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.
Please contact Hideo Takada (404-222-3316；email@example.com) or Shin Kusanagi (404-222-7611；firstname.lastname@example.org) in the Atlanta office, or Michael Maekawa (213-955-8331; email@example.com) in the Los Angeles office, with questions.
On August 17, 2010, the FASB and IASB issued joint Exposure Draft on accounting for leases that, if finalized as proposed, would significantly change how lessees and lessors account for and report leasing arrangements in their financial statements. The proposed guidance would affect almost every organization. Lessees would be required to recognize in their statements of financial position an asset representing the right to use the leased property over the estimated lease term (the right-of-use asset) and a liability to make estimated future lease payments for each lease under the proposed right-of-use model, which would fundamentally change the accounting and reporting of leases currently classified as operating leases. Lessors would account for leases under two very different accounting models: the performance obligation approach, which would apply if the lessor retains significant risks and benefits associated with the underlying property, or the de-recognition approach, which would apply to all other leases. The timing of profit recognition by lessors would be accelerated under the derecognition approach as compared to the performance obligation approach. The proposed guidance would significantly affect disclosure requirements for both lessees and lessors.
New legislation was signed into law on August 10, 2010 by President Obama with resulting potential financial reporting consequences. The new legislation included international tax provisions affecting allowable foreign tax credits, which could have significant financial reporting consequences for companies with foreign operations. The U.S. foreign tax credit provides relief from double taxation resulting from including foreign income in the computation of U.S. tax obligations. Companies will need to recognize the effects of the provisions, if any, on existing deferred tax assets and liabilities, in the period that includes the August 10, 2010 enactment date.
On September 15, the SEC issued a final rule, "Internal Control Over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers", that permanently exempts non-accelerated filers from the requirement in Section 404(b) of the Sarbanes-Oxley Act of 2002 to obtain an external audit on the effectiveness of internal control over financial reporting. Specifically, the rule adopts amendments to SEC rules and forms to conform them to Section 404(c) of the Act, as added by Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which provides that Section 404(b) does not apply to an audit report prepared for an issuer that is neither an accelerated filer nor a large accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934. Under Item 308 of Regulation S-K, non-accelerated filers still must comply with Section 404(a), which requires public companies to perform their own assessments of internal control. The final rule will be effective when it is published in the "Federal Register".
On September 28, the FASB issued FASB Concepts Statement No. 8, "Conceptual Framework for Financial Reporting"-Chapter 1, "The Objective of General Purpose Financial Reporting", and Chapter 3, "Qualitative Characteristics of Useful Financial Information", which replaces Concepts Statements No. 1 and No. 2 and completes the first phase of the FASB and IASB’s joint project to develop an improved conceptual framework for U.S. GAAP and IFRS. Chapter 1 defines the objective of general purpose financial reporting and discusses users, usefulness, and limitations of general financial reporting. Chapter 3 provides guidance about making judgments, and discusses the purpose of qualitative characteristics and distinguishes and defines two kinds of qualitative characteristics. Chapter 3 also prescribes that comparability, verifiability, timeliness, and understandability are complementary to the fundamental qualitative characteristics.
While the FASB issued its document as FASB Concepts Statement No. 8, the IASB revised portions of its framework to incorporate the same content.
The AICPA/FAF/NASBA Blue Ribbon Panel decided to recommend to the Financial Accounting Foundation (FAF) Board of Trustees changes to the standard-setting process and accounting standards for use by private companies. The recommendations include establishing a new standard-setting body under the oversight of the FAF that would develop standards for private companies based on U.S. GAAP with exceptions from certain recognition, measurement, and disclosure requirements.
In connection with their efforts to converge accounting and reporting standards and in recognition of the need to manage the pace and costs of implementing their standards, on October 19, 2010, the FASB and the IASB released a Discussion Paper and a Request for Views, "Effective Dates and Transition Methods", respectively. The Boards issued the documents to seek comment from stakeholders (preparers, auditors, and users of financial statements) about how they adopt new standards, including the timing of adoption and the form of adoption that stakeholders favor.
The FASB and IASB decided to delay deliberations on two convergence projects - financial statement presentation and financial instruments with characteristics of equity - because they lack the capacity to complete these projects on a timely basis and still manage their workload related to the highest-priority convergence projects identified in their Memorandum of Understanding: revenue recognition; leases; insurance; and financial instruments, derivatives, and hedging. The deliberations on these two convergence projects will be postponed until after June 2011 when, assuming they successfully complete higher priority projects, the Boards will have capacity.
The FASB decided that its proposed standard, "Disclosure of Certain Loss Contingencies issued on July 20, 2010", would not be effective for the 2010 calendar year-end reporting period. If it had been finalized as proposed, the standard would have been effective for public entities with fiscal years ending after December 15, 2010 (i.e., years ending December 31, 2010 for calendar year-end entities).
On October 29, 2010, the SEC staff published its first progress report about its work plan to consider incorporating IFRS into the financial reporting system for U.S. public companies. The progress report provides details about specific plans that the SEC staff has undertaken or plans to undertake on each of the six key issues identified in the work plan. This report is expected to be the first of several periodic reports issued during the next year.