolt-on’’ submissions. of software and personnel resources for
approach ranged from 80–100 hours and 67 Although XBRL is frequently called
data input and training. Further,
‘‘interactive data,’’ the use of the term ‘‘data’’ analysts and software developers
that the number of hours dropped should not be deemed to imply numerical data
significantly for subsequent reports (due alone. XBRL also is useful for the tagging of generally are unaware or uninformed
to the lack of a need to replicate the narrative information. about XBRL.
Implementation of XBRL-Tagging of to end April 5, 2008, and it is provider in the early stages before
Financial Statements anticipated that the final XBRL U.S. moving to a broader integrated
We believe that the SEC should, over GAAP Taxonomy and preparer guide interactive data approach. This ‘‘bolt-
the long-term, require all public will be issued in spring 2008. on’’ approach, for many, could be used
reporting companies (preparing their • Ability of SEC EDGAR to as a means to begin to climb the
financial statements using GAAP) to tag ‘‘seamlessly’’ accept XBRL submissions learning curve in a cheap, easily
the financial statements (including using the new XBRL U.S. GAAP managed manner. In this regard, we
footnotes) they are required to file with Taxonomy and other XBRL-tagged data believe that companies should have the
the SEC as part of their Exchange Act and provide an accurate rendered capacity to compare XBRL-tagged and
reports using XBRL. We believe that an version of all such tagged information. rendered financial statements to avoid
Æ Status: The SEC has stated that it errors and the SEC should take steps to
implementation roadmap from the SEC
will use the initial financial statements assist in that regard. We believe that the
is needed to encourage the involved
prepared using the new XBRL U.S. SEC should encourage or commission
parties to move beyond a wait-and-see
GAAP Taxonomy to help it update the development of free software to
approach and commit resources toward
EDGAR so that it will be able to compare rendered and filed statements.
the necessary development of software. During the phase-in period, the SEC
That software would tag financial ‘‘seamlessly accept and render the
filings.’’ Currently, the SEC’s EDGAR and PCAOB should seek input from
information and enable the viewing and companies, investors, and other market
reading of the XBRL-tagged information, system does not accept financial
statements with XBRL tags based on the participants as to the experience of such
the use of XBRL-tagged data by persons in preparing and using XBRL-
investors such as analysts and investors, newly-developed XBRL U.S. GAAP
Taxonomy. tagged financial statements using the
and the integration of XBRL by XBRL U.S. GAAP Taxonomy, and
companies. We believe that full We believe that, to achieve the
desired acceptance of XBRL, after the related costs. The SEC should consider
implementation of mandated XBRL- conducting or commissioning a study of
tagged financial statements will require XBRL U.S. GAAP Taxonomy
precondition is satisfied, on an interim the rate of errors by companies in using
a phase-in over a period of time, as the appropriate XBRL tags in
discussed below, to enable preparers basis XBRL-tagged financial statements
should be required to be implemented comparison to the financial statement
and investors to understand XBRL by items, which should be done only after
preparers and investors, to permit on a phase-in basis as follows:
• The largest 500 domestic public filers use the final uniform Taxonomy
successful use of the new XBRL U.S. and preparer guidance to tag their
reporting companies based on
GAAP Taxonomy, and to enable the financial statements.
unaffiliated market capitalization
further development of tagging and As mentioned above, under the phase-
(public float) should be required to
rendering software. We believe that in approach, the XBRL-tagged financial
furnish to the SEC, as is the case in the
such a phase-in should be sensitive to statements would still be considered
voluntary program today, a document
the concerns of smaller public furnished to and not filed with the SEC.
prepared separately from the reporting
companies regarding mandated XBRL- As part of the mandatory
companies’ financial statements that are
tagged financial statements. implementation, we believe that, as is
We believe that mandatory filed as part of their periodic Exchange
Act reports. This document would the case in the voluntary program, the
implementation of XBRL will involve a SEC should make clear what liability
number of steps leading to the ultimate contain the following:
Æ XBRL-tagged face of the financial provisions the XBRL-tagged financial
goal of requiring public reporting statements would be subject to under
statements.68
companies to tag their financial Æ Block-tagged footnotes to the the federal securities laws.
statements using XBRL. financial statements.69 Finally, at the end of the phase-in
Full mandatory implementation may • Domestic large accelerated filers (as period described above, and as
not be possible until all the following defined in SEC rules, which would promptly as practicable after all the
preconditions are met: include the initial 500 domestic public preconditions to full implementation
• Taxonomy development. reporting companies) should be added discussed above are met, the SEC
Æ Testing of the XBRL U.S. GAAP should evaluate the results from the
to the category of companies, beginning
Taxonomy is completed. The testing phase-in period to determine whether
one year after the start of the first phase,
process for the new XBRL U.S. GAAP and when to move from furnishing to
required to furnish XBRL-tagged
Taxonomy, which is to determine the SEC to the official filing of XBRL-
financial statements to the SEC.
whether disclosures are complete and We believe that a phase-in would tagged financial statements with the
relevant in the current market provide businesses, financial planners, SEC by domestic large accelerated filers,
environment, is now underway. software developers, and investors with as well as whether and when to include
Æ The final XBRL U.S. GAAP all other reporting companies, as part of
the impetus to move forward in building
Taxonomy and preparer guide are a company’s Exchange Act periodic
systems based on XBRL. For example, in
released following public review and reports.
connection with the mandatory
comment.
implementation of XBRL, we are aware II.B. Developed Proposals
Æ Voluntary filers have successfully
that, if tagging were mandated for
used the XBRL U.S. GAAP Taxonomy We would like to make
companies, they may use a ‘‘bolt-on’’
and preparer guide for a period of time. recommendations that increase the
solution in-house or use a service
—Status: On December 5, 2007, XBRL certainty that XBRL will be a significant
published the draft of XBRL U.S. 68 To allow this first phase, the SEC EDGAR part of the reporting landscape so that
GAAP Taxonomy and draft preparer system must permit submissions using the new preparers, investors, auditors, software
guide for public testing and comment. XBRL U.S. GAAP Taxonomy. developers and regulators make the
69 We understand that tagging beyond the face of
The XBRL U.S. GAAP Taxonomy needed investment in XBRL.
the financial statements and block-tagging of
includes tags for a company’s footnotes, such as granular tagging of footnotes and
Based on the above considerations,
financial statements and footnotes. non-financial data, may require significant effort we have developed the following
Public review currently is scheduled and would involve a significant number of tags. proposal:
Developed Proposal 4.1: The SEC assurance of XBRL documents is that depending on whether companies are
should, over the long-term, mandate the financial statement investors could using the ‘‘bolt-on’’ rather than the
filing of XBRL-tagged financial quickly build confidence in interactive integrated tagging approach. Therefore,
statements after the satisfaction of data and increase their use of such data. our other members believe that it is
certain preconditions relating to: (1) One primary reason for not obtaining appropriate to study the assurance
Successful XBRL U.S. GAAP Taxonomy such independent assurance of XBRL process during the phase-in period to
testing, (2) capacity of reporting documents is the concern that the cost assess the actual costs and benefits of
companies to file XBRL-tagged financial and time incurred to obtain such assurance that might be provided on the
statements using the new XBRL U.S. assurance may significantly outweigh XBRL-tagged financial statements.
GAAP Taxonomy on the SEC’s EDGAR the benefits to preparers and investors. The type, timing, and extent of
system, and (3) the ability of the EDGAR As to assurance, we understand that assurance, if any, on a company’s XBRL-
system to provide an accurately questions arise as to whether assurance tagged financial statements and other
rendered version of all such tagged should be provided as to matters such tagged information required to be
information. The SEC should phase-in as: furnished to the SEC should take into
XBRL-tagged financial statements as 1. The appropriate use of the proper account the needs of investors, and
follows: XBRL U.S. GAAP Taxonomy and other market participants, along with
• The largest 500 domestic public accurate tagging of financial statements. the costs to reporting companies. Until
reporting companies based on 2. The reasonableness of any company a group of reporting companies has been
unaffiliated market capitalization extensions to the XBRL U.S. GAAP required to furnish to the SEC XBRL-
(public float) should be required to Taxonomy. tagged financial statements and notes
3. The compliance of the XBRL-tagged using the new XBRL U.S. GAAP
furnish to the SEC, as is the case in the
document (also called the ‘‘instance Taxonomy for a period of time that will
voluntary program today, a document
document’’) with SEC content and allow investors and other market
prepared separately from the reporting
format requirements. participants to evaluate the reliability of
companies’ financial statements that are 4. The separate performance of
filed as part of their periodic Exchange such XBRL-tagged financial statements
validation checks over footings and
Act reports. This document would and notes, it is premature to make
inter-checks (for example, whether
contain the following: concrete suggestions regarding
inventory is reported more than once
Æ XBRL-tagged face of the financial assurance.
throughout the document determine if Accordingly, our developed proposal
statements.70 amounts reported are consistent) of the
Æ Block-tagged footnotes to the does not include any assurance
XBRL instance document. proposal. During the interim phase-in
financial statements.71 5. Whether the information in the
• Domestic large accelerated filers (as XBRL instance document is the same as
period discussed above, the SEC and
defined in SEC rules, which would PCAOB should seek input from
the information in the official filed
include the initial 500 domestic public companies, investors, and other market
financial statements (applicable under a
reporting companies) should be added participants as to the type, timing, and
‘‘bolt-on’’ state).
to the category of companies, beginning We note that there are ways in which extent of desired or needed assurance, if
one year after the start of the first phase, companies may, inadvertently or any. This input should include the
required to furnish XBRL-tagged deliberately, create XBRL reports in a experience of such persons in preparing
financial statements to the SEC. manner that will potentially mislead and using XBRL-tagged financial
• Once the preconditions noted above investors. Accordingly, one of our statements using the newly-developed
have been satisfied and the second members believes that independent XBRL U.S. GAAP Taxonomy, and
phase-in period has been implemented, assurance of XBRL documents prepared related costs. Additionally, after public
the SEC should evaluate whether and by management should be provided, as companies are required to tag their
when to move from furnishing to the described in items (1) and (5) above (at financial statements using XBRL,
SEC to the official filing of XBRL-tagged a minimum), provided that such whether in accordance with our
financial statements with the SEC for assurance does not result in a significant proposals or otherwise, the SEC should
the domestic large accelerated filers, as increase in costs. This member noted consider initiating a voluntary pilot
well as the inclusion of all other that accounting knowledge and program in which companies obtain
reporting companies, as part of a professional judgment would be assurance on their XBRL-tagged
company’s Exchange Act periodic required in providing that assurance, financial statements (whether using a
reports.72 but believed that the assurance process ‘‘bolt-on’’ or integrated approach) in
is relatively simple, should not take a order to evaluate fully potential costs
II.C. Assurance and benefits associated with such effort.
significant amount of time because
An important issue related to tagging many steps can be automated, and, III. Improved Corporate Web site Use
public company financial statements therefore, should not be an expensive or
using XBRL involves whether assurance time-consuming activity. Background
should be provided by a third party. We The concept of obtaining assurance on We have been examining the integral
understand that among the primary the correct tags and matching the XBRL role that technology and corporate Web
benefits of providing independent rendered documents to the filed sites play in informing the markets and
70 To allow this first phase, the SEC EDGAR
statements is predicated on the belief investors about important corporate
system must permit submissions using the new
that the incremental monetary and information and developments,
XBRL U.S. GAAP Taxonomy. human resource costs to provide the including Web site disclosure
71 We understand that tagging beyond the face of assurance will be very small. Reviewing presentations that are under
