FASB Small Business Advisory Committee and Private Company Financial Reporting Committee MINUTES OF MEETING December 7, 2007

Transcription

1 FASB Small Business Advisory Committee and MINUTES OF MEETING December 7, 2007 The FASB Small Business Advisory Committee and Private Company Financial Reporting Committee met for a joint meeting at the FASB offices in Norwalk, Connecticut, on December 7, The following Committee members, FASB Board members, FASB staff members, and others were present for the meeting: Small Business Advisory Committee Members P. Glenn Bradley Gary M. Cademartori Robert A. Dyson Mark Ellis Richard E. Forrestel, Jr. Richard H. Gesseck William G. Hall Gregory P.Hanson W. Stephen Holmes Neal A. Petrovich Darrel L. Posegate Richard L. Reed Charles L. Saemen Leonard Steinberg Troy D. Templeton E. Anson Thrower Scott M. Waite Grafton H. Willey, IV Candace Wright Chilton & Medley PLC Tatum Partners, LLP RSM McGladrey Michael C. Fina Cold Spring Construction Company, Inc. UHY LLP William G. Hall & Company Adventrx Pharmaceuticals, Inc. InterWest Partners American National Bankshares, Inc. Home Federal Bank National Cooperative Bank State Bank of Cross Plains The Steinberg Group Trivest Partners LP GrowthFinance LLC Patelco Credit Union Tofias PC Postlethwaite & Netterville FASB Board Members George J. Batavick G. Michael Crooch Lawrence W. Smith Donald M. Young Member Member Member Member FASB Staff Kenneth B. Bement Assistant Project Manager Suzanne Q. Bielstein Director of Major Projects and Technical Activities Rebecca Chesney Postgraduate Technical Assistant Paul H. Glotzer Project Manager Robert Lipe Academic Fellow Kevin Stoklosa Project Manager T. Jeffrey Wilks Fellow January 25, 2008

2 2 Others Greg Fletcher Assistant Chief Auditor, Public Company Accounting Oversight Board (PCAOB) Jenifer Minke-Girard Senior Associate Chief Accountant, Securities and Exchange Commission (SEC) Judith H. O Dell Chair, Carl Bagge Charles Bramley Daryl Buck Michael Cain H. Marco Kichler Maryann Lawrence David Lomax Jerry Murphy Tom Ratcliffe Carisa Wisniewski Robert Durak (Administration) Introductory Remarks 1. Mr. Batavick called the meeting to order at 9:10 a.m. and welcomed members of the Small Business Advisory Committee (SBAC) and the Private Company Financial Reporting Committee (PCFRC). FASB Update 2. Mr. Batavick reported on the following matters: a. On November 30, 2007, the FASB issued a Preliminary Views, Financial Instruments with Characteristics of Equity, for a 120-day comment period. b. On December 4, 2007, the FASB issued Statements No. 141 (revised 2007), Business Combinations, and No. 160, Noncontrolling Interests in Consolidated Financial Statements. These projects were both joint projects with the International Accounting Standards Board (IASB); the IASB will be releasing its standards in January. c. The FASB Accounting Standards Codification will be available for a one-year constituent verification period beginning January 15, Instructions for accessing and using the codification will be available on the FASB website. d. In October, the Board held a joint meeting with the IASB in Norwalk. FASB members and staff also met with the Accounting Standards Board of Japan and the Accounting Regulatory Department of China. Lin Zhu of the Ministry of Finance of the People s Republic of China has joined the FASB for a oneyear term as an international fellow.

