XBRL and Accounting Update Presented by Avi Alpert
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ROAD MAP FOR THE PRESENTATION XBRL Update Big Accounting Events of Q3 2010 Update on IFRS U.S. GAAP Convergence Deadlines for XBRL Compliance The XBRL Resource Commitment Tactical XBRL Issues Detailed Footnote Challenges 3
Most large public companies have already done their first year of XBRL tagging. DEADLINES FOR XBRL COMPLIANCE SEC XBRL Mandate Type of Filers 30 June 2009 30 June 2010 30 June 2011 30 June 2012 30 June 2013 Large accelerated filers Detail tagging of financials Block tagging of notes/ schedules Liability as furnished Detail and block tagging of notes/ schedules Liability as furnished Liability as filed Remaining large accelerated filers Detail tagging of financials Block tagging of notes/ schedules Liability as furnished Detail and block tagging of notes/ schedules Liability as furnished Liability as filed Smaller domestic filers and foreign private issuers using IFRS Detail tagging of financials Block tagging of notes/ schedules Liability as furnished Detail and block tagging of notes/ schedules Liability as furnished Liability as filed 4
XBRL year-one tagging costs are low the vast majority (81%) of companies spent less than $25,000. XBRL TAGGING COSTS Approximate Cost of XBRL Tagging Efforts Companies expect a significant increase in yeartwo with most expecting costs between $25,000 and $100,000. 81% 15% 4% Under $25,000 $25,000 $50,000 Above $50,000 n = 27. THE XBRL RESOURCE COMMITMENT TACTICAL XBRL ISSUES XBRL CHALLENGES 5
Most firms outsource their XBRL year-two tagging to technical experts, rather than developing internal capacity. REACHING BEYOND THE COMPANY WALLS FOR XBRL XBRL Tagging In-House or Outsource Majority (67%) of firms conducted XBRL tagging the same way for both year one and year two. Companies expect to outsource tagging initially and then bring it in-house. 25% In-House 75% Outsourced n = 36. THE XBRL RESOURCE COMMITMENT TACTICAL XBRL ISSUES XBRL CHALLENGES 6
Most companies outsource XBRL tagging to their financial statement printers. XBRL EXTERNAL VENDOR CHOICES XBRL Outsource Vendors 34% 31% 28% 7% R.R. Donnelley Bowne and Co. Merrill EDGAR Online n = 29. THE XBRL RESOURCE COMMITMENT TACTICAL XBRL ISSUES XBRL CHALLENGES 7
Nearly half of companies have taken longer to file when producing detailed footnote tags. LENGTHENING THE FILING PROCESS Increased Time to File When Detailed Tagging Footnotes 52% 16% 16% 3% 6% 6% No Less Than One Day One Day Two Days Three Days More Than Three Days n = 31. THE XBRL RESOURCE COMMITMENT TACTICAL XBRL ISSUES XBRL CHALLENGES 8
Most inconsistencies in financial data tagging are driven by misunderstanding the tagging conventions. COMMON INCONSISTENCIES IN FINANCIAL DATA TAGS Common Inconsistencies in Year-One Filings Negative Value Reported, Should Have Been Positive 11,941 Required Value Not Reported 2,557 Value Reported for Concept That Should Have Been Zero 1,467 Deprecated Element 593 Value Reported for Concept Different Than Dimensional Equivalent 389 Calculation Error 335 Positive Value Should Be Negative 299 Value Should Be Zero If Another Value Is Not Reported 150 Duplicate Does Not Match 73 Value Should Be Zero If Another Value Reported 44 Source: XBRL U.S. THE XBRL RESOURCE COMMITMENT TACTICAL XBRL ISSUES XBRL CHALLENGES 9
For most companies, the biggest obstacle to detailed footnote tagging is the additional time required. OBSTACLES TO DETAILED FOOTNOTE TAGGING Biggest Obstacles in Detailed Footnote Tagging Efforts 89% 11% Additional Time Additional Cost n = 27. THE XBRL RESOURCE COMMITMENT TACTICAL XBRL ISSUES XBRL CHALLENGES 10
With detailed footnote tagging, the volume and complexity of work increases significantly. THE NEXT CHALLENGE: DETAILED FOOTNOTE TAGGING Four Levels of Tagging Required Level 1 Each complete footnote to be tagged as a single block of text Level 2 Each significant accounting policy within the significant accounting policies footnote to be tagged as a single block of text Level 3 Each table within each footnote to be tagged as a separate block of text Level 4 Each amount, within each footnote to be separately tagged THE XBRL RESOURCE COMMITMENT TACTICAL XBRL ISSUES XBRL CHALLENGES 11
INSIGHTS FROM THE NETWORK Key Challenges Practitioner Insight XBRL Tagging process takes more than a full week from when the 10Q is finalized. Tag the documents concurrently as the 10Q documents are drafted. Whether to outsource the tagging process or do it internally We are doing our tagging in house so that we understand the tags and process. We may at a later date decide to outsource the tagging once it becomes a routine process. Lot of changes in today s businesses may require incremental disclosure. XBRL limits the ability to make these changes and file quickly. External vendors are challenged to do this well. They don t have mature systems, processes and their staff generally do not understand the businesses they are tagging. A bolt-on process could evolve to where the XBRL formatted financial statements are being partially or fully generated directly from the organization s financial reporting system. THE XBRL RESOURCE COMMITMENT TACTICAL XBRL ISSUES XBRL CHALLENGES 12
