A N A LY S I S & P E R S P E C T I V E

Reverse Mergers by China-Based Companies: Is This the End?Nixon Peabody LLP attorneys David K. Cheng, Cindy Zhu, and David Lee of-fer insights regarding the source of the problems involving reverse mergers byChina-based companies, along with some potential solutions. Page 537

F E AT U R E R E P O R T S

Lessor Change Could Cause Leasing Re-Exposure, Says TweedieDelivering his final report to members of the International Financial Report-ing Standards Advisory Council, the former chairman of the International Ac-counting Standards Board, David Tweedie, says that despite the willingnessof members of the Financial Accounting Standards Board to explore a de-recognition approach to lessor accounting, there remains the risk of the twoboards having to re-expose the proposals for a further round of public com-ment. Page 541

Practitioners Concerned Over GASB Pension Overhaul ProposalsGovernmental entities should be aware that new pension accounting rules be-ing proposed by the Governmental Accounting Standards Board mean a com-plete overhaul from current methodologies, some of which are causing con-cerns, practitioners tell BNA. Page 543

C U R R E N T D E V E L O P M E N T S

FASB-IASB Craft Criteria on Allocation of Impaired Loans in CategoriesFASB and IASB—continuing ongoing redeliberations on the impairments por-tion of accounting for financial instruments—tentatively agreed that a ‘‘creditrisk management approach’’ would be the criteria entities should use to deter-mine how impaired loans should be allocated and when they should be trans-ferred between categories or buckets. Page 546

FASB Votes Against Retaining Leveraged Lease Literature in Final StandardFASB votes against retaining leveraged lease accounting literature—veryunique rules under U.S. generally accepted accounting principles related totax advantaged transactions—in a final lease standard. Page 547

FASB Votes Against Alternative Transition for Private CompaniesPrivate companies will not be provided with an alternative method in applyingthe transition requirements in a proposed revenue recognition accountingstandard, FASB says. Page 548

A L S O I N T H E N E W S

AUDITING STANDARDS: The PublicCompany Accounting OversightBoard issues for public commentproposed ‘‘audit and attest’’standards for audits of broker-dealers. Page 557

INTERNATIONAL CONVERGENCE:The consistency with whichstandards are applied is moreimportant than the choice ofstandards themselves, paneliststell a Securities and ExchangeCommission roundtable.Page 560

INTERNATIONAL CONVERGENCE:Executives from small publiccompanies and their auditors tellthe SEC that a shift to interna-tional financial reportingstandards would be of little—ifany—benefit. Page 561

S E C T I O N I N D E X

Analysis & Perspective ............537

Feature Reports .....................541

Accounting & Disclosure ..........546

Audit Developments ................557

Accounting Practice................560

Official Actions.......................565

CalendarFinancial Restatements .......566

Comment Deadlines ............567

Effective Dates ..................568

Upcoming Meetings.............572

VOL. 7, NO. 15 JULY 22, 2011

Copyright � 2011 by Tax Management Inc. ISSN 1558-6642

Accounting Policy& Practice Report®

534 (Vol. 7, No. 15)

7-22-11 Copyright � 2011 by Tax Management Inc. APPR ISSN 1558-6642

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Pamela Atkins, Jane Bowling, Tina Chi, Phyllis A. Diamond, Dave Harrison, Richard Hill, Susan Raleigh Jenkins,Alison Carpenter Johansen, Gail S. Keller, Malini Manickavasagam, Rebecca McCracken, Ellen E. McCleskey,

Cheryl Saenz, Yin L. Wilczek, CONTRIBUTING EDITORS;Marji Cohen, DIRECTOR, INDEXING SERVICES; Charles Knapp, INDEXING MANAGER; Barry Ponticelli, INDEX EDITOR

Accounting for Income TaxesAccounting for Income Taxes—FASB ASC 740 (Portfolio 5000-4)Accounting for Income Taxes: Fundamental Principles and Special Topics (Portfolio 5001)Accounting for Income Taxes: Uncertain Tax Positions (FIN 48) (Portfolio 5002)Accounting for Income Taxes: Uncertain Tax Positions — Selected Topics

(Portfolio 5003)

Accounting Rules and Disclosures:Accounting and Disclosure for Derivative Instruments (Portfolio 5112-2)Accounting Changes and Error Corrections (Portfolio 5124-2)Accounting for Contingencies (Portfolio 5165)Accounting for Debt Instruments (Liabilities) (Portfolio 5105-2)Accounting for Investments Debt Securities (Portfolio 5106-2)Accounting for Leases: Fundamental Principles (Portfolio 5114)Accounting for Share-Based Compensation (Portfolio 5109-2)Accounting Principles and Financial Statements (Portfolio 5116)Accounting Rulemaking Authorities and Accounting Research (Portfolio 5113)Accounts Receivable: Financial Accounting and Auditing (Portfolio 5110-2)Accounts Receivable: Management and Analysis (Portfolio 5111-2)Asset Retirement Obligations (Portfolio 5143)Business Combinations (Portfolio 5170-2)Business Combinations: Goodwill and Other Intangible Assets (Portfolio 5115-3)The Cash Flow Statement (Portfolio 5121-2)Closely Held Business Valuation (Portfolio 5147)Contingent Environmental Liabilities: Disclosures and Accounting (Portfolio 5136-2)Earnings Per Share (Portfolio 5137-2)Fair Value Measurements: Valuation Principles and Auditing Techniques

(Portfolio 5127-2)The Financial Reporting of Inventories (Portfolio 5168-2)Financial Statement Analysis: Qualitative Techniques (Portfolio 5122-2)Financial Statement Analysis: Quantitative Techniques—Analyzing Liquidity,

Profitability and Asset Utilization (Portfolio 5133)Financial Statement Analysis: Quantitative Techniques—

Analyzing Solvency, Price Multiples, and Cash Flow (Portfolio 5134)Governmemtal Accounting: Fundamental Priciples (Portfolio 5140-2)Leases: Lessee Perspective (Portfolio 5117)Leases: Lessee Perspective — Selected Topics (Portfolio 5118)Leases: Lessor Perspective — Economics (Portfolio 5120-2)Leases: Lessor — Classification (Portfolio 5128-2)Leases: Lessor Perspective — Recording the Lease (Portfolio 5129)Management’s Discussion and Analysis (Portfolio 5107)Methodologies for Estimating Future Profitability, Growth and Valuation

(Portfolio 5131)Pension Accounting (Portfolio 5108)Related Party Transactions (Portfolio 5148-2)Revenue Recognition: Fundamental Principles (Portfolio 5100-2)Revenue Recognition: International Accounting Standards (Portfolio 5104-2)Revenue Recognition: Product Sales and Service (Portfolio 5101-2)Revenue Recognition: Software (Portfolio 5103-2)Segment Reporting (Portfolio 5119-2)

The Accounting Policy & Practice Series is designed to help accounting practitioners stay abreast of emerging issues and assist in ana-lyzing and implementing accounting guidance. The Series has two main components: the Portfolios featuring in-depth analysis and prac-tical guidance from expert legal practitioners and the Accounting Policy & Practice Report providing the latest news and developments

Special Industries and Entities:Accounting by Partnerships (Portfolio 5209-2)Accounting for Agricultural Producers (Portfolio 5205-2)Accounting for Combinations of Not-for-Profit Organizations (Portfolio 5203)Accounting for Museums (Portfolio 5201)Accounting for Not-for-Profit Organizations (Portfolio 5200)Accounting for Trusts and Estates (Portfolio 5202)Hospital Accounting (Portfolio 5204-2)Mortgage Banking Activities and Mortgage-Backed Securities (Portfolio 5208)Oil and Gas Accounting Upstream: Operations (Portfolio 5206-2)

Management Control and Analysis:Activity-Based Costing and Management (Portfolio 5306)Coordinating Risk Management and Performance Measurement (Portfolio 5308)Corporate Accountability and Triple Bottom Line Reporting (Portfolio 5302)Cost Accounting Principles for Federal Contracts (Portfolio 5300)Enterprice Risk Management (Portfolio 5303)Internal Reporting and Improvement Initiatives (Portfolio 5313)Linking R&D Performance Measurement and Valuation to Corporate Strategy

(Portfolio 5312)Management’s Reporting on Internal Control Over Financial Reporting (Portfolio 5317)Using the Balanced Scorecard Framework (Portfolio 5304)

Audit Standards and Practices:Audit Committee Oversight Effectiveness Post Sarbanes-Oxley Act (Portfolio 5401)Audit Risk Assessment in Audits of Non-Issuers (Portfolio 5409)Auditing Fair Values (Portfolio 5403-2)Auditor’s Need to Know v. Counsel’s Need to Protect Client Confidences (Portfolio 5407)Auditor’s Reports (Portfolio 5400)Continuous Auditing (Portfolio 5405)Internal Auditing: Fundamental Principles and Best Practices (Portfolio 5406)Internal Controls: Sarbanes-Oxley Act — 404 and Beyond (Portfolio 5402)

Accounting Practice and Responsibility:A Strategic Approach to SEC Investigations (Portfolio 5504)Accounting Ethics: Sources and General Applications (Portfolio 5508)Auditor Independence: General Principles (Portfolio 5510)Avoiding Material Omissions Under the Federal Securities Laws (Portfolio 5509)Corporate Governance of the Financial Reporting Process (Portfolio 5506)Legal Issues for Accountants and Auditors Advising Business Entities (Portfolio 5512)The Liability of Accountants to Non-Clients for Professional Malpractice (Portfolio 5501)Managing Legal Risk in the Financial Reporting Process (Portfolio 5503-2)Preparing for and Defending Accounting Liability Litigation (Portfolio 5500)Responding to Department of Justice Investigations (Portfolio 5515)Sarbanes-Oxley: Auditor Independence (Portfolio 5502)SEC Reporting Issues for Foreign Private Issues (Portfolio 5507)The Section 7525 Tax Practitioner-Taxpayer Privilege and Related Issues (Portfolio 5511)Strategies for an Individual Involved in an SEC Financial Reporting Investigation

(Portfolio 5505)

I N D E X T O S TA N D A R D S E T T E R S

FASBFAF adds public relations VPs .............................. 556

FASB crafts disclosure criteria for investmentfirms financial highlights ................................. 548

vate companies on revenue recognition.................. 548

FASB votes against retaining leveraged leaseliterature in final standard ................................ 547

FASB-IASBFASB-IASB craft criteria regarding allocation of

impaired loans in categories ............................. 546

Seidman says FASB to evaluate joint discussionswith IASB on hedging ..................................... 549

IASBInterpretations committee agrees to add project

on government levy issues ............................... 552

Accounting interpretations committee clears stripmining guidance for publication ........................ 553

IFRIC panel declines to add projects; chairmanhits auditors over pension plan ......................... 555

GASBGASB issues rules on past transactions, hedge

accounting for replaced swaps .......................... 551

GASB seeking public comments on public pensionaccounting revisions ....................................... 553

T O P I C A L I N D E X

ACCOUNTING STANDARDSFAF adds public relations VPs .............................. 556

AUDITING STANDARDSPCAOB issues for public comment proposed

‘audit and attest’ standards .............................. 557

SEC/PCAOB, China regulators to meet overcross-border audits ......................................... 558

BUSINESS COMBINATIONSIFRIC panel declines to add projects; chairman

hits auditors over pension plan ......................... 555

CALENDARComment Deadlines ........................................... 567

Future Effective Dates ......................................... 568

Recent Financial Restatements ............................. 566

Upcoming Meetings ............................................ 572

CONTINGENCIESInterpretations committee agrees to add project

on government levy issues ............................... 552

DISCLOSURESFASB crafts disclosure criteria for investment

firms financial highlights ................................. 548

EMPLOYEE BENEFIT PLANSGASB seeking public comments on public pension

accounting revisions ....................................... 553

ENFORCEMENTCSK executive, SEC fail to reach settlement

accord in SOX clawback case ........................... 563

EXTRACTIVE ACTIVITIESAccounting interpretations committee clears strip

mining guidance for publication ........................ 553

FINANCIAL FRAUDFormer medical device execs agree to settle

charges over revenue recognition ...................... 562

FINANCIAL INSTRUMENTSFASB-IASB craft criteria regarding allocation of

impaired loans in categories ............................. 546

Hedge funds get green light to sue over ComverseTech’s options practices ................................... 562

IFRS 9 will permit ‘judgment’ on impairment ofGreek debt, says IASB’s Hoogervorst ................. 549

Seidman says FASB to evaluate joint discussionswith IASB on hedging ..................................... 549

FINANCIAL REPORTINGCompanies doubted as going concerns decline

again in 2010, but remain high .......................... 558

GOVERNMENTAL ACCOUNTINGGASB issues rules on past transactions, hedge

accounting for replaced swaps .......................... 551

Practitioners concerned over GASB pensionoverhaul proposals .......................................... 543

INCOME TAXESIRS issues uncertain tax position guidance,

clarifies definition of recording a reserve ............ 554

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ACCOUNTING POLICY & PRACTICE REPORT ISSN 1558-6642 BNA TAX & ACCOUNTING 7-22-11

T O P I C A L I N D E X

Continued from previous page

INTERNATIONAL CONVERGENCEConsistent application of standards key in

choosing GAAP or IFRS, SEC panelists say ........ 560

Small U.S. companies tell SEC IFRS to be costly,of little benefit ................................................ 561

LEASINGFASB votes against retaining leveraged lease

literature in final standard ................................ 547

Lessor change could cause leasing re-exposure,says Tweedie ................................................. 541

OFFICIAL ACTIONSSignificant actions of standards setters .................. 565

PROPERTY, PLANT AND EQUIPMENTFASB seeking comments on issue related to in

substance real estate scope .............................. 551

REVENUE RECOGNITIONFASB votes against alternative transition for

private companies on revenue recognition .......... 548

XBRLISACA, IFAC collaborate on XBRL guidance........... 564

A C C O U N T I N G P O R T F O L I O S A F F E C T E D

5109-2nd, Accounting for Share-BasedCompensation, at 5109.II.C.1.d .......................... 562

5113, Accounting Rulemaking Authorities andAccounting Research, at 5113.IX.H .................... 564

5114, Accounting for Leases: FundamentalPrinciples, at 5114.VI.E .................................... 547

5509, Avoiding Material Omissions Under theFederal Securities Laws, at 5509.VII.B.3.j ........... 562

O R G A N I Z AT I O N I N D E X

Beazer Homes ................................................... 563

BNP Paribas ...................................................... 541

California Public Employees’ Retirement System..... 560

Comverse.......................................................... 562

Diebold............................................................. 563

KPMG .............................................................. 555

Moody’s............................................................ 560

Morgan Stanley ........................................... 549, 560

Nasdaq OMX Group ........................................... 537

Nixon Peabody .................................................. 537

NYSE Euronext ................................................. 537

PricewaterhouseCoopers ..................................... 554

TA B L E O F P R I N C I PA L C A S E S

Maverick Fund L.D.C. v. Comverse Technology Inc.(E.D.N.Y.) ............................................................. 562

SEC v. Jenkins (D. Ariz.) ............................................ 563

SEC v. Raffle (W.D. Tex.) ........................................... 562

536 (Vol. 7, No. 15)

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Analysis&PerspectiveB U S I N E S S C O M B I N AT I O N S

Reverse Mergers by China-Based Companies: Is This the End?

BY DAVID K. CHENG, CINDY ZHU, AND DAVID LEE

R ecently, Chinese companies that became publiclylisted in the U.S. through reverse mergers havefallen on tough times: the SEC strengthened its

scrutiny of them, the stock exchanges have suspendedor even delisted them, investors are suing them in classactions, and short sellers have rushed to expose allegedaccounting problems. These developments have drawnextensive attention from New York to Shanghai.

Focusing on China-based reverse merger companies,this article attempts to provide some insight into thesource of the problems and potential solutions thereto.

I. Reverse Merger of ChineseCompanies in the U.S. Market

A reverse merger, also referred to as a reverse take-over, is used by some private companies as an alterna-tive method of going public. In a reverse merger, a pri-

vate company merges with a ‘‘shell’’ company that is al-ready publicly listed but has little or no operations, andthe private company thereby becomes public withouthaving to go through the usually lengthy and complexprocess of an initial public offering (‘‘IPO’’).1 Goingpublic through a reverse merger allows a private com-pany to get listed typically at a lesser cost and in ashorter time frame than through an IPO.2

In the past few years, reverse merger has become apopular method for China-based companies, particu-larly those with smaller market capitalization, to accessthe U.S. capital market. According to a research note byPublic Company Accounting Oversight Board(‘‘PCAOB’’), a nonprofit corporation established byCongress to oversee the audits of public companies,more than 150 companies from the China region went

1 See, Salmon P. Chase, The Truth About Reverse Mergers,THE OHIO STATE UNIVERSITY, ENTREPRENEURIAL BUSINESS LAW JOURNAL,2 ENTREPREN. BUS. L.J. 743.

2 Gariel Nahoum, Small Cap Companies and the Diamondin the Rough Theory: Dispelling the IPO Myth and Followingthe Regulation A and Reverse Merger Examples, 35 HOFSTRAL. REV. 1865 (Summer 2007).

David K. Cheng is Chair & Managing Partnerof Nixon Peabody LLP’s China & Asia PacificPractice. Cindy Zhu is an associate and amember of the firm’s China and Global Busi-ness & Transactions practices. David Lee is anassociate in the firm’s Bankruptcy & Finan-cial Restructuring and China practices.

(Vol. 7, No. 15) 537

ACCOUNTING POLICY & PRACTICE REPORT ISSN 1558-6642 BNA TAX & ACCOUNTING 7-22-11

public in the U.S. through reverse merger transactionsfrom January 1, 2007 to March 31, 2010.3

II. Recent Problems AttractingAttention

Lately, reverse mergers by China-based companieshave attracted skeptical looks from the market andbeen subject to regulatory sanctions.4 According to a re-cent Wall Street Journal article, from February, 2011 toearly June, 2011, about 40 Chinese reverse merger com-panies either acknowledged accounting problems orsaw the SEC or U.S. exchanges halt trading in theirstocks because of accounting questions.5 On June 9,2011, the SEC issued an investor bulletin summarizingrecent actions that it took against certain reversemerger companies and warning investors of the risksassociated in purchasing securities issued by such com-panies. Besides the action taken by regulators, securi-ties litigators have also filed class action securities lawsuits against a number of Chinese companies listed inthe U.S. Moreover, short sellers have targeted Chinesereverse merger companies. A short seller would first re-search Chinese reverse merger companies for possiblefrauds and misdeeds. Upon the discovery of what theshort seller believes to be frauds and misdeeds, theshort seller would first enter into a short sale contract,essentially a bet that the company’s securities wouldfall in price, and then publish its research (which re-search would, of course, tend to cause a fall in the com-pany’s securities). The short selling activities againstChinese reverse merger companies have been so suc-cessful recently that, at a conference devoted to reversemergers, one short seller commented: ‘‘This is harvesttime for our side. If you don’t see a bunch of reallywealthy guys up here, you are not looking close. Thishas been making more money than you can imagine.’’6

The types of frauds, misdeeds or mistakes whichChinese reverse merger companies have been accusedof committing or proven to have committed are wide-ranging. Some reverse merger companies have beende-listed for simply failing to file required period re-ports. One Chinese reverse merger company was ac-cused by the SEC for being involved in a ‘‘pump-and-dump’’ scheme by which original shareholders manipu-lated the market through trades to artificially inflate theprice of stock before selling such stock to public inves-tors for a profit.7 More commonly, reverse merger com-

panies have committed (or have been accused of com-mitting) significant accounting frauds. In some cases,auditors have refused to certify a company’s financialsor have resigned. Chinese reversed merger companieshave also been accused of reporting grossly inflatedrevenues or making up non-existent customer contractsand assets in their SEC filings.8

III. Viewing the Problems in a Larger Context Given theamount of attention focused on problems with Chinesereverse merger companies listed in the U.S. in recentmonths, it must be noted that these issues are neitherrecent nor unique to Chinese companies going public inthe U.S. by way of reverse merger. Instead, such prob-lems are simply one of multiple ways in which account-ing and corporate governance issues of Chinese compa-nies have revealed themselves when these companiesrush to seek capital by going public, and thus subject-ing themselves to the duties of publicly traded compa-nies.

