In perhaps a modest sign of the regulatory times, there will be no more first-class travel for short flights at the Public Company Accounting Oversight Board in 2009. To put a good spin on its 2009 budget, which the Securities and Exchange Commission recently approved, the PCAOB tightened down its travel plans and its policies around travel expenses.

As the PCAOB submitted to the SEC a 2009 operating budget with a 9 percent increase in spending, the board provided the SEC with the results of a self assessment of travel expenses, concluding its travel costs generally are in line with board policies and strategic objectives. PCAOB Chairman Mark Olson said in a letter to SEC Chairman Christopher Cox he acted to eliminate an allowance for first-class upgrades for flights beginning and ending in North America as the result of the internal review.

The board asked for $10.8 million for travel in 2009, primarily to pay visits to audit firms to inspect audit reports. The figure also covers travel costs for board members and staff to speaking engagements and other outreach activities.

Just as public companies are bracing themselves for a grueling audit season in the wake of imploding financial and credit markets and increasingly subjective accounting rules, the PCAOB likewise is expecting a tough inspection cycle beginning in the spring of 2009.

Peter Schleck, director of internal oversight and performance assurance, at the PCAOB said the review of travel costs and policies was in support of the board’s strategic goals “to manage resources effectively and efficiently and to identify and monitor operational and reputational risks.” The review “is intended to help promote the confidence of the SEC, the public, and others that the PCAOB strives for continuous process improvement,” said Schleck.

Private companies have won another deferral in complying with a 2006 order from the Financial Accounting Standards Board to disclose more about tax uncertainties.

FASB agreed—although reluctantly and not even unanimously—to defer the requirements of Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes for another year for non-public entities. FASB member Tom Linsmeier dissented, believing the Board should have provided only a narrow carve-out to address the real problem of FIN 48 application as it applies to pass-through entities. “He believes that because non-public enterprises that are tax-paying entities already have received up to a two-year deferral to understand and apply this interpretation, there is no reason to provide them with an additional deferral,” says a final FASB staff position providing the new deferral.

FIN 48 is the controversial interpretation of Financial Accounting Standard No. 109, Accounting for Income Taxes, requiring companies to provide tabular disclosures that would spell out where they have taken positions on their corporate tax returns that might not hold up under audit or legal challenge. It took effect in calendar year 2007, despite an outcry from public and non-public companies alike. Non-public companies won a deferral but FASB held firm on the timeline for public companies.

During the year of reprieve for non-public companies, FASB’s Private Company Financial Reporting Committee stumped for an exemption from FIN 48, but settled for at least some implementation guidance on how the interpretation would apply to pass-through entities. Those are entities like partnerships, S corporations, certain trusts, estates, and others that don’t pay taxes directly.

FASB promised to provide the guidance but got a bit sidetracked in 2008 with things like fair value, impairments, and off-balance-sheet problems, and the guidance didn’t get done. They tried to come up with a carve-out that would defer FIN 48 only for pass-through entities but found such a carve-out too complicated to create, given the complex structures under which many entities operate.

FASB says it will use the deferral period to develop the guidance necessary to apply FIN 48 to pass-through and not-for-profit organizations and to amend the disclosure requirements for non-public enterprises. In all likelihood, advocates for those organizations will continue to lobby for exemption, and their arguments may gain momentum as the United States moves closer to adopting International Financial Reporting Requirements for public companies. IFRS has no equivalent requirement, and the International Accounting Standards Board doesn’t like the model FASB has established.

An intensive study by the Securities and Exchange Commission has concluded that classic fears of credit quality and banks’ viability caused banks to fail and the financial markets to grind to a halt last year, rather than mark-to-market accounting rules.

The SEC study, mandated by Congress last fall when it passed the Wall Street bailout, recommends that Congress not suspend mark-to-market accounting standards. Rather, the SEC says the market could use some accounting rule changes related to impairments and guidance related to how fair value is measured, especially when markets are inactive and liquidity is a problem. The Financial Accounting Standards Board is already racing the clock to put some impairment changes in place in time for 2008 year-end reporting.