ROAD MAP FOR THE PRESENTATION XBRL Update Big Accounting Events of Q3 2010 Update on IFRS U.S. GAAP Convergence New Proposals to Overhaul Lease Accounting Expanded Disclosure of Certain Loss Contingencies Enhanced Disclosures on Financing Receivables and Credit Losses Completion of First Phase of Conceptual Framework for Financial Reporting 13
The proposals will require significant change for companies with a large number of operating leases, as they will bring all those leases onto their balance sheets. NEW PROPOSALS TO OVERHAUL LEASE ACCOUNTING On 17 August 2010, the FASB and IASB issued a joint ED 1 on lease accounting, proposing a new accounting model for both lessees and lessors, and eliminating the concept of operating leases. Companies will need to reconsider their lease versus buy decisions and their decisions to enter into short-term versus long-term leases. New Lease Accounting Model Lessee Accounting All leases to be reported on the balance sheet on the basis of right-of-use asset and liability to make payments. Liabilities to be initially measured at present value and subsequently at amortized cost, while assets initially at cost and subsequently at amortized cost. Lessor Accounting Introduction of application of derecognition and performance obligation approaches. Approach depending on whether the lessor retains exposure to significant risks or benefits associated with the underlying asset. Is the lessor exposed to significant risks or benefits associated with the underlying asset? Yes No Next Steps Affects all entities Effective date to be considered after the Boards review the comments received to the ED. 1 ED Exposure Draft. Performance Obligation Approach Derecognition Approach 14
Disclosures requirement on certain remote loss contingencies with a potentially severe impact would expand the population of loss contingencies required to be disclosed and may negatively impact a company s reputation. EXPANDED DISCLOSURE OF CERTAIN LOSS CONTINGENCIES On 20 July 2010, the FASB issued a revised ED 1 to expand the disclosure requirements for loss contingencies to provide financial statement users with factual information about contingencies. Major Changes 1. Enhanced Disclosure Requirements Requires disclosures earlier than under current standards. 2. Disclosure of Certain Remote Loss Contingencies Requires disclosures of certain remote loss contingencies with a potentially severe impact. 3. Disclosures on Litigation Contingencies Requires enhanced qualitative and quantitative disclosures on litigation contingencies. Public companies required to include tabular reconciliations, by class, of recognized (accrued) loss contingencies that present the activity in the account during the reporting period. Next Steps Affects all entities Effective for public companies for fiscal years ending after 15 December 2010; for nonpublic companies for the first annual period beginning after 15 December 2010. 1 ED Exposure Draft. 15
This ASU 1 is intended to assist the readers of financial statements in assessing the credit risk exposure of an entity, as well as to evaluate the adequacy of its allowance for credit losses. ENHANCED DISCLOSURES ON FINANCING RECEIVABLES 2 AND CREDIT LOSSES On 21 July 2010, the FASB issued ASU 2010 2020, that requires more robust and disaggregated disclosures about the credit quality of an entity s financing receivables and its allowance for credit losses. Major Changes Requires new and amended disclosures on all financing receivables measured at fair value, with changes in fair value recorded in earnings, or lower of cost or fair value. The ASU s new and amended disclosure requirements focus on the following five topics: 1. Nonaccrual and past due financing receivables. 2. Allowance for credit losses related to financing receivables. 3. Impaired loans (individually evaluated for impairment). 4. Credit quality information. 5. Modifications. Next Steps Affects all entities Effective for public companies for the first interim or annual reporting periods ending on or after 15 December 2010; for non-public companies for annual reporting periods ending on or after 15 December 2011. 1 ASU Accounting Standard Update. 2 Financing Receivable: A contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the entity s statement of financial position. 16