the financial statements and block-tagging of the tags the first time will involve development by software vendors. A
footnotes, such as granular tagging of footnotes and significant effort, but subsequent valuable element of many of such Web
non-financial data, may require significant effort
and would involve a significant number of tags. reviews may be limited to new or site presentations is that they present
72 A dissenting vote on developed proposal 4.1 changed tags. Moreover, the costs and the most important general information
was cast by Peter Wallison. benefits of assurance reviews may differ about a company on the opening page,
with embedded links that enable the reconciliations to GAAP, and the need emphasizes the most important
reader to drill down to more detail by for clarification of the public availability information about the reporting
clicking on the links. In this way, of information disclosed on a reporting company and would include cross-
viewers can follow a path into, and company Web site. Consequently, we references to the location of the fuller
thereby obtain increasingly greater believe that the SEC should issue a new discussion in the annual report.
details about the financial statements, a comprehensive interpretive release The goal of the executive summary
company’s strategy and products, its regarding the use of corporate Web sites would be to help investors
management and corporate governance, for disclosures of corporate information. fundamentally understand a company’s
and its many other areas in which We believe that SEC guidance would businesses and activities through a
investors and others may have an encourage further creative use of relatively short, plain English
interest. corporate Web sites by reporting presentation. An executive summary in
Improving the use of corporate Web companies to provide information, a periodic report may be most useful if
sites can enable shareholders and including Web site disclosure formats it included high-level summaries across
investors to gather information about a following industry developed best a broad range of key components of the
company that is at a level they believe practice guidelines. annual or quarterly report, rather than
is satisfactory for their purposes, detailed discussion of a limited number
without requiring them to wade through Developed Proposal
of variables. The executive summary
large amounts of written material that Based on the above, we have approach may be an efficient way to
may provide a level of detail beyond developed the following proposal: provide all investors, including retail
their particular needs. Developed Proposal 4.2: The SEC investors, with a concise overview of a
Corporate Web sites offer reporting should issue a new comprehensive company, its business, and its financial
companies a cost-effective, efficient interpretive release regarding the use of condition. For the more sophisticated
method to provide information to corporate Web sites for disclosures of investor, an executive summary may be
investors and the market. Encouraging corporate information, which addresses helpful in presenting the company’s
reporting companies to increase their issues such as liability for information unique story, which the sophisticated
use of their Web sites, including presented in a summary format, investor could consider as it engages in
developing a tiered approach to deliver treatment of hyperlinked information a more detailed analysis of the
such corporate information on their from within or outside a company’s company, its business and financial
Web sites, would benefit investors of all Web site, treatment of non-GAAP condition.
types, retail and institutional. Enhanced disclosures and GAAP reconciliations, The executive summary in a periodic
corporate Web site usage could decrease and clarification of the public report should be brief, and it might
the complexity of information availability of information disclosed on fruitfully build on the overview that the
presentation and would enhance its a reporting company’s Web site. SEC has identified should be in the
accessibility. In addition, through Industry participants should forepart of the MD&A disclosure. The
coordination by industry participants, coordinate among themselves to MD&A overview is expected to ‘‘include
uniform best practices on uses of develop uniform best practices on uses the most important matters on which a
corporate Web sites could be developed. of corporate Web sites for delivering company’s executives focus in
The SEC has issued a series of corporate information to investors and evaluating the financial condition and
interpretive releases and rules the market.
addressing the use of electronic media operating performance and provide
to deliver or transmit information under IV. Future Considerations context.’’ 73 The executive summary
the federal securities laws. The SEC should build on the MD&A overview
Use of Executive Summaries in disclosure and include the following:
issued its last comprehensive Exchange Act Periodic Reports
interpretive release on the use of 1. A summary of a company’s current
electronic media, including corporate We have been exploring a financial statements.
Web sites, in 2000. Since 2000, requirement to include an executive 2. A digest of the company’s GAAP
significant technological advances have summary in reporting company annual and non-GAAP KPIs.
increased both the market’s demand for and quarterly Exchange Act reports 3. A summary of key aspects of
more timely corporate disclosure and (Forms 10–K and 10–Q). We understand company performance.
the ability of investors to capture, that a summary report prepared on a 4. A summary of business outlook.
process, and disseminate this stand-alone basis would not necessarily 5. A brief description of the
information. Recognizing this, the SEC provide investors with information they company’s business, sales and
has adopted a large number of rules that need in a desired format. However, an marketing.
mandate, permit, or require disclosure executive summary included in the 6. Page number references to more
of the use of corporate Web sites to forepart of an Exchange Act periodic detailed information contained in the
provide important corporate report may provide investors with an document.
information and developments. important roadmap to the company’s The executive summary would be
We have been informed, however, disclosures located in the body of such required to be included in the forepart
that there are continuing concerns about a report. The executive summary in the of a reporting company’s annual or
the treatment of Web site disclosures Exchange Act periodic report would quarterly report filed with the SEC or,
under the federal securities laws that provide summary information, in plain if a reporting company files its annual
some have argued may be impeding English, in a narrative and perhaps report on an integrated basis (the glossy
greater use of corporate Web sites. These tabular format of the most important annual report is provided as a
concerns include liability for information about a reporting wraparound to the filed annual report),
information presented in a summary company’s business, financial the executive summary instead could be
format, the treatment of hyperlinked condition, and operations. As with the 73 SEC, Commission Guidance Regarding
information from within or outside a MD&A, the executive summary would Management’s Discussion and Analysis of Financial
company’s Web site, the disclosure of use a layered approach that would Condition and Results of Operations, Securities Act
non-GAAP measures and required present information in a manner that Release No. 33–8350 (December 19, 2003).
included in the forepart of the glossy explore ways to encourage companies to earnings by company officials, since
annual report. If the executive summary disclose company and industry-specific some believe that this practice is an
was included in the glossy annual KPIs. In addition, we will examine who important underlying source of
report, it would not be considered filed should develop the disclosure standards reporting complexity and other
with the SEC. for defining and measuring KPIs to accounting problems. Moreover, as
We will continue to evaluate the assure consistency among companies mentioned above, we will focus on
concept of requiring an executive and through time, and whether XBRL efforts to encourage corporate reporting
summary in a public company’s should be extended by industry sector of KPIs and other measures of
Exchange Act periodic reports such as to include KPIs and information on sustainable business progress over
the annual report on Form 10–K and the intangible assets. Further, we will longer periods.
quarterly report on Form 10–Q. examine the interplay between the use
of non-GAAP measures and KPIs. We Continued Need for Improvements in
Disclosures of KPIs and Other Metrics the MD&A and Other Public Company
To Enhance Business Reporting also will examine ways in which
consistent KPIs can be developed Financial Disclosures
Enhanced business reporting and KPIs through industry coordination. Every public company is required to
are disclosures about the aspects of a include a MD&A section in its annual
company’s business that are the source Improved Quarterly Press Release
Disclosures and Timing and quarterly reports filed with the SEC.
of its value. The Enhanced Business The three principal objectives of the
Reporting Consortium,74 has stated that The quarterly press release, being the MD&A are to:
the value drivers for a business ‘‘can be first corporate communication about the • Provide a narrative explanation of a
measured numerically through KPIs or result of the quarter just ended, is company’s financial statements that
may be qualitative factors such as viewed as an important corporate enables investors to see the company
business opportunities, risks, strategies communication. This communication through the eyes of management
and plans—all of which permit often receives more attention than the • Enhance the overall financial
assessment of the quality, sustainability formal Form 10–Q submission which disclosure and provide the context
and variability of its cash flows and often occurs a week or two later. within which financial information
earnings.’’ KPIs include supplemental We intend to review the earnings
should be analyzed
non-GAAP financial reporting press release for its consistency,
• Provide information about the
disclosures that proponents have stated understandability and its timeliness. We
quality of, and potential variability of, a
can improve disclosures by public will consider the consistent provision of
companies. KPIs are leading indicators income statement, balance sheet and company’s earnings and cash flow so
of financial results and intangible assets cash flow tables in the quarterly release. that investors can ascertain the
that are not encompassed on a We also intend to consider the likelihood that past performance is
company’s balance sheet. Proponents of positioning and prominence of GAAP indicative of future performance.
the use of KPIs note that they are and non-GAAP figures, GAAP The SEC has made clear that the
important because they inform reconciliation, the consistent placement quality of the MD&A in public company
judgments about a company’s future of topics, and clear communication of periodic reports is not as good as it
cash flows—and form the basis for a any changes to accounting methods or should be. In 2003, the SEC concluded,
company’s stock price. Managers and key assumptions. Ultimately, we view based in part on the Fortune 500 report
boards of directors of companies are the goal for an earnings release as a issued by Corp Fin, that additional
said to use KPIs to monitor performance consistent, reliable communication form guidance was useful in the following
of companies and of management. that all investors can easily navigate. areas:
Market participants and the SEC have In addition, we will evaluate the • The overall presentation of the
identified KPIs as important advisability of requiring the issuance of MD&A
supplements to GAAP-defined financial the earnings releases on the same day • The focus and content of the MD&A
measures. that the periodic report (e.g., Form 10– (including materiality, analysis, key
The important issues for us to Q) is filed, in contrast to the current performance measures and known
examine are what types of KPIs should practice in which the earnings release material trends and uncertainties)
be made available, in what format and often is issued before the periodic report • Disclosure regarding liquidity and
at what time, and whether they are is filed. In this regard, we will review capital resources
clearly and consistently defined over a survey of CFA Institute members on a • Disclosure regarding critical
time. Currently, companies are similar proposal, as well as the accounting estimates.
disclosing some company-specific KPIs comments received by the SEC when The SEC has stated that the MD&A
in their periodic reports filed with the this idea was put forth in prior SEC rule should not be a recitation of financial
SEC or in other public statements. Other proposals. We will consider, among statements in narrative form or a series
people in the market are working on other things: (1) The savings in time of technical responses to the MD&A
developing industry-specific KPIs in spent cross-referencing two separate but requirements.
order to improve comparability of fairly identical reports separated by a We understand that investors and
companies on an industry basis. We will very short period of time, and (2) the other market participants believe that
elimination of the concern that the two while there has been some improvement
74 The Enhanced Business Reporting Consortium
reports may not perfectly match. in the MD&A disclosures since
was founded by the AICPA, Grant Thornton LLP, We do not intend to deliberate the publication of the SEC’s interpretive
Microsoft Corporation, and
PricewaterhouseCoopers in 2005 upon the
potential elimination of the issuance of release in 2003, significant
quarterly earnings results. The improvement is still needed both in
recommendation of the AICPA Special Committee

