Tuesday, May 8, 2012

FASB: A new era of liberation and perhaps even reformation

The article FASB: Subjugation, liberation, reformation, consternation and incorporation by Paul Miller and Paul Bahnson is a look at not only the history of the Financial Accounting Standards Board, but also where the authors think it should go.

They feel that FASB subjugated itself by penning an agreement in 2002 to make existing standards fully compatible with the International Financial Reporting Standards (IFRS).  Over the last 10 years, both boards have felt the strain of trying to meet the original agreement.
According to Miller and Bahnson, the FASB has now been liberated because it's become obvious that the SEC can not set the IASB as the standard-setting body under the Sarbanes-Oxley Act.  This also frees them to do what they need to do without worry because their funding is assured and they are backed by the SEC, “the baddest big brother of them all”.
Now, in their opinion, is the time for reformation.  It is time for FASB to bring GAAP into the 21st century by updating financial reporting standards and making them more relevant.
They believe the following should be FASB’s to-do list:
·         Reporting Frequency – Dates back to the 1930’s for the stock exchange and the 1960’s for all other companies.  In today’s fast-paced world, why are we still running on 1930’s time?

·         Inventory – Managerial decision-making for LIFO or FIFO dates back to 1946.  Time to fix the weak stance on the matter.

·         Depreciation – Systematic Depreciation dates back to the 1830’s.  No more dodging the question ‘How do we assess market value?’

·         Leases – Accounting for leases hasn’t change since the 1970’s, and it’s time to create a new standard that doesn’t allow for bogus leases to create false financial information.

·         Stockholder Equity – Should be limited to common stock only.  Prefered stock, employee stock options and other derivatives should be listed as liabilities.

·         Pensions – Pension obligations are debt.  Pension funds are investments.  They should be listed separately on the balance sheet.

·         Cash Flows – We’ve been using the indirect method of reporting operational cash flows since 1987.  Isn’t it time to start using what users wanted in the first place?

·         Income Taxes – Is GAAP income tax reporting even useful?  Perhaps it’s time to try the flowthrough method.

·         Investments – Repeat after me: Fair Value.
As for consternation, Miller and Bahnson believe that making these necessary changes will create consternation for managers and auditors alike, but that shouldn’t stop FASB. 
To be truthful, I chose this article because of the name.  However, it will be interesting to see where FASB goes now that they have stepped away from the IASB and have decided they will not be incorporating IFRS.

Auditor Rotation Takes a Front Seat

In the article, Hot Topic, Cool Talk (Mostly), the author, Michael Cohn, discusses a recent public inquiry by the Public Company Accounting Oversight Board (PCAOB) into audit firm rotation.  The obvious cause for the discussion is the memorable audit failures in recent history, WorldCom and Enron.

Has the auditing industry lost focus in the name of acquiring long-term contracts?  Can they keep perspective with clients they have had for a century?  Or do these long-term clients create an industry blind-spot?
The PCAOB asked the auditing community its impressions of a regular schedule for audit firm rotation, drilling to what many consider the heart of the matter, long-term clients.  In response the auditing industry felt that audit firm rotation would be a costly, unnecessary and possibly an impossible task given the concentration of audit firms.
The corporate community felt similarly, quoting as much as 20% increases to costs if they were forced to move from auditing firm to auditing firm.  Highly specialized industries, such as utilities, also lamented the possible loss of “auditor knowledge”.
The U.S. Chamber of Commerce also weighed in on the issue, accusing the PCAOB of “mission creep” and requested the board withdraw its concept release for auditor rotation.  The Chamber feels the board is moving beyond its mission of audit regulation and into regulating corporations.
Not everyone were nay-sayers, however. John Biggs, former CEO of TIAA-CREF, said the insurance provider rotates its audit firms every few years and that industry projections of 20% cost increases are more likely closer to 2%.
As one of the marginally informed, but fully aware of the costly implications of auditor complacency, I’m all for auditor rotation.  I personally feel it would help to keep everyone honest and focused.  However, I haven’t forgotten the lesson I learned while researching international financial standards.  This article barely scratches the surface of auditor rotation, and it would be negligent of me to base my opinion of the topic solely on the ideas expressed therein and the bad press of Enron and WorldCom.
I do intend to keep myself abreast of this topic as the weeks and months progress towards legislation, and along with myself, you, my dedicated reader.
"Hot topic, cool talk (mostly); Strong opinions rise to surface at PCAOB discussion on auditor rotation." Accounting Today 26.5 (2012): 1. Academic OneFile. Web. 7 May 2012.