To begin, using a reverse merger to enter the U.S.market is merely one of many ways in which Chinesecompanies have sought public investment. For ex-ample, a number of Chinese companies have used re-verse mergers to become publicly traded in the Chinesestock market. In fact, when publicly traded companiesin China become insolvent (which typically would causesuch company to be designated as ‘‘ST’’ or ‘‘SpecialTreatment’’ companies) and seek relief under China’sEnterprise Bankruptcy Law, one of the assets that itwould sell in bankruptcy is its publicly traded ‘‘shell.’’9

A private company would purchase the publicly tradedshell in order to go public in China by way of reversemerger. Moreover, Chinese companies can and have, ofcourse, gone public in China, U.S., Hong Kong, Singa-pore and elsewhere by way of the traditional IPOs.

The accounting and corporate governance issues ofChinese companies have been significant concerns re-gardless of where their securities are traded and howsuch securities become publicly traded. For example, asearly as 2004, investors were concerned with account-ing scandals of Chinese companies which had gonepublic in the U.S. by way of IPOs.10 In recent years, sev-eral so-called ‘‘S-Chip’’ companies, i.e. Chinese compa-nies traded in the Singapore stock market, includingFerroChina and China Gaoxian Fiber Fabric Holdings,have faced accounting scandals. On June 14, 2011, con-cerns over such scandals led Singapore’s CorporateGovernance Council to propose requiring boards tocomment on ‘‘whether they have received assurancesfrom a company’s CEO and chief financial officer on theaccuracy of the financial statements’’ in order to‘‘[maintain] investor confidence, and to enhance Singa-pore’s reputation as a leading and trusted internationalfinancial centre.’’11

3 The Public Company Accounting Oversight Board, Activ-ity Summary and Audit Implications for Reverse Mergers In-volving Companies from the China Region (January 1, 2007through March 31, 2010), available at:http://pcaobus.org/Research/documents/Chinese_Reverse_Merger_Research_Note.pdf

4 See, e.g., Bill Alpert & Leslie P. Norton, Beware This Chi-nese Export, BARRON’S, Aug. 28, 2010, available at http://online.barrons.com/article/SB50001424052970204304404575449812943183940.html

5 Michael Rapoport, SEC Probes China Auditors, WALL

STREET JOURNAL, Jun. 3, 20116 For Short Sellers on Chinese Stocks, It is Time to Reap,

June 16, 2011, available at http://news.yahoo.com/s/nm/20110616/bs_nm/us_china_shortsellers; see also Bearish Betson Chinese Reverse Mergers, BARRON’S, March 7, 2011.

7 SEC v. China Energy Savings Technology, Inc., 2008 U.S.Dist LEXIS 110349 (S.D.N.Y. March 18, 2008).

8 SEC Investor Bulletin: Reverse Merger, available at http://www.sec.gov/investor/alerts/reversemergers.pdf.

9 Alan CW Tang, How the New PRC Bankruptcy Law hasFared—Reorganization of A-share Listed Companies andCross-border Implications, September 2009 INSOL Interna-tional, Technical Series Issue No. 9;

10 Cautionary Tale: China’s IPOs Boom Cools Off; FORTUNE

May 31, 200411 Singapore Wants Top Executives to Vouch for Company

Accounts; REUTERS, June 14, 2011; available at http://www.reuters.com/article/2011/06/14/singapore- governance-

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Chinese stocks traded in Korea have faced similarsuspicions from investors and regulators. For example,one Chinese deep sea fishing company traded in Korea,China Ocean Resources, saw its stock plunge after anallegation that the company inflated the size of its fish-ing fleet in its public disclosures.12 The companyquickly denied the allegation and showed that differentvessels had different engine numbers during a presen-tation to journalists and analysts. Nevertheless, inves-tors’ distrust of China’s accounting and auditing prac-tice have caused Chinese companies to trade at a lowervalue than their financials may warrant, creating a‘‘China discount’’ in the Korean stock market.13

In fact, the accounting and governance problems ex-perienced by Chinese companies traded in one marketcan cast suspicions on those traded elsewhere. For ex-ample, it was reported that several Chinese companiestraded in Korea saw their stock prices plummet uponthe revelation of the accounting scandal of theSingapore-traded China Gaoxian Fiber Holdings, Inc..14

IV. Potential SolutionsTo prevent the problems described above from hap-

pening again and to better protect the investors, effortsfrom various parties are necessary, which are discussedin more details below:

The SEC and the Several U.S. StockExchanges

The SEC has brought a number of cases againstChina-based issuers for market manipulations as wellas accounting and disclosure violations.15 It has alsosuspended the trading in the stocks or revoked the se-curities registration of some reverse merger companiesfor reasons including questions regarding the accuracyand completeness of information contained in the com-panies’ public filings or failure to make required peri-odic filings.16 In addition, the SEC has launched a pro-active risk-based inquiry into U.S. audit firms that havea significant number of domestic issuer clients with pri-marily foreign operations, including in the China re-gion.17 As a result, more than twenty-four China-basedcompanies have filed Forms 8-K disclosing auditor res-ignations, accounting problems, or both, from March tolate April, 2011.18

Additionally, U.S, stock exchanges are tighteningtheir oversight over reverse merger companies in orderto prevent the problems from the start. On May 26,

2011, Nasdaq OMX Group Inc. (NDAQ), the second-largest operator of U.S. stock exchanges, proposed toadopt additional listing requirements for reversemerger companies.19

Specifically, Nasdaq proposed to prohibit a companygoing public by combining with a public shell from ap-plying to list until six months after the combined entitysubmits all required information about the transaction,including audited financial statements, to the SEC. Fur-ther, Nasdaq proposed to require that the companymaintain a $4 bid price on at least 30 of the 60 tradingdays immediately prior to submitting the application.Finally, under the proposed rule, Nasdaq would not ap-prove any reverse merger for listing unless the com-pany has timely filed its two most recent financial re-ports with the SEC if it is a domestic issuer or compa-rable information if it is a foreign private issuer.20

These additional requirements are designed to discour-age inappropriate behavior on the part of companies,promoters and others.21 For example, they will makeshort term manipulative trading scheme to boost thestock price more difficult.

In addition, according to a Bloomberg article, NYSEEuronext (NYX), the largest U.S. stock exchange op-erator, has been assessing enhancements to listingstandards to address concerns about reverse mergersand already has the authority to use qualitative factorsin assessing eligibility.22

The SEC is also looking at additional step to addressgrowing concerns about accounting and auditing offoreign-based companies that list in the U.S.23

PCAOB and the AuditorsSince the discovered problems with the reverse

merger companies are mostly related to their financialinformation, the companies’ independent auditorsshould be able to play a key role in stopping the filingsof inaccurate and/or incomplete financial information.

In addition to SEC’s risk-based inquiry into U.S. au-dit firms mentioned above, PCAOB has also identifiedissues with the audits of reverse merger companies and,in response, has issued Staff Audit Practice Alert No. 6on July 12, 2010 and Staff Research Note 2011-P1 onMarch 15, 2011, cautioning registered accounting firmsto follow certain specified auditing practices.24 Specifi-cally, PCAOB is concerned that U.S. accounting firmsare not in full compliance with some PCAOB standardsin the audits of companies with substantially all of their

idUSL3E7HE0JI20110614. The press release of the CorporateGovernance Council can be viewed at: http://www.mas.gov.sg/news_room/press_releases/2011/Consultation_on_the_Proposed_Re-visions_to_the_Code_of_CG.html.

12 To some investors, China still not trustworthy; KOREA

TIMES, June 5, 2011; available at http://www.koreatimes.co.kr/www/news/biz/2011/06/123_ 88357.html

13 Id.14 Id.15 Mary L. Schapiro, Letters to the Honorable Patrick T.

McHenry, April 27, 2011. Available at: s.wsj.net/public/resources/documents/BARRONS-SEC-050411.pdf

16 Id.17 Id.18 Id.

19 Federal Register Volume 76, Number 114 (Tuesday, June14, 2011), available at: http://www.gpo.gov/fdsys/pkg/FR-2011-06-14/html/2011-14648.htm

20 Id.21 Id.22 Dune Lawrence, Nasdaq Tightens Oversight of Reverse

Mergers Amid SEC Scrutiny, BLOOMBERG, May 2, 2011, availableat: http://www.bloomberg.com/news/2011-05-02/nasdaq-tightens-oversight-of-reverse-mergers-amid-sec-scrutiny.html

23 Sarah N. Lynch, SEC Weighs New Policies on ForeignReverse Mergers, REUTERS, June 21, 2011, available at: http://uk.reuters.com/article/2011/06/21/us-sec-china-idUKTRE75K51420110621

24 Federal Register Volume 76, Number 114 (Tuesday, June14, 2011), available at: http://www.gpo.gov/fdsys//FR-2011-06-14/html/2011-14648.htm

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operations outside the U.S.25 In one instance, a U.S.registered accounting firm retained an accounting firmin the China region to conduct audit over the issuer, andthe audit procedures performed by the firm in the Chinaregion constituted substantially all of the audit proce-dures on the issuer’s financial statements. The U.S.firm’s personnel did not travel to the China region dur-ing the audit, and substantially all of the audit docu-mentation was maintained by the firm in the China re-gion.26

In short, PCAOB found that some U.S. auditors whofarm out work to local Chinese auditors aren’t verifyingthat the work complies with U.S. auditing standards. Asa result, PCAOB barred certain U.S. accounting firmsfrom auditing public companies, in part over this is-sue.27

To solve the above problem, reputable auditing firmswith language skills, extensive insight in Chinese ac-counting policies, and in-depth understanding of the lo-cal business environment must be utilized to conductthe auditing over the Chinese reverse merger compa-nies. Direct auditing, instead of reliance on another ac-counting firm to perform part or all of the auditing pro-cedure, should be encouraged. Meanwhile, the SEC isworking with Chinese regulators to try to help PCAOBto obtain approvals to do inspections abroad.28

Other Relevant PartiesOther parties could also make their contributions to

the solution. The Chinese regulators, such as the ChinaSecurities Regulatory Commission (‘‘CSRC’’), couldwork with foreign regulators more closely.29 Invest-

ment bankers, private equity investors, and law firms,as the seasoned players in reverse merger transactions,should conduct due diligence more thoroughly. Shortsellers, security class action lawyers and investors,while motivated by self-interest, provide additionalscrutiny over questionable practices by the reversemerger companies. Most important, the reverse mergercompanies themselves could better their chances ofavoiding regulatory actions, law suits and short sellerattacks by understanding the disclosure requirements,accounting standards and other burdens related to be-ing publicly traded in the market in which they intendto go public.

V. ConclusionAs set forth above, relevant parties have been taking

actions in response to the accounting and corporategovernance problems of Chinese companies, includingthose of Chinese reverse merger companies in the U.S.market. Unfortunately, none of the responses com-pletely protects investors from these problems. In-creased disclosure requirements, while welcome, willnot eliminate blatant fraud cases in which companiesreport fictional earnings and non-existent customercontracts. Lawsuits and regulatory actions have onlylimited effectiveness, particularly because of difficultiesin obtaining jurisdiction in the U.S. courts against per-sons and properties located in China. In the short run,it would appear that the perceived risk of fraud and ac-counting problems in China must simply be reflected inthe ‘‘China discount’’ in the price of the Chinese stocks.

However, this should not be seen as the end of thereverse mergers by China-based companies. Reversemerger, as a financial transaction, has nothing inher-ently bad with it. And accounting fraud is not a uniquelyChinese phenomenon. As an investment banker puts it,‘‘I don’t doubt that there are some funny numbers inChina, just as I don’t doubt that there are funny num-bers in the UK, America and anywhere else where thereis an individual motive to cook the books.’’30 While theSEC focuses on protecting the public investors, it alsowants foreign private issuers to list in the U.S.31 There-fore, the current campaign against China-based reversemerger companies, while discouraging to Chinese com-panies, might be beneficial to them in the long run as away to weed out the fraudulent and weak players andrebuild Chinese companies’ reputation in the U.S.32

Hopefully, we will get there soon.

25 The Public Company Accounting Oversight Board, Activ-ity Summary and Audit Implications for Reverse Mergers In-volving Companies from the China Region (January 1, 2007through March 31, 2010). Available at: http://pcaobus.org/Research/documents/Chinese_Reverse_Merger_Research_Note.pdf

26 Id.27 Michael Rapoport, SEC ProbesChina Auditors, THE WALL

STREET JOURNAL, Jun. 3, 2011, available at: http://online.wsj.com/article/SB10001424052702304563104576361422372121248.html

28 Sarah N. Lynch, SEC Weighs New Policies on ForeignReverse Mergers, available at: http://uk.reuters.com/article/2011/06/21/us-sec-china- idUKTRE75K51420110621

29 Stephanie Tong & Vincent Jiang, China Regulator‘Aware’ of Concerns on Chinese Firms’ Accounting,

BLOOMBERG, Jun 17, 2011, available at: http://www.bloomberg.com/news/2011-06-17/china-regulator-aware-of-concerns-on-chinese-firms-accounting.html

30 Isabella Steger, EM Corporate Governance: China, Rus-sia, Not That Bad? THE WALL STREET JOURNAL, June 9, 2011, avail-able at: http://blogs.wsj.com/exchange/2011/06/09/em-corporate-governance-china-russia-not-that-bad/

31 Sarah N. Lynch, SEC Weighs New Policies on ForeignReverse Mergers, REUTERS, June 21, 2011, available at: http://uk.reuters.com/article/2011/06/21/us-sec-china-idUKTRE75K51420110621

32 Larah Hong, a legal intern of Nixon Peabody LL.P., hasassisted in conducting some of the research on relevant Chi-nese law.

Note to ReadersThe editors of BNA’s Accounting Policy &Practice Report invite the submission for publi-cation of articles of interest to practitioners.

Prospective authors should contact Ali Sar-tipzadeh, Assistant Managing Editor, BNA’sAccounting Policy & Practice Report, 1801 S.Bell St. Arlington, Va. 22202-4501; telephone(703) 341-3893; or e-mail to asartipzadeh@bna.com.

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FeatureReportsLessor Change Could Cause Leasing Re-Exposure, Says Tweedie

L ONDON—Delivering his final report to membersof the International Financial Reporting StandardsAdvisory Council June 21, the former chairman of

the International Accounting Standards Board, DavidTweedie, said that despite the willingness of membersof the U.S. Financial Accounting Standards Board to ex-plore a derecognition approach to lessor accounting,there remains the risk of the two boards having to re-expose the proposals for a further round of public com-ment.

Tweedie said, ‘‘Leases—that too could be a re-exposure.’’ He added, ‘‘We don’t know yet. It is interest-ing that FASB is much more inclined to move to themost popular proposal for lessor accounting, which wasderecognition. There are issues there about how wedeal with the residual asset.’’ He continued, ‘‘Some ofus don’t like the idea of any up-front profit being causedby valuing the residual asset. If the boards do go for de-recognition for lessor accounting, then I think it is ab-solutely certain that we have re-exposure. We have todo. It is quite different.’’

‘‘If, however, they decide no, on the basis that lessoraccounting isn’t broken, there is the question ofwhether you need to do it,’’ Tweedie continued. ‘‘Again,I suspect the boards will at least put up a staff draft sothat people can check whether there are issues there.’’

‘‘If the boards do go for derecognition for lessor

accounting, then I think it is absolutely certain

that we have re-exposure.’’

DAVID TWEEDIE, FORMER IASB CHAIRMAN

Summing up June 14 precisely how this overviewfeeds into the staff’s project planning, IASB projectmanager Petrina Buchanan said, ‘‘The conclusion thatwe reached at [yesterday’s] meeting is that we shouldbring back a paper to you at a future meeting thatwould compare and contrast a model that would deferany day-one profit.’’

She continued that this analysis would be ‘‘based onwhen there is less than substantially less than the risksand rewards of ownership transferred to the lessee andcompare and contrast that with a model that would de-fer profit based on whether profit would be reasonablycertain or reliably measurable.’’

Buchanan added that this paper will ‘‘develop thewording around what would be reasonably certain. I’msure that that wording would link in to the revenue rec-ognition project and what we’re doing there.’’

Those June 13 decisions came as staff guided boththe international board and the U.S. Financial Account-

ing Standards Board through a possible lessor account-ing model to replace the existing operating and financelease split.

Driving the staff’s plan for the meeting was the needto tease out the tension points among board memberson a spectrum ranging from bank lessors, throughmanufacturer lessors, and finally on to lessor account-ing for portions of a leased asset.

U.S. board members in particular were, even onthese early soundings, concerned that the lessor modeldeveloped by staff:

s treated the financial instrument that is a lease lessrobustly would be the case under financial instrumentsliterature;

s failed to deal adequately with the issue of up-frontrevenue recognition by lessors; and

s might be unsuitable for accounting for portions ofan asset.

Lease Accounting Exposure Draft. FASB and IASB is-sued an exposure draft Aug. 17, 2010, setting out pro-posals to eliminate the off-balance sheet accountingtreatment of operating leases (6 APPR 590, 8/20/10).The public had until Dec. 15 to comment on the propos-als. As part of the due process surrounding the docu-ment, the boards have held a series of roundtable meet-ings around the world with interested parties.

If eventually confirmed by the two boards, the pro-posals would require entities to record on their balancesheets all finance and operating leases using the ‘‘right-of-use’’ accounting model. In fact, the proposals wouldlargely scrap the distinction between operating and fi-nance leases.

In their place, both lessees and lessors would be re-quired to record assets and liabilities arising from leasecontracts. Under the performance-obligation approach,a lessor would recognize a lease liability while continu-ing to recognize the underlying asset.

Where the lessor had largely transferred asset riskunder the lease, the board proposed that it would derec-ognize the rights in the underlying asset but continue torecognize a residual asset representing its rights to theunderlying asset at the end of the lease term—the de-recognition approach.

Leave Lessor Accounting Alone. Following the receiptof comment letters from constituents on the exposuredraft, one possibility floated by former IASB chairmanDavid Tweedie is to leave lessor accounting alone onthe grounds that the greater problems are to be foundon the lessee side (7 APPR 275, 4/15/11).

The argument is that the major scope for structuringand abuse will be removed by putting operating leasesonto a lessee’s balance sheet, rendering transparent for

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users for the first time the extent of an entity’s futurecashflow commitments under its lease obligations.

Not an option, argued Mark Venus, a member of theworking group and finance director for BNP Paribas’leasing group in France during a June 11 joint FASB–IASB leases working group. ‘‘It may be true that lessoraccounting isn’t broken at the moment, [because] it iscoherent and consistent with lessee accounting,’’ Venussaid, ‘‘but if you change lessee accounting . . . you aregoing to break lessor accounting. And that’s why youneed to deal with lessor accounting at the same time,. . . because it won’t be consistent with a lessee right-of-use model.’’

Comparison With Financial Instruments. Early in thediscussion, before it migrated to more contentious ar-eas such as manufacturer or dealer lessors and por-tions, FASB chairman Leslie Seidman said, ‘‘If I simplymonetize a loan that’s carried at cost through a set ofcontracts, we have much higher hurdles to recharacter-ize things on the balance sheet and take a gain.’’

‘‘If you change lessee accounting . . . you are

going to break lessor accounting.’’

MARK VENUS, BNP PARIBAS

Putting down a marker for the difficult issue of day-one gains on lease commencement, she added, ‘‘I amstruggling with why upon entering into a lease we thinkwe should realize an appreciation on the underlying as-set.’’

Residual-Asset Issues. A particular tension pointemerged following the discussion of straight banklessors—supposedly one of the least controversial areaof lessor activity—when the boards considered manu-facturer lessors. In relation to the residual asset, staffproposed:

s Approach 1: the receivable and residual allocatedcost approach—the derecognition approach proposedin the August 2010 exposure draft; and

s Approach 2: the receivable and residualapproach—current finance-lease accounting.

Staff noted during the meeting that Approach 2 pro-duces a residual that is closer to fair value on a presentvalue basis and which would mean, in the case of amanufacturer lessor, the recognition of manufacturingprofit at lease commencement.

Approach 1, by way of contrast, would result in asmaller profit because the manufacturer recognizesprofit on the right of use asset, not on the residual as-set, and the rest of the profit at the end of the leaseterm.

Summing up the direction the boards appear at thisearly stage to be headed toward, IASB member JohnSmith said it was a case of the ‘‘performance approachin terms of profit recognition and derecognition interms of the balance sheet.’’

Concerns About Investment Property, Portions. Duringthe follow-up discussion of June 14, FASB membersagain expressed reservations about the proposed lessor

model—particularly in relation to portions of leased as-sets.

FASB member Russell Golden said, ‘‘You’re taking abuilding . . . a non-financial asset, and you’re carving itinto three things, especially if the lessor also uses it forits own purposes. You have a receivable, a residual, anda fixed asset. Under each approach, I don’t know whatthe measurement attribute is for the residual, and Idon’t know what the measurement attribute is for thefixed asset.’’

