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February 2013 Essential Briefings IMPAIRMENT MODEL FOR CREDIT LOSSES
FINANCIAL REPORTING ____________________________________________________________ FASB Releases Summary of Disclosure Effectiveness Forums
TECHNICAL REPORTING ____________________________________________________________ Segment Reporting Operating Effectively
Contents February 2013
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ESSENTIAL BRIEFINGS 2 IMPA IR ME N T MOD E L F OR C R E D I T L O S SE S With the convergence of IASB and FASB accounting, the FASB issued a proposed accounting standard update in December 2012, Financial Instruments-Credit Losses. This proposed standard will address the recognition of credit losses on financial instruments based on expected losses rather than on an incurred-loss impairment model.
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FINANCIAL REPORTING 4 FA SB R E L E A SE S SUMM A R Y OF D IS C L O SUR E E F F E C T I V E N E S S F ORUMS In July of 2012, the Financial Accounting Standards Board (FASB) issued an invitation to comment (ITC) on Disclosure Framework, which outlines possible approaches to improving the effectiveness of disclosures in notes to financial statements.
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TECHNICAL REPORTING 4 SE G ME N T R E P OR T I NG - OP E R AT I NG E F F EC T I V E LY The Financial Accounting Foundation (FAF) recently undertook a post-implementation review of Accounting Standards Codification Topic 280, Segment Reporting, previously known as Financial Accounting Standards Board (FASB) Statement No. 131, Disclosures about Segments of an Enterprise and Related Information.
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ESSENTIAL BRIEFINGS
IMPAIRMENT MODEL FOR CREDIT LOSSES BY SUZIE DORAN | PARTNER
sdoran@singerlewak.com | 310.477.3924
SUMMARY: With the convergence of IASB and FASB accounting, the FASB issued a proposed accounting standard update in December 2012, Financial InstrumentsCredit Losses. This proposed standard will address the recognition of credit losses on financial instruments based on expected losses rather than on an incurredloss impairment model. S CO P E : The proposed guidance would apply to all entities on accounting for credit losses on debt securities, trade receivables, lease receivables and loan commitments. A P P L I C AT I O N : For each reporting period, an allowance would be established for all expected credit losses on debt instruments. Rather than waiting for a triggering event, recognition of a credit loss would be based on if a loss is expected by the next fiscal year or there is a significant deterioration in credit. In calculating an estimate of expected credit losses, quantitative and qualitative factors would need to be considered, such as current
reduced. The allowance would be reduced by this amount. Recovery of any previously written off amounts would be recognized with an adjustment to the allowance when consideration is received. FINANCIAL STATE ME NT PRE SE NTATION: conditions and forecasts specific to the entity. The allowance will also need to be adjusted for the time value of money. The income statement would also reflect the amount of credit loss or reversal required to adjust the balance sheet allowance for expected credit losses as of the end of the reporting period. Accrual of interest income would cease when it is not probable that the principal or interest will not be paid. When the carrying amount has been reduced to zero, any additional amounts would be recognized as recoveries of amounts previously written off with any excess recognized as interest income. When it is determined that there is no reasonable expectation of future recovery, the cost basis of a financial asset would be directly
Financial assets would need to reflect the estimate of any allowances on the balance sheet. Expanded disclosures proposed would significantly expand the amount of disclosure related to the credit quality, factors used to determine the allowance for expected credit losses, and additional tabular formats that include rolling forward changes and reconciling fair value to the amortized cost. Effective Date: As the proposed draft was issued in December 2012, it is too early to determine when a final draft will be issued. Accordingly, no specific effective date has been proposed. SUZIE DORAN CAN BE REACHED AT SDORAN@SINGERLEWAK.COM OR 310.477.3924
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FINANCIAL REPORTING
FASB RELEASES SUMMARY OF DISCLOSURE EFFECTIVENESS FORUMS BY MIKE BARLOEWEN | SENIOR MANAGER mbarloewen@singerlewak.com | 818.999.3924
In July of 2012, the Financial Accounting Standards Board (FASB) issued an invitation to comment (ITC) on Disclosure Framework, which outlines possible approaches to improving the effectiveness of disclosures in notes to financial statements. The ITC suggests that the FASB is exploring ways to provide more flexible disclosure requirements. These would allow a preparer to tailor the disclosures better based on particular circumstances of an entity and that the tailoring would be based on the preparer’s assessment of relevance. The Financial Accounting Standards Board and the Center for Audit Quality issued a summary in December of observations from two forums it sponsored for discussions on disclosure effectiveness. The forums were planned to facilitate discussion between a wide range of financial reporting stakeholders on improving the effectiveness of disclosures in notes to financial statements and other parts of the financial reporting package.
