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Accounting Standards

Pension brouhaha south of the border

FASB is coming out with some tough new standards relating to defined benefit pensions that is expected to result in significant new liabilities (or increases to existing ones) for companies that had been accounting for their pensions under the more lax requirements of the old standard.

Defined benefit pension plans are definitely the more complicated type, compared to defined contribution. I’ve only worked on one pension audit thus far, and it was – luckily for me – a defined contribution. Auditing a defined contribution plan is easier to do because future estimates aren’t necessary. Defined benefit plans require an actuary to perform the highly specialized work.

Anyway, back to the change in the standard. Under the old standard:

Employers reported an asset or liability that almost always differed from the plan’s funded status because previous accounting standards allowed employers to delay recognition of certain changes in plan assets and obligations that affected the costs of providing such benefits.

Pension accounting is one of those things you learn in a 2nd or 3rd year course at university and then pray you don’t have to see frequently in practice, unless you’re a masochist. It’s just so very complicated! I feel lucky that so far the only pension audit I’ve been on has been defined contribution.

Specifically, the new standard requires an employer to:

(a) Recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status

(b) Measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions)

(c) Recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income of a business entity and in changes in net assets of a not-for-profit organization.

Sounds like they’ve improved things from both the investor viewpoint as well as the employee’s. This new standard brings up the issue of comprehensive income, which is a below-the-line adjustment to net income on the income statement. I believe the Canadian standards body has guidance out relating to it but it may or may not be in effect for year ends just yet.

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Accounting Standards

Global ethics and international accounting standards

The Publish What You Pay campaign is where international politics, financial reporting, and the developing world intersect. The campaign seeks to force companies in extractive industries (such as oil and gas) to make public their payments to governments in the developing world.

It began in 1999 with an “exposé of the apparent complicity of the oil and banking industries in the plundering of state assets during Angola ‘s 40-year civil war. It became clear that the refusal to release financial information by major multinational oil companies aided and abetted the mismanagement and embezzlement of oil revenues by the elite in the country.”

The campaign is supported by numerous charities and political organizations such as Oxfam Great Britain and Human Rights Watch. They lobby bodies like the World Bank and IMF, as well the IASB, the International Accounting Standards Board.

Publish What You Pay calls for an International Financial Reporting Standard for the extractive industries to include a requirement that extractive industry companies disclose in their accounts all payments that they make to the governments of countries in which they extract resources, and to agencies or representatives of those governments.

Sounds like a good idea to me. It’s actually surprising to me as a young idealist that this isn’t already part of international standards. But the most recent letter sent from PWYP to the IASB on the matter expresses the campaign’s consternation with the IASB’s actions to date, and I have to agree.

The IASB’s proposed standard leaves segmentation up to management’s discretion, rather than mandating country-by-country grouping. The standard is barely even that – it basically just codifies laissez-faire.

I’m dismayed to say the least by the lack of support this has received from the Board thus far. In a few years I will be working primarily with IFRS as Canadian GAAP converges. I’d like to see a greater sense of urgency on their part in matters of this importance.

The PWYP letter smartly points out “companies already need to generate [country-by-country segmenting] in order to complete tax returns in each country of operation, this should not prove an additional burden.” They also use the lingo: “The citizens of [poor yet resource-rich] countries are important, if non-traditional, users of financial information.”

This is one of those areas where the IASB could showcase those pervasive qualities in public accountancy like ethical conduct and protecting the public interest.

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Accounting Standards

No new international accounting standards effective before 2009

The International Accounting Standards Board (IASB) has announced they won’t be issuing any new standards or major amendments to existing standards with effective dates before January 1st, 2009, in order to give companies reporting under the standards a bit of a breather to get their house in order.

Word around the accountant blogosphere has been tentatively in favour of the break. Maybe it’s my impetuous youth, but I’m not. Full speed ahead, as far as I’m concerned. If businesses are having trouble getting their accounting in line with new standards, then they need to hire someone to help them get it done. Business waits for no one, so why must accounting?

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Accounting Standards

More discussion of rules versus principles

Dennis over at AccMan Pro has commented on the difference between rules-based US GAAP and international principles-based IFRS, and his thoughts echo mine:

Recent commentary has suggested the idea of convergence between US GAAP and IFRS won’t happen until hell freezes over. I’ve long held the view that the rules based US GAAP system is primarily responsible for many of the problems US based companies have experienced. It is the structural defect of being rules driven. Any time there are rules in place, companies and individuals will seek to find ways around them. It allowed CA and PeopleSoft to engage in creative accounting practices, which, in the case of CA, have been deemed fraudulent. And which eventually led to the corporate nose bleed that is SOX.

I’m discouraged that he seems so certain that convergence of US GAAP and IFRS won’t happen any time soon. Canadian GAAP is moving towards convergence, as is the rest of the world it seems.

I suppose we’ll have to wait until the US is no longer a superpower (which will no doubt happen in my lifetime) before they start to work with the rest of the planet. Rules are meant to be broken, or so the saying goes, and its been played out for all to see in the cases mentioned by Dennis above and with Enron and WorldCom and countless others.

Under a principles based system, professional judgement takes centre stage and the aim is to reflect the substance of the transaction as opposed to fitting it into the rules as they exist. It allows the professionals to do their job: Determining whether the statements are fairly presented. It doesn’t take a professional to figure out if the rules are met.

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Accounting Standards

Lease accounting to get overhaul

Apparently FASB is going to overhaul the US GAAP for leases. I’m not sure what exactly is going to be changed, or why it needs changing, but it’ll be interesting to see. Of course, Canadian standards are moving towards harmonization with International Financial Reporting Standards (IFRS), so we might not see Canada following the US revision like we usually have seen occur in the past.

I’ve been discussing the current method of accounting for leases with Greg, whose site I stumbled upon today searching Technorati for accounting-related content. He was blogging about an article in Business Week, and what follows is a quote from that article that may give us some insight into the possible changes:

One new model that FASB will explore, says Herz, would treat a lease as a “right to use” the property, which would be given a value and included among the liabilities and assets of the company that is leasing it. Companies argue that information about these leases is not secret, but is readily available in the footnotes of their annual reports. However, Bear Stearns analyst Chris Senyek has found that such disclosure is far from consistent, with some companies leaving out vital information such as the length of the lease. And the databases that many investors consult to sort through a company’s performance generally don’t include the data from footnotes.

Not sure what the “right to use” means as far as the difference between current rules about leases goes, given that we already have a good method for valuing a lease (the present value of minimum lease payments) asset and corresponding liability. Basically the FASB believes the rules need to be clarified because the criteria have been abused to show more leases as operating versus capital. But that’s just the difference between US rules-based accounting and Canadian and international principles-based accounting.

Plus, the article even notes that the information is already contained in the notes to the financial statements. My firm has a footnote on every page of the financial statements we produce that clearly states “The accompanying notes are an integral part of the financial statements.” If investors are ignoring that information, is this really an accounting problem?