AFP Blogs

Public Company Accounting Oversight Board (PCAOB)

 This week I attended the PCAOB’s Standards Advisory Group (SAG) Meeting.  The topics discussed were (1) broker dealer audit considerations; (2) FASB/IASB projects and potential impact on auditors; (3) subsequent events; (4) auditors reporting framework; and (5) communications with audit committees.  (more…)

The Financial Accounting Standards Board (FASB) released on their website an Exposure Draft (ED) of a proposed Accounting Standards Update (ASU) intended to develop common requirements for measuring fair value and for disclosing information about fair value measurements in U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRSs). AFP will be reviewing this ED and making a decision on whether to issue a comment letter on behalf of our members in the upcoming weeks. Feel free to reach out to our staff should you have any issues with the propoasl.

The proposed ASU sets forth amendments that the Boards believe would improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments would apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in shareholders’ equity in the financial statements.

The IASB is publishing a measurement uncertainty analysis disclosure proposal, Measurement Uncertainty Analysis Disclosure for Fair Value Measurements, which is the same as a proposed disclosure requirement in the proposed Update

The comment period for the proposed ASU extends through September 7, 2010. The ED is available at www.fasb.org.

The Supreme Court held that the Sarbanes-Oxley Act’s provisions making PCAOB Board members removable by the Securities and Exchange Commission (SEC) only for good cause were inconsistent with the Constitution’s separation of powers. However, the operation of the PCAOB will not be interrupted. The courts rectified this inconsistency by changing the SEC’s power to language that now states that the SEC can remove a PCAOB Board member “at will” rather than “for good cause.” All other aspects of the PCAOB’s structure and design remains unchanged including registration, inspection, enforcement, and standard-setting activities.

The accounting issues discussed last week were on leases, revenue recognition and GASB preliminary views on certain aspects of pension accounting and new guidance on accounting for financial instruments. (more…)

The U.S. Securities and Exchange Commission (SEC), Quebec Autorité des marchés financiers (AMF) and Ontario Securities Commission (OSC) today announced a comprehensive arrangement to facilitate their supervision of regulated entities that operate across the U.S.-Canadian border. SEC Chairman Mary L. Schapiro, AMF President and CEO Jean St-Gelais and OSC Chair David Wilson executed a memorandum of understanding (MOU) that provides a clear mechanism for consultation, cooperation, and exchange of information among the SEC, AMF and OSC in the context of supervision.

The MOU sets forth the terms and conditions for the sharing of information about regulated entities, such as broker-dealers and investment advisers, which operate in the U.S., Quebec and Ontario.This MOU is the first comprehensive supervisory MOU to be signed by the SEC since the start of the financial crisis. The SEC currently has comprehensive supervisory MOUs with the securities regulators in the United Kingdom, Germany and Australia.

3. The Regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.

4. The Regulator should adopt clear and consistent regulatory processes.

5. The staff of the Regulator should observe the highest professional standards, including appropriate standards of confidentiality.

6. The Regulator should have or contribute to a process to monitor, mitigate and manage systemic risk, appropriate to its mandate.

7. The Regulator should have or contribute to a process to review the perimeter of regulation regularly.

B. Principles for Self-Regulation

9. Where the regulatory system makes use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, such SROs should be subject to the oversight of the Regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.

C. Principles for the Enforcement of Securities Regulation

10. The Regulator should have comprehensive inspection, investigation and surveillance powers.

11. The Regulator should have comprehensive enforcement powers.

12. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.

D. Principles for Cooperation in Regulation

13. The Regulator should have authority to share both public and non-public information with domestic and foreign counterparts.

14. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.

15. The regulatory system should allow for assistance to be provided to foreign Regulators who need to make inquiries in the discharge of their functions and exercise of their powers.

E. Principles for Issuers

16. There should be full, accurate and timely disclosure of financial results, risk and other information which is material to investors’ decisions.

17. Holders of securities in a company should be treated in a fair and equitable manner.

18. Accounting standards used by issuers to prepare financial statements should be of a high and internationally acceptable quality.

F. Principles for Auditors, Credit Ratings Agencies, and other information service providers

19. Auditors should be subject to adequate levels of oversight. 21. Audit standards should be of a high and internationally acceptable quality.

22. Credit rating agencies should be subject to adequate levels of oversight. The regulatory system should ensure that credit rating agencies whose ratings are used for regulatory purposes are subject to registration and ongoing supervision. G. Principles for Collective Investment Schemes

23. Other entities that offer investors analytical or evaluative services should be subject to oversight and regulation appropriate to the impact their activities have on the market or the degree to which the regulatory system relies on them.

