CFO Essentials Newsletter - February 2013

February 2013

RISKSINTERNALCONTROLS

I.T.MANAGEMENT

FINANCIALREPORTING

TECHNICALACCOUNTING

REGULATORYREPORTING

M&A

TAX

RESOURCEMANAGEMENT

CASHFLOW

FINANCIAL REPORTING____________________________________________________________

FASB Releases Summary of Disclosure Effectiveness Forums

TECHNICAL REPORTING____________________________________________________________

Segment Reporting -Operating Effectively

Essential BriefingsIMPAIRMENT MODEL FORCREDIT LOSSES

1 | SingerLewak February 2013

Contents

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ESSENTIAL BRIEFINGS2 IMPAIRMENT MODEL FOR CREDIT LOSSES

With the convergence of IASB and FASB accounting, the FASB issued a proposed accounting standard update in December 2012, Financial Instruments-Credit Losses. This proposed standard will address the recognition of credit losses on financial instruments based on expected losses rather than on an incurred-loss impairment model.

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FINANCIAL REPORTING4 FASB RELE ASES SUMMARY OF DISCLOSURE

EFFECT IVENESS FORUMS In July of 2012, the Financial Accounting Standards Board (FASB) issued an invitation to comment (ITC) on Disclosure Framework, which outlines possible approaches to improving the effectiveness of disclosures in notes to financial statements.

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TECHNICAL REPORTING4 SEGMENT REPORT ING - OPER AT ING EFFECT IVELY

The Financial Accounting Foundation (FAF) recently undertook a post-implementation review of Accounting Standards Codification Topic 280, Segment Reporting, previously known as Financial Accounting Standards Board (FASB) Statement No. 131, Disclosures about Segments of an Enterprise and Related Information.

February 2013

February 2013 SingerLewak | 2

E S S E N T I A L B R I E F I N G S

IMPAIRMENT MODEL FOR CREDIT LOSSESBY SUZIE DORAN | [email protected] | 310.477.3924

SUMMARY:

With the convergence of IASB and FASB accounting, the FASB issued a proposed accounting standard update in December 2012, Financial Instruments-Credit Losses. This proposed standard will address the recogni-tion of credit losses on financial instruments based on expected losses rather than on an incurred-loss impairment model.

SCOPE:

The proposed guidance would apply to all entities on account-ing for credit losses on debt securities, trade receivables, lease receivables and loan commit-ments.

APPLICAT ION:

For each reporting period, an al-lowance would be established for all expected credit losses on debt instruments. Rather than waiting for a triggering event, recognition of a credit loss would be based on if a loss is expected by the next fiscal year or there is a significant deterioration in credit. In calcu-lating an estimate of expected credit losses, quantitative and qualitative factors would need to be considered, such as current

conditions and forecasts specific to the entity. The allowance will also need to be adjusted for the time value of money.

The income statement would also reflect the amount of credit loss or reversal required to adjust the balance sheet allowance for expected credit losses as of the end of the reporting period. Ac-crual of interest income would cease when it is not probable that the principal or interest will not be paid. When the carrying amount has been reduced to zero, any additional amounts would be recognized as recoveries of amounts previously written off with any excess recognized as interest income.

When it is determined that there is no reasonable expectation of future recovery, the cost basis of a financial asset would be directly

reduced. The allowance would be reduced by this amount. Recov-ery of any previously written off amounts would be recognized with an adjustment to the al-lowance when consideration is received.

F INANCIAL STATEMENT PRESENTAT ION:

Financial assets would need to reflect the estimate of any al-lowances on the balance sheet. Expanded disclosures proposed would significantly expand the amount of disclosure related to the credit quality, factors used to determine the allowance for expected credit losses, and ad-ditional tabular formats that include rolling forward changes and reconciling fair value to the amortized cost.

Effective Date:

As the proposed draft was issued in December 2012, it is too early to determine when a final draft will be issued. Accordingly, no specific effective date has been proposed.

SUZIE DORAN CAN BE REACHED AT

[email protected] OR 310.477.3924

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

FASB RELEASES SUMMARY OFDISCLOSURE EFFECTIVENESS FORUMSBY MIKE BARLOEWEN | SENIOR [email protected] | 818.999.3924

In July of 2012, the Financial Accounting Standards Board (FASB) issued an invitation to comment (ITC) on Disclosure Framework, which outlines pos-sible approaches to improving the effectiveness of disclosures in notes to financial statements. The ITC suggests that the FASB is exploring ways to provide more flexible disclosure requirements. These would allow a preparer to tailor the disclosures better based on particular circumstances of an entity and that the tailoring would be based on the preparer’s assessment of relevance.