• Disclosure relevance to investors and creditors • Effect on the assessment of future cash flows to the investor • Streamlined disclosure in the current environment • Prescriptive nature of current accounting guidance The dialogue focused on parts of the FASB’s ITC and on other financial reporting issues. Participants included financial statement preparers and users, corporate board and audit committee members, auditors, attorneys, regulators, standard setters and academics.
The ITC suggests that the FASB is exploring ways to provide more flexible disclosure requirements Topics addressed during the two forums were: • Flexibility of disclosure requirements • Role of the notes of financial statements
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• Overlap of notes and Management’s Discussion and Analysis • Costs, benefits and incentives for change As a result of the forums, it was clear that the issue of greater financial statement disclosure effectiveness deserves careful consideration by FASB and by stakeholders. The discussion revealed that the perceived need for change depended greatly on the sophistication of the users with sophisticated analysts not interested in reduced volume of disclosure. Efforts to explore potential ways to streamline disclosure requirements are set to continue. MIKE BARLOEWEN CAN BE REACHED AT MBARLOEWEN@SINGERLEWAK.COM OR 818.999.3924
TECHNICAL REPORTING
SEGMENT REPORTING – OPERATING EFFECTIVELY BY AARON SULLIVAN | MANAGER
asullivan@singerlewak.com | 310.477.3924
The Financial Accounting Foundation (FAF) recently undertook a post-implementation review of Accounting Standards Codification Topic 280, Segment Reporting, previously known as Financial Accounting Standards Board (FASB) Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. Topic 280, Segment Reporting was released in 1997 and is applicable to public companies only, with the intention of improving the way financial information about business segments is reported. The review found that the accounting standard generally achieves its purpose, although stakeholders raised various suggested improvements. FASB Chairman Leslie F. Seidman said, “The post-implementation review report on Statement 131 affirms the overall effectiveness of the standard. However, the report identified aspects of Statement 131 that stakeholders think could be improved; for example, the effect of changes in
accepted standard in Topic 280, Segment Reporting, makes sense when you consider that this is the second post-implementation review of a FASB standard, the first being the review of the more recent and arguably more contentious FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). technology on the determination of what information is reviewed by the chief operating decision maker. We are considering the reported findings and will provide our initial response in the coming weeks.” The post-implementation review was carried out by an independent FAF team. This review is separate from the standard setting process of the FASB and is intended to assist ongoing efforts to evaluate the effectiveness of the standard setting processes for both the FASB and the Governmental Accounting Standards Board. The FAF’s choice of a wellestablished and relatively well
Topic 280 establishes standards for the way public companies report information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures regarding products and services, geographic areas and major customers. It does not apply to private companies or nonprofit organizations. The review team, following feedback from financial statement users including investors, preparers, auditors, academics and regulators concluded the following: • Topic 280 provides more information about companies’ different business activities than the prior segment report-
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ing standard did. In addition, companies’ reported segment information is better aligned with their internal structures and more consistent with financial information reported outside the financial statements. However, there are indications that some companies (particularly those reporting only one segment) are not reporting a sufficient number of segments. • Overall, Topic 280 enhanced the relevance of segment disclosures. Additional disaggregated information and improved alignment allows investors to understand the different types of activities in which a company engages and its prospect for future growth. Investors also use the improved segment information to make judgments about the company as a whole. However, reported
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segment information is not always sufficient for their investment decisions. Users would like more segment information (e.g., gross margin and cash flow), and some might like more consistency across companies in the amount, type, and measurement of information disclosed.
• Topic 280 did not result in any significant changes in operating or financial reporting practices, nor did it have any significant economic consequences. However, some companies might be aggregating segments to reduce transparency because of competitive harm concerns or for other reasons.
• In general, Topic 280’s requirements can be understood, can be applied as intended, and result in reliable information. However, the guidance for determining and aggregating operating segments might be difficult for some companies to apply—in part because of advances in technology and the principles-based nature of the standard—and generates continuing discussions between preparers, practitioners, and regulators.
• Both the costs and the benefits associated with Topic 280’s required segment disclosures are consistent with the Board’s and stakeholders’ expectations
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For further information and the complete review please visit the FAF’s website at AccountingFoundation.org. AARON SULLIVAN CAN BE REACHED AT ASULLIVAN@SINGERLEWAK.COM OR 310.477.3924
OUR FIRM SingerLewak is a leading regional accounting services firm in California with offices in Los Angeles, Orange County, Woodland Hills, Monterey Park, San Diego, Silicon Valley and San Francisco. Serving California since 1959, SingerLewak has established a reputation for excellence as professionals with expertise in the Accounting and Management Consulting industry. Providing the services of a large firm with a blended environment of practices, industry specializations and particular attention to hands-on service, SingerLewak continues to demonstrate leadership and industry growth year-over-year.
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