February 10, 2012

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Comment Period Ending on FASB Criteria for Investment Company Accounting Proposal

On October 21, 2011, the FASB issued a proposed Accounting Standards Update (ASU), Financial Services - Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements, intended to improve and converge financial reporting by setting forth consistent criteria for determining whether an entity is an investment company. This proposed ASU is a result of the efforts of the FASB and the IASB (the Boards) to develop consistent criteria for determining whether an entity is an investment company. Under U.S. GAAP, investment companies carry all of their investments at fair value, even if they hold a controlling interest in another company. The primary changes being proposed by the FASB relate to which entities would be considered investment companies as well as certain disclosure and presentation requirements. These changes are also being proposed under IFRS for the first time. The FASB believes the proposed ASU would improve the comparability between entities that meet the criteria to be investment companies under U.S. GAAP and those that meet the criteria to be investment entities under the proposed amendments to IFRS. The IASB issued its proposal, Investment Entities, on August 25, 2011, and the comment period ended January 5, 2012.

In addition to the changes to the criteria for determining whether an entity is an investment company, the FASB also proposes that an investment company consolidate another investment company if it holds a controlling financial interest in the entity.

Comments on the proposed ASU are due Wednesday, February 15, 2012, which was extended from the original date of January 5, 2012.

The proposed ASU Topic 946 is available here.

Comment Period Ending on FASB Accounting for Investment Property Entities Proposal

On October 21, 2011, the FASB also issued a proposed ASU, Real Estate - Investment Property Entities (Topic 973), intended to develop accounting guidance for investment property entities. This proposed ASU would require an entity that meets certain criteria (e.g., substantially all of the entity’s business activities are investing in real estate property or properties) to measure its investment properties at fair value with any changes in fair value recognized in net income. The proposed ASU would also introduce additional presentation and disclosure requirements for an investment property entity. This proposed ASU is a result of the FASB’s efforts to align the scope of entities that would apply the proposed lessor accounting model under U.S. GAAP and IFRS and to address the diversity in practice about the accounting by real estate entities.

As part of the Boards joint project on accounting for leases, the IASB decided that a lessor of an investment property would not be required to apply the proposed lessor accounting requirements in the IASB’s August 2010 Exposure Draft, Leases, if the lessor measures its investment properties at fair value by electing the fair value model under IAS 40, Investment Property. Unlike IFRS, U.S. GAAP does not contain specific accounting requirements for investment properties. As a result, an entity that invests in real estate properties but is not an investment company is required to measure its real estate properties at cost under Codification Topic 360, Property, Plant, and Equipment, and account for the leases separately. In response to consistent investor input, the FASB decided to prescribe the circumstances when fair value would be required, rather than introduce an optional accounting practice into U.S. GAAP.

Comments on the proposed ASU are due Wednesday, February 15, 2012, which was extended from the original date of January 5, 2012.

The proposed ASU Topic 973 is available here.

FASB Comment Period Ending

On November 3, 2011, the FASB issued for public comment a proposed Accounting Standards Update (ASU), Consolidation (Topic 810): Principal versus Agent Analysis. This proposed ASU would affect all reporting entities that are required to evaluate whether they should consolidate another entity and is expected to most significantly affect the financial reporting of entities that are involved with variable interest entities. Specifically, this proposed ASU includes guidance on the principal versus agent analysis and guidance on the evaluation to assess whether a decision maker is using its power as a principal or an agent. Comments on this proposal are due Wednesday, February 15, 2012, which was extended from the original date of January 17, 2012.

Under this proposal, this evaluation of principal versus agent analysis would focus on:

• The rights held by other parties;
• The compensation to which the decision maker is entitled in accordance with its compensation agreement(s); and
• The decision maker’s exposure to variability of returns from other interests that it holds in the entity.

The proposed ASU would also change the requirements for determining whether a general partner controls a limited partnership and, therefore, could affect reporting entities that are involved with partnerships and similar entities. In addition, the proposal would change the evaluation of participating rights held by noncontrolling shareholders.

The proposed ASU Topic 810 is available here.

PCAOB Meeting on Auditor Independence and Audit Firm Rotation

The PCAOB has announced that it will host a public meeting to obtain further input on ways to enhance auditor independence, objectivity, and professional skepticism, including through mandatory rotation, or term limits, for audit firms.

The PCAOB issued a concept release on August 16, 2011, that invited commenters to discuss measures that might meaningfully enhance auditor independence, objectivity, and professional skepticism. The release included a number of questions related to mandatory audit firm term limits, such as whether the PCAOB should consider a firm rotation requirement for audit tenures of more than 10 years, or for the largest issuer audits only.

The public meeting is scheduled to consist of panel discussions, during which panelists will be invited to present their views on the matters raised in the concept release and the PCAOB will have the opportunity to ask panelists follow-up questions. Panelists will include investors and investor advocates, senior executives and audit committee chairs of major corporations, chief executive officers of audit firms, academicians, and other interested parties. Further information will be made available closer to the meeting date.

The meeting will be held in Washington, D.C., Wednesday-Thursday, March 21-22, 2012. It will be open to the public, and also available via webcast on the PCAOB website.

The PCAOB news release is available here.

Monitoring Board and Trustees of the IFRS Foundation Release Reviews

The Monitoring Board and the Trustees of the IFRS Foundation have announced the conclusions of their separate reviews of the governance and strategy of the IFRS Foundation.

The reviews outline the accomplishments of the last 11 years, during which International Financial Reporting Standards (IFRS) have become widely accepted as the framework for financial reporting, required or permitted for use by companies in more than 100 countries. Together, the reviews propose a strategy and governance platform on which the IFRS Foundation and the International Accounting Standards Board (IASB) can continue to work toward their goal of becoming the recognized international accounting standard setter.

The Monitoring Board conducted a wide-ranging review focusing primarily on institutional aspects of governance, particularly the composition and respective roles and responsibilities of the Monitoring Board, the Trustees, and the IASB. The Trustees’ strategy review sought to articulate a clear strategy and vision for the organization as it enters its second decade by considering the mission, governance, standard-setting process, and financing of the IFRS Foundation.

The reviews were conducted in an independent but coordinated manner that recognized the two bodies’ separate responsibilities. The Monitoring Board and the Trustees are publishing the conclusions of the two reviews as a package to reflect a shared desire to coordinate their activities in a way that promotes the primary mission of the IFRS Foundation to set high quality, globally accepted financial reporting standards.

The Monitoring Board will proceed with steps to put into operation the improvement measures, while the Trustees will initiate the process for considering revisions to the Constitution of the IFRS Foundation. The two bodies will follow through with actual implementation of the recommendations in a coordinated manner, referring to the timelines in the action plan appended to the Monitoring Board’s report.

The press release, related information, and links to the reviews are available here.

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