The Financial Accounting Stan-dards Board and the Center for Audit Quality issued a summary in December of observations from two forums it sponsored for discussions on disclosure effectiveness. The forums were planned to facilitate discussion between a wide range of finan-cial reporting stakeholders on improving the effectiveness of disclosures in notes to financial statements and other parts of the financial reporting package.

The dialogue focused on parts of the FASB’s ITC and on other financial reporting issues. Partici-pants included financial state-ment preparers and users, corpo-rate board and audit committee members, auditors, attorneys, regulators, standard setters and academics.

Topics addressed during the two forums were:

•Flexibility of disclosure require-ments

•Role of the notes of financial statements

•Disclosure relevance to inves-tors and creditors

•Effect on the assessment of fu-ture cash flows to the investor

•Streamlined disclosure in the current environment

•Prescriptive nature of current accounting guidance

•Overlap of notes and Manage-ment’s Discussion and Analysis

•Costs, benefits and incentives for change

As a result of the forums, it was clear that the issue of greater financial statement disclosure effectiveness deserves careful consideration by FASB and by stakeholders. The discussion revealed that the perceived need for change depended greatly on the sophistication of the users with sophisticated analysts not interested in reduced volume of disclosure. Efforts to explore potential ways to streamline disclosure requirements are set to continue.


The ITC suggests that the FASB is exploring ways to provide more flexible disclosure requirements

MIKE BARLOEWEN CAN BE REACHED AT


February 2013 SingerLewak | 4

T E C H N I C A L R E P O R T I N G

SEGMENT REPORTING –OPERATING EFFECTIVELYBY AARON SULLIVAN | [email protected] | 310.477.3924

The Financial Accounting Foun-dation (FAF) recently undertook a post-implementation review of Accounting Standards Codifica-tion Topic 280, Segment Report-ing, previously known as Finan-cial Accounting Standards Board (FASB) Statement No. 131, Disclosures about Segments of an Enterprise and Related Informa-tion.

Topic 280, Segment Reporting was released in 1997 and is appli-cable to public companies only, with the intention of improv-ing the way financial informa-tion about business segments is reported. The review found that the accounting standard general-ly achieves its purpose, although stakeholders raised various sug-gested improvements.

FASB Chairman Leslie F. Seid-man said, “The post-implementa-tion review report on Statement 131 affirms the overall effective-ness of the standard. However, the report identified aspects of Statement 131 that stakehold-ers think could be improved; for example, the effect of changes in

technology on the determination of what information is reviewed by the chief operating decision maker. We are considering the re-ported findings and will provide our initial response in the com-ing weeks.”

The post-implementation review was carried out by an indepen-dent FAF team. This review is separate from the standard set-ting process of the FASB and is intended to assist ongoing efforts to evaluate the effectiveness of the standard setting processes for both the FASB and the Govern-mental Accounting Standards Board.

The FAF’s choice of a well-established and relatively well

accepted standard in Topic 280, Segment Reporting, makes sense when you consider that this is the second post-implementation review of a FASB standard, the first being the review of the more recent and arguably more conten-tious FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48).

Topic 280 establishes standards for the way public companies re-port information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures regarding products and services, geographic areas and major customers. It does not apply to private companies or nonprofit organizations.

The review team, following feed-back from financial statement us-ers including investors, preparers, auditors, academics and regula-tors concluded the following:

•Topic 280 provides more information about companies’ different business activities than the prior segment report-


ing standard did. In addition, companies’ reported segment information is better aligned with their internal structures and more consistent with finan-cial information reported out-side the financial statements. However, there are indications that some companies (particu-larly those reporting only one segment) are not reporting a sufficient number of segments.

•Overall, Topic 280 enhanced the relevance of segment disclosures. Additional dis-aggregated information and improved alignment allows investors to understand the different types of activities in which a company engages and its prospect for future growth. Investors also use the improved segment information to make judgments about the company as a whole. However, reported

segment information is not al-ways sufficient for their invest-ment decisions. Users would like more segment information (e.g., gross margin and cash flow), and some might like more consistency across compa-nies in the amount, type, and measurement of information disclosed.

• In general, Topic 280’s require-ments can be understood, can be applied as intended, and result in reliable information. However, the guidance for determining and aggregating operating segments might be difficult for some companies to apply—in part because of advances in technology and the principles-based nature of the standard—and generates continuing discussions between preparers, practitioners, and regulators.

•Topic 280 did not result in any significant changes in operating or financial reporting practices, nor did it have any significant economic consequences. How-ever, some companies might be aggregating segments to reduce transparency because of com-petitive harm concerns or for other reasons.

•Both the costs and the benefits associated with Topic 280’s re-quired segment disclosures are consistent with the Board’s and stakeholders’ expectations

For further information and the complete review please visit the FAF’s website at AccountingFoundation.org.

AARON SULLIVAN CAN BE REACHED AT


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CFO Essentials Newsletter - February 2013

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