on Enhanced Business Reporting. The EBRC is an elimination of quarterly reports would terms of additional disclosures and
independent, market-driven non-profit deprive investors of important sources elimination of what the SEC termed
collaboration focused on improving the quality,
integrity and transparency of information used for
of information about a company’s ‘‘unnecessary detail or duplicative or
decision-making in a cost-effective, time efficient performance. However, we may discuss uninformative disclosure that obscures
manner. public projections of next quarter’s material information.’’
Under the Sarbanes-Oxley Act of on which XBRL will be available to Only after the second phase has begun
2002, the SEC is generally required to investors and analysts. in late 2009 or early 2010 will the SEC
review every public company’s filings at In the Committee’s timetable, the first (in the Committee’s recommendation)
least every three years. In that regard, phase begins with the 500 largest begin to consider whether to require any
we believe that through the review reporting companies. These companies companies to file (rather than furnish)
process, the SEC will gain important would be required to ‘‘file’’ their regular their XBRL-tagged financial statements.
insight into whether there has been audited financial statements, as they do Since the second phase companies will
improvement in the MD&A disclosures today, and at the same time to ‘‘furnish’’ (in the Committee’s recommendation)
and the types of ongoing concerns a supplement consisting of the XBRL be permitted to furnish rather than file
regarding such disclosures. We will be tags that were applied to the filed their XBRL financial statements, that
evaluating whether the SEC should statements (for purposes of this must mean they won’t be required to file
periodically issue a report on common memorandum, I will refer to this their XBRL financial statements until
types of comments issued on the MD&A supplemental XBRL material as the after their 10–Ks are filed in March
and other financial disclosures, similar ‘‘XBRL financial statements’’). In the 2011. That means no company, large or
to the Fortune 500 report, to provide Committee’s recommendation, the small, will be required to file a 10–K
additional guidance on improving the XBRL financial statements would with XBRL financial statements until
MD&A in accordance with the SEC’s include both the facing financials and March of 2012. That’s four years from
most recent interpretive guidance.75 block-tagged footnotes (block-tagging now, and quite a generous phase-in,
means that one XBRL tag is applied to considering we are talking about only
Appendices 2000 or so of the largest and most
the entire footnote, instead of applying
Index of Appendices individual tags to each of the individual sophisticated companies in the U.S.
A—Separate Statement of Mr. Wallison disclosures within the footnote). When the remaining 13,000 reporting
B—Examples of Substantive Complexity companies will be required to file XBRL
C—Committee Members, Official Observers,
The first phase would not begin until
certain technical preconditions have financial statements under this
and Staff ‘‘mandatory’’ phase-in is anybody’s
been resolved, the most significant of
Appendix A guess.
which is the upgrading of the SEC’s
The distinction between furnishing
Separate Statement of Mr. Wallison website to receive XBRL filings. John
and filing is important. Under the
White, the director of the SEC’s Division Securities Exchange Act of 1934,
Introduction of Corporation Finance, told the companies are absolutely liable for false
In its meeting on January 11, 2008, the Committee that he did not think the first or misleading material filed with the
Committee endorsed the use of XBRL phase would begin until the fall of 2008. SEC. However, in the case of material
for financial reports with this statement: One year after the first phase begins, that is merely furnished to the SEC,
‘‘The Committee believes that the SEC domestic large accelerated filers liability only attaches if it can be shown
should eventually require all public (perhaps 1500 additional companies) that the material was intentionally false
companies (preparing their financial would be required to ‘‘file’’ their or misleading. Accordingly, the
statements using U.S. GAAP) to tag the regulator audited financial statements, Committee seems to have adopted the
financial statements (including and ‘‘furnish’’ a set of XBRL financial idea of furnishing rather than filing
footnotes) they are required to file with statements. Some time after the second XBRL financial statements because of its
the SEC as part of their Exchange Act phase has begun, the SEC is to decide concern about the possible cost of
reports using XBRL. The Committee ‘‘whether and when to move from auditor assurance. It seems to have
believes such a mandate is necessary in furnishing to the official filing of XBRL reasoned that, if XBRL financial
order to encourage the commitment of financial statements for the domestic statements were furnished rather than
resources toward the necessary software large accelerated filers, as well as the filed, the reduced liability would permit
development for tagging, viewing and inclusion of all other reporting companies to dispense with auditor
reading of XBRL tagged information companies.’’ assurance entirely, and thus to avoid
* * * ’’.76 The Delay these potential costs. However, as I will
Yet, despite the value the Committee discuss below, the concern about
saw in mandating the use of XBRL by Assuming that the first phase begins assurance costs is misplaced and
reporting companies, the Committee in the fall of this year, it seems unlikely ultimately self-defeating. Not only was
adopted an extended phase-in that will that the companies involved will be there no need to require the furnishing
delay the widespread use of XBRL for required to begin with their 10–K of XBRL financial statements, but
financial reporting well into the next reports, which for the most part are due allowing XBRL financial statements to
decade. I dissented from the to be filed no later than March 31, 2009. be furnished rather than filed will
Committee’s vote—and am filing this So in reality, the first phase 500 severely impair the value of XBRL for
separate statement—because I believe companies will be filing reports and investors and analysts and is an
the Committee’s proposed timetable is furnishing XBRL financial statements important source of what will be an
(i) based on an erroneous assessment of for the quarters ended in 2009 and the enormous and unnecessary delay in the
the potential costs of auditor assurance, 10–K due in March 2010. The second adoption of XBRL in the United States.
(ii) applies restrictions on reporting that phase will begin late in 2009 (one year
will be harmful to XBRL and to users, after the beginning of the first phase) Will auditor assurance as to the
and (iii) unnecessarily delays the date and will include the financial accuracy of XBRL-tagged financial
statements that are due (for most statements be costly?
75 We note that the SEC’s comment letters on a companies) in the first three quarters of As noted above, the Committee’s
reporting company’s filings are made publicly 2010 and the 10–K due at the end of the phase-in recommendation, and its
available on the SEC Web site after completion of first quarter of 2011. We are already distinction between filing and
the SEC’s review of such filings. We also note that
third parties prepare reports on the MD&A three years from today, and only 2000 furnishing XBRL financial statements,
disclosures. or so companies will have been required were apparently motivated by concern
76 Draft report, p. 81 to prepare XBRL financial statements. that auditor assurance as to the accuracy
of the XBRL tagging will be costly. Some • Did the company properly tag each Any suggestion that this simple
committee members, without any disclosure in its financial statements? process will or could involve costs
supporting evidence, referred to the (For example, is the ‘‘revenue’’ item in remotely like section 404 of Sarbanes-
process of auditor assurance as the financial statements properly Oxley is thus completely fanciful. A
potentially as costly as Section 404 of mapped to the correct ‘‘revenue’’ tag in better description of the costs involved
Sarbanes-Oxley—erroneous statements XBRL?) in auditor assurance would be one
that were picked up in some media • Did the company add extensions to word: trivial.
reports of the meeting. However, as I the tags that were not appropriate in
light of the company’s business? Is assurance by auditors necessary?
will discuss below, concerns about the
cost of assurance are unfounded and (Adding extensions to the tags already Certainly. There are two reasons.
should not have been a factor in the included in the XBRL taxonomy, First, without a third-party review,
Committee’s deliberations. although permissible, could make it companies will get careless in the rush
Today, most companies that tag their difficult to compare one company’s to complete their XBRL financial reports
financial statements use the so-called financial statements with another’s.) 77 and file with the SEC. No matter how
bolt-on method. It is the simplest, To put this in some perspective, one simple the tagging process, mistakes
although not potentially the least costly, S&P 50 technology company told will be made. Mistakes are especially
approach to tagging financial Subcommittee 4 that its 10 Q report, likely if the tagged financial statements
statements. In the bolt-on method, including the financial statements, are furnished rather than filed. In that
financial statements are prepared and block-tagged footnotes, and the MD&A, case, companies will believe that they
audited in the usual way. When the required only 192 tags. So the assurance don’t have to be particularly careful
audit is completed, the financial process, had it been done for that with the mapping to the XBRL
statements are ‘‘mapped’’ to the XBRL company by its auditors, would have taxonomy, since there will be little
taxonomy. This means simply that the required that the auditors answer the likelihood of liability for mere
various items in the company’s financial three questions above for only 192 tags. negligence. If, as some have suggested,
statement are tagged with the In the end, the company performed its the SEC will offer some kind of safe
appropriate XBRL tag. The tagging can own assurance, which required only 10 harbor for XBRL-tagged financials that
be done largely automatically, with hours of work by one lower level are furnished rather than filed, this
existing software that reads the financial accountant. problem will be compounded;
statement and applies the appropriate Despite the seeming simplicity of the companies will have little incentive to
tag, or manually through a drag and three principal questions, and the take the time to get the tagging right,
drop method that also uses available relatively small number of tags likely to and many incentives to get the tagging
open source (zero cost) software. be involved, is it possible that auditors wrong if they are hoping to avoid
Once the items in the financial would have to go through complex steps unfavorable comparisons with their
statements have been tagged, the in order to provide assurance as to the peers. Under these circumstances, errors
question arises whether the tags have tagging? The answer is no. There is a in the tagging—and incorrect
been correctly selected and applied. It is simple way for assurance to be done, information in the XBRL financial
at this point that the question of and no reason why a company’s statements—will not be an infrequent
assurance becomes significant. It is also auditors would not follow it. occurrence; the result will be to raise
Today, most companies prepare their questions about the value and
important to note that there is no
financial statements in Excel, Word, or usefulness of XBRL. In this way, a
relationship between the audit of the
some other desktop publishing software; potentially valuable resource for
financial statements and the assurance
those companies that are furnishing or investors, which could have been
process on the application of the XBRL
will furnish XBRL financial statements introduced without flaws, will be
tags we are discussing here. The audit
will use the bolt-on method to add the damaged and diminished. And all this
of the financial statements has been
completed when the bolt-on process XBRL tags. Once the tagging has been because of an unfounded fear that
completed, all these desktop publishing auditor assurance will be costly.
begins. The assurance process for the
applications can be used to print out a
XBRL tags does not make the audit in Second, and perhaps even more
any way more complicated or costly. set of financial statements, and when
important, in the absence of any
printed out these statements should be
The only remaining question is whether consistent rules for tagging, imposed
an exact replica of the audited human-
the tagging, after the audit, has been either by regulation or reporting
readable statements. The two financial
done properly. For purposes of this standards and monitored by auditors,
statements can then be compared either
memorandum, the key question is what many companies may add extensions to
manually, through a visual comparison,
it would cost for the company’s auditor, their tags that will make it difficult or
or through an automated comparative
having completed the audit, to impossible to compare their financial
determine that the company properly analysis. If they match, the XBRL
results from period to period or with
tagging must have been accurate—
applied the XBRL tags after the audit’s others in their industry. The XBRL
otherwise the XBRL financial statements
completion. taxonomy is a set of standardized
could not produce an exact replica of
There are only three significant categories for typical financial reports.
the audited human-readable statements.
questions that must be answered for the The designers have made efforts to
If there are discrepancies, errors in the
auditors to assure themselves—and to include all the tags that would be
tagging will be immediately apparent.
provide assurance to others—as to the necessary to achieve some degree of
accuracy of the tagging: 77 In the brief discussion at the Committee comparability between companies in the
• Did the company choose the correct same business. However, companies, on
meeting on January 11, one member suggested that

