KPMG's Defining
Issues
Click below to read Defining Issues, a publication of KPMG's Department
of Professional Practice. Defining Issues provides developments
in financial reporting, including developments that impact audit
committees.
Proposed Changes to Earnings per Share Computations
This edition of KPMG’s Defining Issues describes a proposed FASB Statement that would cause companies to change their basic and diluted earnings per share computations. The effect of those changes on reported EPS would vary depending on a number of factors and could result in either higher or lower EPS for a particular reporting period as compared to current requirements.
SEC Roundtable Compares Application of IFRS and U.S. GAAP
This edition of KPMG’s Defining Issues describes the recommendations in the final report of the SEC’s Advisory Committee on Improvements to Financial Reporting. Its major recommendations to reduce accounting complexity include reducing industry-specific accounting guidance, applying a “judicious approach” to new requirements to apply fair-value measurements, and reducing exceptions, “bright lines,” and accounting alternatives.
SEC Advisory Committee Issues Final Recommendations Issue No. 8-27
This edition of KPMG’s Defining Issues describes the recommendations in the final report of the SEC’s Advisory Committee on Improvements to Financial Reporting. Its major recommendations to reduce accounting complexity include reducing industry-specific accounting guidance, applying a “judicious approach” to new requirements to apply fair-value measurements, and reducing exceptions, “bright lines,” and accounting alternatives. The Committee also presented recommendations to revise guidance on materiality and error correction that are intended to reduce occasions for restatement of prior-period financial statements, to develop an integrated disclosure framework for useful disclosures based on consistent objectives, and to promote the “pre-eminence” of investor perspectives in standard setting.
Applying the Two-Class EPS Method to Share-Based Payments, June 2008 No. 08-26
This edition of of KPMG’s Defining Issues describes a new FASB Staff Position that may lower the reported earnings per share of companies that issue share-based payments entitling employees to receive dividends even if the awards do not vest. The Staff Position holds that unvested share-based-payment awards that contain nonforfeitable rights to dividends or dividend equivalents are “participating securities” as defined in EITF 03-6 and therefore should be included in computing earnings per share using the two-class method.
Proposed Loss-Contingency Disclosures, June 2008 No. 08-24
This edition of KPMG’s Defining Issues reports on a proposed FASB Statement that would require companies to disclose more information about loss contingencies, including a table showing the effect of recognized loss contingencies on the financial statements. The proposed Statement would be effective for fiscal years ending after December 15, 2008.
New Accounting for Financial Guarantee Insurance, May 2008 No. 08-20
This edition of of KPMG’s Defining Issues reports on new FASB Statement 163, which prescribes accounting for insurers of financial obligations, bringing consistency to recognizing and recording premiums and to loss recognition. A premium-receivable asset and an unearned-premium-revenue liability must be recognized at the inception of the contract, and a claim liability for expected losses in excess of the unearned-premium-revenue liability must be recognized based on the likelihood of default on the insured financial obligation.
SEC Proposes Mandatory XBRL Submissions
This edition of of KPMG’s Defining Issues reports on the SEC’s decision to approve issuing a proposal that would require companies to submit XBRL-formatted financial statements as exhibits to their filed financial statements, phasing in the requirement over three years based on company size and whether the company uses U.S. GAAP or IFRS as issued by the IASB. The requirement would apply to annual and quarterly reports, transition reports, and registration statements, and companies that maintain Web sites would have to make the information available there.
GAAP Hierarchy Brought into GAAP
This edition of of KPMG’s Defining Issues reports on new FASB Statement 162 that adopts a hierarchy of authoritative accounting guidance for nongovernmental entities, an action that is not expected to change practice, but is expected to facilitate designating the coming codification of accounting standards as authoritative. The Statement makes the hierarchy explicitly and directly applicable to preparers of financial statements, a step that recognizes preparers’ responsibilities for selecting the accounting principles for their financial statements. The effective date is 60 days following the SEC’s approval of the PCAOB’s related amendments to remove the GAAP hierarchy from auditing standards, where it has resided for some time.
