In this section, we provide brief updates on regulatory developments in auditing and accounting that may impact Japanese companies in the United States. Further discussion of the issues can be found in KPMG's Department of Professional Practice's Defining Issues.
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The FASB’s proposed Accounting Standards Update (ASU), "Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities–Financial Instruments (Topic 825) and Derivatives and Hedging (Topic 815)", would significantly change many of the fundamentals of accounting for financial instruments. The proposal would require entities to use a more consistent accounting model for the classification and measurement of most financial assets and liabilities and impairment of financial assets. Although most financial instruments would be measured at fair value on the statement of financial position, information about the amortized cost of certain instruments would also be presented in the financial statements. The proposal would remove the current probability threshold and revise the incurred-loss model for recognizing impairment thus accelerating the recognition of credit losses. In addition, the proposal would change hedge accounting to resolve major practice issues.
The effective date will be established when the final ASU is issued. However, the effective date of certain aspects of the guidance for nonpublic entities with less than $1 billion in total consolidated assets would be deferred for four years after the initial effective date.
The FASB and IASB issued a joint progress report that details their modified strategy to converge U.S. GAAP and IFRS by prioritizing certain joint projects and extending the targeted completion dates for some projects beyond June 2011 into the second half of the year. The modified convergence strategy was developed to enable the Boards to focus on projects where they believe there is the most urgent need for improvement of both IFRS and U.S. GAAP and to enable broad-based and effective stakeholder participation in the Boards’ due process to facilitate their efforts to issue high-quality standards for their high priority projects.
The FASB and IASB issued the joint Exposure Draft, "Revenue from Contracts with Customers", a key step in the efforts undertaken by the Boards to develop comprehensive, converged guidance about revenue recognition by mid-2011. The Boards believe that both U.S. GAAP and IFRS can be improved by developing one global standard on revenue recognition that provides more guidance than current IFRS and creates a single model for all revenue arrangements to replace the different industry and transaction-based models in current U.S. GAAP. Because the objective of the proposed standard is to develop a single model for revenue recognition, it could change revenue recognition for long-term contracts, licensing and rights to use intellectual property, franchisors, and other areas for which there is transaction and industry-specific accounting guidance. The proposed standard also would affect consideration of collectibility in recognition and measurement of revenue, require more estimates and detailed disclosures, and modify the accounting for contract costs.
The effective date will be established when the final standard is issued.
The FASB proposed ASU, "Amendments for Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs". The proposal may change how some entities determine fair value, and would require additional disclosures about fair value measurements. The proposal also would provide additional guidance about the principal market determination, valuation premises, blockage factors, instruments with offsetting market or counterparty credit risks, and instruments classified in shareholders’ equity.
The FASB released the revisions to the FASB and IASB joint financial statement presentation project and the FASB’s proposed ASU, "Statement of Comprehensive Income", which seeks to simplify the reporting of comprehensive income by requiring entities to prepare a single statement of comprehensive income that would present in the same financial statement subtotals for net income and OCI and their components. The presentation of comprehensive income initially was part of the joint FASB/IASB project on financial statement presentation, which was delayed as announced in the FASB’s revised work plan and resulted in the Board’s decision to address comprehensive income as a separate project.
The FASB issued its tentative decision to issue a proposed ASU that would require investment property to be measured at fair value. The definition of investment property and other provisions of the proposed ASU are expected to be consistent with IFRS, except that the international standards allow an entity to elect to measure investment property at fair value or cost rather than require use of fair value. The ASU is to be finalized concurrently with the ASU about leases in 2011.
The FASB’s proposed ASU, "Disclosure of Certain Loss Contingencies", would amend the disclosure requirements in FASB ASC Subtopic 450-20, "Contingencies – Loss Contingencies", and address concerns raised by many constituents that the original proposal in 2008 would have affected attorney-client privilege and caused defendants in litigation to disclose information that would be prejudicial to their case. The Board believes that the revised proposal would not require entities to disclose prejudicial information and decided to eliminate the prejudicial exemption that was part of the original Exposure Draft.
For "public entities", the final ASU would be effective for fiscal years ending after December 15, 2010 (December 31, 2010 for calendar-year entities), and interim and annual periods in subsequent fiscal years. For nonpublic entities, the new requirements would be effective for the first annual period beginning after December 15, 2010, and for interim periods of fiscal years subsequent to the first annual period.
The FASB’s ASU, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses", will significantly increase disclosures about credit quality of financing receivables and the allowance for credit losses, and will require disclosures to be made at a greater level of disaggregation. Disclosures of information as of period-end are effective for public companies in interim and annual periods ending on or after December 15, 2010, while disclosures about activity occurring throughout the period are effective for interim and annual periods beginning on or after December 15, 2010. The ASU will be effective for nonpublic companies in fiscal years ending on or after December 15, 2011.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 permanently exempts non-accelerated filers from the internal control audit requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002. Previously, the SEC required non-accelerated filers to comply with Section 404(b) beginning with their annual reports for fiscal years ending on or after June 15, 2010. Non-accelerated filers still must comply with Section 404(a), which requires public companies to perform their own assessments of internal control over financial reporting. Under Item 308(a) of Regulation S-K, management’s annual report on internal control over financial reporting for years ended on or after June 15, 2010 will be considered filed and not furnished, which means that the report will be subject to liability under Section 18 of the Exchange Act.