XBRL taxonomy (there are several more financial information was included in XBRL their own, can add extensions to the
different XBRL taxonomies, because the material associated with a financial statement than standard tags in the XBRL taxonomy. In
in the financial statement itself. This is not correct.
financial statements of banks, for XBRL does not contain any more financial data than
some cases, these extensions may more
example, are different from the financial the company chooses to disclose in its financial accurately describe a company’s specific
statements of operating companies); statements. unique disclosures (e.g., business
segments), but they can also make prepare updated plug-ins, so that produce both a human-readable
comparability more difficult. existing report-writer and desktop statement and be downloaded into a
In the development of XBRL, it was publishing applications will be able to model, will be lost.
assumed that the tagging process would create Microformat documents. Using
be reviewed by the company’s Conclusion
the XBRL Microformat standard, it will
auditors—not only to assure that the be possible to both print out a human- Auditor assurance as to the accuracy
tagging was done properly, but also to readable financial statement, and of tagging is a simple process, and
impose some period-to-period download an XBRL financial statement cannot under any imaginable
consistency on the process by which into a model, from a single XBRL circumstances be costly for companies—
companies choose their tags or add Microformat document. large or small—that are required to file
extensions to the standard tags in the In this case, of course, there can’t be XBRL financial statements. There are
XBRL taxonomy. The Committee’s a separate filing of the XBRL and many ways that assurance can be
proposal to allow XBRL financial human-readable financial statements; accomplished through efficient
statements to be furnished without nor can the human readable portion be automatic means, but one way that even
assurance will invite a chaotic outcome, filed while the XBRL portion is non-technical people can understand is
in which it will be possible for furnished; they will both be included in that the XBRL financial statements can
companies to add unnecessary or the same document and rely on the be used to print out a set of human-
inappropriate extensions to the XBRL same data. If that data contains an error, readable financial statements, which
tags. This will impair comparability, both the human readable portion and can then be compared visually with the
one of the principal purposes of XBRL, the XBRL disclosures will reflect that audited statements. If they match, the
and substantially reduce XBRL’s value error, because both are derived from the tagging must have been done correctly.
to investors and analysts. same underlying information. In other Accordingly, there is no need to
Is the furnished vs filed distinction words, it will make no sense to apply distinguish between furnishing and
sustainable? different liability standards to the filing XBRL financial statements, and no
No. The Committee’s draft report human-readable document and to the need for more than a limited SEC
conceives of the audited human- XBRL tagged disclosures, because both inquiry to confirm that the costs are
readable financial statements and the the human-readable audited financial trivial. After that, the SEC can
XBRL financial statements as two statement and the XBRL financial determine how and at what pace it
separate documents. This is certainly statement will come out of the same should require companies to file their
true as the bolt-on method is used data source. financial statements in XBRL format.
today. The result is two documents, Under these circumstances, one of In my view, therefore, the Committee
with the XBRL materials furnished, two things will happen: either the should eliminate both the distinction
while the human readable (audited) Committee’s distinction between between filing and furnishing XBRL
financial statements are filed. However, furnishing and filing will be ignored by financial statements, and the entire
if companies follow the Committee’s companies that decide to use the phase-in plan contained in its draft
suggestion, they will have to forego the Microformat document, or—more report of January 11. Instead, it should—
use of a major advance in the formatting likely—the distinction between filing for the reasons stated in the January 11
of filed documents that will be available and furnishing that the Committee (and draft—endorse a requirement that all
to companies around the world in only perhaps the SEC) has offered will companies file their financial statements
a few months. This new document induce U.S. companies to forego the in XBRL Microformat, and leave it to the
format is known as Microformat, and Microformat option and continue to use SEC to determine on what timetable this
should be available by this coming May. older and less efficient technology for should occur.
When it is available, it will be usable their financial reporting. Accordingly,
Appendix B
through the bolt-on method as well as the Committee’s hope that a mandatory
other more efficient and less costly timetable for filing financial statements Examples of Substantive Complexity
approaches. The technical specifications in XBRL format will bring about the 1. Industry-Specific Guidance
that will make the Microformat standard adoption of new technology will have
possible will be published soon by been thwarted by the Committee’s own 1. Below is a list of examples of
XBRL International—the umbrella group (unnecessary) requirements. In addition, industry-specific guidance in GAAP.
for the development and worldwide the huge efficiency benefits that would Note that this list does not reflect all
promulgation of XBRL—and this will come from the creation of a single industry-specific guidance or all
enable software manufacturers to Microformat document, which can industries subject to its own guidance.
Industry Sources
Broadcasting Industry ...................................................... SFAS No. 63, 139; EITF 87–10; SOP 00–2.
Banking and Thrift Industries .......................................... APB Opinion 23; SFAS No. 72, 91, 104, 109, 114, 115, 147; Technical Bulletin 85–1;
FSP 85–24–1; SOPs 90–3, 03–3; EITFs 97–3, 93–1, 92–5, 89–3, 88–25, 88–19,
87–22, 86–21, 85–44, 85–42, 85–41, 85–31, 85–24, 85–8, 84–20, 84–9, 84–4, D-
Topics D–78, D–57, D–47, D–39, SEC Regulation S–X—Article 9, SEC Industry
Guide; AICPA Auditing and Accounting Guide.
Cable Television Industry ................................................ SFAS No. 51.
Computer Software to be Sold, Leased, or Otherwise SFAS No. 2, 86.
Marketed.
Contractor Accounting: Construction-Type Contracts & ARB 43, Chapter 11, ARB 45, SFAS No. 111; SOP 81–1.
Government Contracts.
Development Stage Enterprises ..................................... Opinion 18; SFAS No. 7, 95, 154; Interpretation 7; SOP 98–5; AICPA Auditing and Ac-
counting Guides.
Finance Companies ........................................................ SFAS No. 91, 111, 115; SOP 01–6; AICPA Auditing and Accounting Guide.
Industry Sources
Franchising: Accounting by Franchisors ......................... SFAS No. 45, 141.