Modern Auditors: Have you got what it takes?

Throughout the years auditing has changed.  According to one of the interviewees in the article The New Breed of Auditor by Bill Carlino, auditing was far simpler thirty years ago than it is today.  In that era of auditing, "you found out what an asset cost and figured out how to get the income statement properly matched with revenue.”  They also used historical cost instead of fair value. 

So what does the current auditor require to do his job?    Not the worksheets and checklist of yesteryear.  Modern auditors need to be familiar with the International Financial Reporting Standard.  In today’s global market even smaller companies participate in foreign markets.  They are also expected to use technology to enhance their auditing with paperless auditing software. 
But what Mr. Carlino seemed to find in his article is beyond the technology and stricter regulations; there are new ideologies as well.  Today’s auditors' greatest tools are critical thinking and the ability to communicate.  They need to be able to think independently and think fluidly on their feet.  They need to understand data analytics.  They also need specialization of knowledge by industry.

Obviously the field of auditing is not for the weak of heart.  It is a field that is now under public, governmental and agency scrutiny.  Progressing into the future, it is easy to see that regulations are going to continue to get stricter and the auditor’s role will become more and more difficult as it has become more and more important.  At one point I had considered doing auditing, but this one little article makes it sound a bit more difficult than I’d originally thought.  Hopefully an auditing class will help me decide if it is something I should try outside academia.

"The new breed of auditors; A&A used to mean checklists and workpapers, but not anymore." Accounting Today 26.5 (2012): 20. Academic OneFile. Web. 7 May 2012.

Tuesday, March 13, 2012

Changes in the Way We Recognize Revenue

This week's article is about changes to how accountants will recognize revenue for contracts come 2015.  Matthew G. Lamoreaux's article in the January 2012 issue of the Journal of Accountancy, discusses what these changes mean for accountants.

The Federal Accounting Standards Board (FASB) as well as the International Accounting Standards Board (IASB) have decided to create a single standard for recognizing revenue.  Lamoreaux says under a the new standard a company will recognize revenue from contracts as soon as it transfers goods and services.  This is not much of a change from how accountants already handle revenue under GAAP.

According to Lamoreaux the boards also included guidance on how to know a good or service is tranferred over time.  They also simplified proposals on warranties, how to determine transaction price, and modified the test to apply to long term service as well as provided some expemptions from some disclosures for private companies.

The accounting model they have proposed would be:

1.  Indentify the contract with a customer.

2.  Identify the seperate performance obligations in the contract.

3.  Determine the transation price.

4.  Allocate the transaction price to the separate performance obligations in the contract.

5.  Recognize revenue when the business satisfies a performance obligation.

This model is scheduled to go into effect on January 1, 2015 except for private companies, who have an extra year to implement as well as being exempt from some mandatory disclosures.

I personally can't tell the difference between this new standard from what I have already practiced in the professional sphere.  I did however find it interesting that despite the FASB's refusal to adopt or even converge with IFRS, it felt the necessity to write a new standard with the IASB on the recognition of revenue.

They are also handling implimentaion differently as well.  FASB is not allowing early implimentation which means that people will have to collect data for two years and then retroactively apply the new standard to it.  Whereas the IASB is allowing companies to implent the new standard as soon as they are ready.

I can understand why the IFRS vs GAAP debate has gone on for so long, FASB continues to send mixed signals whether it wants to be part of the international community or not.