Echoing comments made the previous day by FASBchairman Leslie Seidman, Golden, the former FASBtechnical director, said he was reluctant to apply differ-ent derecognition criteria to a financial instrument cre-ated under leasing literature as any other financial in-strument.

‘‘I’m uncomfortable taking a non-financial asset andcreating a financial asset out of it when I have otherguidance that takes a financial asset and you have tohave legal transferability and other restrictions. I’m un-comfortable with saying we will be more lenient on de-recognition for a non-financial asset than we are for afinancial asset,’’ he said.

Issues With Reliable Measurements. Staff started theirdiscussion of portions in terms of it being a situationwhere the fair value of the underlying asset might beunreliable or difficult to measure.

Buchanan explained June 14 that this is because thereceivable and residual approach requires the lessor tobe able to arrive at a fair value of the underlying asset.She noted that when it is a portion of something larger,such as a fraction of a cable, it can be harder to do that.

Staff tentatively proposed that where there is mea-surement uncertainty, the initial measurement of the re-sidual would simply be the difference between the re-ceivable and the previous carrying amount.

This would mean that a lessor would embed any day-one profit and accrete the residual over the lease termto the amount that it would have been had you appliedoperating lease accounting.

‘‘I’m uncomfortable taking a non-financial asset

and creating a financial asset out of it when I have

other guidance that takes a financial asset and

you have to have legal transferability and other

restrictions.’’

LESLIE SEIDMAN, FASB CHAIRMAN

FASB member Hal Schroeder also questioned theusefulness of the approach to investors. ‘‘If you take aperson who invests in the debt side of a leasing com-pany . . . they are saying ‘I lent money for them to owna building, is the building still there?’ ’’ He added thathe would want to see the disclosures used to reas-semble the components used ‘‘in this financial instru-ments approach’’ into the building on which the credi-tor lent money. ‘‘I don’t see how their analysis could beimproved by this approach.’’

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Staff had argued in relation to investment propertyheld at cost—as opposed to fair value—that althoughlessors might not see their holdings in these terms,there is in fact an embedded residual and receivable inthe valuation.

‘‘[I]n terms of projecting out, the cashflows will beboth the contractual cashflows that are embedded inlease contracts and then there will be the non-contractual cashflows that obviously the owner expectsto get from the market when that property [is] leased orsold at some point in the future,’’ staff argued.

Accordingly, the staff team said they could see noreason why it would not be possible to apply the receiv-able and residual approach to a property that would beleased out to another party.

How the leasing industry will react to the June 13-14discussions remains to be seen. However, during anApril 11 roundtable meeting focused on the August2010 exposure draft, it provoked leasing specialistMark Venus to hit out at the ‘‘fictions’’ relied on to jus-tify the need for a performance-obligation approach.

‘‘Derecognition in the case of any bank-owned orthird-party type lessor is not synonymous with takingup-front revenue,’’ Venus said. ‘‘And I think that has tobe understood by all the board members because athird-party lessor buys an asset and leases it in the sameinstant to his lessee.’’

Venus continued, ‘‘There is no upfront revenue torecognize because the lessor is making a financial mar-gin to recognize month after month through the life ofthe lease.’’ Moreover, ‘‘that is how third-party leaseswork. You have to know that because this notion that’lessors can take up-front revenue and that’s a worryand concerning’ is something that has colored theboard’s debates for the last two or three years. It is sim-ply a misapprehension of how third-party lessors dotheir business.’’

He conceded that a manufacturer lessor might wellrecognize day-one revenue. But, he wanted to know,why would it be reprehensible for someone ‘‘who hasjust manufactured something [to recognize] some up-front revenue that he would have got anyway if he hadsold it to a dealer or to a third-party lessor?’’

The notion of requiring a performance-obligationmodel to spread revenue ‘‘is a misapprehension of howleasing actually works at the beginning,’’ he concluded.

BY STEPHEN BOUVIER

� Text of the observer notes for the June 13 and 14board discussions can be found on the Web athttp://www.ifrs.org.

� For a discussion on the ‘‘right-of-use’’ accountingmodel, see 5118, Leases: Lessee Perspective — Se-lected Topics, at 5118.VI.E.2.a.

Practitioners Concerned Over GASB Pension Overhaul Proposals

N EW YORK—Governmental entities should beaware that new pension accounting rules beingproposed by the Governmental Accounting Stan-

dards Board means a complete overhaul from currentmethodologies, some of which are causing concerns,practitioners told BNA July 11.

Practitioners said among proposed changes, entitiesshould pay close attention to three key revisions:

s the decoupling of pension expense from funding;s requiring the unfunded liability to be reported on

the face of the finance statement as opposed to the foot-notes; and

s the discount rate at which an entity can discountits liabilities.

Exposure Drafts. GASB issued the proposals July 8 asexposure drafts titled, Accounting and Financial Re-porting for Pensions—an amendment of GASB State-ment No. 27 and Financial Reporting for PensionPlans—an amendment of GASB Statement No. 25 (Seerelated article in this issue).

The first addresses reporting by governments thatprovide pensions to their employees and the second ad-dresses the reporting by the pension plans that admin-ister those benefits.

The board is proposing a two-pronged effective date:for the very largest of single employer plans with netposition of over $1 billion would be effective for periodsbeginning after June 15, 2012, and all other plans wouldbe effective one year later.

Net Pension Liability Not Measureable. Specific to netpension liability, GASB proposes that a governmentwould be required to report in its financial statements anet pension liability equal to the difference between thetotal pension liability and the value of assets set asidein a pension plan to pay benefits to current employees,retirees and their beneficiaries.

GASB said pensions are a form of compensation, likesalaries, and thus the costs and obligations associatedwith them should be recorded as they are earned by theemployees, rather than when contributions are made bythe government to a pension plan or when benefit pay-ments are made to retirees.

‘‘The fact that pensions earned today are not re-ceived by the employees until some point in the futurewhen they retire means that a government has an obli-gation now to provide these benefits at that futuretime,’’ according to a GASB summary report of the pro-posal.

Practitioners cite three reasons why this would beproblematic:

s net pension liability often is not measureable withsufficient reliability;

s resulting volatility; ands potential to overshadow other disclosures on

those statements, thus giving them the appearance ofbeing immaterial.

‘‘The net pension liability often is not measurablewith sufficient reliability because the cost of a pensionbenefit is an estimate—it is a projection—and it canchange,’’ Keith Brainard, director of research for Na-

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tional Association of State Retirement Administratorstold BNA July 11.

In recent years a number of states have madechanges to their pension benefits that reduced their un-funded pension liability. Colorado, for example, re-duced its pension liability by about one third over al-most $9 billion dollars. Minnesota also reduced its pen-sion liability by about $2 billion. Other states—recently,New Jersey, Maine, South Dakota, a number of cities inTexas—have done similar reductions. ‘‘So the idea thata pension liability is immutable and certain is really notfounded in every case,’’ Brainard said.

‘‘The net pension liability often is not measurable

with sufficient reliability because the cost of a

pension benefit is an estimate—it is a projection—and

it can change.’’

KEITH BRAINARD,NATIONAL ASSOCIATION OF STATE RETIREMENT

ADMINISTRATORS

In recent weeks, courts in Minnesota and Coloradoboth ruled that those states did have the authority tomake the changes to pension benefits that they made,which significantly reduced their unfunded pension li-abilities. ‘‘I think a part of GASB’s reasoning was thatthese pension liabilities were largely immutable andthose court cases suggest that they’re not as immutableas people may have thought,’’ Brainard said.

Other practitioners note that the numbers on the faceof the financial statements will now become more vola-tile. Moreover, they point to the potential of misunder-standing the pension liability stemming from the factthat an entity cannot use its pension expense as fund-ing. ‘‘So what’s the right number—is it the fundingnumber, is it the accounting number? It will just lead tosome confusion I think,’’ Kim Nicholl, Senior VicePresident, Consulting Actuary at Segal, told BNA July11.

Nicholl cautioned that planned sponsors are going tohave to make a concerted effort to educate their stake-holders about the change. ‘‘Right now those agenciesthat underwrite bonds and credit risks and so forth,they’re aware of these liabilities,’’ she said. ‘‘It’s not asif they’re not known, so they’re already being taken intoaccount. I just think it’s going to add fuel to the fire ofnegativity about pension plans just because this un-funded liability on the balance sheet will be volatile.’’

Among the reasons GASB made the change is theevolution of its conceptual framework since the issu-ance of Statements 25 and 26 in 1994. ‘‘Essentially whatthe board has done is issue a concept statement on ele-ments of financial statements, and we defined specifi-cally what an asset is and what a liability is and, basedon those definitions and our review of the pension stan-dards, we came to the conclusion that this transactionmeets the definition of a liability and should be reportedon the face of the financial statements to present a faith-ful representation of the financial position of the gov-ernment,’’ Dave Bean, Director of Research and Tech-nical Activities at GASB told BNA July 12.

Backdrop to Issues. This is the third due processdocument from the board on this topic, following morethan five years of public outreach from January 2006progressing toward the start of deliberations in April2008.

In March 2009 GASB issued an invitation to com-ment followed by a preliminary views document in June2010 (6 APPR 449, 6/25/10). The board is seeking com-ments by Sept. 30, 2011 on its current exposure draftand will hold public hearings this fall in New York, Chi-cago and San Francisco, followed by redeliberations to-wards issuing a final standard July 2012.

GASB Chairman Robert Attmore, in a published re-lease, said users of governmental financial reports havesaid that current standards do not provide enough in-formation for them to adequately understand the costand the liability for benefits promised to active and re-tired employees.

Attmore stated that the standards are aimed at mak-ing financial reporting of pensions more transparent,comparable and useful to citizens, legislators, and bondanalysts. They are focused more on financial reportingas opposed to how governments approach the fundingof their pension plans. ‘‘Pension funding is a policy de-cision made by government officials,’’ he said.

The proposals also include note disclosures and re-quired supplemental information. Moreover, the boardproposes more detailed guidance related to the crossover rate, the broader discount rate, and the applicationof cost sharing multiple employer plans.

Decoupling Financial Reporting From Funding. Anotherkey issue, practitioners highlighted, is the GASB’s deci-sion to focus solely on accounting and financial report-ing as opposed to how governments approach the fund-ing of their pension plans. Currently, there is a closeconnection between the ways many governments fundpensions and how they account for and report informa-tion about them in audited financial reports.

‘‘GASB has said that they are an accounting

organization, not a policy setting organization, and

they should not be in the business of setting or

influencing public policy and that funding a

pension benefit is a matter of public policy.’’

KEITH BRAINARD,NATIONAL ASSOCIATION OF STATE RETIREMENT

ADMINISTRATORS

The proposals would separate how the accountingand financial reporting is determined from how pen-sions are funded. ‘‘Should the proposals become ac-counting and financial reporting standards in the fu-ture, governments would not be required to mirror theaccounting and financial reporting changes in theirfunding approaches,’’ said the GASB summary.

Practitioners said this delinking of accounting forfunding is disappointing, since it was highly useful tothe public pension community and to promoting thefunding of pension benefits. ‘‘GASB has said that they

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are an accounting organization, not a policy setting or-ganization, and they should not be in the business ofsetting or influencing public policy and that funding apension benefit is a matter of public policy,’’ Brainardsaid. ‘‘I don’t disagree with that I understand whythey’re doing that, however, it has been enormouslyuseful to the public pension community.’’

Other Practitioners like Nicholl stated that actuariesand planned sponsors have relied on the annual re-quired contribution to measure progress toward fund-ing and will therefore have to come up with anotherstandard. She said, however, that GASB’s reasoning isunderstandable.

From GASB’s viewpoint, the question becomes howmany governments currently are following the param-eters established by the board. ‘‘We’ve heard varyingdegrees of application, but in some cases we heard atleast of one study where less than 50 percent of the gov-ernments were currently meeting the GASB param-eters, so the idea that the accounting standards andhow a pension is funded are permanently joined at thehip isn’t necessarily reflected in practice,’’ said Bean.

Moreover, Bean said, though this does take place inmany large plans, ‘‘the board looked at the results andthe application, particularly of some of the amortizationperiods, and began to question whether it was appropri-ate for accounting purposes.’’

‘‘It may be well appropriate for funding purposes butwe began to question whether those were appropriatefor accounting,’’ Bean said.

Rate at Which Entity Can Discount Liabilities. Related toissues pertinent to the rate at which an entity can dis-count its liabilities, for plan sponsors making actuari-

ally determined contributions, the GASB proposal doesnot change what they will do, that is, they can continueto use a long term rate of return.

However, for those plans whereby they are not mak-ing the actuarially required contribution (for whateverreason), plan sponsors now need to discount their li-abilities using a short term assumption—like a bondrate—to the extent that their projected assets will notcover their projected benefits.

‘‘What that will do is it will increase the liabilities,’’said Nicholl. ‘‘And the other issue is the volatility issue,so when bond rates jump around, that will also intro-duce another volatility component,’’ she said.

GASB said it is currently in the process of field test-ing the proposals and would have a better understand-ing once the field test is completed. ‘‘There are manypositions associated with the discount rate, we’ve hadadvocates for a risk free rate, we’ve had advocates for afiscal bond index rate, and we’ve had advocates for along term rate,’’ said Bean.

BY DENISE LUGO

� For a copy of the GASB exposure drafts includ-ing how to submit comments or participate in thepublic hearings go to www.gasb.org.

� For a brief discussion on GAS 27, see 5140-2nd,Governmental Accounting: Fundamental Principles,at 5140.III.B.3.a.(1). For a brief discussion on GAS25, see 5140-2nd, Governmental Accounting: Funda-mental Principles, at 5140.VI.B.2.

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Accounting&DisclosureFinancial Instruments

FASB-IASB Craft Criteria RegardingAllocation of Impaired Loans in Categories

N ORWALK, Conn.—Members of the Financial Ac-counting Standards Board and the InternationalAccounting Standards Board—continuing ongo-

ing redeliberations on the impairments portion of ac-counting for financial instruments—tentatively agreedJuly 20 that a ‘‘credit risk management approach’’would be the criteria entities should use to determinehow impaired loans should be allocated and when theyshould be transferred between categories or buckets.

The decision was a continuation of discussions heldat a June board meeting whereby they tentativelyagreed to continue to develop a ‘‘three bucket’’ ex-pected loss approach for the impairment of financial as-sets (loans).

Specifically, the guiding principle of the ‘‘threebucket’’ approach is to reflect the general pattern of thedeterioration of credit quality of loans, according to ahandout crafted by staff accountants. At that meeting,the boards asked staff to research criteria to determinewhen to allocate assets to and transfer assets betweencategories, referred to as bucket 1, bucket 2 and bucket3.

The boards July 20 tentatively decided that under acredit risk management approach, entities would be re-quired to follow a ‘‘relative credit risk model,’’ wherebythe overall objective would be to reflect the credit dete-rioration or improvement in loans, making maximumuse of credit risk management practices.

The boards considered but rejected an ‘‘event basedapproach,’’ which would have required transfers to bebased on specific events that would indicate the exist-ence of credit deterioration or credit improvements.

FASB Chairman Leslie Seidman said it was impor-tant that the boards signal that the model being devel-oped is based on expected losses and cautioned againstuse of the word ‘‘event.’’ Seidman suggested wordingsuch as ‘‘indicators’’ as a much more sensitive thresh-old that might signal a change in accounting rules.

Seidman said, moreover, she favored a relative ap-proach since it would better translate to a wider rangeof asset classes. ‘‘I can’t imagine a consumer companylooking at its trade receivables and thinking aboutcredit ratings for them, whereas if we start talkingabout deterioration or changes in collectability, I thinkthey do think about it that way, even if it’s in terms ofdelinquency or other more common ways of looking atloan losses in those types of situations,’’ she said.

‘‘It is important under any approach that the boards. . . communicate more clearly that we’re talking aboutapplication at a disaggregated level, so that similar as-set classes are being evaluated discretely,’’ said Sei-dman.

Make Abuse as Difficult as Possible. Under discussionsof ‘‘a credit risk management approach,’’ in addition toa relative credit risk model, the boards alsoconsidered—but rejected—use of an ‘‘absolute creditrisk model’’ whereby the buckets (categories) wouldalign with the credit quality of loans. Board membersfelt that the ‘‘relative credit risk model’’ would be a hy-brid approach that would resolve concerns about otherapproaches outlined by staff.

IASB Chairman Hans Hoogervorst cautioned theboards that the issue of ‘‘impairment’’ in general was anarea whereby whatever the boards decided would ‘‘re-main highly judgmental and highly vulnerable to earn-ings management. It has always been so,’’ said Hooger-vorst. ‘‘The current circumstances around certain sov-ereign debt are a prime example of massive earningsmanagement, no matter how much we wanted to pre-vent it with IAS 39,’’ he said.

He stated moreover that the boards would not beable to perfect the accounting rules but could make‘‘abuse as difficult as possible.’’ ‘‘I think staff did a veryconvincing job explaining that the events based ap-proach is not going to work because in the end it is aholistic judgment,’’ Hoogervorst said. ‘‘If you look atthe present situation around Greek debt, if you just lookat the impairment struggles in IAS 39, I could only findone—that is, that the country is in serious financial dif-ficulties, which is still disputed by some, but seems tobe the case,’’ he said.

Background to Deliberations. For the IASB, impair-ments falls under Phase II of its broader project to re-place IAS 39, Financial Instruments: Recognition andMeasurement. Based on its project summary, the IASBis expected to issue a final accounting standard onPhase II in the third quarter this year.

On January 31, 2011, the FASB and the IASB pro-posed a common solution for impairment accounting,Supplementary Document—Accounting for FinancialInstruments and Revisions to the Accounting for De-rivative Instruments and Hedging Activities—Impairment (7 APPR 93, 2/4/11). The comment periodended on April 1, 2011. The proposals were publishedas a supplement to an exposure draft published by theIASB in November 2009, and a separate FASB exposuredraft published in May 2010.

Operationally Simple. The boards’ July 20 discussionsalso focused on—from their June board meeting—discussions related to the calculation of the allowancebalance for Bucket 1 of the ‘three bucket approach’(Buckets 1, 2, 3). Bucket 1 in the context of open port-folios is comprised of loans that are evaluated collec-tively and do not meet the criteria for Buckets 2 or 3,according to a board handout.

In June the boards said that for financial assets in thelatter two buckets, the allowance balance would equal

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remaining lifetime expected credit losses. For bucket 1,they decided that the allowance balance would be equalto a portion of the remaining lifetime expected creditlosses on the financial assets in that bucket. Staff pre-sented three alternative calculations for the allowancebalance for bucket 1.

The boards July 20 agreed with staff recommenda-tions that the calculation of the allowance balance inBucket 1 be as operationally simply as possible, eventhough that means creating a bright line rule based onan arbitrary amount.

In addition, they tentatively agreed to consider thefollowing two methods for the calculation of the allow-ance balance for bucket one:

s Method A: 12 months’ worth of losses expected tooccur on the financial assets, or for the remaining ex-pected life if that is less than 12 months; and

s Method B: 24 months’ worth of losses expected tooccur on the financial assets, or for the remaining ex-pected life if that is less than 24 months.

Moreover, the boards said they would require the useof an annual loss rate.

IASB member Patrick Finnegan said both methodswould work and suggested the introduction of the useof ‘‘watch lists.’’

‘‘I think it should be developed and disclosed bybucket. So if you’ve got stuff that you think could tran-sition into bucket 2, then I want to know about it, evenif you didn’t provide for it,’’ said Finnegan. ‘‘If you’vegot stuff that you think is going to transition to bucket3, I want to know about that, too. I want to know whatyour internal thinking is about potential problemloans.’’

FASB member Harold Schroeder said he did a per-sonal mock up to see how both Methods A and B wouldapply to to commercial banks in the U.S. (from periods1948 to 2010) and found that method A would have vir-tually no impact on U.S. banks.

BY DENISE LUGO

� For a copy of the board’s handout related to thisdiscussion go to: http://www.ifrs.org.

Leasing

FASB Votes Against RetainingLeveraged Lease Literature in Final Standard

N ORWALK, Conn.—Members of the Financial Ac-counting Standards Board July 13 voted againstretaining leveraged lease accounting literature—

very unique rules under U.S generally accepted ac-counting principles related to tax advantagedtransactions—in a final lease accounting standard.

FASB said leveraged lease accounting rules do notexist in international financial reporting standards(IFRS), and for the sake of improving comparability andconvergence, there was no reason to retain those spe-cialized accounting provisions. Board members alsosaid that regular lease accounting rules would capturethe transaction and the underlying economics similar toother leasing transactions by lessors. Moreover, FASBsaid that there are many tax-advantaged transactionsthat do not get special accounting rules.