Insurance Industry ........................................................... SFAS No. 5, 60, 91, 97, 109, 113, 114, 115, 120, 124, 133, 135, 140, 144, 149, 156;
Interpretation 40; FSP FAS 97–1; AICPA Auditing and Accounting Guides; EITFs
99–4, 93–6, 92–9; D-Topics D–54, D–35. D–34, SEC Regulation S–X—Article 7,
SEC Industry guide.
Investment Companies .................................................... SFAS No. 102; FSP AAG INV–1; SOPs 94–4–1, 93–1, 93–4, 95–2, 00–3, 01–1;
AICPA Auditing and Accounting Guide; D-Topics D–76 D–74, D–11, SEC Regulation
S–X—Article 6.
Mortgage Banking Activities ............................................ SFAS No. 65, 91, 114, 115, 124, 125, 133, 134, 140, 149, 156; Technical Bulletin 87–
3; SOP 97–1, 03–3; EITF 95–5, 90–21, 87–34, 85–13, 84–19, D-Topics D–10, D–4,
D–2.
Motion Picture Industry ................................................... SFAS No. 139, SOP 00–2.
Oil and Gas Producing Activities .................................... SFAS No. 19, 25, 69, 95, 109, 131, 143, 144, 145, 153; Interpretation 33, 36, FSP
FAS 19–1, 141/142–1, 142–2; AICPA Auditing and Accounting Guide; SEC Industry
Guide, SEC Reg S–X Rule 4–10, SAB Topic 12, FRR Section 406; EITFs 04–6, 04–
4, 04–3, 04–2, 90–22.
Pension Funds: Accounting and Reporting by Defined SFAS No. 35, 75, 102, 110, 135, 149; SOPs 92–6, 94–4, 94–6, 95–1, 99–2, 99–3, 01–
Benefit Pension Plans. 2.
Real Estate: Sales & Accounting for Costs and Initial SFAS No. 13, 34, 66, 67, 91, 98, 114, 140, 144, 152; Interpretation 43; SOPs 75–2,
Rental Operations of Real Estate Projects. 78–9, 92–1, 97–1, 04–2; AICPA Auditing and Accounting Guide; EITF 06–8, 05–3,
98–8, 97–11, 95–7, 95–6, 94–2, 94–1, 91–10, 91–2, 90–20, 89–14, 88–24, 88–12,
87–9, 86–7, 86–6, 85–27, 84–17, SEC Regulation S–X—Rule 3–14, SEC SAB Topic
5N, 5W.
Record and Music Industry ............................................. SFAS No. 50.
Regulated Operations ..................................................... SFAS No. 71, 87, 90, 92, 98, 101, 106, 109, 135, 142, 144, Interpretation 40; Tech-
nical Bulletin 87–2; EITFs 97–4, 92–7; D Topics D–21, D–5; SAB Topic 10.
Title Plant ........................................................................ SFAS No. 61, 144.
2. Industry-specific exceptions in comprehensive income below the total • EITF Topic D–98, Classification and
GAAP, such as the scope exception for for net income in a single statement, in Measurement of Redeemable Securities,
registered investment companies and a separate statement that begins with net which permits a choice of methods of
life insurance entities in FIN 46R, income, or in a statement of changes in accreting to the redemption value.
Consolidation of Variable Interest equity.
• SFAS No. 133, Accounting for • FIN 48, Accounting for Uncertainty
Entities and for U.S. savings and loan
Derivative Instruments and Hedging in Income Taxes, which permits an
associations, other ‘‘qualified’’ thrift
Activities, which permits, but does not entity to classify interest and penalties
lenders, and stock life insurance
companies in SFAS No. 109, require, the use of hedge accounting, as either interest or taxes.
Accounting for Income Taxes. which, in certain circumstances, may • FSP AUG AIR–1, Accounting for
3. Industry practice such as mitigate earnings volatility from Planned Major Maintenance Activities,
accounting for certain types of inventory marking derivative instruments to which prohibits the accrue in advance
at fair value. market. method, but allows for continued use of
• SFAS No. 159, The Fair Value one of three other alternatives: direct
2. Alternative Accounting Policies Option for Financial Assets and expense, built-in overhaul, or deferral
Examples of alternative accounting Financial Liabilities, which permits, but methods.
policies are as follows: does not require, the measurement of
• SFAS No. 87, Employer’s certain financial assets and financial • Oil & gas accounting: The two
Accounting for Pensions and SFAS No. liabilities at fair value. accounting methods followed by oil and
106, Employers’ Accounting for • EITF 88–1, Determination of Vested gas producers are the successful efforts
Postretirement Benefits Other Than Benefit Obligation for a Defined Benefit method and the full cost method.
Pensions, which permits alternatives for Plan, which permits vested benefit Successful efforts accounting essentially
amortizing delayed recognition amounts obligations to be determined as the provides for capitalizing only those
and for measuring return on plan assets. actuarial present value of the vested costs directly related to proved
• SFAS No. 95, Statement of Cash benefits to which the employee is properties; the costs associated with
Flows, which permits alternative entitled if the employee separates exploratory dry holes are expensed as
presentations of the form and content of immediately or the actuarial present incurred. Full cost accounting generally
the statement. value of the vested benefits to which the provides for capitalizing (within a cost
• SFAS No. 115, Accounting for employee is currently entitled but based center) all costs incurred in exploring
Certain Investments in Debt and Equity on the employee’s expected date of for, acquiring, and developing oil and
Securities (specifically Q&A 35 of the separation or retirement. gas reserves-regardless of whether or not
SFAS 115 Implementation Guide), • EITF 06–3, How Taxes Collected the results of specific costs are
which indicates that companies are not from Customers and Remitted to
successful.
precluded from classifying securities as Governmental Authorities Should Be
trading, even if they have no intention Presented in the Income Statement • SAB Topic 5H, Accounting for
of selling them in the near-term. (That Is, Gross Versus Net Presentation), Sales of Stock by a Subsidiary, which
• SFAS No. 130, Reporting which permits that certain taxes, such permits gains/losses on sales of stock by
Comprehensive Income, permits a as sales, use, and value added taxes, a subsidiary to be recognized in income
choice in presenting comprehensive may be presented either on a gross or or equity.
income. An entity may present other net basis.
3. Bright Lines Bright lines may also be found in Bright lines are also present in
Examples of bright lines, rules of revenue recognition literature. One classification requirements. For
thumb, and pass/fail models include the example is SFAS No. 66, Accounting for example, SFAS No. 95, Statement of
following: Sales of Real Estate, which provides Cash Flows, clarifies the definition of
bright lines for determining the buyer’s ‘‘cash equivalents’’ by stating that
A. Bright Lines minimum initial investment ‘‘generally, only investments with
• Lease Accounting requirements for real estate sales. original maturities of three months or
Current lease accounting is based on • Business Combinations less qualify under that definition’’
When an SEC registrant undergoes a (paragraph 8). Despite use of the word
a principle: when a lease transfers
change in control, the company must ‘‘generally,’’ this bright line is often
substantially all of the benefits and risks
reflect the new basis of accounting interpreted stringently.
of ownership of the property, it should arising from its acquisition in its stand- In addition, SEC Regulation S–X
be accounted for as an asset and a alone financial statements (i.e., apply includes bright lines for separate
corresponding liability by the lessee and purchase accounting to its own stand- presentation of amounts that would
the asset is derecognized by the lessor alone financial statements) if the otherwise be included in lines such as
(capital lease); otherwise, rental expense company becomes substantially wholly- revenue, other current assets and
is recognized as amounts become owned. ‘‘Substantially wholly-owned’’ liabilities, and other assets and
payable (operating lease). However, to is defined such that this push down liabilities.
apply this principle, SFAS No. 13, accounting is prohibited if less than • Disclosure
Accounting for Leases, provides the 80% of the company is acquired, Bright lines also exist with respect to
following bright lines for classifying permitted if 80% to 95% of the the determination of related parties for
leases as capital or operating. Meeting company is acquired, and required if the purposes of disclosing related party
any one of these criteria results in 95% or more of the company is transactions and the identification of
capital lease treatment. acquired. segments for the purposes of
Æ The lease transfers ownership of In addition, SFAS No. 141, Business determining which operating segments
the property to the lessee by the end of Combinations, requires that the require separate presentation.
the lease term. purchase price allocation period in a Further, SEC Regulation S–X includes
Æ The lease contains a bargain business combination usually not a number of bright lines regarding
purchase option. exceed one year from the consummation requirements to present stand-alone
Æ The lease term is equal to 75 date.79 acquiree financial statements, stand-
percent or more of the estimated • Pension and Other Post-Retirement alone equity method investee financial
economic life of the leased property. Employment Benefit Accounting statements, and pro forma financial
Æ The present value at the beginning SFAS No. 87, Employers’ Accounting information, among others. These
of the lease term of the minimum lease for Pensions, and SFAS No. 106, bright-lines are based on the results of
payments, excluding certain items, Employers’ Accounting for certain significance tests, or
equals or exceeds 90 percent of the Postretirement Benefits Other Than calculations, defined in Regulation S–X.
excess of the fair value of the leased Pensions, permit the use of smoothing These significance tests compare the
property. mechanisms that delay the recognition acquiree or investee to the registrant in
• Consolidation of the effects of changes in actuarial the areas of assets, investments, and
For those entities that are not subject assumptions and differences between income.
to the FIN 46R model, ‘‘the usual actual results and actuarial
condition for a controlling financial B. Rules of Thumb
assumptions. However, these standards
interest is ownership of a majority contain a bright line as to when the • Consolidation Accounting
voting interest, and therefore, as a delayed recognition amounts should be The fall of Enron in late 2001
general rule, ownership by one recognized. refocused attention on the effect of
company * * * of over 50% of the • Hedge Accounting bright lines as they relate to
outstanding voting shares of another SFAS No. 133, Accounting for consolidation accounting. Enron, and
company is a condition pointing toward Derivative Instruments and Hedging others, took advantage of bright lines
consolidation.’’ 78 Further, there is a Activities, requires that derivative related to the consolidation of special
presumption that an investment of instruments be recognized at fair value, purpose entities (SPEs) to avoid
20%–50% requires equity method with changes in fair value recognized in reporting assets and liabilities, to defer
accounting. In addition, the equity income. However, in an effort to reporting losses, and/or report gains. At
method is required for investments in mitigate earnings volatility, SFAS No. the time, the consolidation of SPEs
limited partnerships unless the interest 133 permits the use of hedge accounting hinged on an analogy to guidance that
‘‘is so minor that the limited partner when a derivative is highly effective in required lessees to consolidate SPE
may have virtually no influence over achieving offsetting changes in fair lessors that lacked a substantive
partnership operating and financial value or cash flows attributable to the investment at risk from an unrelated
policies’’ (SoP 78–9, Accounting for risk being hedged. GAAP, however, party. ‘‘Substantive’’ was defined as 3%,
Investments in Real Estate Ventures). In does not define ‘‘highly effective.’’ at a minimum, with the caveat that a
this case, practice has used a 3%–5% Instead, practice has defined ‘‘highly greater investment may be necessary in
bright line to apply the ‘‘more than effective’’ as an offset ratio of 80% to certain facts and circumstances. Despite
minor’’ provision. This practice has 125%. this caveat, which would suggest the
been acknowledged by the SEC staff in • Classification need for judgment, the presence of the
EITF Topic No. D–46, Accounting for 3% bright line gave rise to numerous
Limited Partnership Investments. 79 We note SFAS No. 141, Business