3 3 e. The FAF s and FASB s joint response to the Securities and Exchange Commission s (SEC) Concept Release on Allowing U.S. Issuers to Prepare Financial Statements in Accordance with International Financial Reporting Standards (IFRS) and the proposed release to eliminate the requirements for certain foreign filers to reconcile to U.S. GAAP (Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards without Reconciliation to U.S. GAAP) is available on the FASB website. Additionally, the public testimony of Mr. Robert Herz and Sir David Tweedie to the Senate Subcommittee on Securities, Insurance, and Investment also is available on the website. On December 13, 2007 and December 17, 2007, FASB members will participate in public roundtables on IFRS hosted by the SEC. f. The Board will soon issue FASB Staff Position (FSP) FIN 48-2, Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises, for a one-year delay for private companies of the effective date of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, and FSP FAS 157-2, Effective Date of FASB Statement No. 157, for a deferral of the effective date of FASB Statement No. 157, Fair Value Measurements, essentially for nonfinancial assets and liabilities. Additionally, the Board will issue for public comment an Exposure Draft on the objective and qualitative characteristics of financial reporting and a Discussion Paper on the reporting entity as part of the joint conceptual framework project. 3. In response to a question about the deferral of Statement 157, Mr. Batavick clarified that the effective date for financial assets and financial liabilities did not change. The Board decided to permit a deferral for nonfinancial assets and liabilities in order to allow the Valuation Resource Group more time to work out the difficulties of measuring these items within the new fair value measurement framework. Mr. Batavick noted that the Board did not permit a deferral for financial assets and liabilities since many of these items are currently being recorded at fair value using the new measurement framework. 4. Mr. Ratcliffe suggested that the Interpretation 48 deferral be highlighted on the main page of the FASB website along with the Statement 157 deferral. The Interpretation 48 deferral is an important issue that private companies should know about. Report of the SEC 5. Ms. Minke-Girard reported on the following matters: a. At its November open meeting, the SEC voted to adopt several measures to modernize and improve capital raising, reporting, and disclosure requirements for smaller companies. These measures address some of the recommendations from the SEC s Advisory Committee on Smaller Public Companies and deal with making scaled disclosure regulations available to around 1,500 additional smaller companies, shortening holding periods under Rule 144 from one year to six months, and creating two new exemptions for

4 4 compensatory employee stock options. Constituents should look for updates and related press releases about these items on the SEC website. b. Progress reports from subcommittees of the Advisory Committee on Improvements to Financial Reporting are available on the SEC website. An open meeting of the full committee will be held in January. c. At its November open meeting, the SEC voted to eliminate the U.S. GAAP reconciliation requirement for foreign private issuers that prepare their financial statements in accordance with IFRS as published by the IASB. The staff has received comment letters on its Concept Release related to potentially allowing U.S. companies to adopt IFRS. As previously mentioned, the SEC will hold public roundtables on issues raised in the Concept Release later this month. d. In November, the SEC staff issued SEC Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value through Earnings, which revises and rescinds portions of SEC Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments. Report of the PCAOB 6. Mr. Fletcher reported on the following matters: a. On October 17, the Public Company Accounting Oversight Board (PCAOB) issued for public comment guidance (Preliminary Staff Views, An Audit of Internal Control That Is Integrated with an Audit of Financial Statements) on auditing internal control and financial reporting for smaller public companies. The comment period ended on December 17, The PCAOB is encouraging auditors to adopt the guidance early and provide feedback even after this date. The guidance explains how the PCAOB s internal control standard, Accounting Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated with an Audit of Financial Statements, can be applied in the audits of smaller companies, specifically relating to entity-level controls, risk of management override, segregation of duties and alternative controls, information technology controls, and testing controls with less formal documentation. b. In October, the PCAOB issued a report (Report on the PCAOB s 2004, 2005, and 2006 Inspections of Domestic Triennially Inspected Firms) on problem areas identified in the inspections of U.S. firms that audited fewer than 100 public companies. The report noted 11 areas where auditing or quality control deficiencies were observed, including revenue recognition, the use of specialists and other auditors, concurring reviews, and related party transactions, and is intended to help firms evaluate their work in these areas. The report is available on the PCAOB s website. c. The PCAOB also adopted two amendments to its Rule 4003 regarding the frequency of inspections for firms that do not regularly issue audit reports, which are generally those firms that annually audit less than 100 public companies. The amendments eliminate the requirements that the PCAOB