Tuesday, March 6, 2012

Standards for Private Companies

I managed, almost, to get away from IFRS.  I instead chose to look at the push to change the U.S.'s standards (GAAP) to recognize the differences between public and private companies.  In the middle of the article I realized it had included how the international community was dealing with issue and so found myself reading about IFRS once again.

In the article One Size Does Not Fit All, Judith Kamnikar and Ashley Burrowes assess why the Financial Accounting Standards Board (FASB) should create a seperate set of standards for private companies.  It boils down to the end users of private companies being quite different from public companies, thus their needs are different.  Why should a private company have to figure its Earnings Per Share if they don't publicly sell their stock?

The FASB was created in 1971.  It took quite some time, however, for the FASB to decide to do something about the disparate reporting needs of private companies.  Finally in 2004 they created the Small Business Advisory Committee (SBAC) to begin the process of developing reporting and financial standards for small businesses.  The SBAC is still providing input private company reporting issues.

A seperate task force created by the AICPA (American Institute of Certified Public Accountants) in 2005 produced a report that concluded, "the users of private company financial statements have different needs than users of public company fiancial statements (and) that GAAP exceptions and OCBOA should not be the resolution to the private company financial reporting problems."  This report thus generated yet another committe, the Private Company Financial Reporting Committee (PCFRC) for the purpose of providing recommendations to the FASB about how prospective and existing GAAP rules would affect small businesses.  Unfortunatley, the PCFRC has not enjoyed much attention from FASB.

In response to this the AICPA again created another committee who issued another report in 2011 claiming that GAAP for private companies is "urgent and growing".

Internationally, the IASB has been a bit more receptive to the needs of small businesses and has implimented IFRS for SME's (International Financial Reporting Standards for Small and Medium-sized Entities).

Some of the changes in IFRS for SME's include:
  • Some topics are omitted from small business reporting
  • A more simplified accounting method
  • Substantially fewer disclosures
  • Omitted Earnings per share
In the end it appears that the IASB has made leaps and bounds on this issue within the international community while the FASB has sat on its thumbs.  In their defense, they have been overshadowed by the needs of public industry and it looks as if they are finally applying the attention that is required to fix this deficit of standards for private companies.


Kamnikar, J., Kamnikar, E., & Burrowes, A. (2012). One Size Does Not Fil All. Journal of Accountancy, 213(1), 46-49.

Monday, March 5, 2012

IFRS: A Contradictory View

I had thought that for this week's blog I would shift away from IFRS, but during my search for a new and interesting international topic, I found a dissenting view of IFRS to those I have previously found.  And so, despite my thoughts of new topics, this week I will instead present the argument for IFRS.

In the article, International Adoption Issues:  A View From the IASB, Patricia McConnell lays out the different types of acceptance of IFRS as well as explains why it should be adopted.  Her differing ideas stem from her work with the International Accounting Standards Committee (IASC) since the 1980's and as a financial analyst for Bear Stearns.  She has spent a great deal of her 40 year career as a Certified Public Accountant (CPA) viewing the accounting world through investor-tinted glasses.

McConnell lays out a lot of information we have already heard or discussed.  She believes that a "high-quality global financial reporting standards are essential for the transparency an comparability that is critically important to the effective functioning of today's global capital markets."  Which is, as stated in previous articles, the reason that IFRS should not be a pipe dream.
She also goes on to state that despite the stereotype, the International Accounting Standards Board (IASB) is not a British organization.  Instead it consists of 15 members from 12 countries, and 1/4 of the members, trustees and technical staff are American.  Unfortunately, whether or not IASB is a multi-cultural organization was never in question by its opponents.

She believes that IFRS will result in a common financial reporting language that will improve transparency and enable investors to make comparisons among similar entities across jurisdictions.  Several more times throughout her commentary she describes how IFRS will help investors.  Miller and Bahnson in their article however pointed out that for many countries investors aren't the point of financial accounting.  Never once does McConnell address the cultural diversity issues that IFRS must overcome for the implementation she so strongly desires.