The two new chapters outline the principles that will form the basis for future standard setting and provide a means for evaluating existing standards. COMPLETION OF FIRST PHASE OF CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING On 28 September 2010, the FASB and IASB issued two chapters to mark the end of the first of eight phases of the joint project to develop an improved and common conceptual framework. Summary of the Two Chapters Chapter 1 Defines the objective of general purpose financial reporting Focuses on providing decision-useful information to primary users Chapter 3 Defines the constraints on and qualitative characteristics of useful financial reporting Conceptual Framework Project Status Next Steps Affects all entities Effective for public companies for the first interim or annual reporting periods ending on or after 15 December 2010; for non-public companies for annual reporting periods ending on or after 15 December 2011. Phase Topic Status A Objectives and qualitative characteristics Finalized B Elements and recognition In progress C Measurement In progress D Reporting entity ED issued E Presentation and disclosure, including financial reporting boundaries Not started F Framework purpose and status in GAAP hierarchy Not started G Applicability to the not-for-profit sector Not started H Entire framework Not started 17
ROAD MAP FOR THE PRESENTATION XBRL Update Big Accounting Events of Q3 2010 Update on IFRS U.S. GAAP Convergence FASB-IASB Convergence Update Target Completion Dates Update on Significant MOU Projects 18
Although companies support a single set of accounting standards, most are concerned with the ambiguity surrounding SEC s decision to adopt IFRS. INCORPORATING IFRS FOR U.S. ISSUERS As part of SEC s work-plan to reach a decision on whether to incorporate IFRS into the US financial reporting system, SEC is seeking comments on three topics, Contractual agreements, Corporate governance and Statutory distribution restrictions. Contractual Agreements: Review of existing and new contracts agreements required. An Analysis of 10 Public Companies Comments on the Three Topics Contractual Agreements Challenge Areas Existing Contracts Agreements New Contracts Costs Examples of Affected Areas Within Contractual Agreements Impact Extensive review and re-negotiation of existing contracts agreements Negotiation of new agreements Significant investment in information systems Financial instruments, contracts related to separate accounts, annuity contracts, life contracts, reinsurance contracts, brokerage contracts Companies Suggestions to the SEC Clearly communicate an IFRS adoption decision and allow for adequate lead time for transition Encourage 2 3 years of comparable financial information under IFRS before the year of adoption 19
Adequate transition period and implementation support will be the most important considerations in mitigating concerns. INCORPORATING IFRS FOR U.S. ISSUERS (CONTINUED) Corporate Governance; Stock Exchange Listing Requirements Corporate Governance: Significant internal staff IFRS training required. Statutory Distribution Restrictions: Amendments to state laws required. Challenge Areas Costs NYSE Listing Training Examples of Affected Areas for Corporate Governance and Disclosure Requirements Impact Significant increase in IT-related costs Potential risk of non-compliance with quantitative securities exchange listing standards Significant effort on IFRS training for internal staff Item 9 (a) of 10-K, item 4 of 10-Q, item 11 of 10-K, Item 303 of regulation S-K Companies Suggestions to the SEC Revise definition of audit committee financial expert Clearly communicate an IFRS adoption decision and allow for adequate lead time for transition Provide transition guidelines to develop sufficient understanding of IFRS Statutory Distribution Restrictions and Other Legal Standards Tied to Financial Reporting Standards Challenge Areas Payment of Dividends Income Tax Accounting Costs State Statutes Impact May effect ability to declare and pay dividends or repurchase stock Significant impact on accounting for income taxes because certain IRS income tax reporting requirements depend upon use of US GAAP Modifications to IT systems required Amendment to state laws, especially those on dividend distribution and state laws Companies Suggestions to the SEC Provide a transition period for state legislatures to amend state laws to incorporate IFRS provisions 20
