Companies and their audit committees need to evaluate the business implications of the proposed changes.

Although the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) modified the work plan for the convergence projects, the majority of the final standards are still expected in 2011.

In June 2010, the FASB and IASB (the Boards) issued a progress report on the joint convergence projects. Due to stakeholder concerns and delays in deliberations, the Boards developed a modified strategy to prioritize projects that are expected to bring significant improvement and convergence to IFRS and US GAAP.

FASB and IASB convergence
project timeline — exposure drafts

The Boards will consider the effective date for all major joint projects as part of another project. A number of preparer groups have requested at least a three-year implementation period, which would mean potential effective dates in 2014. By the end of 2010, seven different exposure drafts are expected to be outstanding, covering various items including revenue recognition and leases.

More use of fair value for financial instruments

The FASB issued its exposure draft on accounting for financial instruments in May 2010. Under the proposed guidance, companies will measure most financial assets at fair value, with changes recognized either through net income or, in limited cases, other comprehensive income (OCI). The proposed guidance expands the use of fair value as a measurement attribute to almost all financial instruments within its scope, most notably to loans and equity securities of non-public entities. This is a significant change from current practice, especially for financial institutions.

Implementation considerations for financial instruments:

• Will the company’s IT systems capture and process information to support these changes?
• Does the company have access to the necessary fair value information?

One revenue recognition model for all industries

In June 2010, the Boards issued their joint proposal on revenue recognition. The exposure draft proposes a single, converged revenue recognition model for contracts with customers that would be applied consistently across industries — eliminating specific revenue recognition guidance on an industry-by-industry basis.

In the new model, a company would recognize revenue as it satisfies its performance obligations to its customer equivalent to the fair value of that performance obligation.

Implementation considerations for revenue recognition:

• What types of contracts does the company have?
• Can the company’s IT systems capture and document "performance obligations" and allocate the transaction price to them or will the company need to use a manual process?
• How will the company determine the estimated selling price for items not sold separately?

More leased assets on the balance sheet

The accounting for leases will change significantly based on the conclusions to date in this joint project. Most leases will receive similar accounting treatment in the lessee’s financial statements under the proposed model — off-balance sheet financing through operating leases will be eliminated and all leases will be recognized on the balance sheet.

Implementation considerations for leases:

• How will the company capture the information needed to record leases on the balance sheet?
• Can the company’s IT systems handle the assets and related obligations on its balance sheet or will the company resort to the use of spreadsheets?
• Would the proposed accounting significantly change any key financial metrics (e.g., loan covenants)?

Big changes proposed for financial statement presentation

While originally scheduled for June 2010, the Boards deferred this exposure draft to Q4 2010. If ultimately adopted as proposed, the standard will fundamentally redefine the way that entities present their financial position, performance and cash flows, and will add several new disclosure requirements. This guidance will require significant changes to entities’ information systems if adopted as proposed. For many companies, these changes could be more costly to implement than those from any other project.

Implementation considerations for financial statement presentation:

• What IT system changes would be needed to prepare a direct cash flow statement?
• How will the company need to change its chart of accounts to separate the financial statements into operating, investing and financing components?
• Does the company currently have the necessary information to prepare the proposed disclosures, including the proposed rollforwards of significant accounts, or would it need to implement new internal reporting systems to do so?

And many more...

In addition to these projects, the FASB has projects underway covering insurance contracts, consolidations, liabilities and equity, as well as disclosures of loss contingencies. Each of those projects could result in significant implementation activities for many companies.

Companies and their audit committees should closely monitor the status of these joint convergence projects and may want to shape the final standards through the FASB’s due process (e.g., by submitting comment letters on the proposals). Planning early for these accounting changes will allow companies to reduce overall implementation costs by addressing the changes in an organized and controlled manner, thus avoiding resource intensity that might otherwise be required to implement the new standards.

 Questions for the audit committee to consider