structured transactions to achieve a
• Revenue Recognition Combinations, has been superseded by a new FASB specific accounting purpose.
standard, SFAS No. 141 (revised 2007), Business
Combinations, which similarly states in paragraph
In December 2003, the FASB issued
78 ARB No. 51, Consolidated Financial 51, ‘‘* * * the measurement period shall not FIN 46R, Consolidation of Variable
Statements, paragraph 2. exceed one year from the acquisition date.’’ Interest Entities, which superseded the
3% rule. FIN 46R requires consolidation • SoP 97–2, Software Revenue Treasurer, Varian, Inc. (Substantive
in certain circumstances by the party Recognition, related interpretations, and Complexity Subcommittee)
that holds the majority of the risks and audit firm guidance contain the Edward E. Nusbaum, CEO and Executive
Partner, Grant Thornton LLP. (Audit
rewards of an entity, rather than equity following pass/fail tests: Process and Compliance Subcommittee)
ownership and voting rights. This Æ If vendor specific objective James H. Quigley, Chief Executive Officer,
model has led some to assert that FIN evidence (VSOE) does not exist for all Deloitte Touche Tohmatsu. (Standards-
46R is a principles-based standard. of the undelivered elements of a Setting Process Subcommittee)
However, even FIN 46R contains a rule software sales arrangement, the David H. Sidwell, Former Chief Financial
of thumb—a presumption that if equity recognition of all revenue from the Officer, Morgan Stanley. (Chairperson,
investment at risk is less than 10% of arrangement must be deferred until Standards-Setting Process Subcommittee)
the entity’s total assets, the entity is a Peter J. Wallison, Arthur F. Burns Chair in
sufficient evidence exists, or until all Financial Market Studies, American
variable interest entity subject to the elements have been delivered, unless Enterprise Institute. (Delivering Financial
FIN 46R model, with similar caveats certain exceptions are met. Information Subcommittee)
that require additional analysis, Æ Extended payment terms usually Thomas Weatherford, Former Executive Vice
judgment and consideration. result in a deferral of revenue. President and Chief Financial Officer,
• Contingencies Specifically, when extended payment Business Objects S.A. (Substantive
SFAS No. 5, Accounting for terms are present, a presumption exists Complexity Subcommittee)
Contingencies, provides an example of that the vendor’s fee is not fixed or Official Observers
rules of thumb in interpretations of determinable, due to the possibility that Robert Herz, Chairman, Financial Accounting
GAAP. SFAS No. 5 establishes the vendor may provide a refund or Standards Board.
recognition and disclosure requirements concession to a customer. While there Assisted by: Thomas Linsmeier
based on the likelihood—remote, are factors to overcome this (Substantive Complexity Subcommittee).
possible, probable—that a liability has presumption, interpretive guidance sets Leslie Seidman (Standards-Setting
been incurred. Although GAAP does not the hurdle to overcome this Subcommittee). Larry Smith (Audit Process
define these terms, audit firms have presumption extremely high, generally and Compliance Subcommittee). Donald
developed rules of thumb for these resulting in the deferral of revenue until Young (Delivering Financial Information
terms. Subcommittee).
payment is due.
Charles Holm, Associate Director and Chief
C. Pass/Fail Tests Appendix C Accountant, Banking Supervision and
Regulation, Federal Reserve Board.
• SFAS No. 48, Revenue Recognition Committee Members, Official Phil Laskawy, Chairman of the Trustees,
When Right of Return Exists, requires Observers, and Staff International Accounting Standards
that where a right of return exists, Committee Foundation.
Members
revenue be recognized at the time of sale Mark Olson, Chairman, Public Company
only if certain criteria, such as the Robert C. Pozen, Chairman, MFS Investment Accounting Oversight Board.
amount of future returns can be Management. (Ex Officio Member of All Assisted by: Charles Niemeier (Substantive
reasonably estimated. Otherwise, Subcommittees) Complexity Subcommittee). Dan Goelzer
revenue recognition is deferred until the Dennis R. Beresford, Ernst & Young (Audit Process and Compliance
Executive Professor of Accounting, Subcommittee).
right expires or the criteria are
University of Georgia. (Standards-Setting
subsequently met. Kristen E. Jaconi, Senior Policy Advisor to
Process Subcommittee)
• SFAS No. 133, Accounting for the Under Secretary for Domestic Finance,
Susan S. Bies, Former Member, Board of
Derivative Instruments and Hedging U.S. Department of the Treasury.
Governors, Federal Reserve System.
Activities—if critical terms do not (Chairperson, Substantive Complexity Committee Staff
match or if documentation does not Subcommittee) Conrad Hewitt, Chief Accountant, Office of
comply with the rules, then companies J. Michael Cook, Former Chairman and CEO, the Chief Accountant, U.S. Securities and
are not eligible to apply hedge Deloitte & Touche LLP. (Chairperson, Exchange Commission.
accounting. Audit Process and Compliance James Kroeker, (Designated Federal Officer),
Subcommittee) Deputy Chief Accountant, Office of the
• SFAS No. 140, Accounting for Jeffrey J. Diermeier, CFA, President and CEO, Chief Accountant, U.S. Securities and
Transfers and Servicing of Financial CFA Institute. (Chairperson, Delivering Exchange Commission.
Assets and Extinguishments of Financial Information Subcommittee) John W. White, Director, Division of
Liabilities contains requirements, all of Scott C. Evans, Executive Vice President, Corporation Finance, U.S. Securities and
which must be satisfied, to achieve sale Asset Management, TIAA–CREF. Exchange Commission.
accounting for a transfer of financial (Standards-Setting Process Subcommittee) Wayne Carnall, Chief Accountant, Division of
assets. Otherwise, the transfer is treated Linda L. Griggs, Partner, Morgan, Lewis & Corporation Finance, U.S. Securities and
as a secured borrowing with a pledge of Bockius LLP. (Audit Process and Exchange Commission.
Compliance Subcommittee) James Daly, Associate Director, Division of
collateral.
Joseph A. Grundfest, William A. Franke Corporation Finance, U.S. Securities and
• EITF 00–19, Accounting for Professor of Law and Business, Stanford Exchange Commission.
Derivative Financial Instruments Law School. (Substantive Complexity Russell Golden (Senior Advisor to the
Indexed to, and Potentially Settled in, a Subcommittee) Committee Chairman), Director of
Company’s Own Stock, identifies a Gregory J. Jonas, Managing Director, Moody’s Technical Application and Implementation
number of criteria that must be met in Investors Service. (Audit Process and Activities, Financial Accounting Standards
order for an instrument to be classified Compliance Subcommittee) Board.
as an equity instrument. Failure to meet Christopher Liddell, Chief Financial Officer, Holly Barker, Project Manager, Financial
any of these criteria results in Microsoft Corp. (Delivering Financial Accounting Standards Board.
Information Subcommittee) Adam Brown, Professional Accounting