The board has been in joint redeliberations with theInternational Accounting Standards Board towards

issuing—tentatively set for the fourth quarter thisyear—a final lease accounting standard that is con-verged. The July 13 meeting was a FASB-only discus-sion focused on the leveraged lease issue.

The board also voted 5-to-2 against grandfatheringexisting leveraged lease transactions. ‘‘These are trans-actions that were entered into with an understanding ofwhat the accounting was and understanding of what thetax treatment was etcetera, and I would submit thatwhen you fundamentally change the balance sheettreatment and the income statement treatment such asthese, these transactions would probably not have beenentered into,’’ FASB Chairman Leslie Seidman said. ‘‘Idon’t mean that there’s no economic substance tothem—there is economic substance to them—but Ithink that it’s such a radical change, it strikes me as po-tentially punitive,’’ she said. The board’s decision alignswith advice given by members of its Investor’s Techni-cal Advisory Committee at a July 12 meeting.

Leveraged Leases as Rules for Lessors. FASB’s deci-sion also aligned with its staff’s viewpoint and meansthat lessors would be required to account for leveragedleases the same as all other leases, that is, in accor-dance with the proposed new leases requirements forlessors. This would require the associated nonrecoursedebt to be presented gross on the balance sheet. In ad-dition, income recognition on a leveraged lease wouldnot be different from any other lease. Moreover, theafter-tax yield recognition required for leveraged leasesunder current guidance would be precluded.

‘‘I think the current leveraged lease accountingmodel does reflect the economics of the transactions,’’FASB member Lawrence Smith said. ‘‘At the same time,I acknowledge that there are a lot of other transactionsthat are significantly influenced by the tax attributes ofthose transactions, and we do not do specialized ac-counting for those.’’

That raises a question as to whether the accountingof leveraged leases is right or whether the other ac-counting is right, Smith said. ‘‘Seeing where we’re go-ing, and also considering the fact that the IASB will noteven entertain adopting leveraged lease accounting, Ireluctantly have to agree with the staff recommenda-tion,’’ he said. Another board member, Thomas Lins-meier, said he agreed with Smith and added that if thiswas something the board needed to address, ‘‘it’s a taxaccounting issue that we ought to be considering ratherthan developing a specialized model.’’

Project Background. FASB and the International Ac-counting Standards Board on Aug. 17, 2010 published,for public comment, an Exposure Draft, Leases (6APPR 590, 8/20/10). The comment period for the Expo-sure Draft ended on Dec. 15, 2010. The leasing projectis aimed at developing a new approach to lease ac-counting that would ensure that assets and liabilitiesarising under leases are recognized in the statement offinancial position, according to a summary written bystaff accountants at the FASB.

BY DENISE LUGO

� For a discussion on leveraged leases, see 5114,Accounting for Leases: Fundamental Principles, at5114.VI.E.

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Revenue Recognition

FASB Votes Against Alternative TransitionFor Private Cos. on Revenue Recognition

N ORWALK, Conn.—Private companies will not beprovided with an alternative method in applyingthe transition requirements in a proposed revenue

recognition accounting standard, a majority of the Fi-nancial Accounting Standards Board said July 13.

FASB, by a 6-to-1 vote, said private companies willtherefore be required to apply proposed revenue recog-nition guidance retrospectively in accordance withFASB (Accounting Standards Codification) ASC 250,Accounting Changes and Error Corrections, and as pro-posed in its exposure draft, Revenue from Contract withCustomer, which was issued jointly with the Interna-tional Accounting Standards Board June 2010. Theboards are expected to re-expose their viewpoints dur-ing the third quarter this year for public comment.

Private companies have available to them thealternative—under current U.S. generally accepted ac-counting principles—of presenting only one year finan-cial results, FASB members said. Meaning, a privatecompany is not required to present comparative finan-cial statements.

‘‘I think it is very important that the basis for conclu-sions indicates that there is relief due to the fact thatonly one year can be presented,’’ said FASB memberLawrence Smith. ‘‘But it maximizes the extent to whichusers that are involved and demand comparability getcomparability.’’

FASB Chairman Leslie Seidman added that since theboard was discussing revenue ‘‘in the cases where morethan one period is presented I think they need to be pre-sented on a comparable basis.’’

Preparers Do Not Support Retrospective Application. Atthe June 14 joint board meeting the FASB and the IASB,which have been in joint redeliberations on the expo-sure draft since January, affirmed their proposed viewthat an entity should apply the proposed revenue recog-nition guidance on a retrospective basis. The boardsalso decided to provide four practical expedients thatan entity may select and apply.

Outreach staff performed with nonpublic entity con-stituents including financial statement users, preparersand auditors to evaluate whether nonpublic entitiesshould be provided with an alternative transition re-quirement, revealed that a majority of preparers do notsupport retrospective application, a FASB staff membersaid during the July 13 FASB meeting. Preparers said itwould not be operational or practical in many cases andthe costs to comply would be significant, the staff per-son said.

In addition, most lenders to nonpublic entities havestated that they require a minimum of two years of com-parable financial information because they need this in-put for their lending assessment models and in makingcredit decisions.

Moreover, some lenders indicated they would acceptprospective application because of cost-benefit con-cerns if the effect on comparability was not significantor upon request if management directly provides themwith comparable unaudited financial information, thestaff person said.

FASB members said would consider a deferred effec-tive date for private companies but said they would holdthat discussion at a later meeting. Some nonpublic enti-ties said that concerns about applying retrospective ap-plication could be mitigated by providing them with anextended implementation period such as two to threeyears beyond the effective date for public entities, ac-cording to a board handout.

BY DENISE LUGO

� For a copy of the board’s revenue recognitionproject page go to: http://www.fasb.org.

Disclosures

FASB Crafts Disclosure CriteriaFor Investment Firms Financial Highlights

N ORWALK, Conn.—The Financial AccountingStandards Board July 13 said investment com-pany disclosures should show an investment com-

pany’s calculation of its financial highlights at the con-solidated level if it consolidates another entity.

Board members said, however, that the financialhighlights of the consolidated entity should excludeamounts attributable to the noncontrolling interestholders of the investment property subsidiaries.

Discussions were in relation to an ongoing project tocraft criteria for what qualifies as an investment com-pany. It is part of a broader joint project with the Inter-national Accounting Standards Board on consolidationpolicy.

FASB is expected to issue an exposure draft duringthe third quarter this year with a comment period set tocoincide with the end date of the comment period of theIASB’s exposure draft on investment entities, which isexpected to be 120 days.

At its June 8 discussions, FASB decided that an in-vestment company would be required to consolidate aninvestment property entity when it has a controlling fi-nancial interest in the investment property entity.

For purposes of computing the ratios in its financialhighlights, an investment company, however, is re-quired to use the expense and net investment incomeamounts presented in the entities’ statement of opera-tions.

If the current disclosures were not amended, the fi-nancial highlights of an investment company would in-clude amounts related to the investment company’sconsolidated investment property subsidiaries, accord-ing to a staff person during the board’s July 13 discus-sions.

The nature of the expenses and income of an invest-ment company are typically different from those of aninvestment property entity. An investment company’sincome usually included dividend and interest incomewhile its expenses include investment advisory fees, ad-ministrative fees, shareholder service costs, distributionexpenses, custodial fees, interest expense and taxes,the staff person said.

On the other hand, an investment property entity’sincome generally includes rental income and develop-ment and management fees, while its expenses includeinterest expense, general and administrative expensesand property taxes.

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Presentation Requirements. FASB’s July 13meeting—a solo discussion by that board—also focusedon presentation requirements for the statement ofchanges in net assets and the calculation of the finan-cial highlights when an investment company is requiredto consolidate an investment property subsidiary thathas a noncontrolling interest holder.

The board tentatively decided that an investmentcompany would be required to calculate an expense ra-tio that excludes the effects of consolidating an invest-ment property entity. In addition, the board decidedthat noncontrolling interests in a consolidated invest-ment property entity should be presented in accordancewith ASC 810 as follows:

s the statement of assets and liabilities would reflectthe noncontrolling interest separately from the equityheld by the parent entity’s investors;

s the statement of operations would include an allo-cation of the increase in net assets from operations (netincome) between the parent entity’s investors and thenoncontrolling interest; and

s the statement of changes in net assets would sepa-rately identify changes in net assets that are attributedto the parent entity’s investors and those that are attrib-uted to the noncontrolling interest holders.

BY DENISE LUGO

� For a copy of the overall project on investmentcompanies including a summary of current deci-sions go to: http://www.fasb.org.

Financial Instruments

Seidman Says FASB to EvaluateJoint Discussions With IASB on Hedging

N ORWALK, Conn.—Financial Accounting Stan-dards Board Chairman Leslie Seidman July 12said one of the board’s priorities over the summer

will be ‘‘to get up to speed’’ on the changes that havebeen made from the exposure draft that the Interna-tional Accounting Standards Board issued on hedge ac-counting to evaluate whether and how they have re-sponded to the comments that they have received.

Differences already exist between international fi-nancial reporting standards and U.S. generally ac-cepted accounting principles in hedge accounting. TheIASB’s proposed revisions in its exposure draft wouldresult in hedge accounting guidance that would differ infurther aspects compared to the FASB’s current andproposed hedge accounting guidance.

At a meeting of the FASB with its Investors Techni-cal Advisory Committee, Seidman said the board wouldfactor that into its evaluation of how to proceed relativeto what the IASB exposed. Seidman’s comments fol-lowed a suggestion by some ITAC members that theFASB move more urgently toward engaging in jointwork on hedging accounting stating that the IASB’sproposal ‘‘was quite radical’’.

‘‘If the [IASB’s] train’s leaving the station inLondon—and their proposal I thought was quiteradical—if that’s where they’re continuing to head,there might be some urgency [from FASB] to move thisfrom an investor standpoint,’’ said Gregory Jonas, Man-

ager Director, Morgan Stanley, Research and a memberof ITAC.

Seidman said that she hoped the IASB would con-sider the changes FASB made to classification and mea-surement and likewise for FASB to consider thechanges the IASB has made to hedging to ‘‘ see ifthere’s an opportunity for us to get back on the samepage.’’

Moreover, she noted that neither board was in a po-sition to make a commitment ‘‘like that as yet.’’ ‘‘Butwe’ve both committed to get educated and take a lookat it in the near term,’’ Seidman said.

Background. For the IASB, hedge accounting makesup the third phase of its broader effort to replace IAS 39Financial Instruments: Recognition and Measurement .The objective of this phase is to improve the usefulnessof financial statements for users by fundamentally re-considering the current hedge accounting require-ments, according to an IASB summary. The board isconsidering hedge accounting of both financial andnon-financial hedged items.

In December 2010 the IASB issued an exposure draftwith a comment deadline that ended March 9, 2011 toaddresses general hedge accounting, which is expectedto be finalized by the end of the year. IASB has alsobeen redeliberating macro or portfolio hedge account-ing and is expected to issue an exposure document dur-ing the third quarter this year.

On Feb. 9, 2011, the FASB issued a DiscussionPaper—Invitation to Comment—Selected Issues aboutHedge Accounting to solicit input on the IASB’s Expo-sure Draft, Hedge Accounting, in order to improve, sim-plify, and converge the financial reporting requirementsfor hedging activities. The comment period ended onApril 25, 2011.

Getting the type of information users were interestedin from a hedging standard would be challenging, FASBmember Thomas Linsmeier stated. Linsmeier said,however, that he was hopeful the boards would be ableto move forward in converging on accounting for finan-cial instruments.

Sending SEC Letter on Work Plan. Separately, ITACmembers said they were considering sending a letter tothe U.S. Securities and Exchange Commission relatedto its work plan.

ITAC said views among the committee on the issuehowever were ‘‘shockingly’’ diverse.

BY DENISE LUGO

Financial Instruments

IFRS 9 Will Permit ‘Judgment’ on ImpairmentOf Greek Debt, Says IASB’s Hoogervorst

L ondon and Zurich—The adoption of InternationalFinancial Reporting Standard 9, Financial Instru-ments, by the European Union would permit enti-

ties to exercise ‘‘judgment’’ when assessing impairmentcharges on Greek debt, the chairman of the Interna-tional Accounting Standards Board, Hans Hoogervorst,said July 5.

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Specifically—addressing the first day of the 2011IFRS annual conference—Hoogervorst said, ‘‘The en-dorsement of IFRS by Europe has been extremely im-portant for IFRS. We still have a small problem nowwith IFRS 9. I think there are many people who nowthink that they should adopt it quickly because it givesa little bit more leeway in terms of the Greek govern-ment bonds.’’

The former Dutch securities regulator, who sinceJuly 1 has headed the London-based standards-setter,continued, ‘‘Right now, most of them are held availablefor sale. If you impair them, you have to impair them atthe going market rate—not very high, I believe, 30percent—whereas if they are at amortized cost, as IFRS9 makes possible, then you still have the possibility ofmaking at least some sort of judgement.’’

U.S. Role. Later in his keynote address to the Zurichaudience, Hoogervorst said he was, ‘‘convinced that theUnited States, in the end, will want to maintain its posi-tion of leadership in international financial reporting’’and eventually endorse international standards for useby domestic listed entities.

‘‘An important piece of the IFRS jigsaw is encourag-ing the United States to come on board. IFRSs are al-ready permitted for use by [SEC foreign registrants]and the SEC has already indicated that later this year, itwill make a decision about incorporating IFRSs into thereporting regime for U.S.companies.

‘‘The United States is the largest national capitalmarket in the world, with some of the most developedand sophisticated national accounting standards. Ittherefore seems perfectly reasonable to me that theSEC has taken its time to make the appropriate transi-tional agreements.’’

Not an ‘Easy Choice.’ But in marked contrast to themore strident tone of his predecessor, Sir DavidTweedie, Hoogervorst conceded the leap to interna-tional standards was far from easy for domestic capitalmarkets to contemplate and commit to.

‘‘Let us be clear, this is not an easy choice for the USto make,’’ Hoogervorst said. ‘‘The rationale for Euro-pean adoption was straightforward. You cannot have acommon market with 25 different ways of accountingfor the same transaction. The United States already hashigh-quality mature financial reporting standards. Infact, U.S. expertise has been a very positive influenceon the development of IFRS.

‘‘So, objections regarding the cost of transition andthe perceived loss of sovereignty must be handled in asensitive manner. I think it is only rational the UnitedStates would have an endorsement protocol for newand amended IFRSs. Other countries do the same. Dif-ficult as the position may be, it is hard to imagine thepossibility of the United States not taking a positive de-cision.’’

‘‘U.S. investors invest globally, and US companiesseek international capital, and it is in the economic in-terests of the US to adopt IFRS,’’ Hoogervorst contin-ued. ‘‘Is China going to accept U.S. GAAP? As a signa-tory to G20 communiques, the U.S. has repeatedly ex-pressed support for global accounting standards. If youbelieve in a global language for financial reporting, thenIRFRS is the only game in town.

‘‘I am convinced that the United States, in the end,will want to maintain its position of leadership in inter-national financial reporting. And therefore it is veryhard to fathom a negative decision on the part of theSEC.’’

Along U.S. Adoption, Three Other Priorities. AlongsideU.S. adoption or endorsement of IFRSs, Hoogervorstsingled out three other key priorities for his new chair-manship:

s completion of the convergence agenda;s development of the post-convergence work pro-

gram; ands strengthening the IASB’s ‘‘institutional relation-

ships’’ with those impacted by its activities.

In relation to the delayed convergence projects—revenue recognition, lease accounting, and financial in-struments, plus the non-convergence insuranceproject—Hoogervorst said they must be completed ‘‘tothe highest possible standard and to do so in way thatbenefits from the inputs we received from the financialreporting community.’’

‘‘I have already mentioned that the banks have notbeen applying the incurred loss impairment model asintended,’’ Hoogervorst said. ‘‘In fact, I think IAS 39 hasbeen abused to such an extent that it is showing ratherugly stretch marks and it needs to be replaced by IFRS9 as soon as possible.’’

In relation to the longer-term work plan, he added,‘‘We will shortly publish a consultation document thatsets out some ideas but more importantly is designed tosolicit feedback from you. You will notice in this agendaconsultation we deliberately leave many questions openfor comment.

‘‘Everyone is asking us to complete the conceptualframework . . . it will be done. I think our future agendashould show we have a lot of jurisdictions on board thathave legitimate requests that wait for an answer.’’

In the context of performance reporting, the IASBchairman also noted the importance—perhaps as partof the future work program—of establishing a concep-tual basis for other comprehensive income. ‘‘If youcould come up with a sound definition of OCI, andtherefore also of P&L, I think we will have achieved amajor feat. I believe that P&L and OCI are both very im-portant.’’

Finally, in relation to the IASB’s institutional rela-tionships, Hoogervorst explained, ‘‘By this, I mean todeepen our engagement with those around the worldwho are impacted by our work and ensure that theyhave a sense of ownership and respect of the productthat we are developing for investors globally.’’

Tweedie’s Views. Hoogervorst’s message of outreachwas more conciliatory than the tone struck June 20 byhis IASB predecessor, Tweedie. Addressing a gatheringof the IFRS Advisory Council, Tweedie laid the blamefor the predicaments facing IASB squarely at the doorof external interference and FASB. ‘‘If one thing reallyannoys me it is the fact that people almost forget whatthe crisis was like two or three years ago,’’ Tweediesaid. ‘‘We were asked, by Europe, especially, to have areplacement on classification and measurement for useby 2009 year ends and we did it. The team bust a gut.’’

He added, ‘‘that’s when we started all the outreach.We invited FASB to join us and they didn’t want to. So

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what do we do? Turn round to Europe and say, ’sorry,we’re not going to bother, we’re going to just take ourtime and do it with FASB?’ There was no way we coulddo that. We had to do it.’’

Similarly, in relation to both insurance and consoli-dations, the former IASB chief noted that FASB trails inthe wake of the international board. ‘‘Secondly, insur-ance. We’ve been on this project almost since theboards started. FASB joined us three years ago. Theyare out of line. That is why they are behind.’’

On the issue of consolidations, he added, ‘‘We heldthat a year for them to catch up. And then they didn’tactually agree to deal with the control method. You onlyconsolidate legal subsidiaries if it is 50 percent plus oneof the equity in the United States. They didn’t agree. So,it is great in theory. We could hold everything up. Weare ahead on hedging, we are ahead on insurance, weare ahead on IFRS 9. So what do we do? We hear fromvarious people, ’Go your own way’; others say, ‘Youmust get a converged standard.’ We are trying to do thebest we can to bring them together.’’

Finally, in relation to the hedge accounting segmentof the boards financial instruments project, Tweediesaid, ‘‘Hedging. We invited them to join us. Theyweren’t there. They had a different method. We weretold that the whole hedging method had to be re-examined.’’ He added, ‘‘FASB put out a proposal whichmore or less kept the existing type of model, which wason the basis that hedge accounting is necessarily a badthing and, therefore, [you ought to] restrict it in the waythat it has been restricted in the past, whereas welooked at it on the basis that hedging is done for a par-ticular economic reason [and] we should reflect that inthe accounting. Two totally different philosophies.’’(see related story in this issue).

But as for why the boards had adopted an approachof working on free-standing proposals and then at-tempting to converge them, Tweedie was clear: ‘‘Wewould not have survived if we had said, ‘We’re not do-ing it, we’re going to wait.’ ’’

BY STEPHEN BOUVIER

Property, Plant and Equipment

FASB Seeking Comments on IssueRelated to in Substance Real Estate Scope

N ORWALK, Conn.—The Financial AccountingStandards Board July 20 said it is seeking com-ments on a narrow-scoped proposal clarifying if

an entity being deconsolidated is in substance real es-tate.

At issue is whether the parent is required to apply as-pects of accounting rules for property, plant and equip-ment, in order to derecognize the assets in its financialstatements.

Specifically, the guidance would resolve diversity inpractice about whether the guidance in ASC 360-20,Property, Plant and Equipment—Real Estate Sales, ap-plies to a parent that has the following profile: ceases tohave a controlling financial interest in a subsidiary thatis in substance real estate as a result of default on thesubsidiary’s nonrecourse debt.

FASB said it is seeking comments by Oct. 3 on theproposal, issued as an ASU titled, Property, Plant and

Equipment (Topic 360), Derecognition of in SubstanceReal Estate—a Scope Clarification, a consensus of theFASB Emerging Issues Task Force.

At its July 13 meeting, the board ratified the guid-ance, following the final consensus reached by itsEmerging Issues Task Force unit June 23.

The proposal says that the reporting entity shouldapply the guidance in Subtopic 360-20 to determinewhether to derecognize real estate and related debt inthe subsidiary that is an in substance real estate subsid-iary.

