SEC to mandate IFRS adoption?
“It’s time to start preparing for the arrival of international accounting standards,” says the lead article in this month’s CFO Magazine, simply entitled “Goodbye GAAP.” “Experts at the Big Four accounting firms say a Securities and Exchange Commission mandate for all U.S. publicly traded companies to use IFRS [International Financial Reporting Standards] is inevitable.” Some predict that larger U.S. firms could begin using IFRS instead of GAAP in three years, while a mandatory conversion could take effect within five.
But international convergence of accounting standards is “clouded with questions,” says the editor’s letter. IFRS is “only” seven years old (compared to GAAP’s thirty-five years), but already has thousands of pages of rules. These could multiply as each country makes its own modifications. U.S. implementation will be “costly and difficult,” say representatives from accounting firms (for which convergence could be “the next gigantic billing opportunity,” according to the CFO letter). If auditors are understandably slow to advise on GAAP now, in the current oversight climate, will international convergence completely stall the process? “Will you be indemnified for implementing IFRS, or will it open up a hole large enough for the plaintiff’s bar to drive a truck through?”
SEC roadmap for convergence. The SEC will vote on a proposed timeline for U.S. adoption and implementation of IFRS sometime this year, says the “Goodbye GAAP” article. Larger U.S. firms could begin to use IFRS as early as 2011, with mandated compliance by 2013; smaller firms could follow suit in 2015. In the meantime, as part of its initiative to support convergence of accounting standards and “in light of market developments,” the SEC recently proposed amendments to permit foreign private issuers improved access to U.S. capital markets and cross-border transactions while also protecting investors. The amendments appear in the March 12, 2008 Federal Register, with comments due by May 12, 2008.
FASAC proposes alternative to SEC advisory group
In its comments to the Progress Report of the SEC Advisory Committee on Improvements to Financial Reporting (see BVWire™ #65-3), the Financial Accounting Standards Advisory Council (FASAC) focused primarily on the proposal to improve the standards-setting process. Specifically, Developed Proposal 2.3 recommends the FASB to create a formal Agenda Advisory Group, from investors’ groups, auditors, preparers, and others, to actively manage U.S. standards-setting procedures.
“We disagree with [the proposal] as currently drafted, because it appears to create systemic redundancies,” says the official FASAC comment letter, before adding, with emphasis, “The proposal disregards existing councils and committees that currently advise the FASB on its agenda and its technical projects.” These include the FASAC and other FASB-formed groups such as its Investors Technical Advisory Committee, Private Company Financial Reporting Committee, and others. “If the proposal is adopted…it has the potential to create tremendous overlaps in responsibility and inefficiency in the agenda advisory arena because two separate groups—FASAC and the Agenda Advisory Group—essentially would be tasked with the same functions” (emphasis in original).
Instead, FASAC supports the formation of a new system-wide advisory group to: i) advise all constituents of the financial reporting system; ii) assist in emergency application and implementation issues with U.S. GAAP (not FASB projects); and iii) take a “triage-like” approach to assess which groups (FASB, PCAOB, SEC, audit firms, etc.) should address emergency issues. To read all comment letters, including one from SEC former Acting Chief Accountant Scott Taub (in which he says that “preparers and auditors fear being second-guessed, and that fear is affecting their actions in unhealthy ways”) click here.
2008 Duff & Phelps data now available
The Duff & Phelps, LLC Risk Premium Report 2008 has just been released, providing updated risk premium data based on average returns through December 31, 2007. As in prior years, the Report presents data on rates of return related to company size and fundamental company risk. The size portion provides data categorized by two market-value-based measures and six “fundamental” or accounting-based measures; the risk portion analyzes data against the three fundamental measures of business risk—operating margin, variability of operating margin, and variability of return on invested capital.
New this year: The Report discusses the use of its data in conjunction with industry risk premia reported in the Ibbotson® SBBI® Valuation Yearbook (Morningstar) and provides examples. The 2008 Report is available through BVResources. In addition, the next issue (May 2008) of the Business Valuation Update™ will publish the Duff & Phelps’ 2008 premiums over long-term risk-free rates in its monthly “Cost of Capital” feature.