The 211-page study says investors generally believe fair-value accounting results in more transparent financial reporting and allows better investment decision making. The report says banks failed more as a result of credit losses, concerns about asset quality, and in some cases diminished lender and investor confidence, not fair-value accounting. It outlines some specific recommendations that would improve the application of fair-value accounting, according to the SEC, including:

1. Guidance and tools for determining fair value when market information is not available because markets are inactive; addressing how to determine when markets are inactive and therefore transactions are distressed; how a change in credit risk should impact the value of asset or liability; when it’s appropriate to rely on management estimates; and how to confirm assumptions represent the view of the hypothetical market participant, as required in Financial Accounting Standard No. 157, Fair Value Measurement;
2. Enhanced disclosure and presentation requirements regarding the effect of fair value in the financial statements;
3. Examination by FASB on the effect liquidity has in the measurement of fair value, including whether additional application or disclosure guidance might be helpful;
4. Consideration by FASB of whether credit risk should be factored into the measurement of liabilities, including whether current practice provides enough transparency;
5. Educational efforts, including those to reinforce the need for management judgment in the determination of fair-value estimates.

The report says FASB should consider reducing the number of impairment models, allowing management more leeway to tell investors whether declines in value are consistent with underlying credit quality, and allowing impaired assets to reflect recoveries as they regain value. FASB is working on short-term projects now (one looking at streamlining impairment models and one calling for a tabular presentation of measurement attributes in valuing certain debt securities) that address those issues. It is working on guidance related to the remaining issues as well.

Rick Ueltschy, a partner with Crowe Horwath, says the broad findings generally support what his firm has seen in practice. “The study indicates that credit losses have been a much greater contributor to bank weakening and failure than losses on investments recorded because of fair-value accounting,” he says. “While banks have taken some investment related hits, the credit losses have been more significant, except for certain, rare cases where banks had concentrations of investments in particularly troublesome securities.”

Cindy Fornelli, director of the Center for Audit Quality, said in a prepared statement that she’s pleased to see the study calls for improvements to rules, but not a retreat from fair value. “Any changes should be proposed and dealt with through the independent standard-setting process,” she said.

Accounting rule makers have formed an international all-star team to help chart a path out of the current financial crisis.

The Financial Crisis Advisory Group, formed by the Financial Accounting Standards Board and the International Accounting Standards Board, is tasked with helping the rule-making bodies sort out the standard-setting implications of the current global financial crisis and potential changes to the global regulatory environment.

The advisory group won’t try to establish consensus or recommendations, but will provide input to FASB and IASB through group meetings. FASB and IASB plan for the group to meet on a rotating basis in New York and in London for only about six months or less. Meetings generally will be public, although co-chairs Harvey Goldschmid, former commissioner with the Securities and Exchange Commission, and Hans Hoogervorst, chairman of the Netherlands Authority for the Financial Markets, have the discretion to hold private sessions as well.

FASB and IASB said the makeup of the advisory group includes senior leaders with broad experience in international financial markets and an interest in the transparency of financial reporting information. U.S. representatives on the 18-member advisory group include John Bogle, founder of Vanguard; Jerry Corrigan, former president of the New York Federal Reserve Bank; Gene Ludwig, former Controller of the Currency; and Don Nicolaisen, former chief accountant for Securities and Exchange Commission. Observers represent the Basel Committee of Banking Supervisors, the Committee of European Securities Regulators, the International Association of Insurance Supervisors, the Japan Financial Services Agency, and the SEC.

Although the group has a short shelf-life, Goldschmid says that doesn’t mean results will come quickly. “There is much to be considered, and we will proceed as quickly as possible, with an understanding these are complex issues with large public policy stakes and many interdependencies,” he said in a prepared statement. “There are likely to be few quick fixes.”