The EITF reached a consensus for exposure on thetopic June 23, which was deliberated as Issue 10-E, Ac-counting for Derecognition of in Substance Real Estate.

FASB member Thomas Linsmeier expressed reser-vations July 13 about the guidance stemming from theoutcome of an example outlined in a staff memo. ‘‘I amnot going to dissent to this simply because I’m going torejoice when we issue the final revenue recognitionstandard and get rid of the abomination called 360-20because it’s over engineered and results in silly out-comes,’’ Linsmeier said.

No additional recurring disclosures should be re-quired by the amendments resulting from this issue,FASB said.

In addition, the amendments would require prospec-tive application ‘‘to evaluate whether to derecognizereal estate owned by an in substance real estate subsid-iary.’’ Moreover, prior periods should not be adjustedeven if the reporting entity has continuing involvementwith a previously deconsolidated in substance real es-tate subsidiary. The transition disclosures for a changein accounting principle should be required in the periodthat a reporting entity adopts the amendments resultingfrom this issue with no additional transition disclosuresrequired, FASB said.

Ratified as GAAP. FASB also ratified as final generallyaccepted accounting principles (accounting standardsupdates) two additional issues ratified by the EITF June23:

s Issue 09-H, Health Care Entities: Presentation andDisclosure of Certain Patient Service Revenue, Provi-sion for Bad Debts, and the Allowance for Doubtful Ac-counts; and

s Issue 10-H, Fees Paid to the Federal Governmentby Health Insurers.

BY DENISE LUGO

� For a copy of the exposure draft including howto submit comments go to: http://www.fasb.org.

Governmental Accounting

GASB Issues Rules on Past Transactions,Hedge Accounting for Replaced Swaps

T he Governmental Accounting Standards BoardJuly 13 issued two new standards, one depictinghow past governmental transactions will continue

to affect financial statements in the future, and theother clarifying when and how hedge accounting con-tinues to be applied upon replacement of a governmententity’s swap counterparty or of a swap counterparty’scredit support provider.

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GASB Statement 63—Financial Reporting of De-ferred Outflows of Resources, Deferred Inflows of Re-sources, and Net Position—provides a new statement ofnet position format to report all assets, deferred out-flows of resources, liabilities, deferred inflows of re-sources, and net position. The net position is the net re-sidual amount of the other elements, GASB said. It is ef-fective for financial statements for periods beginningafter Dec. 15, 2011, with earlier application encouraged,GASB said.

GASB Statement 64, Derivative Instruments: Appli-cation of Hedge Accounting Termination Provisions (anamendment of GASB Statement No. 53), clarifies thatwhen certain conditions are met, the use of hedge ac-counting should not be terminated. It is effective for pe-riods beginning after June 15, 2011, with earlier appli-cation encouraged, GASB said.

GASB 63. GASB said that Statement 63 requires thatdeferred outflows of resources and deferred inflows ofresources be reported separately from assets and liabili-ties.

Statement 63 explains that ‘‘a deferred outflow of re-sources is a consumption of net assets that is applicableto a future reporting period. A government’s hedginginterest rate swap agreement in which the fair value be-comes negative would be an example of a deferred out-flow,’’ Under this principle, ‘‘if the hedge is determinedto be effectively offsetting the changes in fair value ofthe debt, the decrease in the fair value of the derivativeinstrument would be reported as a liability with a corre-sponding deferred outflow of resources to reflect thefact that this decrease is not expected to be recognizedin investment income in future periods,’’ GASB said.

For deferred inflow of resources under Statement 63,an acquisition of net assets applicable to a future re-porting period would meet that definition, GASB said.An example of a deferred inflow would be a toll road inwhich a government receives and up-front paymentfrom the road’s operator. Revenue from that paymentwould be recognized in future years because the ar-rangement that generated the up-front payment relatesto those future periods, GASB said.

GASB 64. Under GASB 64, the conditions underwhich hedge accounting should not be terminated are:

s ‘‘the collectability of swap payments is consideredto be probable;’’

s ‘‘the replacement of the counterparty or creditsupport provider meets the criteria of an assignment orin-substance assignment as described in the state-ment;’’ and

s ‘‘the counterparty or counterparty credit supportprovider (and not the government) has committed theact of default or termination event.’’

GASB Statement 53, which Statement 64 amends,provides for the use of hedge accounting for derivativesthat are effective hedges. But when a counterparty to aneffective hedge defaults or is terminated through nofault of the government and finds a suitable replace-ment, GASB said it concluded for Statement 64 that thegovernment’s position in effect remains unchanged.

� The two new GASB standards can be obtainedthrough www.gasb.org.

Contingencies

Interpretations Committee AgreesTo Add Project on Government Levy Issues

L ONDON—The International Financial ReportingStandards Interpretations Committee voted July 7to add an interpretive project to its agenda ad-

dressing how entities should account for governmentlevies on trading activities under International Account-ing Standard or IAS 37, Provisions, Contingent Liabili-ties and Contingent Assets.

The levies, among them the recently introduced U.K.banking levy and a French railway turnover tax, falloutside the scope of IAS 12, Income Taxes.

Noting the need to keep a tight rein on the issues ad-dressed by the project, committee chairman RobertGarnett said, ‘‘We’ve got to be aware of scope creep be-cause we have got to be mindful of reaching a consen-sus on a timely basis.’’

Project Scope. Ahead of the issue returning to thecommittee in September, staff were cleared, in line withtheir recommendation, to develop a project scope toclarify:

s the reference in IAS 37 to ‘‘no realistic alternativeto settling the obligation created by the event�; and

s the application the recognition criterion in para-graph 14(a) of IAS 37 in cases where a levy combinestwo features—the measurement of the levy is based onfinancial data in the previous annual financial reportingperiod, and it is virtually certain at the end of the previ-ous annual financial reporting period that the entity willhave to pay the levy.

Accounting Confusion. The Interpretations Committeereceived a request to clarify whether it is possible to ap-ply IFRIC 6 Liabilities arising from Participating in aSpecific Market—Waste Electrical and ElectronicEquipment to other levies.

A feature of these levies, such as the U.K. bank levy,is that they are charged on market participants only ifthe entity participates in its market on a specified futuredate. Another example is a French railway turnoverlevy, a recurring tax, which is payable by entities thatare in the market on Jan. 1, 2011 as a percentage of theprior year’s turnover.

However, because the levies often span two report-ing periods, constituents have asked the committee toclarify precisely when they should recognize levy pay-ments.

Doubts Over Outcome. One committee member ques-tioning the wisdom of adding the project was BerndHacker. He said, ‘‘We often have the situation wherepeople to a conclusion and don’t like the outcome.That’s when they come to us and ask us to reinterpretthe standard. Listening to what members say, the stan-dard is clear but some of the people in here don’t likethe answer.

‘‘I think the standard is quite clear and there is noprovision to set off, and I’m not sure that we can rein-terpret the standard. We can ask the IASB to rewrite thestandard, but I’m not sure that we can . . . [interpret]the standard just on the basis that we don’t like it.’’

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Driving the decision to explore the issue is the con-cern that the board might not restart its stalled IAS 37amendment project.

Overlap With IASB Project. Commenting on the issue,IASB member Philippe Danjou said July 7, ‘‘First, we donot know yet whether we will re-open IAS 37. That isone of the potential agenda items, but our decision willdepend on the support that our constituents will ex-press for that during the agenda consultation.’’

He continued, ‘‘Second, the scope of the revision ofIAS 37, if it were the same scope as we had in pro-cess. . . would not [touch on] the recognition criteria, itwas more about measurement and uncertain liabili-ties.’’

On the issue of the timeline for the board’s work, hisboard colleague Patricia McConnell said, ‘‘It would besome considerable period of time before [the board] is-sued a standard, and therefore guidance in the interimwould be very helpful.’’

The committee also agreed, as part of its work onany future interpretation, to consider the issue of in-terim reporting and levies.

Further as a basis for developing the interpretation,committee members confirmed that although ‘‘IFRIC 6is not directly applicable, . . . any conclusions drawn onthe application of IAS 37 to the levies must be consis-tent with the conclusions drawn in IFRIC 6.’’

BY STEPHEN BOUVIER

� Text of observer notes for the committee’s dis-cussions are available at http://www.ifrs.org alongwith a link to the official meeting recording.

Extractive Activities

Accounting Interpretations CommitteeClears Strip Mining Guidance for Publication

L ONDON—Members of the International FinancialReporting Standards Interpretations Committeevoted July 7 to issue as IFRIC 20, an interpretive

document setting out guidance on how entities shouldaccount for costs associated with strip mining activities.

The committee also agreed to recommend that theInternational Accounting Standards Board fixes thenew guidance with an effective date of Jan. 1, 2013.

Allocation Basis Dispute. Provoking the most conten-tious debate of the meeting, however, was the provisionin the guidance document dealing with how an entityshould allocate production stripping costs on initialmeasurement. Committee chairman Robert Garnett ex-plained that committee members instructed staff toamend ‘‘paragraph 16 to say that the entity should usean allocation basis that is based on a relevant produc-tion measure.’’

But in a set-back for those members calling for staffto conduct further last-minute outreach on the likelyimpact of the change on current practice, Garnett said,‘‘We have gone through a full due process. Based on theinformation that we have, we now have to come to a de-cision.’’

Due Process Steps. Addressing staff on the point, thecommittee’s chairman said, ‘‘In your discussions withthe industry, did you come across any descriptions ofhow they allocate costs of stripping in the productionphase on a basis other than production?’’ Staff con-firmed, ‘‘No, none at all.’’

During its consideration of the most appropriate al-location basis for production stripping costs, the com-mittee rejected any basis that was based on sales val-ues.

In relation to a further two sweep issues, the inter-pretations committee agreed to:

s amend paragraph 17 of the near final interpreta-tion in order to acknowledge that entities might use ei-ther a cost or revaluation alternative for subsequentmeasurement of the stripping-activity asset; and

s remove paragraphs 12 and 13 of the draft inter-pretation.

Summary of Earlier Decisions. Ahead of presentingtheir substantive recommendations to the committee,staff outlined key differences between the draft inter-pretation and the near final draft:

s in the background section of the interpretation,the committee has removed the concepts of routinecosts and stripping campaign and expanded instead onthe notion that two benefits might accrue to an entitywhen it undertakes stripping activity—current periodinventory and improved access for the future;

s made no changes to the scope of the interpreta-tion;

s in the consensus section of the document, thecommittee has revised some concepts—namely aligningthe recognition criteria, staff noted, more closely withthe principles in IAS 16. Additionally, the interpretationnow follows what staff described as a components ap-proach;

s renamed the stripping campaign component asthe stripping activity asset, which, staff said, is still ac-counted for as an addition to an existing asset, but isnow referred to as forming part of an existing asset; and

s made no substantive changes in relation to subse-quent measurement issues.

The interpretations committee added the mining-costs issue to its agenda in January 2010. In August2010 it published for public comment a draft interpreta-tion, Stripping Costs in the Production Phase of a Sur-face Mine. The comment deadline on that documentended on Nov. 30.

BY STEPHEN BOUVIER

� Text of the observer notes accompanying thecommittee’s discussions can be found on the Webat http://www.ifrs.org.

Employee Benefit Plans

GASB Seeking Public CommentsOn Public Pension Accounting Revisions

N ORWALK, Conn.—The Governmental AccountingStandards Board said July 8 that it is seeking com-ments on proposed revisions to pension account-

ing rules that would require, among other changes,state and local governments to report the unfunded por-

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tion of their retirement plans as a liability on their bal-ance sheets.

At present, the difference between a state or localgovernment’s total pension obligation and assets avail-able for benefits, referred to as the unfunded liability, isdisclosed in the notes, but does not appear on the faceof the balance sheet.

‘‘Recognition in the financial statements, alongsideother liabilities such as outstanding bonds, claims andjudgments and long-term leases, will clearly put thepension liability on an equal footing with other long-term obligations,’’ GASB said.

The widely anticipated revisions are expected to pro-vide transparency regarding the size and condition ofgovernmental pension funds as well as address any ac-counting deficiencies. Some groups, however, said as-pects of the changes could prove challenging.

‘‘Government sponsors and their defined benefitpension plans will be challenged by the tough newchanges to its regulations that GASB is proposing,’’ theNational Association of State Retirement Administra-tors and the National Council on Teacher Retirementsaid in a July 7 joint release. ‘‘However, given the delib-erative, thorough process GASB has followed in devel-oping them, we are hopeful that on balance, these in-dustry changes may ultimately help alleviate concernsabout transparency, consistency and comparability,thereby strengthening public confidence in state and lo-cal pension accounting and reporting,’’ they said.

Measuring Pension Liability. Other provisions of theproposals include clarifications of how governmentswould measure the total pension liability. In addition,the proposals would revise how governments woulddiscount projected benefit payments, proposing use of along-term expected rate of return as long as plan net as-sets are projected to be available to make the projectedbenefit payments.

The exposure drafts also clarify how governmentswould measure the annual cost of pensions. Further,they address the provision of information about cost-sharing of multiple employer plans with a goal of fur-nishing users access to the same pension informationabout individual governments regardless of what kindof plan they participate in. Moreover, the board pro-poses requirements for note disclosures and requiredsupplementary information following the notes.

Constituents have until Sept. 30 to comment on theproposals, which are titled Accounting and FinancialReporting for Pensions and Financial Reporting forPension Plans. One document relates to reporting bygovernments that provide pension benefits, and theother relates to reporting by the pension plans that ad-minister those benefits through qualified trusts, GASBsaid.

The proposed changes are expected to lead to signifi-cant improvements in the usefulness of pension infor-mation for making decisions and assessing accountabil-ity, GASB said. The board will also hold three publichearings this fall in New York, Chicago, and San Fran-cisco. A final accounting standard is expected to be is-sued in July 2012.

BY DENISE LUGO

� The GASB exposure documents are available athttp://www.gasb.org.

Income Taxes

IRS Issues Uncertain Tax Position Guidance,Clarifies Definition of Recording a Reserve

T he Internal Revenue Service offered more guid-ance July 19 to taxpayers about reporting their un-certain tax positions to the government, address-

ing key questions surrounding the recording of a tax re-serve and the treatment of net operating losscarryforwards, among other significant issues.

The updated set of frequently asked questions andanswers (FAQ) comes as the deadline approaches forthe first wave of taxpayers to file the Schedule UTP,Statement of Uncertain Tax Position. The guidanceadds eight new questions to the FAQ first unveiled inMarch and updates one existing question on whetherinterest and penalties should be included when taxpay-ers are ‘‘ranking’’ their positions on the new schedule.

Recording a Reserve Defined. In general, under the IRSinitiative, taxpayers are required to report uncertain po-sitions for which they have recorded a reserve, butmany have said there is uncertainty about what thatterm means. In Question 6, the agency clarified that areserve is recorded when an uncertain tax position or aliability under Financial Accounting Standards BoardInterpretation 48 (now ASC 740-10) is stated anywherein the financial statements and footnotes of a corpora-tion or related party.

Stakeholders said the guidance is welcome. Law-rence Hill, a practitioner with Dewey & LeBoeuf LLP inNew York, said, ‘‘The new FAQs provide constructiveguidance on a number of common questions that arebeing confronted by corporate taxpayers, includingwhen interest and penalties must be included in a rank-ing of the tax position, the definition of a reserve, re-porting related to merged corporations and in the caseof an intention to litigate, clarification of the recordingof NOLs, and the application of the transition rules.’’

He noted that the guidance issued will be part of the2011 instructions, ‘‘but does clarify the issues for tax-payers who have not yet filed their 2010 returns.’’

Michelle Koroghlanian, a technical manager with theAmerican Institute of Certified Public Accountants, saidJuly 19 that, ‘‘We’re very pleased to see the guidanceand appreciate that the government has been so open tolistening to taxpayers. The new additional FAQs reallydo touch on a lot of areas that have been of concern.’’

She noted that the clarification of what it means torecord a reserve is especially helpful. IRS said thatsome types of financial statement entries that, alone orin tandem, indicate the recording of a reserve include:

s an increase in a current or non-current liability forincome taxes, interest, or penalties payable, or a reduc-tion of a current or non-current receivable for incometaxes and/or interest with respect to a tax position; or

s a reduction in a deferred tax asset or an increasein a deferred tax liability with respect to the tax posi-tion.

Net Operating Loss Guidance. In the NOL area, IRSposted an example where a taxpayer carries forward anNOL from its 2010 tax return that will not be utilized toreduce tax liability until 2012. However, the taxpayerrecords a reserve for the position that is reflected on an

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audited financial statement in 2010. IRS said that thisreporting in 2010 is the only reporting required and thetaxpayer does not have to do any additional reporting in2012.

‘‘Even though the future use of the NOL or credit car-ryforward is a tax position for which the corporation re-corded a reserve, the IRS will not require reporting withrespect to the future use of NOLs or credit carryfor-wards,’’ the agency said.

Addressing several other issues, IRS said in broadterms that:

s taxpayers should not file blank Schedules UTP ifthey have no 2010 tax positions for which reserves havebeen recorded;

s taxpayers who reconsider their tax positions dur-ing the course of an audit and record a reserve in a lateryear must report those positions on a Schedule UTP inthat later year, even if IRS is already aware of the posi-tion;

s taxpayers must report a position either if theyrecord a reserve, or if they do not record a reserve be-cause they expect to litigate, even if that decision torecord or not record occurs because of a change in cir-cumstances in a later year;

s taxpayers are not required to report accruals of in-terest on a tax reserve recorded with respect to a tax po-sition taken on a pre-2010 tax return; and

s taxpayers do not have to include interest and pen-alties in ranking the size of a tax position, or in comput-ing whether a position is a major position, unless theyare separately identified in the books and records asso-ciated with that position.

Clarifying Taxpayer Questions. The questions and asso-ciated answers ‘‘are going to be very helpful for taxpay-ers trying to sort out what their reporting responsibili-ties are under the Schedule UTP,’’ said Ken Kuykendall,a practitioner with PricewaterhouseCoopers LLP inWashington, D.C., to BNA July 19.

He said the guidance ‘‘goes a long way� in clarifyinganswers to many questions that taxpayers had. ‘‘Youget an answer as to what the Service means by record-ing a reserve, how to handle reserves that are part ofNOLs in 2010 and after, and how to deal with UTPs thatarise in business combinations,� he said.

Kuykendall said that the definition of recording a re-serve is broad, but does offer taxpayers clarity. ‘‘By hav-ing a broad definition the Service is really leveraging fi-nancial accounting reporting,’’ he said, noting that thedefinition appears to be flexible enough to deal withother accounting frameworks, such as international fi-nancial reporting standards.

With regard to IRS’s addressing of the NOL issue, ‘‘Ithink it was probably the best answer that taxpayerscould have hoped for, as it eliminates the need for tax-payers to potentially disclose these UTPs multipletimes,’’ Kuykendall said. He noted that under the newIRS guidance, taxpayers will only need to report NOLsin the initial year the position was taken that createdthe tax attribute.

Strong Links Seen to Financial Accounting. This ap-proach is more closely linked to financial accountingfor these attributes, the PwC practitioner said. He notedthat more clarification may be useful in IRS’s definitionof taking a position on a return, which currently encom-passes any line item on a tax return that is impacted by

an uncertain position, even informational portions of areturn.

‘‘The Service may need to look at this,’’ Kuykendallsaid, noting that this could touch on areas that have im-pact on informational portions of returns that have notgiven rise to a tax liability. He said an example could bethe area of earnings and profits, where under the IRSguidance, if a calculation for a foreign subsidiary hassome associated uncertainty, it could trigger reportingeven though there is no current liability.

BY ALISON BENNETT

� Text of the updated FAQ on Schedule UTP is inTaxCore.

Business Combinations

IFRIC Panel Declines to Add Projects;Chairman Hits Auditors Over Pension Plan

L ONDON—The International Financial ReportingStandards Interpretations Committee tentativelydeclined July 8 to address interpretive projects on

four issues after its chairman July 7 criticized a possiblealternative accounting approach suggested by KPMGfor payments made by employers to defined-contribution pension plans with vesting features.

The four areas in which the committee declined toaddress interpretive projects are:

s IFRS 3, Business Combinations—business combi-nations involving newly formed entities: factors affect-ing identification of the acquirer;

s IFRS 3—business combinations involving newlyformed entities: business combinations under commoncontrol;

s IFRS 3—accounting by an acquirer in a reverseacquisition; and

s IAS 27, Consolidated and Separate FinancialStatements—group reorganisations in separate finan-cial statements.

Separately July, 7 the committee also confirmed itsearlier tentative decision not to add a project dealingwith the cost of testing an asset under IAS 16 Property,Plant and Equipment.