24. The regulatory system should set standards for the eligibility, governance, organization and operational conduct of those who wish to market or operate a collective investment scheme.

25. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.

26. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme.

27. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.

28. Regulation should ensure that hedge funds and/or hedge funds managers/advisers are subject to appropriate oversight.

H. Principles for Market Intermediaries

29. Regulation should provide for minimum entry standards for market intermediaries.

30. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.

31. Market intermediaries should be required to establish an internal function that delivers compliance with standards for internal organization and operational conduct, with the aim of protecting the interests of clients and their assets and ensuring proper management of risk, through which management of the intermediary accepts primary responsibility for these matters.

32. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.

I. Principles for Secondary Markets

33. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.

34. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.

35. Regulation should promote transparency of trading.

36. Regulation should be designed to detect and deter manipulation and other unfair trading practices.

37. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.

38. Securities settlement systems and central counterparties should be subject to regulatory and supervisory requirements that are designed to ensure that they are fair, effective and efficient and that they reduce systemic risk

FASB’s Chairmen, Bob Hertz, gave a podcast to discuss the exposure draft on Accounting for Financial Instruments (Formerly issued as FAS 133).  Hertz indicated in the podcast that there are basically three elements addressed in the proposal:

1. Classification and measurement – Whether an instrument will be carried at fair value versus amortized costs and whether the changes in fair value will be recorded in earnings or other comprehensive income (OCI).  the proposed change would require those instruments held to maturity be continue to be recorded at amortized costs but now also report their respective fair values through OCI.
2. Impairment of loans and debt securities – Proposed changes attempt to simplify current methodology by requiring just one model for all of these instruments.  Currently there are various models for accounting for loan impairment (e.g. as currently found in FAS 5 – measuring collective impairment, FAS 114 – measuring individual impairment, SOP 03-3 – measuring impairment of purchased loans to name a few)
3. Hedging of financial instruments and risks using derivative instruments. – Proposes a more simplified model for hedging as the current hedge model has been deemed to be onerous and overly complex.

Hertz indicated that the rewrite will hopefully improve the overall relevance and usefulness of information provided to investors and other users of the information. 

Hertz also indicated that companies with a significant treasury operation would more than likely be impacted by the changes (e.g. some manufacturing companies). 

In addition, companies that have a significant debt portfolio and retail companies that extend loans out to their customers will also be impacted.  

Hertz’s podcast can be viewed at the FASB’s website.

The Financial Accounting Standards Board (FASB) has issued an Exposure Draft (ED) of a proposed Accounting Standards Update (ASU) intended to improve accounting for financial instruments. This is a replacement for the existing standard FAS 133.  Among other changes, the proposed ASU would seek to bring more transparency into financial statements by incorporating both amortized cost and fair value information about financial instruments held for collection or payment of cash flows.

The proposal also aims at providing more timely information on anticipated credit losses to financial statement users by removing the “probable” threshold for recognizing credit losses. It seeks to better portray the results of asset-liability management activities at financial institutions. In the proposal, non-public entities with less than $1 billion in total consolidated assets would be allowed a four year deferral beyond the effective date from certain requirements relating to loans and core deposits.

Other potential improvements addressed by the ASU include:

1. A single credit impairment model for both loans and debt securities.
2. The criteria for hedge accounting would be simplified in order to improve the consistency in the reporting of the economic impacts of hedging activities.

The comment period for the proposed ASU extends through September 30, 2010. The FASB will also hold additional public roundtable meetings immediately following in October to collect further input. In addtion, the FASB will be hosting a live webcast on the financial instruments proposal on June 30, 2010. The proposal is available at www.fasb.org.

AFP is carefully examining the ED to determine whether we will issue a comment letter. More detailed analysis of the changes are to follow. We are planning to host a webinar that will inform our members of the proposed changes in this model and the impact it will have on their operations.

The Securities and Exchange Commission (SEC) proposed a new rule that would require the self-regulatory organizations (SROs) to establish a consolidated audit trail system that would enable regulators to track information related to trading orders received and executed across the securities markets. The SEC believes that a consolidated audit trail system would help regulators keep pace with new technology and trading patterns in the markets.

Currently, there is no single database of comprehensive and readily accessible data regarding orders and executions. Stock market regulators tracking suspicious market activity or reconstructing an unusual event must obtain and merge an immense volume of disparate data from a number of different markets and market participants. Regulators are seeking more efficient access to data through a far more robust and effective cross-market order and execution tracking system.  Hopefully this will expand regulatory monitoring  and oversight activities.  In addition promote more market discipline amonst the SROs.