Despite revising their convergence strategy, the Boards will ensure completion of most projects by June 2011, with the exception of Derecognition, Financial Statement Presentation (Main Project and Discontinued Operations), and Financial Instruments with Characteristics of Equity. TARGET COMPLETION DATES Project Expected Completion Date 1 Consolidation Q2 2011 Balance Sheet Netting of Derivatives and Other Financial Instruments Q2 2011 Financial Instruments Q2 2011 Financial Statement Presentation Presentation of Other Comprehensive Income Q1 2011 Financial Statement Presentation Main Project Q4 2011 Financial Statement Presentation Discontinued Operations Q4 2011 Financial Instruments with Characteristics of Equity Q4 2011 Leases Q2 2011 Fair Value Measurement Q1 2011 Revenue Recognition Q2 2011 Post-Employment Benefits Q1 2011 Joint Ventures Q4 2010 1 As per IASB Work Plan as of October 12, 2010. 21
The Boards have released staff drafts on Financial Statement Presentation and Fair Value Measurement. Financial Statement Presentation: The Boards will publish an ED 1 in Q1 2011. UPDATE ON SIGNIFICANT MOU PROJECTS Financial Statement Presentation Q3 Update The Boards released a staff draft of proposed standard that the cumulative, tentative decisions made by the boards. Fair Value Measurement: The Boards plan to issue a common fair value measurement standard in Q1 2011. Milestone Targets Q4 2010 Q1 2011 Q3 2011 Q4 2011 The Boards and Staff to complete their extended stakeholder outreach programs IASB and FASB to publish an ED of a comprehensive standard. IASB and FASB to hold public roundtable meetings The IASB and FASB aim to issue improved and converged standards. Fair Value Measurement Q3 Update The Boards released a staff draft on fair value measurement reflecting their decisions on convergence on this topic. Milestone Targets Q1 2011 IASB and FASB to issue final, converged standards 1 ED Exposure Draft. 22
The Boards have published Exposure Drafts on Revenue Recognition and Leases in Q2 2010 and Q3 2010 respectively. Revenue Recognition: The Boards will commence work on this project after the comment letter deadline. Leases: The Boards will consider all comments to the ED and discuss responses to the proposals in public meetings. UPDATE ON SIGNIFICANT MOU PROJECTS (CONTINUED) Revenue Recognition Q3 Update The Boards published an exposure draft on 24 June 2010 to solicit public comments on the proposed changes. Comments on the ED 1 are due by October 22, 2010. Milestone Targets Q4 2010 Q2 2011 IASB and FASB to hold public roundtable meetings IASB and FASB to publish final standards on Revenue Recognition Leases Q3 Update The Boards published an ED on 17 August 2010 to solicit public comments on the proposed changes. Comments on the ED are due by 15 December 2010. Milestone Targets Q4 2010 Q1 2011 Q2 2011 IASB and FASB to hold public roundtable meetings IASB and FASB to issue improved and converged standards 1 ED Exposure Draft. 23
The Boards are yet to publish EDs 1 on Consolidation and Financial Instruments With Characteristics of equity. Consolidation: The Boards will publish an ED in Q4 2010. UPDATE ON SIGNIFICANT MOU PROJECTS (CONTINUED) Consolidation Q3 Update IASB released a staff draft of a forthcoming IFRS on consolidation that reflects the tentative decisions made to date by the Board. Financial Instruments with Characteristics of Equity: The Boards will publish an ED in Q1 2011. Milestone Targets Q4 2010 Q2 2011 FASB to hold a two roundtable meetings to discuss IASB s proposed consolidation standard with US stakeholders. IASB and FASB to publish ED on consolidation. IASB and FASB to publish final standard on consolidation of investment companies Financial Instruments with Characteristics of Equity Q3 Update IASB discussed the next steps of this project in a meeting on 14 September 2010. The main focus of the meeting was to decide whether to continue to pursue the proposed approach in the staff draft. Milestone Targets Q1 2011 Q3 2011 Q4 2011 IASB and FASB to publish ED proposed requirements for identifying financial instruments that should be classified as equity and those that should be classified as an asset or as a liability IASB and FASB to hold public roundtable meetings IASB and FASB to issue improved and converged standards 1 ED Exposure Draft. 24
IASB has postponed its ED 1 publication date on hedge accounting to Q4 2010. UPDATE ON SIGNIFICANT MOU PROJECTS (CONTINUED) Financial Instruments Q3 Update IASB continued its redeliberations on the ED on Fair Value Option for Financial Liabilities and on phase II of the project to replace IAS 39 Financial Instruments: Recognition and Measurement, and released summary of tentative decisions on phase 3 of the project on hedge accounting. FASB announced that it will host five public roundtable meetings to solicit input on its proposed ASU on accounting for financial instruments. Milestone Targets Q4 2010 Q2 2011 IASB to issue an ED on hedge accounting IASB and FASB to finalize and issue new standards 1 ED Exposure Draft. 25
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