Under the committee’s due process, constituents willhave about 30 days to comment on the decisions follow-ing their publication in the committee’s official journal,IFRIC Update.

Pension Vesting at Issue. IFRIC Chairman Robert Gar-nett hit out at audit concern KPMG July 7 for telegraph-ing in a June 13 comment letter a possible alternativeaccounting approach for payments made by employersto defined-contribution pension plans with vesting fea-tures.

‘‘What I think is concerning . . . is to receive lettersthat say ‘Hypothetically, you could think of this in a dif-ferent way. Nobody is actually doing that, but you couldthink of it in this way,’ ’’ Garnett said.

The committee received a submission in February2011 from a constituent seeking clarification on the im-pact that vesting conditions have on the accounting fordefined-contribution pension plans.

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At the heart of the submission was the question ofwhether or not the contributions should be accountedfor:

s as a current-period expense; ors spread over the vesting period.The committee formally rejected the request for in-

terpretive guidance at its May meeting (7 APPR 349,5/13/11). In line with the committee’s due process, no-tice of the rejection wording was released for publiccomment in the committee’s journal, IFRIC Update—prompting the KPMG comment letter.

Alternative Approach. Noting paragraph 44(a) of IAS19, KPMG argued that it was possible for ‘‘a contribu-tion payable in a period being expensed over the vest-ing period as a whole.’’

The advisers went on to suggest a proposed mark-upof the May rejection wording to acknowledge main-stream practice on the issue ‘‘but not to preclude the al-ternative.’’

In a strongly worded rebuke, Robert Garnett said,‘‘[I]f people are now writing in and saying there is nosignificant divergence in practice but, as a result of writ-ing in and telling us an alternative view that could cre-ate it, I think that is undesirable.’’ He continued, ‘‘Ithink we’ve got to keep ourselves contained in here andyour over-enthusiastic technical teams [that] mighthave views that are different from the views that are be-ing applied in practice should keep them to them-selves.’’

Of the KPMG amendments to the May agenda deci-sion, Garnett added, ‘‘If we publish that in an agendadecision, it is tantamount to saying to the rest of theworld, ‘This is now an acceptable way of doing it. Evenif you haven’t been doing it before, we are encouragingyou now to create diversity and having different ac-counting. . . . I don’t think that is the function of thiscommittee.’ ’’

KPMG’s Defense. In defense of his firm’s take on theissue, KPMG audit partner Andrew Vials said, ‘‘To befair, I don’t think we sit there and think up hypotheticalinterpretations.

‘‘I didn’t say there is absolutely no diversity in prac-tice, I said we haven’t come across much diversity inpractice and [that] my understanding of the purpose ofour letter was to point out that we just disagree with thestaff’s analysis on the technical front on [paragraph]44a.’’

The committee’s staff rejected the KPMG argument.In paragraph 21 of agenda paper 4, staff countered, ‘‘Inour view, the alternative interpretation presented by theconstituent is contrary tour understanding of the con-cept of defined contribution accounting’’ and relatedguidance.

BY STEPHEN BOUVIER

� Text of observer notes for the committee’s dis-cussions are available at http://www.ifrs.org alongwith a link to the official meeting recording.

In Brief

FAF Adds Public Relations VPsThe Financial Accounting Foundation, parent to the

Financial Accounting Standards Board and the Govern-mental Accounting Standards Board, appointed RobertStewart, vice president of communications and GraceHinchman, vice president of government affairs and ex-ternal relations, the organization announced July 12.

Stewart and Hinchman were named to two new posi-tions aimed at helping the organization in better fulfill-ing its strategic commitment, FAF President and CEOTeresa Polley said. Stewart will be based in Norwalk,and Hinchman, in Washington, D.C.

� For more information on this issue go to:ww-w.accountingfoundation.org

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AuditDevelopmentsAuditing Standards

PCAOB Issues for Public CommentProposed ‘Audit and Attest’ Standards

T he Public Company Accounting Oversight BoardJuly 12 issued for public comment proposed ‘‘auditand attest’’ standards for audits of broker-dealers.

The proposed attestation standards would apply to au-ditor examinations of compliance and exemption re-ports under the Securities and Exchange Commission’sproposed amendments to Rule 17a-5 of the SecuritiesExchange Act of 1934, if those amendments areadopted.

The Securities and Exchange Commission June 15unanimously agreed to propose amendments to itsbroker-dealer financial reporting rule that wouldstrengthen oversight of firms’ custody of customer as-sets.

The board also issued for comment new proposedstandards on auditing supplemental information for au-dited financial statements that brokers, dealers, and is-suers file with the SEC. ‘‘Today’s proposals are an im-portant and necessary step for implementation of sec-tion 982 of the Dodd-Frank Wall Street Reform andConsumer Protection Act,’’ PCAOB Chairman, James R.Doty, said at a July 12 PCAOB open meeting.

Proposed Attestation Standards. The proposed Rule17a-5 amendments would require broker-dealers to filecompliance reports in connection with areas such as‘‘internal control over compliance with specific SECrules related to net capital requirements, customer pro-tection, reserves and custody of securities, quarterly se-curity counts, as well as compliance with rules of theentity’s designated examining authority on sending ac-count statements to customers,’’ Doty said.

According to Doty, the SEC amendments also pro-pose requiring audits of exemption reports filed bybroker-dealers that do not hold customer funds or secu-rities and qualify for exemption under the SEC’s Rule15c3-3 on Customer Protection—Reserves and Custodyof Securities.

Board member Daniel L. Goelzer said the PCAOB’sproposed standards would provide ‘‘rules-of-the-roadfor auditor association with reports that the SEC hasproposed to require broker-dealers to file.’’ The pro-posed standards are designed to provide assurance‘‘without generating unnecessary expense or complex-ity, especially for smaller firms,’’ he said. Board mem-ber Jay D. Hanson added that the standards ‘‘redefineand strengthen the audit requirements applicable to theaudits of brokers and dealers, by requiring auditors tofocus on the primary risks associated with the activitiesof brokers and dealers.’’

Examining Compliance Reports. The proposed stan-dards for examining compliance reports would requireauditors to use independent judgment in identifyingand focusing on the most salient matters to thecustomer-protection objectives of attestation engage-ments, Doty said.

The aim of this review standard is to ensure the es-tablishment and consistent use of ‘‘appropriate custodyprocedures for the assets of their clients,’’ Hanson said.Along these lines, he said, auditors would be required tofocus on compliance by broker-dealers with specificSEC rules addressing net capital requirements, re-serves, and custody and reporting requirements, as wellas evaluate internal controls for preventing investorlosses of broker-dealer controlled securities or funds.

Examining Exemption Reports. The proposed standardsfor reviewing exemption reports are less stringent thanthose related to compliance reports, as activities ofbroker-dealers that qualify for an exemption underRule 17a-5 pose less of a risk to investors, Hanson said.Thus, he explained, these standards require ‘‘fewer andless burdensome procedures and requires the auditor toprovide moderate assurance, as opposed to reasonableassurance, on the broker’s or dealer’s assertions in theexemption report.’’

Both proposed standards are designed such that ex-aminations are ‘‘explicitly risk-based,’’ and scalable tothe size, complexity, or nature of a broker-dealer’s busi-ness, the board said. In addition, the standards aremeant to ‘‘strike an appropriate balance’’ between in-creasing investor protection and increased audit coststhat may result.

Auditing Supplemental Information. The PCAOB alsoproposed a new standard for auditing additional infor-mation filed with the SEC along with financial reportstitled, Auditing Supplemental Information Accompany-ing Audited Financial Statements, which would super-sede the board’s current standard, AU sec. 551. Accord-ing to Doty, the proposed standards on auditing supple-mental information would ‘‘apply to audits of brokers,dealers, and issuers, when the auditor is engaged to au-dit and report on supplemental information that accom-panies the audited financial statements.’’

Under the proposed standard, Hanson said, ‘‘the au-ditor will audit and report on whether the supplementalinformation accompanying the financial statements isfairly stated, in all material respects, in relation to thefinancial statement as a whole.’’

Doty further said that, under the proposed standard,‘‘the extent of testing the supplemental informationwould be based on the extent of the risk of materialmisstatement of the information.’’ However, the chair-man noted that if the supplemental information had al-ready been audited along with the financial statement,no additional testing would be required.

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According to Hanson, the proposed standard‘‘increase[s] investor transparency into the auditor’s re-sponsibilities’’ and ‘‘establishes substantive require-ments for the audits of supplemental information, whileretaining the concept that the supplemental informationis presented in relation to the financial statements.’’Hanson also said that the proposed standard ‘‘promotescoordination between the work performed on thesupplemental information with the work performed onthe financial statement audit.’’ Ultimately, the boardsaid the main goal of the proposed standard was to in-crease investor protection and understanding of finan-cial statements.

The board voted unanimously to submit the propos-als for public comment for 60 days.

BY MORGAN YUAN AND COLIN ANDREWS

� The news release, board member statements,and audio file of the meeting are available at http://pcaobus.org.

Auditing Standards

SEC/PCAOB, China RegulatorsTo Meet Over Cross-Border Audits

I n hopes of surmounting an impasse regarding thePublic Company Accounting Oversight Board’s abil-ity to inspect China-based accounting firms, the

board announced July 6 that a joint PCAOB/Securitiesand Exchange Commission delegation will meet the fol-lowing week in Beijing with representatives of China’sMinistry of Finance and the China Securities Regula-tory Commission.

‘‘This meeting is the commencement of our acceler-ated efforts with the People’s Republic of China to forge

a cooperative resolution to cross-border auditing over-sight. I believe we share a common objective with Chi-nese regulators to protect investors and safeguard auditquality through our mutual cooperation,’’ PCAOBChairman James R. Doty said in a release.

‘‘The purpose of this meeting is to provide an

opportunity to exchange information about how

each country conducts inspections of auditing

firms and to move toward a bilateral agreement

providing for joint inspections of China-based

auditing firms registered with the PCAOB.’’

He said the delegation will be led by PCAOB mem-ber Lewis H. Ferguson; it will include staff from thePCAOB Office of International Affairs and Division ofRegistration and Inspections, and the SEC’s Offices ofInternational Affairs and Chief Accountant. ‘‘The pur-pose of this meeting is to provide an opportunity to ex-change information about how each country conductsinspections of auditing firms and to move toward a bi-lateral agreement providing for joint inspections ofChina-based auditing firms registered with thePCAOB,’’ Ferguson explained.

Bilateral Agreement. In the release, the U.S. boardsaid that since 2007, it has been in discussions with itsChinese counterparts regarding a bilateral agreementthat would enable it to inspect auditing firms in

Financial Reporting

Companies Doubted as Going Concerns Decline Again in 2010

T he number of companies thatreceive doubts from their au-ditors about their ability to

remain a going concerns is ex-pected to have dropped in 2010from the highs that occurred asthe financial crisis set in 2008 and2007, but will probably continueat historically high levels, the Au-dit Analytics research firm saidJuly 15.

Audit Analytics, an accountingand auditing intelligence firm forinvestors, said that the number offirms expected to receive audit re-ports doubting their ability to re-main as going concerns is pro-jected to reach 2,875 for all of2010, based on the 2,636 that re-ceived such reports through May31, 2010.

The companies receiving re-ports about doubts as going con-cerns remained fairly steady inthe middle of the last decade, butstarted rising in 2005 and peakedat 3,328 in 2008 before falling to2,994 in 2009, the research firmsaid in an advanced copy of its‘‘Going Concern Review.’’

While the number of compa-nies doubted to remain as goingconcerns is expected to decline in2010, much of that drop could bebecause they actually will failrather than their conditions hav-ing improved enough for their au-ditors to withdraw going-concerndoubts and give them a clean au-dit report, Audit Analytics said.

The probable downturn in 2010‘‘is due to the loss of some compa-

nies that filed a going concernduring the prior year,’’ Audit Ana-lytics said.

Audit Analytics also found thatthe percentage of audit reportsfiled with the Securities and Ex-change Commission that con-tained going-concern warnings isexpected to be 18.5 percent in2010, compared with 19.4 percentin 2009. The historic high was 21.0percent in 2008. While the per-centage for 2010 marks a de-crease, it is ‘‘nevertheless a his-torically high percentage,’’ the re-search firm said.

� A copy of Going ConcernReview can eventually be pur-chased through http://www.auditanalytics.com/.

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China—a topic of ongoing frustration. ‘‘Recently, thePCAOB has renewed efforts to reach an agreement thatwould accomplish this objective,’’ and ‘‘is hopeful that aresolution to this matter can be achieved in the nearterm. To this end, both the PCAOB and Chinese au-thorities have committed to accelerating their efforts toreach an agreement on cross-border oversight coopera-tion.’’

The board noted that under the Sarbanes-Oxley Act,all public companies whose securities trade on U.S. ex-

changes must use an audit firm that is registered withthe PCAOB, regardless of where the company and theaudit firm are located. ‘‘To date, the PCAOB has beenblocked from conducting inspections of auditing firmsin China due to sovereignty concerns raised by Chineseregulators. Currently, PCAOB registrants include morethan 900 non-U.S. auditing firms from 87 jurisdictions,including 110 firms in China and Hong Kong.’’

BY PHYLLIS DIAMOND

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AccountingPracticeInternational Convergence

Consistent Application of Standards KeyIn Choosing GAAP or IFRS, SEC Panelists Say

W hether the United States adopts international fi-nancial reporting standards or maintains use ofU.S. generally accepted accounting principles,

the consistency with which standards are applied ismore important than the choice of standards them-selves, panelists told a Securities and Exchange Com-mission roundtable discussion July 7.

They made that point as the SEC considers whetherand how it should adopt IFRS, or maintain use of U.S.GAAP. The SEC held the roundtables to garner outsideadvice to help it make that decision.

‘‘Whether it’s IFRS or U.S. GAAP, for us at this pointreally doesn’t matter,’’ Mark LaMonte, a managing di-rector at Moody’s Investors Service, told the investorspanel. ‘‘It’s more about the application and the trust wehave from the auditing of the numbers.’’

Still, the roundtable’s investor panelists generallysupported adoption of IFRS, provided the InternationalAccounting Standards Board that issues IFRS has suffi-cient and independent funding to be largely free of po-litical influences.

Political Counterweight. Some panelists at the July 7roundtable also suggested that U.S. participation in theinternational standard-setting process through the Fi-nancial Accounting Standards Board would provide a‘‘counterweight’’ to any political pressures exerted onIASB from various jurisdictions around the globe, pro-viding another reason they felt that the United Statesshould help develop and then adopt IFRS.

The SEC is expected to make a decision by the endof the year on U.S. use of IFRS and a timetable forimplementation. FASB and IASB have been engaged ina multi-year project to converge their standards asmuch as possible. The boards in 2009 and 2010 revisedthe completion deadline (6 APPR 478, 7/9/10) and inearly 2011 slimmed the list of projects expected to be fi-nalized later this year. The SEC has set the degree towhich FASB and IASB are converged as a major crite-rion for determining whether to adopt IFRS.

‘Condorsement’ Endorsed. Greg Jonas, a Morgan Stan-ley managing director, said he strongly supported theSEC ‘‘condorsement’’ option for IFRS adoption that wasoutlined in a May 26 staff paper. It would retain U.S.GAAP and gradually incorporate IFRS into GAAP as thedifferences between the standards narrowed (7 APPR435, 6/10/11).

Jonas said the ‘‘condorsement’’ model ‘‘is the bestway forward’’ because IFRS adoption is better than ‘‘theU.S. going its own way’’ and because it can provide a‘‘hedge’’ against the possibility of IFRS failing or ulti-

mately proving to be unworkable. In the event IFRSshould lose credibility for financial reporting, theUnited States under the condorsement approach wouldretain GAAP as a fall-back option.

The ‘‘condorsement’’ approach also addresses the‘‘harsh reality’’ that the United States would lose all in-fluence over international standard setting if it ‘‘contin-ued to go its own way’’ by rejecting IFRS, Jonas said.

Narrow the Alley. Duff & Phelps Managing DirectorDavid Larsen said the key task for standards setters isto use standards and disclosures to channel financial re-porting in such a way that the flow of information isconsistent and comparable. He likened their task toerecting ‘‘bumper guards in the bowling alley, so youknow the bowling ball stays in the lane’’ and therebyhelping to assure that investors ‘‘get an established con-sistency’’ in the application of accounting standards.

Mary Morris, investment officer for the CaliforniaPublic Employees’ Retirement System, said reliabilityof the information in the financial report is what is criti-cal for investors, and not necessarily which set of finan-cial standards was used to produce it. ‘‘Accounting doesplay a critical role,’’ Morris said, also noting that an in-vestor will not make a decision based on whether acompany uses IFRS or GAAP.

Panelists said they were also concerned that differ-ences in interpretation and enforcement globally fromjurisdiction to jurisdiction could cause inconsistency instandards application. But despite the risk that incon-sistent enforcement across jurisdictions could open a‘‘pretty wide bowling alley’’ of interpretation of thestandards, Morgan Stanley’s Jonas said U.S. adoptionof IFRS would still be wise. ‘‘My logic is that just . . .narrowing differences between IFRS and GAAP is help-ful’’ because that would create a situation ‘‘where wewould have better comparability’’ among financialstatements, he said.

‘‘Some improvement is better than no improve-ment,’’ Jonas added.

Patricia O’Malley, former member of the CanadianAccounting Standards Board and of IASB, said users ofIFRS must press standards setters to confront issuesthat need interpretation and to develop guidance in anopen and transparent way in order to prevent differingjurisdictions devising their own guidance.

Need Better Interpretive Venues. SEC Chief Accoun-tant James Kroeker told the panel that ‘‘I agree com-pletely’’ that ‘‘better venues’’ are needed to settle inter-pretive issues.

Larsen urged that the global standard setters ‘‘begiven the resources’’ to develop such forums as FASB’sEmerging Issues Task Force to devise in an open pro-cess ‘‘a way to understand . . . how to apply very diffi-cult judgments.’’ Such a process will ensure that thestandards setters—and not local regulatory or enforce-ment authorities—will guide how accounting is to be

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applied. Larsen said that the Public Company Account-ing Oversight Board in some of its actions over auditorsis having an interpretive impact on the application ofaccounting, whether it intended to not.

BY STEVEN MARCY

� SEC roundtable and other IFRS materials can befound at http://www.sec.gov.

International Convergence

Small U.S. Companies Tell SECIFRS To Be Costly, of Little Benefit

E xecutives from small public companies and theirauditors told the Securities and Exchange Com-mission July 7 that a shift to international financial

reporting standards would be of little—if any—benefit,would prove costly, and should not be done precipi-tously.

Specifically, Ron Zilkowski, chief financial officer forCuisine Solutions, told an SEC roundtable on the smallpublic company perspective of IFRS that any IFRSimplementation requires ‘‘realistic dates’’ and help inmaking the transition. ‘‘There will be a lot of pain,’’ hetold the panel and the SEC staff and commissioners inattendance.

Nothing Positive About It. Shannon Greene, chief fi-nancial officer of Tandy Leather Factory, said IFRSwould provide a firm like hers with no practical advan-tage. It would prove distracting and costly to imple-ment, including diverting resources otherwise neededto develop the firm’s business, she explained. She saidthat, strictly from her company’s perspective, ‘‘we havenothing to say positively at all’’ about U.S. use of IFRS.’’She continued, ‘‘All it’s going to do is cost us money.’’

The SEC is expected to make a decision by the endof the year on U.S. use of IFRS and a timetable forimplementation. The Financial Accounting StandardsBoard and the International Accounting StandardsBoard have been engaged in a multi-year project to con-verge their standards as much as possible. The boardsin 2009 and 2010 revised the completion deadline (6APPR 478, 7/9/10) and in early 2011 slimmed the list ofprojects expected to be finalized later this year. TheSEC has set the degree to which FASB and IASB areconverged as a major criterion for determining whetherto adopt IFRS.

The SEC staff in a May 26 staff paper outlined onepossible IFRS adoption scenario in which the UnitedStates would retain U.S. GAAP and gradually incorpo-rate IFRS into GAAP as the differences between thestandards narrowed (7 APPR 435, 6/10/11).

SEC Commissioner Elise Walter asked the small-company panel if it would be helpful for the SEC to seta time on which companies could begin using IFRS fol-lowed by a deadline on which they must begin using it.Several roundtable participants said that such an ap-proach would not end confusion or ease any transition.

Zilkowski said he worried that such an approachwould cause continued modifications and updating tothe standards as the implementation period wore on,causing financial preparers to continually modify and

update their procedures, further increasing cost andcomplexity. ‘‘That’s the fear,’’ he said.