Hoogervorst says the diversity and seniority of the group “will help to ensure that any enhancements to financial reporting are considered in the context of the broader financial system and measured against a benchmark of enhancing investor confidence.”

The Financial Accounting Standards Board has published the second of four planned pieces of guidance intended to help free up seized credit markets.

The second proposed staff position would amend Financial Accounting Standard No. 107, Disclosures About Fair Value of Financial Instruments, to assure that assets with related economic characteristics but different measurement attributes would get comparable disclosure treatment. The guidance would apply to financial assets such as debt securities classified as held to maturity and available for sale, as well as to loans and long-term receivables that are not measured at fair value with changes affecting earnings.

The guidance would require companies to compare the common measurement attributes used for financial assets and provide the pro forma income from continuing operations before taxes under the different measurement scenarios. The guidance sets out a tabular requirement for comparison of measurement attributes, breaking out items reported in the statement of financial positions at fair value and at the incurred loss amount. The intention is to allow users of financial reports to more clearly see the effects on net income of changes arising from credit problems versus liquidity problems.

The guidance also would require disclosures such as the accounting policy for each type of financial asset, the methodology used to estimate the key inputs used to measure the incurred loss amount (such as estimated cash flows) and a description of factors causing the differences in measurements for each financial asset, to the extent such factors may be known.

FASB developed the requirements in tandem with the International Accounting Standards Board, which recently published a similar proposal for a change to international accounting rules. FASB is open to comments on the revision to FAS 107 through Jan. 15.

FASB’s first proposal in relation to the credit crisis is a revision to EITF 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets. That staff position is intended to reduce complexity and achieve more consistent determinations of whether other-than-temporary impairments of available-for-sale or held-to-maturity debt securities have occurred.

Still to come, the FASB staff is working on two more projects to clarify a scope exception related to embedded credit derivatives in FAS 133, Accounting for Derivative Instruments and Hedging Activities and to enable recovery for asset impairments when they are deemed other than temporary. The Board also is starting up a longer-term joint project with IASB to look at other complexities in the accounting and reporting for financial instruments

Despite drastic plunges in pension plan assets in recent weeks, an investment advisory firm’s research suggests plan sponsors shouldn’t necessarily assume they need to make drastic changes to their return-on-asset assumptions for financial reporting purposes.

SEI recently updated its annual research study on how companies can apply Financial Accounting Standard No. 87, Employers’ Accounting for Pensions. The firm’s research suggests short-term average returns may be extremely time dependent. For example, the 20-year average return-on-asset of a portfolio allocated 60 percent to equities and 40 percent to fixed income is 7.5 percent as of Nov. 30, 2008; it was 10.2 percent as of Nov. 30, 2007.

These are considerations plan sponsors should take into account when setting assumptions, SEI Chief Actuary Jon Waite says. But at a time when plan sponsors may face intense pressure from auditors to rethink their ROA assumptions, SEI’s research suggests more of a long-term view in setting or revising those assumptions, said Waite.

“Recent losses are a consideration,” Waite says. “But the bigger consideration will be whether you are changing asset allocation. Are you going to become more aggressive in your asset allocation to make up for that? If so, certainly the assumptions you’ve used in the past will be supportable.”

SEI says the study can be used by companies to calculate pension expense and obligations by providing guidance related to the discount rate and ROA assumptions that plan sponsors will use for 2008 year-end calculations. Discount rates, a key factor in measuring pension liabilities, have risen 50 to 100 basis points through November, Waite says. “An increase in the discount rate means the liabilities will be lower, so that’s a good thing,” he adds.

As for return on assets, Waite says the down market is one factor in setting or rethinking the assumption, but not the only factor. “We reiterate this is a long-term assumption and 2008’s experience should be one more piece of information put into the assumption,” he says.

U.S. and international accounting rule makers want feedback on their initial efforts to bridge the wide gulf in their respective rules on recognizing revenue.