New Accounting for Many Convertible Bonds
This edition of of KPMG’s Defining Issues reports on a new FASB Staff Position that requires issuers of convertible debt that may be settled wholly or partly in cash when converted to account for the debt and equity components separately. The requirements for separate accounting are to be applied retrospectively to previously issued convertible instruments as well as prospectively to newly issued instruments, negatively affecting both net income and earnings per share for issuers of the instruments.
Proposed Accounting for Trading Inventories
This edition of of KPMG’s Defining Issues reports on a proposed FASB Staff Position that would require companies to determine their trading inventories based on their trading activities and to account for their trading inventories at fair value, both initially and afterward, with changes in fair value recognized in earnings. Companies would also have to disclose information about the effect of reclassifying inventories from trading to nontrading and vice versa.
New Guidance on Estimating the Useful Lives of Intangible Assets
This edition of of KPMG’s Defining Issues reports on a new FASB Staff Position that requires companies estimating the useful life of a recognized intangible asset to consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, to consider assumptions that market participants would use about renewal or extension as adjusted for Statement 142’s entity-specific factors.
FASB Moves Toward Elimination of QSPEs
This edition of of KPMG’s Defining Issues reports on the FASB’s tentative decision to remove the qualifying-special-purpose-entity (QSPE) concept from U.S. GAAP and its exception from consolidation, a step that would dramatically increase the population of variable interest entities that companies must evaluate for consolidation and change accounting for transfers of financial assets. The step would be accompanied by changes in the accounting model for variable interest entities.
SEC Staff Suggests MD&A Disclosures About Fair-Value Measurements
This edition of of KPMG’s Defining Issues reports on published SEC staff views about disclosures relating to fair-value measurements that public companies should consider for inclusion in the Management’s Discussion and Analysis section of upcoming quarterly reports on Form 10-Q.
Separate Accounting for the Conversion Options of Many Convertible Bonds
This edition of of KPMG’s Defining Issues reports on a soon-to-be-released FASB Staff Position that will require issuers of convertible debt that may be settled wholly or partly in cash upon conversion to account for the debt and equity components separately. The new requirements, which will be applied retrospectively to previously issued convertible instruments as well as to new instruments, will increase reported interest expense for these instruments.
Proposed Disclosures about Postretirement Benefit Plan Assets
This edition of of KPMG’s Defining Issues reports on a proposed FASB Staff Position that would require employers of public and nonpublic entities to disclose more information about assets held in postretirement benefit plans, including concentrations of risk, fair-value measurements by major category of plan assets, and the fair-value techniques and inputs used to measure plan assets. The proposal would also require nonpublic entities to disclose net periodic benefit cost.
New Disclosures about Derivative Instruments and Hedging Activities
This edition of of KPMG’s Defining Issues reports on new FASB Statement 161, which will require companies to disclose the fair value of derivative instruments and their gains or losses in tabular format and information about credit-risk-related contingent features in derivative agreements, counterparty credit risk, and the company’s strategies and objectives for using derivative instruments.
SEC Advisory Committee Publishes Proposals
This edition of of KPMG’s Defining Issues describes the progress report of the SEC’s advisory committee on improving financial reporting and its proposals for consideration by the SEC, including recommendations to eliminate industry-specific accounting guidance and alternative accounting treatments, to establish both new SEC guidance on materiality and error correction and a framework for accounting judgments, to improve the standard-setting processes, and to phase in mandatory XBRL filings.
FASB Staff Positions on Statement 157’s Applicability, SOP 07-1’s Effective Date
This edition of of KPMG’s Defining Issues reports on recently issued FASB Staff Positions that delay for one year the applicability of Statement 157’s fair-value measurement requirements to some nonfinancial assets and liabilities, exclude most lease accounting fair-value measurements from Statement 157’s scope, and defer the effective date of the AICPA Statement of Position that defines “investment company” for purposes of applying the industry-specific guidance in an AICPA guide.
