A Securities and Exchange Commission (SEC) advisory committee has released its final recommendations to improve financial reporting for companies, analysts and investors. If adopted, certain recommendations could produce more uniform financial statements under an improved mixed-attribute accounting model and a single source of disclosure guidance.
The widely used mixed-attribute model measures certain assets and liabilities at fair value and others at historical cost, while affording companies some flexibility. However, because the model does not specify which measurement attributes should apply to different types of business activities, comparisons of performance between companies are harder to draw.
Compounding this complexity is the debate over the reliability of historical cost and fair value estimates. Since historical costs remain unchanged over time, companies use their judgment in devaluing an asset on their balance sheet. Nor is the fair valuation of lightly traded and non-traded assets and liabilities an exact science.
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Sidestepping this controversy, the committee recommends that the SEC direct the Financial Accounting Standards Board (FASB) not to adopt new fair value rules until its framework to systematically assign measurement attributes to different types of business activities is completed. In the meantime, FASB should be "judicious" in expanding fair value.
Standard & Poor's global chief accountant, Neri Bukspan, agrees that a consistent measurement framework is sorely needed "because often business activities are mingled." As an example, Bukspan notes that "there may be funding that is associated with several activities at a bank or hedging activities that impact both trading and lending activities."
Also, companies should present amounts according to business activity and group individual activities into "meaningful" categories such as operating, investing and financing sections. Companies should also differentiate in their income statements what part of earnings per share are core earnings (derived from historical costs) from what part are derived from unrealized profit and loss (based on fair value estimates).
To improve disclosure, the committee recommends the SEC and FASB develop a disclosure framework to eliminate redundancies and provide a single source of guidance across all financial reporting standards. "This hopefully will reduce the amount of what I call 'quasi-GAAP' that runs around the world, and everyone will know what's authoritative," committee chairman Robert Pozen said in a press conference. The SEC has already begun analyzing the committee's recommendations with a view to developing proposals for public comment. This process will likely continue through the spring of 2009.
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