5 5 regularly inspect each registered public accounting firm that plays a substantial role in audits but does not issue audit reports, and that the PCAOB inspect each firm that issues an audit report even if the firm does not regularly issue audit reports. d. On December 5, the PCAOB released for public comment a proposed policy statement ( Guidance Regarding Implementation of PCAOB Rule 4012 ) regarding the implementation of Rule 4012, which allows the PCAOB to rely on independent overseers of audit firms located in the firms home countries. PCFRC Activities 7. Ms. O Dell stated that the PCFRC was formed in January 2007 by the AICPA and the FASB to better understand and address the needs of private companies. It is made up of 1 chair and 12 members, including 4 practitioners, 4 preparers of private company financial statements, and 4 users of private company financial statements. The PCFRC considers user needs and cost-benefit considerations specific to private companies when making recommendations to the Board. These recommendations can be about existing accounting standards or current projects. Since it was formed, the Committee has held four meetings and has planned to meet six times next year. The PCFRC is divided into task forces for the purposes of researching and forming recommendations. Additionally, the Committee formed a resource group to obtain more input from private company constituents. 8. Ms. O Dell stated the PCFRC has submitted four recommendation letters to the Board on the following topics: a. Requiring disclosure of the date through which subsequent events have been considered since there is no formal issue date for private company financial statements b. Including SEC language related to materiality in the proposed FSP FAS 154- a, Considering the Effects of Prior-Year Misstatements When Quantifying Misstatements in Current-Year Financial Statements, since private companies are not likely to be familiar with SEC language (the Board voted to remove the proposed FSP from its agenda on August 1, 2007) c. Issuing important accounting standards, such as Interpretation 48, after the normal private company continuing education cycle and using clear wording regarding the effects on private companies of such standards d. Considering the effects of convergence and the IASB s project on small and medium companies on private companies. 9. Committee members have been active in speaking with and increasing awareness among constituents. Ms. O Dell noted that the deferral of Interpretation 48 has helped the PCFRC gain credibility with constituents. She noted that the members of the SBAC can contribute as resource group members. The PCFRC plans to increase the number of resource group members to 1,000 by the end of next year.

6 6 10. Ms. O Dell stated that the PCFRC is currently focusing on the following existing guidance: a. FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities b. FASB Statement No. 123 (revised 2004), Share-Based Payment c. FASB Statement No. 142, Goodwill and Other Intangible Assets. 11. Ms. O Dell stated that the PCFRC is currently monitoring and may provide recommendations on the following FASB projects: a. Financial statement presentation (working with the AICPA Technical Issues Committee) b. Discussions with staff regarding the definition of a private company c. Statement 157 and the effects on private companies of Level 3 fair value inputs d. Revenue recognition. Discussion of PCFRC Activities 12. Mr. Cain expressed concern that the financial statement presentation project appears to follow a large, public company model and that the staff s resource group does not include a representative from the private-company community. He questioned how the model fits the needs of users, especially users of private company financial statements. He asked that PCFRC members review the financial statement presentation model and give feedback to the task force. Mr. Smith agreed that the Board would find information helpful, especially information regarding the cost of implementing the new model; he emphasized the importance of the project and its potential to improve financial reporting. Ms. Bielstein noted that this project is the first to holistically review the presentation of financial information in financial statements. A differences-based approach has been adopted for the project, which involves considering the needs of issuers and then determining whether differences should be made for private companies or small companies. 13. Mr. Cademartori questioned whether 12 members is an amount sufficient to accomplish the PCFRC s goals. Ms. O Dell stated that the Committee plans to utilize the resource group and task forces to make robust recommendations without overloading the Committee members. She also noted that this structure has worked well for the AICPA Technical Issues Committee and also that the PCFRC carefully chooses projects that are most important to private companies and their constituents. 14. Mr. Young asked for clarity regarding the definition of users for private companies. He expressed his concern about defining the users of private company financial statements in terms of banks and other creditors and not other groups, such as minority shareholders. Ms. O Dell noted that the PCFRC constitution of users is divided into bankers, as well as a venture capitalist and a surety. Mr. Young noted that bankers, venture capitalists, and other similar groups may have more influence than minority shareholders on the information they receive from a private company.