Further Delay of 404(b) Requirements Proposed for Non-accelerated Filers
This edition of of KPMG’s Defining Issues reports on the FASB’s decision to permit nonpublic entities to defer applying Interpretation 48’s requirements on accounting for uncertainty in income taxes until preparation of their annual financial statements for years beginning after December 15, 2007, unless they have already issued a complete set of annual financial statements fully reflecting the Interpretation’s requirements or are nonpublic subsidiaries of public entities that report in U.S. GAAP. The FASB Staff Position incorporating these decisions is expected to be issued soon.
FASB Defers Interpretation 48 for Nonpublic Entities
This edition of of KPMG’s Defining Issues reports on the FASB’s decision to permit nonpublic entities to defer applying Interpretation 48’s requirements on accounting for uncertainty in income taxes until preparation of their annual financial statements for years beginning after December 15, 2007, unless they have already issued a complete set of annual financial statements fully reflecting the Interpretation’s requirements or are nonpublic subsidiaries of public entities that report in U.S. GAAP. The FASB Staff Position incorporating these decisions is expected to be issued soon.
New Guidance on Applying the “Shortcut Method” of Hedge Accounting
This edition of of KPMG’s Defining Issues describes new guidance that amends Statement 133’s criteria for using the shortcut method of hedge accounting in two circumstances: when the transaction price of the interest rate swap is zero at the inception of a hedging relationship but its fair value is not, and when the settlement of the hedged item occurs subsequent to the swap’s trade date.
SEC Extends Permissibility of “Simplified” Method for Some Share Option Grants
This edition of of KPMG’s Defining Issues describes the SEC staff’s decision, presented in new Staff Accounting Bulletin 110, to continue to accept the “simplified” method for estimating the expected term of a “plain vanilla” share option grant under specified conditions. The expected term used to value a share option grant under the simplified method is the mid-point between the vesting date and the contractual term of the share option.
Proposals to Change U.S. Standard-Setting Process
This edition of of KPMG’s Defining Issues describes proposals by the Trustees of the Financial Accounting Foundation (FAF) to reduce the FASB’s membership from seven to five, give the FASB chairman more agenda-setting powers, and increase the intensity of the FAF’s oversight. These and other proposals originated in the FAF’s most recent periodic review of the standard-setting structure and are intended to enhance the operating efficiency of both the FASB and the GASB, the standard setter for governmental bodies. Comments on the Trustees’ proposals are due by February 10, 2008.
Easier Filing Requirements for Smaller Public Companies
This edition of of KPMG’s Defining Issues describes new SEC rules that allow a wider group of smaller public companies to qualify for scaled reporting requirements, facilitate compliance with Rules 144 and 145, and create two exemptions from the Exchange Act’s registration requirements for compensatory employee stock options.
SEC Roundtables on Using IFRS in the U.S.
This edition of of KPMG’s Defining Issues describes recent SEC Roundtables at which panelists generally agreed that the SEC should establish a timetable ending in a specific date at which U.S. public companies would be required to file IFRS financial statements, opposed granting the option to file using IFRS for an unlimited period, and strongly supported the goal of globally-accepted, high-quality IFRS.
Proposed Deferral of Interpretation 48 for Nonpublic Entities
This edition of of KPMG’s Defining Issues reports on the FASB’s proposal to permit nonpublic entities, including nonpublic not-for-profit organizations, that have not already applied Interpretation 48 on accounting for uncertainty in income taxes to defer its application until fiscal years beginning after December 15, 2007. Comments on the proposal are due by January 18, 2008.
AICPA Conference on SEC and PCAOB Developments
This edition of of KPMG’s Defining Issues describes highlights from the AICPA conference on SEC and PCAOB developments, at which speakers from the SEC, FASB, IASB, and PCAOB identified challenges, initiatives, and goals that would serve the long-term interests of the financial-reporting community. They emphasized the need to simplify accounting standards, converge U.S. GAAP and international accounting standards, and move domestic companies to XBRL and IFRS reporting in SEC filings.