classification as a liability, which is William H. Mann, III, Senior Analyst, The Fellow, Office of the Chief Accountant,
marked to market through income. The Motley Fool. (Delivering Financial U.S. Securities and Exchange Commission.
criteria do not provide for probability Information Subcommittee) Bert Fox, Professional Accounting Fellow,
assessments or judgments based on the G. Edward McClammy, Senior Vice Office of the Chief Accountant, U.S.
preponderance of evidence. President, Chief Financial Officer and Securities and Exchange Commission.
Todd E. Hardiman, Associate Chief Accountant, U.S. Securities and Exchange Sharon Virag, Director of Technical Policy
Accountant, Division of Corporation Commission. Implementation, Public Company
Finance, U.S. Securities and Exchange Christopher Roberge, Project Manager, Accounting Oversight Board.
Commission. Financial Accounting Standards Board. Brett Williams, Professional Accounting
Stephanie Hunsaker, Associate Chief Nili Shah, Assistant Chief Accountant, Office Fellow, Office of the Chief Accountant,
Accountant, Division of Corporation of the Chief Accountant, U.S. Securities
U.S. Securities and Exchange Commission.
Finance, U.S. Securities and Exchange and Exchange Commission.
Commission. Amy Starr, Senior Special Counsel to the [FR Doc. E8–3544 Filed 2–27–08; 8:45 am]
Shelly Luisi, Senior Associate Chief Director, Division of Corporation Finance, BILLING CODE 8011–01–P
Accountant, Office of the Chief U.S. Securities and Exchange Commission.