Charlie Rowland, chief financial officer for Viop-harma, said a phase-in of IFRS could be ‘‘reasonable,’’but ‘‘once it’s done, it needs to be done’’ with no furthermajor modifications of the standards that would requirefurther updates to systems. Also, ‘‘if you set the date,and it’s [a] drop-dead date and you set it too soon, it’sgoing to be a mess,’’ he said. Rowland said IFRS was a‘‘good long term goal for the capital markets,’’ but‘‘there is not a lot of short-term benefit that would wewould realize’’ from its adoption.

David Grubb, a partner in auditing firm Planet & Mo-ran, warned that ‘‘auditor interpretations’’ will intro-duce more ‘‘deviations’’ into the application of IFRSthat will render them less clear and effective as well hascausing increased complexity.

Enough Consultants? Rowland also declared that mostsmall companies cannot add more staff to effect thetransition to IFRS because once completed and the sys-tems to implement IFRS are up and running, there willno longer be a need for them and they will be laid off.That means many small companies will turn to part-time consultants to implement IFRS, ‘‘and are there go-ing to be enough consultants,’’ wondered Rowland,whose company also operates outside the UnitedStates.

The smaller companies declared that very few oftheir investors are asking for a switch to IFRS or seeany real advantage in it. From the perspective of bankslending to the communities, they are concerned almostsolely with cash flow, regardless of the accounting rulesused to report it, Rowland told the roundtable.

Bill Yeates, partner and national director of auditingand accounting for Hein & Associates LLP, said thatmany of his company’s clients have European andAsian investors, and none of them have focused onwhether the company operates under U.S. GAAP orIFRS.

Don’t Rush; Stakes Too High. Yeates cautioned the SECnot to ‘‘rush into this and make a mistake. The stakesare just too great.’’ He further warned against setting adeadline for adoption. He also said that allowing foradoption before that deadline was ‘‘too confusing’’ ascompanies try to train personnel to adopt under two dif-ferent accounting regimes and as FASB and IASB con-tinue to modify their standards on the way to conver-gence. It is better to wait until that process is more fi-nalized, he said.

Yeates said it is not necessary for the SEC to decidethis year whether to allow or require U.S. use of IFRS.He urged the SEC to wait at least one more year beforesetting any IFRS implementation dates.

At Least Three Years Needed. Zilkowski said an adop-tion date ‘‘needs to be three years out’’ with the optionof adopting earlier if it can get ready in time. However,‘‘I can’t see it being any sooner than three years out,’’Zilkowski said.

Greene said that regardless of whether the SECwould set a phase-in period with an ultimate date foradoption, her company would not work on adoption un-

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til close to the approach of the deadline because hercompany needs resources for other purposes.

The roundtable panelists also said they were con-cerned about how IFRS would work after years of oper-ating under the more rule-based U.S. GAAP.

David Grubb, partner in Plante & Moran, explainedthat IFRS ‘‘requires a very different mindset’’ in whichless application guidance often is available from IASB’sIFRS Interpretations Committee than is availablethrough FASB under GAAP. He said that this mightopen the way for more interpretations by auditorfirms—‘‘in the absence of official interpretation.’’ Thatwill require IFRS users to make some additional adap-tations, he said. Grubb added that IFRS for the UnitedStates should not be adopted until FASB and IASB arecloser to convergence, especially in their approaches torevenue recognition (ASC 605).

BY STEVEN MARCY

� SEC IFRS materials are at http://sec.gov/spotlight/globalaccountingstandards.shtml. An ar-chived webcast of the IFRS roundtable is availableat http://sec.gov

Financial Instruments

Hedge Funds Get Green Light to SueOver Comverse Tech’s Options Practices

S even hedge funds that owned Comverse Technol-ogy Inc. stock from 2001 to 2007 may proceed withmost of their federal and common law securities

claims against the company and numerous officers anddirectors over an alleged illegal stock options backdat-ing scheme, the U.S. District Court for the Eastern Dis-trict of New York ruled July 12 (Maverick Fund L.D.C.v. Comverse Technology Inc., E.D.N.Y., 10-CV-4336(JG) (JO), 7/12/11).

Ruling on the defendants’ motion to dismiss, JudgeJohn Gleeson held that Maverick Fund L.D.C. statedplausible claims under the 1934 Securities ExchangeAct and New York common law against the defendantsexcept for claims based on their 2007 statements de-signed to reassure the markets about Nasdaq’s suspen-sion and delisting of Comverse stock. Those claims, thecourt continued, are protected by the safe harbor forforward-looking statements under the Private Securi-ties Litigation Reform Act.

‘In-the-Money’ Options. The seven funds (collectively‘‘Maverick’’) alleged that between 1991 and 2006, Com-verse granted at least 26 stock options to the officer de-

Financial Fraud

Former Execs Agree to Settle Charges Over Revenue Recognition

T wo former ArthroCare Corp.senior vice presidents agreedJune 27 in the U.S. District

Court for the Western District ofTexas to pay disgorgement plusprejudgment interest to settle Se-curities and Exchange Commis-sion charges they caused themedical device manufacturer im-properly to record revenue tomeet earnings targets (SEC v.Raffle, W.D. Tex., Civil Action No.1:11-cv-540, 6/27/11).

In a July 5 release, the commis-sion said defendants John Raffleand David Applegate also agreedwithout admitting or denyingwrongdoing to five-year officer/director bars, and to refrain fromfuture violations.

In the release, the commissionsaid it also settled with Raffle’s ex-wife Kathy Raffle to recover$200,000 in incentive compensa-tion and profits from the sale ofArthroCare stock John Raffle ob-tained during the course of the al-leged scheme. Kathy Raffle, whowas not charged with wrongdo-

ing, received the funds in a di-vorce agreement, the agency ex-plained.

Products Shipped. The SEC al-leged that between 2006 and thefirst quarter of 2008, John Raffleand Applegate caused ArthroCareto record revenue from shipmentsof spine products to variousdistributors—‘‘even though thedistributors often did not need theproducts or have the ability to payfor them. Most of the impropertransactions occurred at or nearthe end of quarters and were in-tended to enable ArthroCare tosatisfy external revenue and earn-ings targets.’’

As a result, the company’s pub-licly reported revenue and earn-ings were materially misstated,the SEC said. It also alleged thatJohn Raffle misled his company’saccountants and auditor regard-ing ‘‘aspects’’ of the transactions.

Under the settlement, JohnRaffle agreed to pay $1,782,742.43in disgorgement plus prejudgment

interest of $329,230.44. However,payment of all but $175,000 of thisamount was waived and no civilpenalty imposed based on his fi-nancial condition. Applegate,meanwhile, agreed to pay$621,754.60 in disgorgement plusprejudgment interest of$106,469.70, but based on his fi-nancial condition, payment of allbut $55,000 of this amount waswaived and no civil penalty wasimposed.

Earlier this year, the commis-sion settled chargesagainst Ar-throCare based on its alleged rolein the controversy. The concern—which undertook a number of re-medial measures and provided theagency with ‘‘substantialcooperation’’—agreed without ad-mitting or denying wrongdoing tocease and desist from future viola-tions.

� For a brief discussion of theSEC’s case against Arthrocare,see 5504-2nd, A Strategic Ap-proach to SEC Investigations,at 5504.III.F.6.

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fendants and other employees pursuant to four differ-ent option plans, each backdated to disguise the factthat the company was paying higher compensation toexecutives and employees by awarding them ‘‘in-the-money’’ options.

Before 2006, the defendants made no public disclo-sures regarding its options backdating and they also hidthe practice from the company’s outside auditors, thefunds charged. In addition, the defendants allegedlymanipulated the published financial results to give theappearance that the company was well managed. Theseaccounting manipulations impacted reported financialresults from 1996 to mid-2006, the funds charged.When the company began to disclose its backdatingpractices, the stock price fell, culminating in the funds’decision to sell all of their shares between Sept. 12 andOct. 4, 2006.

In December 2009, Comverse entered into agree-ments to settle shareholder suits filed against it in 2006.Settlement payments totalled $165 million.

The funds opted out of the settlement and in Septem-ber 2010 filed 1934 Act claims against Comverse and allindividual defendants except for two officers whoserved only after the alleged illegal backdating ceased.They were named as defendants in a separate negligentmisrepresentation claim under New York law alongwith all the other defendants.

Plausible Claim. The funds have adequately allegedthe elements necessary for the 1934 Act claims, includ-ing loss causation and reasonable reliance, the courtheld. The funds sufficiently alleged both that the priceof Comverse stock declined when the truth was re-vealed, and that the decline in price caused them to suf-fer damages when they sold shares at a loss.

The court rejected the defendants’ argument that thefunds’ claims were undermined by their in-and-outtrading pattern and repeated purchases of Comversestock after adverse information was released about thecompany. Although the funds frequently traded stockmultiple times in a day, ‘‘it does not appear that theyclosed out their position in Comverse stock so quicklyafter purchasing shares that they were able to avoid thelosses when the price of the stock declined,’’ the courtsaid. Rather, the funds apparently held on to theirshares for months at a time, and numerous transactionsin Comverse stock were actually transfers of shares be-tween funds with no net purchase or sales.

In addition, the court said, a factfinder could reason-ably find that the defendants’ disclosures and warningsthat the company’s financial statements should nolonger be relied on ‘‘may not have been intense or cred-ible enough to ‘counter-balance effectively’ Comverse’sprevious misstatements.’’

Safe Harbor. The defendants’ 2007 statements at-tempting to reassure the market of the company’s fi-nancial stability are protected by the safe harbor forforward-looking statements under the PSLRA, the courtheld.

Mixed present and future statements are not entitledto the safe harbor for the part of the statement that re-fers to the present, the court said. In this case, however,the defendants’ present tense statements are so vagueas to be inseparable from the forward-looking portionsof the statements.

Negligent Misrepresentation. To sustain a negligentmisrepresentation claim under New York law, the al-leged misrepresentations must be factual in nature andnot promissory or relate to future events that mightnever happen, the court explained. Applying this crite-ria, the court ruled that the funds may sue the defen-dants over their pre-2007 statements, because they rea-sonably relied on those statements to continue to makestock purchases.

On the other hand, none of the statements defen-dants allegedly made in 2007 can serve as the basis fora negligent misrepresentation claim; they are forward-looking statements regarding defendants’ expectationsthat Comverse would be able to become current with itsSEC filings by the end of fiscal 2007, which may or maynot occur.

Counsel. David A. Thorpe, Edward P. Dietrich andMatthew P. Siben, Dietrich Siben Thorpe LLP, Carls-bad, Calif., represented Maverick Fund, L.D.C. JosephS. Allerhand, Weil, Gotshal & Manges LLP, New York,represented Defendants Comverse Technology Inc. andAvi Aronovitz. Jeffrey H. Temkin, Morvillo, Abramow-itz, Grand, Iason & Silberberg P.C., New York, repre-sented defendant Jacob Alexander. David S. Hoffnerand Robert W. Topp, Dechert LLP, New York, repre-sented defendant David Kreinberg. Solomon N. Klein,Law Office of Solomon N. Klein, New York, appearedfor defendant William F. Sorin. Thomas P. Puccio, LawOffices of Thomas P. Puccio, appeared for defendantWilliam F. Sorin.

Arthur H. Aufses III, Kramer Levin Naftalis &Frankel, New York, represented defendants John H.Friedman and Sam Oolie. Seth T. Taube, Baker BottsLLP, New York, represented defendant Ron Hiram, andGregg M. Mashberg and Sigal P. Mandelker, ProskauerRose, New York, represented defendant Andre Dahan.

� For additional background on this matter, see5509, Avoiding Material Omissions Under the Fed-eral Securities Laws, at 5509.VII.B.3.j. For a discus-sion on grant dates and backdating, see 5109-2nd,Accounting for Share-Based Compensation, at5109.II.C.1.d.

Enforcement

CSK Executive, SEC Fail to ReachSettlement Accord in SOX Clawback Case

S ettlement negotiations between the Securities andExchange Commission and former CSK AutoCorp. chief executive officer Maynard Jenkins to

settle the agency’s clawback lawsuit have fallenthrough, the parties said in a July 18 filing (SEC v. Jen-kins, D. Ariz., No. 2:09-cv-1510-RJB, 7/18/11).

In a joint status report to the U.S. District Court forthe District of Arizona, the parties said their ‘‘efforts tosettle this matter have not been successful.’’ They toldthe court that they would confer on a discovery planand proposed schedule by July 29, and submit anotherjoint status report.

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Stay Granted in March. In March, the court granted ajoint request by the parties to stay the litigation pend-ing approval by the SEC commissioners of a tentativesettlement agreement.

SEC spokesman Kevin Callahan declined to com-ment beyond what was said in the July 18 filing. Jen-kins’s counsel—Gregory Weingart, Munger Tolles & Ol-son LLP, Los Angeles—did not immediately respond toBNA’s request for comment.

The SEC sued Jenkins in July 2009 to recover morethan $4 million in bonuses and stock sale profits that hereceived between May 2003 through May 2005, whileother CSK senior executives allegedly were orchestrat-ing a multimillion-dollar accounting scheme at the com-pany (5 APPR 734, 8/7/09).

The case marked the first time that the commissionproceeded under Section 304 of the 2002 Sarbanes-Oxley Act against a senior executive who was not ac-cused of a securities law violation. The clawback provi-sion allows the SEC to seek forfeiture of certain profitsfrom CEOs and chief financial officers where the com-pany issues a financial report restatement due to ‘‘mis-conduct’’ that caused a material noncompliance with fi-nancial reporting requirements.

Case Closely Watched. Jenkins’s case was closelywatched because thus far, it is the only litigation involv-ing the SEC’s authority under Section 304. In June2010, Jenkins’s defense received a setback when thecourt denied his motion to dismiss. Ruling on an issueof first impression, the court held that the SEC does nothave to allege wrongdoing on the part of corporate ex-ecutives when pursuing reimbursement under the claw-back provision.

Following the lawsuit against Jenkins, the SECbrought two more no-fault actions against other senior

executives—Diebold Inc. CEO Walden O’Dell and Bea-zer Homes USA Inc. CEO Ian McCarthy—both of whichwere settled on filing (7 APPR 214, 3/18/11).

BY YIN WILCZEK

In Brief

ISACA, IFAC Collaborate on XBRL GuidanceThe Information Systems Audit and Control Associa-

tion, in conjunction with the International Federation ofAccountants, have developed a paper to ‘‘provide guid-ance on how to leverage the value of eXtensible Busi-ness Reporting Language (XBRL),’’ the organizationssaid June 22.

‘‘Understanding how to embed XBRL within an orga-nization’s information processes can enhance manage-ment communication, increasing the value of the infor-mation used within an enterprise,’’ said Roger Debre-ceny, member of ISACA and co-developer of the XBRLpaper. ‘‘ISACA collaborated with IFAC to develop thispaper to provide accounting and assurance profession-als with guidance they can rely on from trusted sourcesto leverage value from XBRL initiatives and compliancerequirements,’’ Debreceny said.

� The paper can be obtained at http://press.ifac.org.

� For a discussion on XBRL, see 5113, AccountingRulemaking Authorities and Accounting Research,at 5113.IX.H.

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OfficialActionsJ u l y 7 - J u l y 2 0

Financial Accounting Standards BoardProposals

FASB July 20 proposed a narrow-scoped standard in-tended to clarify if an entity being deconsolidated is insubstance real estate and whether the parent must ap-ply aspects of accounting rules for property, plant andequipment (Page 551).

Meeting Discussions

In a July 13 meeting, FASB:s voted not to provide private companies with an al-

ternative method in applying the transition require-ments in a proposed revenue recognition accountingstandard, therefore requiring them to apply proposedrevenue recognition guidance retrospectively in accor-dance with FASB (Accounting Standards Codification)ASC 250, Accounting Changes and Error Corrections(Page 548);

s tentatively decided investment company disclo-sures should show an investment company’s calculationof its financial highlights at the consolidated level if itconsolidates another entity as part of its ongoingproject to craft criteria for what qualifies as an invest-ment company (Page 548);

s voted against retaining leveraged lease accountingliterature—very unique rules under U.S generally ac-cepted accounting principles related to tax advantagedtransactions—in a final lease accounting standard forthe sake of improving comparability and convergencewith IASB leasing rules (Page 547).

FASB, International Accounting StandardsBoardMeeting Discussions

In a July 20 joint meeting, the boards:s tentatively agreed that a ‘‘credit risk management

approach’’ would be the criteria entities should use todetermine how impaired loans should be allocated andwhen they should be transferred between categories orbuckets (Page 546).

IASBInternational Financial Reporting StandardsInterpretations Committee

IFRIC July 8:

s declined to address interpretive projects on fourissues dealing with business combinations, reverse ac-quisitions, and group reorganisations in separate finan-cial statements (Page 555).

IFRIC July 7:s voted to issue as IFRIC 20 an interpretive docu-

ment setting out guidance on how entities should ac-count for costs associated with strip mining activitiesand also agreed to recommend that the IASB fixes thenew guidance with an effective date of Jan. 1, 2013(Page 553);

s voted to add an interpretive project to its agendaaddressing how entities should account for governmentlevies on trading activities under International Account-ing Standard, or IAS 37, Provisions, Contingent Liabili-ties and Contingent Assets (Page 542).

Public Company Accounting Oversight BoardThe PCAOB July 12 proposed ‘‘audit and attest’’ stan-dards for audits of broker-dealers that would apply toauditor examinations of compliance and exemption re-ports under the Securities and Exchange Commission’sproposed amendments to Rule 17a-5 of the SecuritiesExchange Act of 1934. The proposal follows on theheels of the SEC June 15 agreeing to propose amend-ments to its broker-dealer financial reporting rule thatwould strengthen oversight of firms’ custody of cus-tomer assets. The PCAOB also issued for comment newproposals on auditing supplemental information for au-dited financial statements that brokers, dealers, and is-suers file with the SEC (Page 557).

Governmental Accounting Standards BoardFinal Actions

GASB July 13 issued two new standards, one—GASBStatement 63—depicting how past governmental trans-actions will continue to affect financial statements inthe future, and the other—GASB Statement 64—clarifying when and how hedge accounting continues tobe applied upon replacement of a government entity’sswap counterparty or of a swap counterparty’s creditsupport provider (Page 551).

Proposals

GASB July 8 proposed revisions to pension accountingrules that would require state and local governments toreport the unfunded portion of their retirement plans asa liability on their balance sheets (Page 553).

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CalendarRecent Financial Restatements

The following list summarizes financial restatementsreported to the Securities and Exchange Commissionbetween July 4 and July 15, based on BNA reviews of

reports submitted to the SEC on Forms 8-K, 8-K/A, 10-K/A, and 10-KSB/A.

Company Date Statement FormAmerican Superconductor Corporation 7/11/11 The Devens, Mass., company stated that financial

statements contained in the company’s Quarterly Re-ports on Form 10-Q for the fiscal quarters endedSept. 30, 2010, and Dec. 31, 2011, should no longerbe relied upon because revenues were incorrectlyrecorded, as collectibility was not reasonably assuredat the time of shipment for certain of the company’scustomers in China during these quarters. For thesecustomers, the company plans to restate revenuesbased on a cash basis of accounting and expects torecord revenues only to the extent that payment wasreceived or otherwise reasonably assured during thequarter.

8–K

AsherXino Corporation 7/6/11 The San Francisco, Calif., company stated that fiscal2009 financial statements would be restated in orderto restate the number of shares issued for the yearsended Dec. 31, 2009, and 2010.

8–K

China Medicine Corporation 7/8/11 In addition to 2008 through 2010 financial state-ments that were to be restated (mentioned in ChinaMedicine’s 8-K filed Mar. 23, 2011), the Guangzhou,Guangdong Province, China, company stated that fis-cal 2006 and 2007 financial statements should nolonger be relied upon due to certain accounting andreporting errors that were identified with respect toimproper activities by certain employees of Guang-zhou Konzern Medicine Co., Ltd, a wholly-owned sub-sidiary of the company.

8–K

Commerce Group Corp. 7/14/11 The Milwaukee, Wis., company stated that the fiscal2010 audit report prepared by its previous auditor,Chisholm, Bierwolf, Nilson & Morrill, LLC, can nolonger be relied upon due to the PCAOB’s revocationof Chisholm’s registration.

8–K

First Place Financial Corp. 7/13/11 The Warren, Ohio, company stated that fiscal 2009and 2010 financial statements could no longer berelied upon due to an understatement of the allow-ance for loan losses.