FASB’s Preliminary Views on Financial Instruments with Characteristics of Equity
This edition of of KPMG’s Defining Issues describes the FASB’s preliminary preference for the “basic ownership approach” to distinguishing between instruments that should be classified as equity or as liabilities or assets. The approach classifies as equity only claims to the company’s assets that have no priority over other claims, and is one of three approaches presented in the FASB’s Preliminary Views document.
XBRL U.S. GAAP Taxonomies Released for Public Review and Comment
This edition of of KPMG’s Defining Issues reports the release of draft revised U.S. GAAP XBRL taxonomies for public review and comment. The materials released by XBRL US are expected to be augmented soon by guidance on how to apply the XBRL taxonomies to U.S. GAAP financial statements.
New Accounting for Business Combinations and Noncontrolling Interests
This edition of of KPMG’s Defining Issues describes new FASB Statements 141R and 160, which require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity. Both Statements are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited.
EITF Approves Two Consensuses
This edition of of KPMG’s Defining Issues describes the EITF’s Consensuses on accounting for collaborative arrangements and accounting for sales of real estate that include buy-sell provisions. This edition also covers the EITF’s reversal of its previous tentative conclusion on applying the two-class earnings-per-share method to master limited partnerships and its discussion of the framework for determining whether an instrument or embedded feature is considered indexed to an entity’s own stock for purposes of determining whether to classify it as a liability (or an asset) or equity.
Proposal on Determining the Useful Lives of Intangible Assets
This edition of of KPMG’s Defining Issues describes a newly proposed FASB Staff Position that would require companies developing renewal and extension assumptions in determining the useful lives of recognized intangible assets to consider their historical experience in renewing or extending similar intangible assets. Companies that have no such experience would have to develop renewal and extension assumptions based on the assumptions that market participants would use.
FEI Financial Reporting Issues Conference
This edition of of KPMG’s Defining Issues reports selected highlights from the FEI’s recent conference on financial reporting issues, which presented a broad update on accounting and SEC developments, including perspective from Robert Pozen on the work of the SEC Advisory Committee on Improvements to Financial Reporting.
Partial Deferral of Statement 157’s Effective Date
This edition of of KPMG’s Defining Issues describes the FASB’s decisions to propose a one-year deferral of Statement 157’s fair-value measurement requirements for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis, clarify disclosure requirements about the fair-value measurements of pension plan assets by plan sponsors, and develop additional guidance on how Statement 157 applies to measurements of liabilities. The immediate result of these decisions will be three proposed FASB Staff Positions.
SEC Eliminates U.S. GAAP Reconciliation for Foreign Private Issuers Using IFRS
This edition of of KPMG’s Defining Issues reports on the SEC’s decision to allow foreign private issuers to file financial statements using IFRS as published by the IASB without a reconciliation to U.S. GAAP. The permission will be available beginning with financial statements for years ending after November 15, 2007.
How the IFRS Movement Will Affect Financial Reporting in the U.S.
This edition of of KPMG’s Defining Issues analyzes the major forces that make a requirement to file IFRS financial statements with the SEC more likely and what a transition to an IFRS-only regime would look like and mean for U.S. public companies.
SEC Staff Guidance on Loan Commitments Recorded at Fair Value Through Earnings
This edition of of KPMG’s Defining Issues describes the new SEC Staff Accounting Bulletin 109, which requires fair-value measurements of derivative and other written loan commitments that are recorded through earnings to include the future cash flows related to the loan’s servicing rights and also requires that internally developed intangible assets be excluded from the measurements.
Effective Date of Interpretation 48 to Be Postponed for Nonpublic Entities
This edition of of KPMG’s Defining Issues describes the FASB’s decision to propose a one-year delay of the effective date of Interpretation 48, on accounting for uncertainty in income taxes, for nonpublic entities that have not already applied the Interpretation’s provisions. Assuming the proposed FASB Staff Position is adopted, the effective date of Interpretation 48 for nonpublic entities that have not already applied Interpretation 48 would be for periods beginning after December 15, 2007.