Notice: Progress Report of The SEC Advisory Committee On Improvements To Financial Reporting

Enviado por

Dados do documento

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Notice: Progress Report of The SEC Advisory Committee On Improvements To Financial Reporting

Enviado por

Direitos autorais:

Formatos disponíveis

Thursday,

February 28, 2008

SECURITIES AND EXCHANGE (202) 551–5300, Office of the Chief Appendices

Executive Overview Todd E. Hardiman

4 Comments to the Committee are available at

underlying our interim developed proposals. We

existing U.S. industry-specific guidance on the

existing standards. (Chapter 2— materiality. (Chapter 3—developed be given in implementing any

of Decision-Useful Financial Reporting Information

productive to make recommendations conceptual approaches, and matters for future

16 Comments to the Committee are available at

existing U.S. industry-specific guidance on the

Background companies, which may be involved in a unless it is specifically prescribed

consideration arrangement in which the payments

on cash, accruals, and changes in fair Background certified by auditors, as discussed

disclosure requirements as new FASB

50% probability) that some portion or all of the

FAF: Our proposal complements the

authoritative content issued by the SEC, as well as

a means by which new or revised interpretations

complete such a list of priorities.

have not determined if the principles are

related to the estimated income for the full fiscal

different developments, including c. Lack of agreement in principle on Implementation judgments can be

environment, preparers and auditors judgments include determining if a judgments to make.

should be expected to exercise due care in gathering

recommendation of the AICPA Special Committee

meeting on January 11, one member suggested that

Franchising: Accounting by Franchisors ......................... SFAS No. 45, 141.

Limited Partnership Investments. 79 We note SFAS No. 141, Business

Information Subcommittee) Adam Brown, Professional Accounting

Você também pode gostar