Tax Season 2010

IASB Issues New Guidance Options for Private Entities

By Philip Santarelli, CPA

Which accounting standards being created now will affect your firm and your clients in the future? At a recent liaison meeting with the Financial Accounting Standards Board, the AICPA PCPS Technical Issues Committee reviewed a range of issues that will impact private entity clients down the road. We discussed the future of financial reporting for private companies in the United States since the International Accounting Standards Board recently issued International Financial Reporting Standards for Small and Medium-Sized Entities. U.S. private entities have the option of using these standards, and TIC offered the small firm perspective to the FASB about the board's ongoing role in setting standards for private entities. The board also is hearing feedback on this topic from the Private Company Financial Reporting Committee, which provides recommendations to the FASB on setting standards.

Another key topic is the FASB guidance on fair value measurements — this time on improving disclosures in its Proposed Accounting Standards Update to Topic 820. (As a reminder, changes to the FASB Accounting Standards Codification, the source of authoritative U.S. GAAP, now are issued as accounting standards updates.)

The FASB has issued a great deal of guidance in the past year, covering topics that include: Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased; Identifying Transactions That Are Not Orderly; Interim Disclosures about Fair Value of Financial Instruments; and Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).

FASB's most recent proposal would require a sensitivity disclosure for fair value measurements with unobservable inputs. TIC questioned the value of these analyses for most users of private entity financial statements and explained that many private entities would not have the expertise to perform them. The proposal also includes amendments that would expand existing disclosures to a more granular level, which TIC also opposed. TIC, therefore, asked the board to exempt private entities from all amendments in the proposal. If, based on further research, the board concludes that one or more elements of the proposal are appropriate for private entities, TIC asked that the FASB extend the effective date for one year to give smaller companies time to understand and implement the guidance. The effective date applies to interim and annual periods ending after Dec. 15, 2009, and does not apply to sensitivity disclosures, which would go into effect for periods ending after March 15, 2010.

We also addressed a project that could affect nearly all entities, a discussion document on leases that is part of a joint project of the FASB and the International Accounting Standards Board. According to the boards, the project was launched, in part, to address inconsistencies in the accounting for financing and operating leases. The boards noted: "Only the assets and liabilities arising from finance leases are recognized in the statement of financial position. For an operating lease the lessee simply recognizes lease payments as an expense over the lease term."

One issue of concern in the document was the absence of the board's preliminary views on lessor accounting; the discussion focused on lessees. A final exposure draft should include both lessee and lessor accounting so that the implications of all major components of the lease project can be considered at once. That also would make implementation easier. TIC advocated for a more comprehensive approach and alerted the board to some of the costs associated with the implementation of the changes envisioned. I'll keep you updated on any further developments in this area.

Understandably, the pace of new guidance can be overwhelming. Many resources are available to help practitioners understand and implement changing standards. For example, the FASB Web site (http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1218220137102#asu) highlights effective dates for recently issued standards. This resource makes it easier to keep up.