FASB Retains Effective Date of Statement 157, Will Delay Effective Date of SOP 07-1s
This edition of of KPMG’s Defining Issues describes the FASB’s decisions against a comprehensive delay of the effective date of Statement 157 on fair value measurements and for an indefinite delay of the effective date of Statement of Position 07-1, which defines “investment company” for purposes of applying the specialized industry accounting in the AICPA guide. It also describes the staff directive to analyze selectively deferring the effective date of Statement 157.
The Accounting Implications of Illiquid Markets
This edition of of KPMG’s Defining Issues describes the three white papers intended to clarify accounting issues related to current illiquid conditions in the credit markets that were issued by the Center for Audit Quality after they had been shared with the staffs of the SEC, FASB, PCAOB, and federal banking regulators. The papers’ topics are measuring fair value in illiquid markets, accounting for underwriting and loan commitments, and consolidation of commercial paper conduits. All three limit their objectives to explaining the application of existing accounting requirements.
SEC Announces XBRL
Milestone
This edition of of KPMG’s Defining Issues describes the completion of XBRL labels, or “tags,” for all financial-statement
elements, a major step in its quest to convert financial reporting by registrants to electronic
filing using the XBRL computer language.
EITF Reaches Three Tentative
Conclusions
This edition of of KPMG’s Defining Issues describes the EITF’s tentative conclusions on accounting for collaborative arrangements, applying the two-class earnings-per-share method to master limited partnerships, and accounting for sales of real estate that include buy-sell provisions. This edition also covers the EITF’s discussion of determining whether an instrument or embedded feature is considered indexed to an entity’s own stock for purposes of determining whether to classify it as a liability (or an asset) or equity.
SEC Seeks Input on Allowing Domestic Companies to Use IFRS
This edition of of KPMG’s Defining Issues describes an SEC Concept Release seeking comments on whether to consider permitting domestic companies registered with the SEC to file financial statements that comply with international financial reporting standards as published by the IASB, rather than U.S. GAAP. The potential change could have broad ramifications for preparers, auditors, users, regulators, colleges and universities, and other interested parties. Comments on the release are due November 13, 2007.
SEC Advisory Committee to Study Ways to Reduce Complexity in Financial Reporting System
This edition of KPMG's Defining Issues discusses a new SEC advisory committee charged with examining the U.S. financial reporting system and recommending how to make financial reports clearer and more beneficial to investors, reduce costs and unnecessary burdens for preparers, and better utilize advances in technology to enhance all aspects of financial reporting.
FASB Requests Views on a Project to Develop an Insurance-Accounting Model
This edition of KPMG's Defining Issues describes a recently published Invitation to Comment on whether to add to the FASB agenda a project with the IASB to develop a comprehensive set of accounting requirements for all insurance contracts (including reinsurance contracts), a project that could transform accounting by U.S. insurers and policyholders, adding volatility to the liability side of insurers’ balance sheets and presenting preparers with implementation challenges.
Proposed Guidance on Applying the “Shortcut Method” of Hedge Accounting
This edition of KPMG's Defining Issues describes proposed guidance issued by the FASB that would require companies to evaluate previous and new hedges of interest rate risk, with fewer of them qualifying to use the simplified “shortcut method” of hedge accounting under Statement 133’s requirements. More companies may therefore need additional systems to track the data and the evaluations for far more demanding hedge accounting.
FASB to Propose Separate Accounting for the Conversion Options of Many Convertible Bonds
This edition of KPMG's Defining Issues describes a soon-to-be released proposed FASB Staff Position that would require issuers of convertible debt that may be settled wholly or partly in cash to account for the debt and equity components separately. The proposal would require separate accounting to be applied retrospectively to both new and existing convertible instruments within the proposal’s scope and would thereby affect net income and earnings per share reported by many issuers of these convertible instruments.