She also does not mention that recently the IASB has begun to appoint politicians, not accountants, to its regulatory board.  In the end her article discusses how the world should be with a global policy for investors without ever once discussing who is going to make sure that each country is giving IFRS its due diligence and ensuring it is implemented the same throughout various nations with various cultural perceptions of the purpose of financial reporting.
These are the issues with IFRS, not its base premise, a global financial standard.  In the end she simply reiterates the hope and promise of what IFRS could be and disappointingly never addresses how, other than people adopting it, IFRS is to be maintained or regulated, or any other opposing arguments.

McConnell, Patricia. "International adoption issues: a view from the IASB." The CPA Journal 81.12 (2011): 6+.  General OneFile.  Web. 27 Feb. 2012

Tuesday, February 21, 2012

SEC's Decision on IFRS: Understanding the Words

Following up on my previous thoughts on the adoption of the International Financial Reporting Standards (IFRS), I searched for an article on the Security and Exchange Commission's (SEC) decision, if any.  As it turns out, Accounting Today in their February issue, discussed exactly that.

According to Paul Miller and Paul Bahnson of Accounting Today, in their article, The Demise of the Drive to Bring International Standard-setting to the U.S., the SEC's announcement in December that the commission would not in fact make a decision on this topic by the end of the year was not just a a setback but its death knell.  Miller and Bahnson explain this opinion to be based on of their understanding of the issue as well as the actual wording used in the SEC's Chief Accountant Jim Kroeker's statement.  Some of the points they present are reminiscent of last week's article, and some are new and previously, at least for me, not considered.

They start off by explaining the differences in what was expected and what was said.  Kroeker's announcement was "I'm encouraged for the prospect of incoporation of IFRS."  Obviously incorporation is not the same same as adoption.  The largest difference is that incorporation is not using the IFRS in whole, but instead it would integrate acceptable pieces into the U.S's existing system, Generally Accepted Accounting Principles (GAAP).  Adpotion on the other hand would use IFRS exactly as it is without a single change.

Miller and Bahnson believe this soft wording with no pre-determined date of an answer is a way to introduce the idea to IFRS's die-hards that the SEC will never adopt IFRS.  Their reasoning for this is:

1. Adopting IFRS is legally impossible.  I had not considered that the SEC can't give up its legal obligation to set the accounting standards for the U.S.  Adoption of the IFRS would remove the SEC's power and give it to International Accounting Standards Board (IASB).

2.  Allowing U.S. companies to choose between GAAP and IFRS is ridiculous.  The entire point was to create a single accounting standard, not confuse the issue more.

3.  Expecting the IASB and the Financial Accounting Standards Board (FASB) to agree on key issues is optimistic at best.

This is further complicated by the IASB's recent political tilt.  The newly appointed chairman of the IASB was a career politian with Master's degrees in history and international relations, not accounting or even business.  The IFRS Foundation then followed up the politician's selection with the selection of a French lawyer with extensive political experience.  In the U.S. it is hard to fathom how political knowhow could surpass the need for accounting or business qualification for a board that wants to set international accounting standards.  But as David pointed out in last week's article, many European countries see financial reporting as a political tool instead of an investor's.

I must then, under the weight of such well thought out and persuasive arguements, change my previous assessment that IFRS is something acheivable with the correct application of want and will.  As an accountant, I want my accounting standards to be set by men who understand the struggles of accounting for the myriad of different customers I will face upon graduation.  I want the accounting standards that I follow be set in place by men knowing the difficulties companies face competing in the expansive global market.  And much like the FASB I am not ready to hand over the power to decide what these rules are to politicians.


Bahnson, P. R., & Miller, P. R. (2012). The demise of the drive to bring international standard-   
     setting to the U.S. Accounting Today, 26(2), 16. retrieved from http://wichita.edu.