7 7 15. Mr. Willey suggested the Committee form a pyramid structure of the resource group and task forces to efficiently increase input to the Committee s projects. Other members of the PCFRC and SBAC agreed that this structure would be effective. Ms. O Dell noted that the PCFRC is currently utilizing its resource group members for input. For example, a group of volunteers has agreed to track the cost and time required to comply with Statement 123(R). 16. Mr. Thrower stated that the PCFRC should focus on how standard setting affects the daily operations of private companies. Perhaps the PCFRC should develop a lens through which standard-setters should be able to see the user perspective of the private company. Mr. Thrower stated that he believes, unlike the model for equity investors, this is not clearly articulated for private company users. Mr. Thrower suggested that such a project should be undertaken by either the PCFRC or the SBAC. Ms. O Dell agreed that this may be needed. Interaction between the SBAC and the PCFRC 17. Mr. Glotzer noted that some have questioned whether both the PCFRC and SBAC are needed. He asked for suggestions regarding how the two committees might work together to achieve their respective goals. 18. Mr. Hall noted that the SBAC is directly related to the FASB and that its members should communicate to constituents the activities of the FASB. The PCFRC develops recommendations on technical issues, while the SBAC helps communicate this information back to constituents. Mr. Petrovich noted that much of the PCFRC s focus, specifically its cost-benefit considerations, is of interest to small companies more than private companies. Mr. Cain added that, although the PCFRC focuses primarily on cost-benefit analysis, not all of its recommendations will satisfy all the issues since not all small businesses are private companies. 19. Mr. Forrester noted that the FASB should determine whether it needs both groups to receive the input it needs. He agreed that the SBAC members should inform their peers of FASB activities and also actively provide input to the FASB. Mr. Hanson agreed that there is overlap between the two committees, but noted that the PCFRC does contribute more to technical issues. Mr. Hanson noted that a pyramid scheme would help add structure to interactions between the two groups. 20. Mr. Crooch stated that both groups have helped the Board make more informed decisions. Without opportunities to communicate with these groups, the FASB would not be aware of or understand the full range of needs related to financial reporting. Mr. Holmes noted that the FASB staff should more proactively educate members of the Committees. Ms. Wright suggested that SBAC members be informed of PCFRC meetings in case they might be able to attend. 21. Mr. Batavick noted that the SEC sponsored its Committee on Smaller Public Companies, which considered whether differences permitted for private companies might be carried over for smaller public companies. Having the insight of smaller public companies from the SBAC may help develop such a relationship.

8 8 Revenue Recognition 22. Mr. Wilks and Mr. Bement led two breakout discussions on the measurement model and the customer consideration model of revenue recognition. During the sessions, the Committees suggested that the staff: a. Explicitly identify the changes and similarities to current revenue recognition guidance derived from each model. b. Analyze whether the information required could be presented in other ways such as disclosures. c. Clarify that the term contract broadly means an arrangement between the entity and a customer and not necessarily a legal contract. d. Consider the auditability of the models. e. Consider whether realizability is included in credit risk. f. Consider whether items other than an increase in the contract value should be reported (such as an increase in the underlying asset to be delivered). 23. The PCFRC and SBAC agreed they should be included in the 2008 Survey on the Priorities of the FASB to provide feedback on the revenue recognition project and other FASB activities. International Convergence 24. Mr. Lipe summarized the joint letter from the FAF and FASB in response to the SEC s releases regarding the elimination of the reconciliation requirement for foreign filers using IFRS as promulgated by the IASB and whether U.S. companies should be permitted to adopt IFRS. The letter supports a single set of accounting standards and a blueprint for convergence. Additionally, the letter suggests that the IASB needs more funding and a larger staff. Ms. Bielstein noted that the IASB and FASB have roughly equivalent numbers of staff working on joint projects. However, the FASB has additional staff provided by the fellowship program, which supports the FASB s interpretative function, and the postgraduate internship program. She noted the IASB is currently looking to extend its fellowship program. 25. Mr. Lipe noted that the support for convergence is based on the needs of global capital markets. However, private companies, not-for-profit companies, and smaller public companies do not have the same needs as companies operating in the global capital market. Mr. Lipe asked members of the Committees whether they were familiar with IFRS and what would be the implications and time requirements of implementing IFRS for public and small companies. 26. Mr. Posegate questioned whether academic research has identified the differences between IFRS and U.S. GAAP. Mr. Lipe noted that most of the large accounting firms have listed the differences item-by-item. Additionally, there are some academic studies that identify the reconciling items between U.S. GAAP and IFRS. Mr. Young noted that Jack Ciesielski s report, It s Not a Small World, After All: The SEC

