January 26, 2010
NOTES ON THE Financial Accounting Standards Board Small Business Advisory Committee Meeting December 3rd, 2009 By Leonard Steinberg SBE Council Representative to the Advisory Committee • 1) Marc Siegel, of FASB, opened the meeting with an overview of the following issues to be discussed: Future Financial Reporting for Nonpublic Entities and the FASB's Disclosure Framework Project, Leases, Accounting for Financial Instruments, and Financial Instruments with Characteristics of Equity. • 2) Bob Herz, Board Chairman of FASB, Ms. Jenifer Minke-Girad of the SEC, Mr. Greg Fletcher of the PCAOB and Ms. Judy O'Dell of the PCFRC (Private Company Financial Reporting Committee) all provided reports on the current activities of each of their respective agencies and projects. Mr. Herz also reported that the FASB will not require segment reporting for private companies and that additional research will be undertaken to determine whether the direct method or indirect method for the Cash Flow Statement would be better for financial reporting purposes. Mr. Fletcher reported that the PCAOB will carefully monitor the discussions concerning the recent Supreme Court hearing to determine the constitutionality of presidential appointments to the PCAOB. The Supreme Court is expected to announce the decision in the spring of 2010. Judy O'Dell reported that she and Paul Glazer, of the FASB staff, had an article published in the December 2009 issue of the Journal of Accountancy. Her report and the article concerned the FASB implementation and guidance for the Uncertainty in Income Taxes (formerly FIN 48; now Topic 740 of the FASB Accounting Standards Codification) for private companies (pass-through entities) and nonprofit organizations. • 3) The Future Financial Reporting for Nonpublic Entities and the FASB's Disclosure Framework Project discussion concerned issue of IFRS implementation for Small and Medium-Sized Entities (SMEs). The SME document states that the IFRS financial statements are not considered GAAP but rather OCBOA (Other Comprehensive Basis of Accounting). The Canadians issued a hybrid method GAAP for private companies, which is a simplified version of the Canadian GAAP. South Africa will be adopting the full IFRS for SMEs. The emphasis is being placed on the investor community who will utilize these statements to make informed decisions. There are approximately 22 million companies many of which are privately owned. These owners use their tax returns and personal guarantees to obtain financing. Approximately 3 million of these companies (14%) use GAAP financials, which are required by the commercial banks. The discussions led to the opinion that the time may be appropriate to begin discussions regarding private company accounting standards. The SME document appears flawed for private companies. Users of the financial statements would require a separate group to formulate policies and accounting standards. There are also the cost considerations that the private sector would have to absorb. The discussion then led to the issue of whether there should be a "big GAAP" for the larger companies and a "little GAAP" for the smaller and privately held companies. Concerned was voiced that the quality of the notes to the financial reports could pose a problem since there is no currently available template for the SMEs. If there were 2 separate GAAP protocols, then the imprimatur of the FASB could be compromised. If the FASB was responsible for both the SMEs and the bifurcated GAAP, would this arrangement lead to a heavier oversight by the FASB was also discussed. Questions regarding financial statement comparability between GAAP and IFRS, tax compliance and filing issues and reconciliation between the two different standards were also discussed. Final comments on this topic regarded the relevancy, complexity and cost/benefit of adopting IFRS for the SMEs. The issues are far from resolved regarding whether the small public and privately owned businesses would benefit from adopting IFRS. The discussions are scheduled to continue at future meetings. • 4) The next topic discussed concerned Leases. The objective of the FASB project is to create a common standard on lease accounting to ensure that the assets and liabilities arising from lease contracts are correctly recognized in the statement of financial position (Balance Sheet). The FASB board decided that the timing of the initial recognition of the lease on the financial statement arose when a contract is signed. Both the lessor and lessee would be required to present the net contract asset or liability on a cost basis subject to any asset impairment. In a sale and leaseback transaction, the seller/lessee would consider whether the entire leased asset qualifies for derecognition. The lessor would use the Performance Obligation approach to present the information on the financial statements. The lessor would recognize its right to receive rental payments (receivables based on the present value of the lease payment discounted using the implicit interest rate plus any direct costs incurred by the lessor)) and recognize the liability for performance obligation (measured at the present value of the lease payment using the interest rate implicit in the lease). The lessee would use the Right-of-Use approach to present the information of its financial statements. The lessee would recognize an asset representing its right to use the leased item for the leased term and a liability for its obligation to pay rentals. Cost would be presented using the present value of the leased payments plus any direct costs incurred by the lessee. Additional issues discussed were the presentation of any lease contracts with options to extend or terminate the lease and contingent rental arrangements. FASB staff acknowledged that all issues not been fully scoped. The classification of the asset was based on materiality. As an example: the leasing for 1 car would not be considered material; the leasing of a fleet of cars would be material. In the area of real estate, lease accounting would also require further assessment since real estate transactions take into consideration the Consumer Price Index (CPI), real estate taxes and other charges in determining the length and value of the lease. The right of use would be considered an asset since income is generated by that asset. The FASB staff will present an update on the lease issues at a future meeting • 5) The next topic was on Accounting for Financial Instruments. The discussion centered on loan losses. Loan losses are usually based on economic forecasts and qualitative factors (economic condition). The FASB was anticipating proposing a draft by 2011 at the earliest. Measurements of qualitative economic conditions are estimates only. These management estimates effect valuations for loan loss reserves and impairments. Should the use of economic forecasts have a specific end time to validate the presentation of the estimates on the financial statements? Since economic forecasts are just that, the committee suggested that the FASB staff provide better guidance and definitions of what the proposed financial statements should report. The FASB staff was also requesting views on when interest income should stop being accrued for non-performing loans. • 6) The last topic was on Financial Instruments with Characteristics of Equity. The FASB staff presented a list of financial instruments and how they are classified under current U.S. GAAP, current IFRS and how the FASB board is approaching each of the types of financial instruments. This part of the meeting was informational only and SBE Council members are welcome to contact me for copies of this appendix. The meeting ended at 3:00PM. SBE Council Members are always welcome to contact me if they would like to discuss these issues further or would like copies of the handouts provided by the FASB. Steinberg Enterprises, LLC 119 Tunicflower Lane West Windsor, NJ 08550 Tel: 609-443-0469 Fax: 609-443-0499 Email: Lsteinberg@SteinbergEnterprises.com
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