The Financial Accounting Standards Board and the International Accounting Standards Board have published a joint discussion paper on their work so far to establish a single revenue recognition model for use in U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. It’s a preliminary step in establishing converged accounting standards for when and how entities should recognize revenue, especially for complex, multi-stage transactions.

U.S. rules on revenue recognition often are criticized as too voluminous and too inconsistent among various industries, leading to different outcomes for transactions that involve the same basic economics. International rules have been criticized for leading to inconsistent outcomes as well, but for the opposite reason: Their brevity and lack of specificity give preparers too little guidance and too much leeway.

The discussion paper outlines a single revenue recognition model intended to be applied uniformly across all industry sectors. The underlying concept is to require an entity to recognize revenue when it meets a performance obligation by transferring goods or services to a customer as agreed under contract. FASB and IASB acknowledge that the concept may be difficult to apply to certain kinds of transactions, such as some financial instruments, insurance contracts, and leasing contracts, for example.

The paper describes how a standard might establish recognition requirements based on contractual requirements and how performance obligations might be identified and satisfied. It also indicates the boards likely would pin the measurement of performance rights and obligations to the transaction price.

In a prepared statement, IASB Chairman Sir David Tweedie said now is the time for entities to get involved if they want to influence the ultimate direction of the revenue recognition model. “We believe that a single revenue model, applied consistently across various industries and countries, would greatly improve comparability of a key number in the financial statements,” he said. “We haven’t got all the answers yet, but we need to know whether we’re heading in the right direction.”

The boards are open to comments through June 19, 2009.

A member of the Public Company Accounting Oversight Board is calling on his fellow board members to get serious about converging public company auditing standards with international standards and those for private organizations in the United States.

PCAOB member Bill Gradison is in Denver today to address the Colorado Society of CPAs with his call for convergence. According to his prepared remarks, Gradison will say the current international financial crisis spotlights an important imperative for regulators and rule makers—the need for coordinated actions. “More specifically, the recent focus on fair-value accounting has demonstrated that standard setters on both sides of the Atlantic are well aware of the necessity of speaking with a single voice,” he plans to say.

The PCAOB writes auditing standards for companies doing business in U.S. capital markets, but some 100 countries around the world follow International Auditing Standards, written by the International Auditing and Assurance Standards Board, or national variations of ISAs. In addition, private entities in the United States follow standards written by the American Institute of Certified Public Accountants, which has followed a path in recent years to make its rules more consistent with the ISAs.

“Put me down as skeptical that in the long run it will be practical to educate, test, and supervise auditors in three different complex sets of auditing standards,” Gradison’s text says. “The challenge is for the three standard setters to develop a road map—a systematic, joint, comprehensive standard-by-standard review, identifying and merging the highest quality aspects of each standard.”

The IAASB has said it would welcome the PCAOB to look more closely at its standards and develop a convergence objective, although the PCAOB’s rule on auditing internal control over financial reporting stands out as a clear, major difference that countries abroad have not chosen to embrace. PCAOB member Charles Niemeier also has pointed out that he would not support converging to international standards in part because they are written by auditors themselves. The IAASB is an arm of the International Federation of Accountants, which is a professional accounting association, not an independent regulatory body.

In a September speech to the New York Society of CPAs, Niemeier said he sees no “beneficial policy objective” in allowing auditors to write their own standards, nor does he see a need for comparability in auditing standards as the case is made for comparability in financial reporting or accounting standards.

Gradison says none of the three sets of standards can be regarded as superior in all respects, but the best of each can be drawn into a single, global standard. He also believes convergence of auditing standards would not involve as steep a learning curve because they apply only to auditors and could ultimately make auditing more efficient. He’s calling on the PCAOB to adopt a convergence roadmap and timetable as part of its strategic plan.

Companies sponsoring pension plans have won some sympathy from Congress on the difficulty in funding pension plans that have been ravaged by market turmoil.

