About that new FASB revenue recognition standard . . .

This morning, I made a short presentation on the new FASB-IASB revenue recognition standard, Revenue From Contracts With Customers, now at FASB Codification Topic 606. The slides appear below this post.

At the moment, Topic 606 will be effective for public company year ends beginning on or after January 1, 2017. We’ll see whether this effective date holds. Either way, a deeper dive on the new standard is available from three sources:

(a) Lexus Nexis Complexus: Comparative Contract Law and International Accounting Collide in the IASB-FASB Revenue Recognition Exposure Draft, co-authored by Gerlinde Berger-Walliser, Pier Luigi Marchini, and yours truly, now available online at the Vanderbilt Journal of Transnational Law;

(b) BNA’s Special Report, Navigating the New Road to Revenue Recognition by Lisa Starczewski; and

(c) FASB’s own Topic 606. It’s definitely not user-friendly — except, perhaps, to creative plaintiff’s counsel — but it’s big and it’s threatening.


Brief Overview of the New FASB-IASB Revenue Recognition Standard


SEC loses laptops. IRS, EPA lose emails. CDC loses Ebola. What next?

SEC OIG Laptop Report

What times are these when supposedly uber-competent government agencies lose control of, well, mission-critical stuff like laptops, emails, and deadly viruses? What’s next?

The SEC OIG says hundreds of laptops are unaccounted for. The good news is that OIG has disclosed they’re missing. Bad news? While the IRS and EPA “lose” only emails, the SEC loses entire laptops. More good news: These laptops almost certainly don’t carry Ebola. More bad news: SEC laptops should contain lots of really sensitive information about ongoing investigations and the people involved, most of whom will never be accused — let alone found guilty of or liable for — any wrongdoing. Kind of like securities law Ebola. Not to mention the possibility of lots of inside information, possibly including the identity of SEC whistleblowers.

Read the entire OIG report below.

SEC OIG – Laptops Missing

Which changes in accounting principle are material?

What misstatements or omissions are “material” and which are not?  With the recent roll-out of the SEC’s new whistleblower regulations, it is a popular question among companies and prospective whistleblowers.  This brief summary offers insights into this important topic as it applies to changes in accounting principle.

First, despite recent IFRS rumblings, SEC regulations require U.S.-based registrants (known as “domestic issuers”) to follow U.S. Generally Accepted Accounting Principles (a.k.a. “U.S. GAAP”).   The SEC is currently seeking input regarding a possible future move to International Financial Reporting Standards (“IFRS”) promulgated by the International Accounting Standards Board (“IASB”).  However, for now, U.S. GAAP is still published by the U.S.-based and controlled Financial Accounting Standards Board (“FASB”) through its Accounting Standards Codification (“Codification”).

Beyond U.S. GAAP as contained in the Codification, domestic issuers are also obligated to abide by the financial statement content standards prescribed by SEC Regulation S-X.  As a practical matter, issuers and their auditors tend to follow the technically non-binding opinions of SEC staff expressed through Staff Accounting Bulletins (“SABs”).

So what about changes in accounting principle?  At what point is a change material? Under U.S. GAAP, a presumption exists that an accounting principle once adopted shall not be changed in accounting for events and transactions of a similar type.[1] A change in the method of applying an accounting principle is considered a change in accounting principle. [2] Entities must report changes in accounting principle through retrospective application of the new accounting principle to all prior periods (including interim ones), unless it is impracticable to do so.[3]

Take mortgage banking, for example, an industry on the bleeding edge of the financial markets meltdown of 2007.  Issuers involved in the mortgage industry are required to disclose the method (aggregate or individual loan basis) used in determining the lower of cost or fair value of the mortgage loans carried on their balance sheets as assets.[4] An issuer who makes a material change in its method of accounting (including accounting for mortgage loans) must indicate the date of and the reason for the change and include as an exhibit in the first Form 10-Q filed subsequent to the date of an accounting change, a letter from the issuer’s independent accountants indicating whether or not the change is to an alternative principle which in the judgment of the accountants is preferable under the circumstances.[5]

For SEC purposes, a fact is material if there is a substantial likelihood that the fact would have been viewed by a reasonable investor as having significantly altered the “total mix” of information available.[6] While some financial market players — including some auditors — might prefer to define “materiality” solely with reference to an item’s numeric magnitude (because percentages make much better bright lines), materiality must be assessed for SEC purposes with respect to quantitative and qualitative factors.   As a result, in numerous circumstances, misstatements below an arbitrary quantitative threshold — say 5%-of-basis — may be material.[7]

Potentially significant qualitative factors include whether (a) the misstatement masks a change in earnings or other trends; (b) whether the misstatement affects the registrant’s compliance with regulatory requirements; (c) whether the misstatement affects the registrant’s compliance with loan covenants or other contractual requirements; (d) whether the misstatement involves concealment of an unlawful transaction.[8]

As one hypothetical illustration, a $5,000 embezzlement by the president of a Fortune 100 corporation might seem numerically insignificant in relation to the company’s balance sheet or income statement.  However, the fact that the president was involved in the embezzlement suggests serious weaknesses in the company’s governance and internal control systems and, therefore, would arguably be “material”.