9 9 Goes International, published in the September 24, 2007 edition of the Analyst s Accounting Observer, shows that intangibles and research and development costs represent major differences, and that IFRS generally yields higher numbers. Mr. Batavick added that FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, also has been a major reconciliation item since IFRS results in far fewer items under sale accounting. 27. Mr. Willey asked which discussions have taken place regarding the roles of the SEC and FASB in implementing IFRS in the United States. Mr. Fletcher stated that the United States might utilize the inspectors of other countries while training staff on IFRS. Ms. Minke-Girard stated that the Advisory Committee on Improvements to Financial Reporting is currently reviewing whether it is appropriate for both the SEC and the FASB to issue guidance for U.S. GAAP. This work likely will include the added complexity of international standard setters. Additionally, the different interpretations of securities regulators could possibly add jurisdictional differences to GAAP. Ms. Minke-Girard noted that securities regulators around the world also are discussing these same issues. 28. Mr. Dyson observed that IFRS is principles based, while U.S. GAAP has shifted to a rules-based model. He asked whether a move to the principles-based IFRS would eventually shift to a rules-based model. Mr. Lipe noted that the Advisory Committee on Improvements to Financial Reporting is currently looking at this issue to determine whether the shift was a result of litigation, regulation, standards, or other reasons. Mr. Batavick stated that the shift from a principles-based model to a rulesbased model was a function of time. IFRS have not been in place as long as U.S. GAAP. Mr. Young noted that Statement 141(R) is in fact more principles based than the IASB s recently revised IFRS 3, Business Combinations. Mr. Batavick added that this difference highlights the difficulty of two standard setters promulgating GAAP. 29. Ms. O Dell asserted that the lack of knowledge of IFRS will impede its implementation in the United States. Further, the expansion of IFRS will possibly affect the certification designation in the United States. Mr. Hall suggested including convergence awareness as a professional education requirement and that the profession should look to the future and not to what is currently in practice. Mr. Dyson noted that, without a deadline, people are less likely to become educated or begin making the required changes. Mr. Crooch stated that the SEC should announce a date by which IFRS must be adopted in the United States and then start the education process; people will remain uninformed if they believe adoption is far from occurring. Ms. Bielstein noted that many other countries have adopted IFRS. The United States may be able to leverage off the experiences of these countries. 30. Mr. Batavick noted that adopting IFRS while maintaining the current U.S. GAAP for private companies would not be desirable for users, auditors, and preparers; the costs would be too great. Mr. Thrower asked what would happen if the small and medium enterprise model was released before the adoption of IFRS. Mr. Crooch noted that many countries continue to say that the small and medium enterprise model is too complicated.