8–K

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Company Date Statement FormiTrackr Systems, Inc. 7/15/11 The Boca Raton, Fla., company stated that as a re-

sult of a material misstatement that was determinedby the PCAOB to have occurred in the fiscal 2010audit of the company’s financial statements by itsauditor, Bedinger and Company, the company wasrestating its 2010 financial statements. The mis-statements concerned a license fee incorrectly rec-ognized as revenue pursuant to FASB ASC 985-605.Rather, the company should have applied the guid-ance in FASB ASC 605-10-S99-1, SAB Topic 13,wherein the initial license fee should have been rec-ognized ratably over the term of the agreement.

10–K/A

On-Air Impact, Inc. 7/1/11 The Red Bank, N.J., company stated that financialstatements for the fiscal quarter ended Feb. 28,2011, should no longer be relied upon because of er-rors relating to accounts payable and due to relatedparties that were not reflected in the Form 10-Q, aswell as an adjustment to common stock and addi-tional paid-in-capital.

8–K

Puda Coal, Inc. 7/14/11 The Ft. Lauderdale, Fla., company stated that auditreports related to fiscal years 2009 and 2010 shouldno longer be relied upon due to circumstances sur-rounding the resignation of its auditor, Moore Ste-phens. Moore Stephens resigned because manage-ment representation letters provided to Moore Ste-phens by the company in connection with the auditsof the company’s consolidated financial statementsfor the years ended Dec. 31, 2009, and 2010, in-cluded representations that were materially inconsis-tent with the transfers of subsidiary ownership by thecompany’s chairman, Mr. Ming Zhao, which are cur-rently subject to investigation by its audit committee.

8–K

Tryon Alpha, Inc. 7/8/11 The Charlotte, N.C., company stated that fiscal 2010financial statements should no longer be relied uponbecause one of the company’s stockholders paid ex-penses on behalf of the company which was improp-erly recorded as a loan and on which amount an inter-est expense was improperly recorded when theamounts paid by the stockholder should have beenrecorded as amounts payable to a related party inthe liabilities section of the company’s balancesheet.

8–K

Source: BNA.

Comment Deadlines for Pending Accounting and Auditing Rulemaking Projects

IASB PROJECTS

Comments Due Project DescriptionAug. 2, 2011 IFRS Foundation Exposure Draft, IFRS Taxonomy 2011 interim release: common-

practice conceptIssued June 2, 2010http://www.ifrs.org/XBRL/IFRS+Taxonomy/2011+IR1+common+practice/ED+2011+IR1+common+practice.htm

GASB PROJECTS

Comments Due Project DescriptionSept. 30, 2011 Accounting and Financial Reporting for Pensions, an amendment of GASB

Statement No. 27Issued July 8, 2011http://www.gasb.org

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GASB PROJECTS − Continued

Comments Due Project DescriptionSept. 30, 2011 Financial Reporting for Pension Plans, an amendment of GASB Statement No. 25

Issued July 8, 2011http://www.gasb.org

SEC PROJECTS

Comments Due Project DescriptionAug. 2, 2011 Credit Risk Retention

Issued March 30, 2011http://www.sec.gov/rules/proposed.shtml

IFAC PROJECTS

Comments Due Project DescriptionJuly 29, 2011 Exposure Draft, Predictive Business Analytics: Forward-Looking Measures to

Improve Business PerformanceIssued May 2, 2011http://www.ifac.org/Guidance/EXD-Details.php?EDID=0162

Aug. 31, 2011 IPSASB exposure draft, Key Characteristics of the Public Sector with PotentialImplications for Financial Reporting,Issued April 29, 2011http://www.ifac.org/Guidance/EXD-Details.php?EDID=0159

Sept. 1, 2011 IAASB Exposure Draft, ISAE 3000 (Revised), Assurance Engagements Other ThanAudits or Reviews of Historical Financial InformationIssued April 29, 2011http://www.ifac.org/Guidance/EXD-Details.php?EDID=0161

Sept. 16, 2011 IAASB Consultation Paper, Enhancing the Value of Auditor Reporting: ExploringOptions for ChangeIssued May 16, 2011http://www.ifac.org/Guidance/EXD-Details.php?EDID=0163

PCAOB PROJECTS

Comments Due Project DescriptionSept. 30, 2011 Concept ReleasePossible Revisions to PCAOB Standards Related to Reports on

Audited Financial StatementsIssued June 21, 2011http://pcaobus.org/Rules/Rulemaking/Pages/Docket034.aspx

Effective Dates of Accounting and Auditing Standards and Rules

FASB GUIDANCE, EFFECTIVE SINCE Dec. 15, 2010

Effective Date Title Date IssuedFor public entities, effective for fiscal years, and interimperiods within those years, beginning after Dec.r 15,2011. For nonpublic entities, the amendments areeffective for fiscal years ending after December 15,2012, and interim and annual periods thereafter. Earlyadoption is permitted, and they should be appliedretrospectively

Update No. 2011-05, Comprehensive Income(Topic 220): Presentation of ComprehensiveIncome.

6/16/11

Effective for the first interim or annual period beginningon or after Dec. 15, 2011. Should be appliedprospectively to transactions or modifications of existingtransactions that occur on or after the effective date.Early adoption is not permitted.

Update No. 2011-03, Transfers and Servicing(Topic 860), Reconsideration of EffectiveControl for Repurchase Agreements.

4/29/11

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FASB GUIDANCE, EFFECTIVE SINCE Dec. 15, 2010 − Continued

Effective Date Title Date IssuedEffective for the first interim or annual period beginningon or after June 15, 2011, and should be appliedretrospectively to the beginning of the annual period ofadoption. As a result of applying these 3 amendments, anentity may identify receivables that are newly consideredimpaired. For purposes of measuring impairment of thosereceivables, an entity should apply the amendmentsprospectively for the first interim or annual periodbeginning on or after June 15, 2011. An entity shoulddisclose the total amount of receivables and theallowance for credit losses as of the end of the period ofadoption related to those receivables that are newlyconsidered impaired under Section 310-10-35 for whichimpairment was previously measured under Subtopic450-20, Contingencies—Loss Contingencies. An entityshould disclose the information required by paragraphs310-10-50-33 through 50-34, which was deferred byAccounting Standards Update No. 2011-01, Receivables(Topic 310): Deferral of the Effective Date of Disclosuresabout Troubled Debt Restructurings in Update No. 2010-20, for interim and annual periods beginning on or afterJune 15, 2011. Early adoption permitted.

Update No. 2011-02, Receivables (Topic310), a Creditor’s Determination of Whether aRestructuring Is a Troubled DebtRestructuring.

4/5/11

Effective upon issuance Update No. 2011-01, Receivables (Topic310): Deferral of the Effective Date ofDisclosures about Troubled DebtRestructurings in Update No. 2010-20.

1/19/11

Effective prospectively for business combinations forwhich the acquisition date is on or after the beginning ofthe first annual reporting period beginning on or afterDec. 15, 2010.

Update No. 2010-29—Business Combinations(Topic 805): Disclosure of Supplementary ProForma Information for Business Combinations(a consensus of the FASB Emerging IssuesTask Force).

12/21/10

For public entities, effective for fiscal years, and interimperiods within those years, beginning after Dec. 15,2010. Early adoption is not permitted. For nonpublicentities, the amendments are effective for fiscal years,and interim periods within those years, beginning afterDec. 15, 2011. Nonpublic entities may early adopt theamendments using the effective date for public entities.

Update No. 2010-0-28—Intangibles—Goodwilland Other (Topic 350): When to Perform Step2 of the Goodwill Impairment Test forReporting Units with Zero or NegativeCarrying Amounts (a consensus of the FASBEmerging Issues Task Force).

12/17/10

Effective for calendar years beginning after Dec. 31,2010, when the fee initially becomes effective.

Update No. 2010-27—Other Expenses (Topic720): Fees Paid to the Federal Government byPharmaceutical Manufacturers (a consensusof the FASB Emerging Issues Task Force).

12/16/10

Effective for fiscal years, and interim periods within thosefiscal years, beginning after Dec. 15, 2011. Theamendments in this Update should be appliedprospectively upon adoption. Retrospective application toall prior periods presented upon the date of adoption alsois permitted, but not required. Early adoption ispermitted, but only at the beginning of an entity’s annualreporting period.

Update No. 2010-26, Financial Services—Insurance (Topic 944), Accounting for CostsAssociated with Acquiring or RenewingInsurance Contracts (a consensus of theFASB Emerging Issues Task Force).

10/13/10

Should be applied retrospectively to all prior periodspresented, effective for fiscal years ending after Dec. 15,2010. Early adoption is permitted.

Plan Accounting—Defined ContributionPension Plans (Topic 962): Reporting Loansto Participants by Defined ContributionPension Plans (a consensus of the FASBEmerging Issues Task Force).

9/28/10

Effective for fiscal years, and interim periods within thoseyears, beginning after Dec. 15, 2010

Health Care Entities (Topic 954):Presentation of Insurance Claims and RelatedInsurance Recoveries (a consensus of theFASB Emerging Issues Task Force).

8/27/10

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FASB GUIDANCE, EFFECTIVE SINCE Dec. 15, 2010 − Continued

Effective Date Title Date IssuedEffective for fiscal years beginning after Dec. 15, 2010. Update No. 2010-23, Health Care Entities

(Topic 954): Measuring Charity Care forDisclosure (a consensus of the FASBEmerging Issues Task Force).

8/26/10

Effective for periods ending on or after Dec. 15, 2010.The amendments that require disclosures about activitythat occurs during a reporting period are effective forperiods beginning on or after Dec. 15, 2010. Fornonpublic companies, the amendments are effective forperiods ending on or after Dec. 15, 2011.

Update No. 2010-20, Disclosures about theCredit Quality of Financing Receivables andthe Allowance for Credit Losses.

7/22/10

Effective for fiscal years, and interim periods within thosefiscal years, beginning on or after Dec. 15, 2010.

Update No. 2010-16, Entertainment—Casinos(Topic 924): Accruals for Casino JackpotLiabilities (A consensus of the FASBEmerging Issues Task Force).

4/26/10

Effective for fiscal years and interim periods within thoseyears beginning after Dec. 15, 2010.

Update No. 2010-15, Financial Services—Insurance (Topic 944), How Investments HeldThrough Separate Accounts Affect anInsurer’s Consolidation Analysis of ThoseInvestments, (a consensus of FASB’sEmerging Issues Task Force).

4/21/10

Effective for fiscal years beginning on or after Dec. 15,2010, and interim periods within those fiscal years.

Update No. 2010-13, Compensation—StockCompensation (Topic 718), Effect ofDenominating the Exercise Price of a Share-Based Payment Award in the Currency of theMarket in Which the Underlying EquitySecurity Trades.

4/16/10

For public companies, effective for interim and annualperiods beginning on or after June 15, 2011, and appliesretrospectively to restructurings occurring on or after thebeginning of the fiscal year of adoption. For nonpublicentities, the amendments in the Update are effective forannual periods ending on or after Dec. 15, 2012,including interim periods within that annual period. Earlyapplication is permitted.

Update No. 2011-02, Receivables (Topic310): A Creditor’s Determination of Whethera Restructuring Is a Troubled DebtRestructuring.

4/5/11

FASB, IASB JOINT GUIDANCE AND STANDARDS

Effective Date Title Date IssuedFor public companies it is effective prospectively forinterim an annual periods beginning after Dec. 15, 2011,with no early adoption allowed. For private companies, itis effective for annual period after Dec. 15, 2011, withearly adoption allowed for interim periods only.

IFRS 13 Fair Value Measurement; AccountingStandards Update 2011-04, Fair ValueMeasurement (Topic 820): Amendments toAchieve Common Fair Value Measurementand Disclosure Requirements in U.S. GAAPand IFRSs

5/12/11

AICPA STANDARDS AND GUIDANCE

Effective Date Title Web AccessEffective for interim reviews of interim financialinformation for periods beginning after Dec. 15, 2011.Early application is permitted.

SAS 121, Revised Applicability of Statementon Auditing Standards No. 100, InterimFinancial Information

AICPA auditand atteststandards

Effective for audits of financial statements for periodsbeginning on or after Dec. 15, 2010. Early application ispermitted.

SAS 120, Required SupplementaryInformation

AICPAresearch page

Effective for audits of financial statements for periodsbeginning on or after Dec, 15, 2010. Early application ispermitted.

SAS 119, Supplementary Information inRelation to the Financial Statements as aWhole

AICPAresearch page

Effective for audits of financial statements for periodsbeginning on or after Dec. 15, 2010. Early application ispermitted.

SAS 118, Other Information in DocumentsContaining Audited Financial Statements

AICPAresearch page

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AICPA STANDARDS AND GUIDANCE − Continued

Effective Date Title Web AccessEffective for periods beginning on or after Dec. 15, 2010.This date is provisional but will not be earlier than Dec.15, 2010.

Planning an Audit supersedes SAS No. 108,Planning and Supervision (AICPA,Professional Standards, vol. 1, AU sec. 311)

AICPAresearch page

Effective for periods beginning on or after Dec. 15, 2010.This date is provisional but will not be earlier than Dec.15, 2010.

Materiality in Planning and Performing anAudit supersedes SAS No. 107, Audit Riskand Materiality in Conducting an Audit(AICPA, Professional Standards, vol. 1, AUsec. 312)

AICPAresearch page

Effective for periods beginning on or after Dec. 15, 2010.This date is provisional but will not be earlier than Dec.15, 2010.

Evaluation of Misstatements Identified Duringthe Audit supersedes SAS No. 107, AuditRisk and Materiality in Conducting an Audit(AICPA, Professional Standards, vol. 1, AUsec. 312)

AICPAresearch page

Effective for periods beginning on or after Dec. 15, 2010.This date is provisional but will not be earlier than Dec.15, 2010.

Understanding the Entity and Its Environmentand Assessing the Risks of MaterialMisstatement (Redrafted) supersedes SASNo. 109, Understanding the Entity and ItsEnvironment and Assessing the Risks ofMaterial Misstatement (AICPA, ProfessionalStandards, vol. 1, AU sec. 314)

AICPAresearch page

Effective for periods beginning on or after Dec. 15, 2010.This date is provisional but will not be earlier than Dec.15, 2010.

Performing Audit Procedures in Response toAssessed Risks and Evaluating the AuditEvidence Obtained (Redrafted) supersedesSAS No. 110, Performing Audit Procedures inResponse to Assessed Risks and Evaluatingthe Audit Evidence Obtained (AICPA,Professional Standards, vol. 1, AU sec. 318)

AICPAresearch page

Effective for periods beginning on or after Dec. 15, 2010.This date is provisional but will not be earlier than Dec.15, 2010.

Audit Evidence (Redrafted) supersedes SASNo. 106, Audit Evidence (AICPA, ProfessionalStandards, vol. 1, AU sec. 326)

AICPAresearch page

Effective Dec. 15, 2011. Early application is permitted. Statement on Auditing Standards No. 121,Revised Applicability of Statement onAuditing Standards No. 100, Interim FinancialInformation

AICPAresearch page

Effective Jan. 1, 2012. Early application is permitted. SQCS No. 8, A Firm’s System of QualityControl (Redrafted)

AICPAresearch page

PCAOB STANDARDS AND RULES

Effective Date Title Web AccessJune 14, 2011 Interim Inspection Program of Broker-Dealer

AuditorsPCAOB Program Materials http://pcaobus.org/News/Events/Pages/06142011_OpenBoardMeeting.aspx

On or after Dec. 15, 2010 Auditing Standards No. 8-No. 15, related torisk assessment and response to risk in anaudit.

PCAOB press release http://pcaobus.org/News/Releases/Pages/08052010_AuditingStandards-RiskAssessment.aspx

IASB STANDARDS AND GUIDANCE

Effective Date Title Date IssuedEffective for financial years beginning onor after Jan. 1, 2013. Earlier applicationis permitted.

Amendments to IAS 19, Employee Benefits,http://www.ifrs.org/News/Press+Releases/IAS+19+June+2011.htm

6/16/11

Effective for annual periods beginning onor after Jan. 1, 2013. Earlier applicationis permitted.

IFRS 12 Disclosure of Interests in Other Entities, http://www.ifrs.org/Current+Projects/IASB+Projects/Consolidation/Consol+disclosure/IFRS+12+Disclosure+of+Interests+in+Other+Entities/IFRS+12+Disclosure+of+Interests+in+Other+Entities.htm

5/12/11

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IASB STANDARDS AND GUIDANCE − Continued

Effective Date Title Date IssuedEffective for annual periods beginning onor after Jan. 1, 2013. Earlier applicationis permitted.

IFRS 11 Joint Arrangements, (http://www.ifrs.org/Current+Projects/IASB+Projects/Joint+Ventures/IFRS+11+Joint+Arrangements/IFRS+11+Joint+Arrangements.htm).

5/12/11

Effective for annual periods beginning onor after Jan. 1, 2013. Earlier applicationis permitted.

IFRS 10 Consolidated Financial Statements, (http://www.ifrs.org/Current+Projects/IASB+Projects/Consolidation/Consol+disclosure/IFRS+10+Consolidated+Financial+Statements/IFRS+10+Consolidated+Financial+Statements.htm).

5/12/11

Jan. 1, 2013 IFRS 9, Financial Instruments, (IASB press release of 11/12/09).

11/12/09

Jan. 1, 2012 Amendments to IAS 12, Income Taxes, removing applicabilityof Taxes—Recovery of Revalued Non-Depreciable Assets toinvestment properties carried at fair value (IASB press releaseof 12/20/10).

12/20/09

Effective from July 1, 2011. Earlierapplication is permitted.

Severe Hyperinflation and Removal of Fixed Dates for First-timeAdopters, Amendments to IFRS 1, First-time Adoption ofInternational Financial Reporting Standards (IASB pressrelease of 12/20/10).

12/20/10

July 1, 2011 Amendments to IFRS 7 Financial Instruments: Disclosures,(IASB press release of 10/7/10).

10/7/10

Effective for mandatory adoption Jan. 1,2011, with early adoption permitted for2009 year-end financial statements.

Amendment to IFRIC 14, Prepayments of a Minimum FundingRequirement (IASB press release of 11/26/09).

11/26/09

Effective for annual periods beginning onor after Jan. 1, 2011, with earlierapplication permitted.

Revised version of IAS 24 Related Party Disclosures,simplifying disclosure requirements for government-relatedentities and clarifying definition of a related party (IASB pressrelease of 11/4/09).

11/4/09

GASB STANDARDS AND GUIDANCE

Effective Date Title Date IssuedEffective for financial statements forperiods beginning after Dec. 15, 2011,with earlier application encouraged.

Statement No. 63, Financial Reporting of Deferred Outflows ofResources, Deferred Inflows of Resources, and Net Positionhttp://gasb.org

7/13/11

Effective for periods beginning after June15, 2011, with earlier applicationencouraged.

Statement No. 64, Derivative Instruments: Application of HedgeAccounting Termination Provisions (an amendment of GASBStatement No. 53)http://gasb.org

7/13/11

Upcoming Meetings of Standard Setters

To check for latest meeting updates for FASB, go tothe board’s calendar page at http://www.fasb.org. Forthe IASB’s calendar, go to the Diary page on http://

www.iasb.org. For AICPA AcSEC meetings go tohttp://www.aicpa.org.

STANDARD-SETTING MEETINGS

7/26/11 FASB education session Norwalk, Conn.

7/26/11 GASB teleconference Norwalk, Conn.7/27/11 FASB meeting/education session Norwalk, Conn.8/3/11 FASB meeting/education session Norwalk, Conn.8/5/11 FASB education session Norwalk, Conn.8/5/11 IASB Financial Instruments Working Group London8/10/11 FASB meeting/education session Norwalk, Conn.

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STANDARD-SETTING MEETINGS − Continued

8/17-19/11 GASB meeting Norwalk, Conn.8/24/11 FASB meeting/education session Norwalk, Conn.8/31/11 FASB meeting/education session Norwalk, Conn.9/6/11 GASB teleconference Norwalk, Conn.9/8-9/11 IFRS Interpretations Committee meeting London9/16-18/11 World Standards Setters Meeting London9/19-23/11 IASB meeting London10/4-6/11 GASB meeting Norwalk, Conn.10/5-6/11 IASB XBRL Advisory Committee London10/12-13/11 IFRS Foundations Truestees TBA10/18/11 GASB teleconference Norwalk, Conn.10/18-21/11 IASB meeting TBA10/24-26/11 FASB/IASB meeting Norwalk, Conn.11/3-4/11 IFRS Interpretations Committee meeting London11/8-10/11 GASB meeting Norwalk, Conn.11/14-18/11 IASB meeting TBA11/29/11 GASB teleconference Norwalk, Conn.12/12-16/11 IASB meeting TBA12/13-15/11 GASB meeting Norwalk, Conn.

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