Bottom line:  In assessing the materiality of a change in accounting principle (or any other aspect of an issuer’s SEC reports and disclosures), it is important to remember that easily quantified numbers and percentage thresholds are only a starting point for a thorough analysis.

[1] FASB Codification Topic 250-10-45-1.

[2] FASB Codification, Glossary.

[3] FASB Codification Topic 250-10-45-5 and 45-14.

[4] FASB Codification Topic 948-310-50-1, Financial Services, Mortgage Banking, Receivables, Disclosure.  This requirement has been in effect since the original issuance of FASB Statement No. 65 in 1982.

[5] Regulation S-X, Rule 10-01(b)(6).

[6] TSC Industries v. Northway, Inc., 426 U.S. 438, 449 (1976). See also Basic, Inc. v. Levinson, 485 U.S. 224 (1988).

[7] SEC Staff Accounting Bulletin No. 99.

[8] SEC Staff Accounting Bulletin No. 99.



“Right GAAP” and the move to IFRS

Whenever “risk-management” professionals characterize their prognostications as near-certain, I get nervous.  Memories of the Berlin Wall, Black-Scholes, Long-Term Capital Management, Salomon Brothers and AIG dance before my eyes.  Today’s exhibit A: Bruce Pounder’s September 2, 2010 CFO.com article, “Why the SEC Won’t Flip the IFRS Switch.”

Pounder’s “most significant” point — that “for the SEC to order a switch from future U.S. GAAP to future IFRS despite substantial differences … the SEC would have to conclude that the FASB and its standard-setting predecessors completely failed to get U.S. GAAP ‘right'” — embodies a whopping non sequitur.*  Why? Among other things, there is no “right” GAAP any more than there is “a” right spelling of “grey”. Continue reading

SEC settles Dell fraud case: Execs pay millions

Is the SEC on a roll or just looking over its shoulder at salivating securities whistleblowers? On the heels of settling with Goldman Sachs last week for $550 million, the SEC yesterday announced its $111+ million take from settling accounting fraud charges against Dell Computer and several current and former Dell executives including Michael Dell, Kevin Rollins and James Schneider.  The three will pay the SEC $4M, $4M and $3M, respectively, to settle.  Assuming the facts are as stated by the SEC, they’re fortunate. And wasn’t the Sarbanes-Oxley Act supposed to prevent this kind of thing? Continue reading

Supreme Court Rejects Jeff Skilling’s Honest Services Fraud Conviction

Business executives everywhere can breath a sigh of relief this morning after the U.S. Supreme Court (“SCOTUS”) yesterday struck down former Enron CEO Jeff Skilling’s convictions for so-called “honest services fraud”.  While the SCOTUS decision temporarily leaves intact Skilling’s other convictions, they are now on life-support. Continue reading

Did Accountants Really Let Us Down? Floyd Norris Misfires on FASB & IASB Role in Recession

Who ruined your retirement portfolio? In his September 10, 2009 New York Times’ column, Accountants Misled Us Into Crisis , Floyd Norris points the finger at standard-setting accountants at the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB).

Norris appears convinced that if the FASB and IASB had written the “right” accounting standards the “right” way (especially to require banks to report their assets at “fair” value), banks could not have become so weak as to threaten the financial system.  If only reality were that simple.  Four factors argue against Norris’ view. Continue reading

SEC should cease regulatory fraud, quit issuing SABs

From the War on Terror to the War on Wall Street, due process violations by government agencies are proliferating like nuclear weapons. Facilitated by widespread ignorance among Americans — general public, financial professions, and the federal judiciary — the pattern of abuse threatens not only American markets but the very foundations of American life.

In April 2009, the staff of the Securities and Exchange Commission took another bite out of due process by issuing without public notice or input a “Staff Accounting Bulletin” or “SAB” for the first time since December of 2007. Continue reading

Not even WSJ reporters get FASB accounting standards. Why write more of them?

For an eloquent illustration of how accounting innovations like FAS 157’s “fair value” regime are way beyond even above-average American financial readers, try Michael Rapoport’s May 1, 2009 article entitled
New FASB Rule Aims to Clarify ‘Net Income’.

Rapoport, trying to capture the meaning of the new SFAS No. 160, stumbles over one of the most basic concepts in the accounting literature — that “minority interests” in consolidated financial statements reflect the fact that “parent” companies don’t really “own” 100 percent of the assets or income of “subsidiaries” except those they wholly own. Continue reading

Comments on FASB’s fair value amendment reflect FAS 157 distress

Lenders have been hammered by the pathologically procyclical impact of FAS 157’s mark-to-market regime.  Hardly surprising, therefore, that banks and credit unions came out in force to support the latest FASB “clarification” of FAS 157.  Some other commenters, mostly from the “analyst” community, emphatically disagree.

Continue reading