Submitted by Arthur J. Dykes, CPA, and Donald Paris, CPA
As I travel around visiting with CFO’s and controllers of small to mid size businesses, a common frustration is the blizzard of regulatory and accounting rule changes affecting financial statement reporting and presentation. CFO’s are constantly trying to comply with new reporting rules, as well as improve their financial statements
John, a client of mine, is in the middle of refinancing debt, selling a subsidiary, and trying to satisfy due diligence and audit teams, and get year end statements finalized; he finally just called a time out, and asked for two months additional time to comply with these third party requests. This is just a typical example of the problems out there right now.
CFO’s have to deal with significant number of new accounting standards which have been issued in the past five years. Some of these standards cover broad topics such as fair value, business combinations, subsequent events and consolidation, which affect most companies. Other new standards cover topics like stock options, securitization, and industry specific standards, which do not affect as many companies. On top of these changes is the FASB’s Codification (also referred to as the Accounting Standards Codification or ASC), which brings together all authoritative standards in one place and reorganizes all of the guidance by topic. While it has been difficult to keep pace with these significant changes, they will pale in comparison to the changes on the horizon.
A question being debated today is whether and/or when the U.S. Securities and Exchange Commission (SEC) will permit or require U.S. public companies to adopt International Financial Reporting Standards (IFRS). A further question is how any decision the SEC makes will affect private companies. In February 2010, the SEC released a statement in support of IFRS, but stated it believes more study on a number of key questions is necessary before any decisions are made. The SEC staff has developed a "work plan" covering six major topics to evaluate before any decision is made. One major subject under evaluation is measuring the progress on "convergence" between U.S. generally accepted accounting principles (GAAP) and IFRS. The theory is if the major standards are closer together or converged, the effort for conversion to IFRS will be less.
For private companies, these are "interesting" times, to say the least. In December 2009, the American Institute of Certified Public Accountants, Financial Accounting Foundation, and National Association of State Boards of Accountancy announced the establishment of a "Blue-Ribbon Panel" to address how U.S. accounting standards can best meet the needs of users of private company financial statements. The formation of this panel is the most significant development in private company accounting standards setting since the "Wheat Report" in 1972 on the Establishment of Accounting Principles, which led to the creation of the FASB. The time is right to address the problems private companies face in accounting. We don’t know how the Blue-Ribbon Panel’s recommendations will affect these major projects for private companies. For public companies, regardless of the ultimate decisions on whether and/or when IFRS will be required, the changes to U.S. GAAP as a result of these major projects will be applicable.
Your company should be concerned about these major projects including:
- Financial statement presentation - changes to make them more relevant and more cash flow details.
- Percentage of completion method may not be available
- Leases will now be capitalized
- All loans, notes, receivables - accounted for at fair value.
- Reclassification of equity as liabilities.
- More footnote disclosures
The consolidation rules will change again. Major system changes will be necessary. Loan covenants may need to be modified. Buy-sell agreements may no longer make sense. Financial statement users will need substantial help to understand the changes.
The summaries in this paper are condensed and don’t discuss every aspect of each project. The FASB’s Web site, www.fasb.org, has more information on all projects. The FASB also needs to hear from you about the practical difficulties and costs companies will face to implement the new standards.
We encourage your CFO and Controller to begin a formal education process to learn about these changes in order to (1) minimize outside auditor costs, (2) meet deadlines in your loan and other contractual obligations, and (3) prepare for alternative financial reporting choices. CFO’s will need more lead time to produce reports for third party vendors, and more quality control procedures to ensure compliance. We suggest you start now before the next audit season starts.