US Week in Review - Week ending 26 April 2012
The US Week in Review highlights this week’s developments and emerging issues in the financial reporting world and gives you direct access to relevant technical accounting guidance and thought leadership produced by Ernst & Young.
Ernst & Young publications
In our comment letter on the FASB's proposal to give entities the option to use a qualitative screen to test indefinite-lived intangible assets for impairment, we support the Board's efforts to reduce the cost and complexity of performing the impairment test. We also say the Board should consider adding implementation guidance on how to assess a mix of positive and negative evidence affecting the significant inputs used to determine fair value.
The April issue of Proxy Perspectives, "Proxy season 2012: trends in proxy statement disclosure", shows that companies are using the proxy statement as a strategic tool to strengthen board communications with shareholders and enhance the transparency of their corporate governance practices and policies. Key observations include:
- Executive summaries emerge as a communication strategy
- Shareholder engagement is becoming a priority for some boards
- Disclosures about board composition show that the board is a strategic asset
Standard Setter updates
Financial Accounting Standards Board (FASB)
FASB and IASB issue joint update
The FASB and the IASB recently issued a joint progress report on their convergence activities for consideration at the April 2012 meeting of G20 Finance Ministers and Central Bank Governors. Additional information is available on the IASB's site.
25 April 2012 FASB meeting
Disclosure framework - The FASB decided that its upcoming Invitation to Comment will discuss (1) the costs and consequences of disclosure requirements and (2) interim disclosure requirements. The FASB is scheduled to issue the Invitation to Comment in the second quarter.
Consolidation - The FASB staff presented the Board with a summary of the feedback received on its consolidation exposure draft. The Board discussed the need to carefully consider each of the issues, including how to evaluate: (1) a decision maker's exposure to negative and positive returns, (2) substantive kick-out and participating rights, (3) consolidation conclusions for certain entities (e.g., money market funds) and (4) partnerships and similar entities that are not variable interest entities. The meeting was informational and no decisions were reached.
Nonpublic entity fair value measurement disclosures - The FASB indicated its support to reduce the fair value Level 3 disclosure requirements for nonpublic entities as a means to potentially reduce costs for these entities. The FASB discussed providing nonpublic entities the option to disclose a narrative explanation for the significant changes to their Level 3 balances from the beginning to the end of the reporting period instead of the tabular reconciliation now required for recurring Level 3 measurements in Topic 820 (commonly referred to as the Level 3 rollforward). The FASB tentatively decided that this option would not be available for not-for-profit organizations and nonpublic entities for which fair value is the primary measurement attribute (e.g., investment companies).
Definition of a nonpublic entity - The Board began discussions of its project to re-examine the definition of a nonpublic entity by deciding that an entity that is required to file or furnish financial statements with the SEC for purposes of issuing securities to be traded in a public market would not be included in the definition of a private company. The Board also decided that privately held financial institutions would be included in the definition of a private company.
For additional detail of the Board's discussion, see the FASB's Action Alert.
18-19 April 2012 joint FASB-IASB meeting - Insurance contracts
The Boards decided that assuming entities would evaluate whether to account for a reinsurance contract under the building block approach (BBA) or the premium allocation approach (PAA) in the same way as a direct insurance contract. However for ceding entities, the FASB decided on the approach used for the underlying contracts, while the IASB decided to use the same evaluation process as for assuming entities. Retroactive reinsurance contracts' residual (IASB) or single (FASB) margin would be amortized over the remaining settlement period.
The Boards decided that riders that exist at contract inception would be accounted for as contractual terms, and policy loans would be considered in determining the related investment component, consistent with previous decisions on unbundling and disaggregation. The Boards also decided on the criteria to be used to evaluate when a modification to a contract creates a new contract and, therefore, would require the previous contract to be derecognized.
For more details, see our upcoming Insurance Accounting Alert.
For additional detail of the Boards' discussion on this project, see the FASB's Action Alert.
Upcoming meetings and webcasts
2 May 2012 FASB meeting
The Board is scheduled to discuss its projects on the liquidation basis of accounting and the definition of a nonpublic entity.
See the FASB calendar for upcoming education sessions. No decisions are made at these sessions.
Securities and Exchange Commission (SEC)
SEC staff issues disclosure guidance for smaller financial institutions
The staff of the SEC's Division of Corporation Finance issued new guidance that summarizes its financial reporting comments in its reviews of smaller financial institutions. The guidance is intended to help smaller financial institutions improve their disclosures to investors in future SEC filings.
The guidance highlights comments in which the staff requests more disclosure about asset quality and loan accounting issues including (1) the calculation of the allowance for loan losses and its components, (2) policies for placing loans on nonaccrual status or charging them off, (3) commercial real estate loans, (4) loan portfolios that are measured for impairment based on the collateral value, (5) credit risk concentrations when a small number of loans make up a significant portion of the registrant's recorded investment in nonaccrual loans, (6) troubled debt restructurings and modifications and (7) other real estate owned.
In the guidance, the SEC staff discusses its focus on the valuation of deferred tax assets because many smaller financial institutions have experienced significant operating losses for one or more years. The guidance also describes comments the staff commonly issues to registrants that have acquired troubled financial institutions in transactions assisted by the Federal Deposit Insurance Corporation.
The topics build on similar communications in a 2010 slide presentation released by the staff of the Division of Corporation Finance.
Upcoming Thought center webcasts and podcasts
Global PE watch: Striving for growth - a return to entrepreneurship 2012
10 May 2012, 11:00 a.m. Eastern time