SEC Approves Information-Gathering Release on U.S. Registrants' Use of IFRS in Filings
This edition of KPMG's Defining Issues reports on the SEC’s approval of a Concept Release to obtain public comment on whether U.S. registrants should be permitted to file financial statements prepared in accordance with International Financial Reporting Standards as published by the International Accounting Standards Board, which would give U.S. companies a choice between filing financial statements using IFRS or U.S. GAAP. The comments received will be used by the SEC in considering what follow-up steps, if any, should be taken on the use of IFRS in filings by domestic registrants.
FASB to Propose Separate Accounting for the Conversion Options of Many Convertible Bonds
This edition of KPMG's Defining Issues describes a soon-to-be released proposed FASB Staff Position that would require issuers of convertible debt that may be settled wholly or partly in cash to account for the debt and equity components separately. The proposal would require separate accounting to be applied retrospectively to both new and existing convertible instruments within the proposal’s scope and would thereby affect net income and earnings per share reported by many issuers of these convertible instruments.
SEC Proposals on Reporting by Smaller Public Companies
This edition of KPMG's Defining Issues describes new SEC proposals that would make it easier for smaller companies to meet the SEC’s filing and capital-raising requirements. The proposals would allow most companies with a public float below $75 million to qualify for the scaled reporting requirements now reserved for companies with a public float below $25 million and would allow companies with a public float below $75 million that meet other eligibility criteria to register primary offerings of their securities on Form S-3 or F-3, thereby enabling them to benefit from shelf registration.
SEC Guidance on Internal Control Over Financial Reporting
This edition of KPMG's Defining Issues describes new interpretive guidance for management evaluations of internal control over financial reporting and related rule amendments that are intended to allow management to comply with Section 404 of the Sarbanes-Oxley Act more cost-effectively. This edition also covers the SEC’s request for comment on the definition of a “significant deficiency” that would apply to management’s obligations under the SEC’s rules implementing the Sarbanes-Oxley Act.
SEC Proposes to Eliminate U.S. GAAP Reconciliations by IFRS Filers
This edition of KPMG's Defining Issues describes a newly proposed SEC rule that would allow foreign private issuers to file financial statements in accordance with International Financial Reporting Standards without a reconciliation to U.S. GAAP. The rule would make the choice available for financial statements prepared in accordance with the English language version of IFRS as published by the International Accounting Standards Board, not for financial statements prepared using IFRS as adopted jurisdictionally, such as EU-endorsed IFRS, unless the issuer also complies with IFRS as issued by the IASB.
PCAOB Auditing Standard on Internal Control Over Financial Reporting
This edition of KPMG's Defining Issues describes a new PCAOB auditing standard that would affect the auditor’s work in forming an opinion on internal control over financial reporting. If approved by the SEC, the new standard will supersede the Board’s existing standard for an audit of internal control over financial reporting that is integrated with an audit of financial statements.
SEC Announcement on IFRS in Filings
This edition of KPMG's Defining Issues describes the SEC’s announced plans to issue a Proposing Release requesting comments on rule changes that would give foreign private issuers a choice between using International Financial Reporting Standards (IFRS) or U.S. GAAP in their filings and a Concept Release to obtain comments on whether the same choice should be made available to U.S. issuers. The potential rule changes could eliminate the requirement for foreign private issuers to reconcile their IFRS financial statements to U.S. GAAP beginning with 2008 calendar-year financial statements, provided they apply IFRS as issued by the IASB.
Challenges for U.S. Standard Setters
This edition of KPMG's Defining Issues analyzes the FASB’s initiatives to reduce complexity in accounting standards, increase the use of fair-value measurements, and eliminate differences between U.S. GAAP and international financial-reporting standards. It explains the ongoing challenges from pursuing these initiatives, some of their relationships, and some of their potential consequences for the financial-reporting community.
FASB Retains Effective Date for Tax Uncertainties Interpretation
This edition of KPMG's Defining Issues reports the FASB’s decision not to delay the effective date of Interpretation 48 on uncertainties in income taxes. The reconsideration of the effective date responded to requests received from organizations and companies. Companies continue to be required to adopt Interpretation 48 for fiscal years beginning after December 15, 2006 (January 1, 2007 for calendar year companies).
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