It’s still a good time to sell a business
“Investors are loaded with cash. Boomers are looking to buy. Foreign firms are eager to invest. What does that add up to?” asks this month's Inc. magazine, in its annual feature on business valuation: “A seller's market for your business.” The current economic downturn and credit crunch may be dampening billion-dollar private equity deals. But middle market investment capital—consisting of companies with less than $500 million annual revenues—remains plentiful. Venture capital firms raised more than $34.7 billion in 2007, hedge funds more than $31.5 billion. Those investors are asking how they can put their money to work, Inc. says, and “the answer just might be your company.”
For the fifth year in a row, Inc. has partnered with BVResources to map out the marketplace for private companies. Those in the hottest growth sectors—technology and software, energy, and anything aimed at the aging U.S. population—are in the greatest demand. Construction and other housing-related firms are “cooling off,” although the tightening market could prompt midsize companies to consolidate. But the current seller’s market for businesses will end sometime during the next five to ten years, the article predicts, as an estimated 65% to 75% of small companies hang out a “for sale” sign when their baby-boomer owners retire. To see “How Much is Your Business Worth” today, compiled by Inc. from BVR data (3,838 transactions in 141 industries) click here.
New edition—and new author—for Cost of Capital
The third edition of Cost of Capital: Estimations and Applications, released just this past week, features new co-author Roger Grabowski in addition to the original author Shannon Pratt. Not surprisingly, the new edition contains extensive discussion of data from the Duff & Phelps Risk Premium Report as well as added chapters on:
- cost of capital for financial reporting under SFAS 141, 142 and 144
- risk measures and their relationship to cost of capital
- cost of capital for companies in developing economies
- cost of capital for transfer pricing
The authors have updated chapters on cost of capital in the courts and marketability discounts, and leading experts have contributed specialized chapters on real estate, property tax, and family limited partnership valuations. The chapter on Company-Specific Risk also features a discussion of the Butler Pinkerton Model™—Company-Specific Risk and TCOE Calculator™. To order your copy of Cost of Capital, third edition, click here.
FASB incorporates SEC content into Codification project
Last Friday the Financial Accounting Standards Board released selected portions of the SEC content onto its Accounting Standards Codification™, for reference by public companies. (For more on the Codification, see BVWire # 64-3). “The Codification does not change the SEC content,” says the FASB release; “instead, it includes the content reorganized into roughly 90 accounting topics to more closely align with the non-SEC-content.”
The SEC sections contain content related to matters within the basic financial statements. However, the sections do not contain the entire population of SEC rules, regulations, interpretive releases, and staff guidance. For example, the Codification does not include content related to matters outside of the basic financial statements, such as Management's Discussion and Analysis, or auditing or independence matters.
The FASB encourages constituents to use the free, online Codification Research System to research accounting issues and provide feedback on whether the content accurately reflects existing U.S. GAAP for non-governmental entities. Registration is available here.
More evidence FASB acting fast to comply with SEC requests. Last week the FASB voted to remove the Qualified Special Purpose Entity (QSPE) concept from FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and to remove the related scope exception from FIN 46R, Consolidation of Variable Interest Entities (VIEs). (For more on the concept and the Board’s release of FSP 140-3, see BVWire #65-3). The Board expects to release an amended Exposure Draft during the second quarter of this year, according to an FEI posting (April 3, 2008), which also notes that the FASB acted fast to comply with SEC requests to address the QSPE issue by year-end.
Two new U.S. trustees join IFRIC
The Trustees of the International Accounting Standards Foundation have just appointed two additional members to the International Financial Reporting Interpretations Committee (IFRIC), expanding the Committee from twelve to fourteen members. Margaret Smyth, Vice-President and Controller for United Technologies Corp., and Scott Taub, Managing Director, Financial Reporting Advisers, LLC (and formerly of the SEC) have given the Committee broader IFRS experience, says the IASB release, and are “well positioned” to assist the IFRIC in its work.
PCAOB finding labor market tight, too
The Public Company Accounting Oversight Board recently posted its updated Strategic Plan (2008-2013). The Plan provides a framework for PCAOB focus over the next five years and a check to make sure the Board’s activities are aligned with its core values. Interestingly, the Board notes that the market for experienced accountants has become “highly competitive” and “difficult to predict,” with the competition for such talent “fierce.” Despite these challenges, the PCAOB remains optimistic, insisting that it has attracted highly competent staff. For example, the leads on its 2007 inspection teams had, on average, 23 years experience in public accounting, it says. The Board also believes that its hiring ability will improve in the near term, even though it admits facing “constraints in hiring and maintaining the staff,” due to training, budget, and other shortfalls.