10 Mr. Willey asked what would be the roles of the FASB, SEC, and PCAOB once IFRS is adopted in the United States. Mr. Fletcher noted that the PCAOB could use inspectors in home countries. He added that the PCAOB s inspection staff would need to be trained on IFRS in order to inspect U.S. firms if IFRS is adopted in the United States or if the PCAOB did not use the firm s home country inspectors. Ms. Minke-Girard noted that, because Sarbanes-Oxley requires reviews of foreign filers, the SEC currently has a process for reviewing filings under IFRS. However, the SEC s role in recommending accounting guidance and standards projects would potentially change if there was one global standard-setting body, but any such changes remain to be seen. 32. Ms. Bielstein noted that the IASB currently is reviewing its governance policy and the possibility of a supervisory body made up of representatives from different countries. Mr. Crooch stated his belief that the FASB would likely continue to exist in its current form, but act as a satellite to the global standard setter. Mr. Smith added that the IASB and FASB have developed a process for convergence in their Memorandum of Understanding. However, the major concern relates to whether the IASB, which is currently under a lot of pressure, will continue to work with the FASB on future projects. Mr. Young stated that the letter stated the opinions of the FASB, but that the SEC makes its own decisions. 33. Mr. Lipe noted that the FASB would appreciate input from the Committees regarding the planning activities for IFRS adoption and asked Committee members to begin educating the profession about these events. Hedge Accounting 34. Mr. Stoklosa stated that the FASB will issue its final standard for derivatives disclosures in early 2008 with an effective date of fiscal years beginning after November 15, The standard will require tabular disclosure of the amount and location in the balance sheet of the fair value of derivatives. The standard also will require disclosure of the amount and location in the income statement of the changes in fair value of derivatives. An alternative disclosure will be allowed for all trading activities, including derivatives. 35. Mr. Stoklosa said that the FASB will issue an Exposure Draft in early 2008 on its project to simplify hedge accounting. At its meeting in May, the Board directed the staff to develop a fair value approach to accounting for fair value and cash flow hedges. The simplified approach will eliminate the shortcut method, critical terms match, and bifurcation-by-risk. Additionally, the approach will relax the required level and testing of effectiveness. For issuances of debt, entities will be permitted to hedge only the interest rate if the hedge is designated when the debt is initially recognized. For cash flow hedges, a perfect derivative will be required as a proxy for the variability in cash flows associated with the forecasted transaction. 36. Mr. Steinberg asked whether the SEC has offered its guidance for the hedging project. Mr. Stoklosa noted that the FASB staff has not had conversations with the SEC inconsistent with the project s objectives and Board decisions made to date.

11 Mr. Young asked the Committees whether hedging their own debt at inception is a common practice for private companies or small businesses. Mr. Thrower noted that entering into interest rate swaps for cash flow hedges is a common practice. Open Discussion 38. Mr. Hanson noted that the Advisory Committee on Improvements to Financial Reporting has a subcommittee that is addressing the launch of XBRL. Any comments related to the risks and costs of XBRL should be forwarded to Mr. Hanson so that he may pass them on to the subcommittee. 39. Mr. Forrestel noted that the profession should start looking less at the end result of convergence and more at the process. Mr. Batavick noted that other countries have plans for adopting IFRS while the United States does not. He agreed with Ms. Bielstein s earlier comment that the United States should be able to leverage off the plans and experiences of these other countries. 40. Ms. Wright noted that the AICPA requires, as a component of continuing education, courses to raise awareness of IFRS. However, surveys show that over half of course attendees do not believe that IFRS affects their business. 41. In response to a question about the recent subprime mortgage and credit events, Mr. Smith noted that the FASB took several steps to increase the transparency of the reporting of lending activities. Several years ago the FASB issued an FSP that pointed to different areas of guidance and required disclosures related to the accounting for nontraditional lending activities. Mr. Smith added that the FASB issued another FSP on implied guarantees, which addresses some of the items related to Interpretation 46(R). Mr. Smith stated that the FASB acknowledges that the guidance for accounting for securitizations is flawed, but there is a project underway to address these issues. Mr. Young noted that the FASB has received positive feedback from investors on the Statement 157 disclosure requirements. Mr. Batavick added that understanding the level of fair value inputs helps investors assess the quality of the fair value amounts reflected in financial statements. Mr. Hall stated that investors accepted risky securities. Mr. Young noted that many of these investors relied heavily on the credit ratings granted to these securities by credit rating agencies. 42. Mr. Steinberg asked if the Board has taken into consideration the effect the revenue recognition models might have on accounting for income taxes. Mr. Batavick noted that the FASB does not necessarily look to the tax law to ensure that financial statements are transparent. 43. Mr. Smith noted that the FSP for the deferral of Statement 157 and the FSP for the deferral of Interpretation 48 are both expected to be issued in December (they were both issued in February 2008). He encouraged the Committee members to review and comment on the Preliminary Views on liabilities and equity since statistics show that most restatements related to liabilities and equity occur for smaller companies.

12 Mr. Batavick noted that there will be another rotation of Committee members over the next month or two. Mr. Glotzer asked the Committee members to let him know if they will no longer be able to serve on the SBAC. 45. Mr. Batavick adjourned the meeting at 2:45 p.m.