June 4, 2010

Highlights From AICPA National Conference on Current SEC & PCAOB Developments

By Giuseppe Lenopoli, Senior Accountant - Assurance Services

Highlights From AICPA National Conference on Current SEC & PCAOB Developments

In December 2009, the AICPA held its annual national conference on current SEC and PCAOB developments in Washington, DC. Representatives from the SEC, FASB, IASB, AICPA and PCAOB discussed current challenges within the auditing profession. Issues discussed included the importance of independent accounting standards, the convergence in accounting standards and improvements in financial statement disclosures by registrants.

One of the key speakers of this year’s annual national conference was SEC Commissioner Elisse B. Walter. Commissioner Walter spoke about the importance of setting independent accounting standards. As a result of the recessionary U.S. economy, the role of accounting standards is being challenged. Commissioner Walter stated that the SEC wants “accounting standards to be fair and objective, based on expert analysis and judgment, and free of undue influence, both political and commercial, so that they can be applied consistently across situations involving thousands of different companies.” As a result of the economic crisis, many feel that regulatory agencies should be involved in reforming accounting standards and making these standards less stringent. Accounting standards have been designed to help investor’s measure financial performance of companies. These standards should be improved to address weaknesses, protect investors and not be influenced by political agendas. The SEC will continue to work on setting independent accounting standards that will keep pace with the changes of the global economy.

Another topic of discussion at the annual national conference was the convergence in accounting standards from Generally Accepted Accounting Principles (“GAAP”) to International Financial Reporting Standards (“IFRS”). The recent global economic downturn has shown the need to improve accounting standards and have one single set of high-quality global accounting standards. James Kroeker, SEC Chief Accountant in the Office of Chief Accountant noted that there are many challenges involved in converging GAAP to IFRS. These challenges include the average U.S. investor understanding IFRS, applying IFRS to U.S. public issuers, the impact on U.S. regulatory environment and changes in accounting systems. Having one set of global accounting standards is an important priority of the SEC however, Commissioner Walter stated “we should move forward with further incorporating IFRS into the U.S. capital markets if, and only if, it is the right thing to do for U.S. investors.” The SEC is currently working on the proposed IFRS Roadmap, the SEC’s plan that would lead to the use of IFRS as the single-set of global standards starting in 2014. On February 24, 2010, the Securities and Exchange Commission voted to issue a statement that lays out its position regarding global accounting standards and makes clear that the Commission continues to believe that a single set of high-quality globally accepted accounting standards would benefit U.S investors.

During the annual conference, the SEC staff suggested areas where registrants could improve disclosures in their annual and quarterly reports. The SEC suggested that registrants should simplify financial statement disclosures and the financial statements should not be written as a compliance document but written in plain English for investors. Wayne Carnall, Chief Accountant of the Division of Corporate Finance, states that a registrant should start with a disclosure checklist as a starting point, not an end point. By using a disclosure checklist, registrants can determine how much needs to be disclosed based on the company’s operations and what is material to the company. Additionally, the way registrants reference the new Accounting Standards Codification (“ASC”) in footnotes was discussed. The ASC was effective for all entities for interim and annual periods ending after September 15, 2009. The ASC became the single source of authoritative GAAP in the U.S., other than rules and interpretations issued by the SEC. The ASC reorganized GAAP into a topical format and established two levels of guidance, authoritative and non-authoritative. The ASC did not change GAAP, it just simplified user access to the authoritative literature. To corroborate with the SEC’s suggestion to simplify financial statement disclosures, Mr. Carnall suggested that registrants describe the accounting standard/concept in the footnote rather than referencing to the ASC with the “nuclear launch codes”. The SEC also encouraged registrants to be consistent with their financial statements to other publications such as press releases and websites.

In addition to simplifying financial statement disclosures, the SEC staff suggested ways registrants should improve items that are disclosed in annual and quarterly reports. For example, as a result of the recessionary economy, many registrants have had to perform analysis on the fair value of their business to determine if there is potential goodwill impairment. As a result of impairment testing, the SEC staff has made suggestions on what registrant’s should disclose relating to the goodwill impairment. A two-step approach is used to test for impairment of goodwill. The first step is to determine the fair value of the reporting unit. If the fair value of the reporting unit is greater than carrying value, no further testing is needed and there is no evidence of impairment. If the fair value of the reporting unit is less than the carrying amount, a second test is required. In the second step of the goodwill impairment test, the fair value of the reporting unit is allocated to all of the reporting unit’s assets and liabilities, excluding goodwill. Any excess of fair value of the reporting unit’s assets and liabilities is the implied fair value of goodwill. If the carrying amount of goodwill exceeds the implied value, an impairment charge is recognized. If the registrant has no impairment of goodwill, the registrant should disclose that fact in the financial statements. Additionally, a registrant should disclose any known material uncertainties regarding the potential failure of step one of a goodwill impairment test. The registrant should consider disclosing the percentage by which fair value exceeds carrying value, a description of the key assumptions that drives fair value and a brief overview of uncertainty associated with the key assumptions and any potential events that could have a negative effect on carrying value of the assets. Disclosing these facts would let the financial statement reader understand the steps the registrant has taken to determine whether there is or is not goodwill impairment.

The annual national conference on current SEC and PCAOB developments provided everyone in the accounting profession an update of what has occurred in the accounting profession, the goals the profession is working on and what the profession can expect in the future. For more information on the 2009 AICPA annual national conference, please visit www.sec.gov.