Both houses of Congress have approved the Worker, Retiree, and Employer Recovery Act of 2008 to ease up on the two-year-old requirements of the Pension Protection Act of 2006 requiring companies to get pension plans more fully funded. A technical summary from the Joint Committee on Taxation provides a 44-page synopsis of the bill.

The PPA required companies to get plans fully funded by 2012. The new bill adjusts the funding levels that must be met over a five-year period to give companies more time to achieve full funding as required in the PPA by 2012. It also allows pension plans to smooth out unexpected asset losses over 24 months for purposes of determining how much they must contribute to reach required funding levels.

While the legislation allows plan sponsors to smooth losses for purposes of calculating funding requirements, it has no impact on the accounting required for financial reporting purposes, which is driven by the Financial Accounting Standards Board. “This is a matter of regulatory funding requirements,” said FASB representative Christine Klimek. The accounting requirements have taken a dim view of smoothing, and FASB is working on a long-term project to overhaul pension accounting to eliminate the smoothing concept.

More than 350 corporate supporters signed a letter to Congress asking for the relief, according to Peter Kravitz, director of Congressional and political affairs for the American Institute of Certified Public Accountants. Most frightening to companies, he said, was the requirement in the Pension Protection Act for companies to immediately contribute enough to become 100 percent funded if they fail to achieve the various funding plateaus established in the five-year plan. For 2008, companies were required to be 92 percent funded, he said.

The Financial Accounting Standards Board is pulling back from its call for fair-value measurement of outstanding lawsuits when entities are reporting on newly acquired business units.

FASB published a proposed staff position that would revise Financial Accounting Statement No. 141R, Business Combinations, with respect to contingencies, or unresolved issues such as lawsuits that could lead to future assets or liabilities. FAS 141R requires entities to disclose contingencies and establish fair values for them that would be recorded as assets or liabilities at the time of a merger or acquisition.

Preparers, auditors, and especially attorneys have argued that establishing book values for uncertain events requires too much speculation and interpretation, not to mention too much revelation of legal strategies that would hinder outcomes.

The proposed amendment would specify that assets or liabilities arising from a contingency in a business combination must be recognized at fair value if fair value can be reasonably determined. The amendment also gives guidance on how to make that determination.

If the fair value can’t reasonably be determined, the guidance would direct preparers back to Financial Accounting Statement No. 5, Accounting for Contingencies, and Financial Interpretation No. 14, Reasonable Estimation of the Amount of a Loss. The proposed FSP would also amend the requirements around subsequent measurement and disclosures. With respect to disclosures, FASB is looking for information that enables financial statement readers to evaluate the nature and financial effects of a business combination as well as the effects of any adjustments arising from the transaction.

“While FASB believes that fair value is the most relevant measurement attribute for assets acquired and liabilities assumed in a business combination, the Board also acknowledges concerns raised by preparers, auditors, and members of the legal profession,” said FASB member Larry Smith in a written statement. “The proposed FSP addresses those concerns by requiring the use of fair value to value assets and liabilities arising from contingencies only when fair value is reasonably determinable.”

Greg Rogers, an attorney with Advanced Environmental Dimensions focused on environmental accounting and disclosure issues, said the guidance was even a little clearer than he expected. “It addresses the litigation issue directly and creates an expectation that other contingencies should be recorded at fair value,” he said.

Meanwhile FASB also is still working on a revision to FAS 5 for contingencies in general, even outside the context of a business combination. FASB published a planned revision to FAS 5 that made a similar call for fair-value measurement of all contingencies, and the proposal drew a comparable outcry of protest.

The board has developed a new model that attempts to address the concerns, and both models are undergoing field testing at a number of entities. The board plans to review the results and determine its next move in the spring of 2009, with a final standard effective no earlier than the end of 2009.

FASB is accepting comments on the proposed amendment to FAS 141R through Jan. 15, 2009.