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Final report of the SEC's financial reporting advisory committee

  • SEC (US Securities and Exchange Commission) (dark gray) Image

03 Aug 2008

The US SEC's Advisory Committee on Improvements to Financial Reporting (ACIFR) has published its final report of recommendations to increase the usefulness of financial information to investors, while reducing the complexity of the financial reporting system to investors, preparers, and auditors.

The report sets out 25 recommendations that the ACIFR believes could be implemented by the Commission, the Financial Accounting Standards Board (FASB), the Public Company Accounting Oversight Board (PCAOB), or their respective staff, as appropriate, without legislation. The Committee's proposals to improve financial reporting are categorised into five main areas:
  1. Increasing the usefulness of information in SEC reports
  2. Enhancing the accounting standards-setting process
  3. Improving the substantive design of new accounting standards
  4. Delineating authoritative interpretive guidance
  5. Clarifying guidance on financial restatements and accounting judgments
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Examples of some of the proposals relating to the design of accounting standards and the process for setting standards include:

  • Fair value reporting. The SEC should recommend that the FASB be judicious in issuing new standards and interpretations that expand the use of fair value in areas where it is not already required until (a) FASB completes a measurement framework to systematically assign measurement attributes to different types of business activities and (b) the SEC, FASB, and others develop and implement a plan to strengthen the infrastructure that supports fair value reporting.
  • Financial statement presentation. The SEC should recommend that the FASB consider (a) aggregating financial statements by meaningful categories of business activities, such as the operating, investing, and financing sections and (b) developing a practical means for reconciling the statements of income and cash flows by major classes of measurement attributes.
  • Disclosure. Integrate existing SEC and FASB disclosure requirements into a cohesive whole based on consistent objectives and principles.
  • Disclosure of risks and judgements. Require disclosure of the principal assumptions, estimates, and sensitivity analyses that may impact a company's business, as well as a qualitative discussion of the key risks and uncertainties that could significantly change these amounts over time.
  • Recognition. Recognition guidance in US GAAP should be based on a presumption that bright lines should not exist.
  • General vs industry accounting standards. US GAAP should be presumptively based on business activities, rather than industries. Industry-specific standards should be rare.
  • Accounting policy choices. US GAAP should be based on a presumption that formally promulgated alternative accounting policies should not exist. US GAAP should be based on a presumption that similar activities should be accounted for in a similar manner.
  • Scope of standards. US GAAP should be scoped with sufficient precision to minimize the use of scope exceptions.
  • Investor involvement in standards. Add more investor representation to the FASB and the Financial Accounting Foundation.
  • Financial Reporting Forum (FRF). Create a Financial Reporting Forum (FRF) that includes key constituents from the preparer, auditor, and investor and other user communities, to meet with representatives from the SEC, the FASB, and the PCAOB to discuss pressures in the financial reporting system overall, both immediate and long-term, and how individual constituents are meeting these challenges. This may require the FASB to re-evaluate the roles and composition of its advisory groups or agenda committees.
  • Interpretations. FASB should be the single US standards-setter for all authoritative accounting standards and interpretive implementation guidance for US GAAP. The SEC should issue only registrant-specific guidance.

 

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