Projects Under Consideration

Accounting issues that may be addressed by the center at a later date include the topics given in the following partial list. This list will be updated periodically, and interested parties may also sign up on the CEASA homepage for email updates on CEASA's activities.

 

Executory Contracts — Leases

What's the issue?

Recent events have highlighted the potential for companies to enter into contractual commitments leading to unrecognized obligations. The SEC has now mandated disclosures in the US but they will be difficult for users to interpret. The most common form of executory contract is "leases" for which there is a very detailed set of accounting rules. There are many hundreds of pages of prescriptive rules under US-GAAP related to accounting for leases, yet few people believe there is much economic rationale for what exists. The separation of capital and operating (finance) leases is defined in the rules but is artificial in practice. These "bright-line" rules have also been used to avoid the application of appropriate accounting. The G4+1 group of standard setters articulated some time ago that they needed to tackle the issue and put out a discussion paper. The FASB and IASB have this topic under consideration: in April 2004, the IASB met to discuss an anticipated project that will ultimately lead to the replacement of IAS 17, and the FASB met in April 2005 to discuss FASB Statement 13, Accounting for Leases, to transactions classified as leveraged leases.

Why CEASA?

The outcome of any change in standards has broad implications for a wide spectrum of corporations and is expected to be a topic that will be hotly debated. This alone makes it a good candidate, but the issue also resonates because it is an area with inadequate analysis by most users leading to potential inefficiencies in capital allocations for the markets. The topic might be narrowed to leases, but the findings are likely to have implication for the broader set of similar contracts.

Performance Reporting

What's the issue?

There are two complementary issues: one relevant to financial reporting, the other to security analysis: How should business income be reported in financial statements? Should equity and debt analysts adjust income reported in GAAP financial statements? If so, how? Is one summary number - like earnings per share - meaningful? If so, what characteristics of these earnings and the measure of shares should be used? If this is a notion of core earnings or sustainable earnings, is there a set of principles as to how it should be calculated? Is such a measure feasible? What is the role of comprehensive income reporting and what is the basis for separating items into net income for EPS and other comprehensive income (STRGL in UK)?

For example, how should one-time write-offs and charges be handled, especially when these charges affect income to be reported in the future? Should a measure of operating income be distinguished from net income and can a meaningful distinction be made? How might the income statement be presented to identify various attributes of income? How might answers differ under historical cost accounting and fair value accounting? How is performance reported under a mixed model? Does the issue require a radical rethinking about financial reporting? Is the issue just a formatting problem or is it one of redefining the way that income is measured? To what extent is the issue a financial reporting matter versus a question for equity analysis? If the latter, is there sufficient information for appropriate analysis? If not, what is needed?

Why CEASA?

The FASB and IASB have an active joint project on Revenue Recognition and many specific issues are being confronted daily. Some of the ideas being considered by these regulators, in the spirit of logical consistency, will have a dramatic impact on business practice and security analysis. The issues are complex and varied and lends itself to the blending of theory and practice envisioned in CEASA's objectives.

At its next revenue recognition meeting, the FASB intends to discuss principles for revenue recognition using the allocated customer consideration approach and issues related to executory contracts. That meeting tentatively is scheduled for late February 2006. In the third quarter of 2006, the FASB plans to issue a Preliminary Views document covering both concepts- and standards-level revenue recognition guidance.

Revenue Recognition

What's the Issue?

Revenue is usually the largest single measure in determining earnings and is the starting point for most forecasting approaches. Many investors perceive revenue to be easily measured and relatively free of manipulation, yet more than half of all accounting frauds prosecuted in the U.S. have been related to revenue recognition. There is no general accounting standard on revenue, and US-GAAP contains 180 instances of transaction-specific and industry-specific guidance. Despite, or perhaps because of, the volume of guidance similar business arrangements are not necessarily accounted for in a similar way. The complexity of business arrangements and transactions continue to grow, making application of specific rules difficult to apply and potentially misleading. Revenue recognition also impacts cost recognition and can lead to confusing balance sheet measures, via application of a traditional matching concept.

Why CEASA?

The FASB and IASB have an active joint project on Revenue Recognition and many specific issues are being confronted daily. Some of the ideas being considered by these regulators, in the spirit of logical consistency, will have a dramatic impact on business practice and security analysis. The issues are complex and varied and lends itself to the blending of theory and practice envisioned in CEASA's objectives.

At its next revenue recognition meeting, the FASB intends to discuss principles for revenue recognition using the allocated customer consideration approach and issues related to executory contracts. That meeting tentatively is scheduled for late February 2006. In the third quarter of 2006, the FASB plans to issue a Preliminary Views document covering both concepts- and standards-level revenue recognition guidance.

Consolidation of Business Combinations

What's the issue?

After the elimination of "pooling" in 2001, the application of the purchase method and issues concerning consolidation have been high atop the list at the FASB and IASB. The purchase method was developed over thirty years ago, and the relevance, completeness and comparability of financial information needs to be updated for new industry, financial instruments and accounting standards.

Currently, there exist inconsistencies in the guidance for measuring assets acquired and liabilities assumed in a business combination. What assets and liabilities should be recognized in the accounting for a business combination? Should the purchase method sbe used in a transaction or event other than a purchase of net assets or equity interests that result in a reporting entity obtaining control over a business? In many instances, the classification of minority interests in consolidated statements and the accounting for such transactions between the reporting entity and holders of these interests are difficult to compare and unclear. Should proportioned consolidation be entertained?

Why CEASA?

This is currently a joint-project between the FASB and IASB, with the intention of developing a single accounting standard that could be applied to both domestic concerns and cross-border concerns. On June 30, 2005, the FASB and the IASB each published two documents on the topic. The FASB's Exposure Drafts are entitled, Business Combinations and Consolidated Financial Statements, Including Accounting and Reporting of Noncontrolling Interests in Subsidiaries. The IASB completed Proposed Amendment to IFRS 3, Business Combinations, and Proposed Amendments to IAS 27, Consolidated and Separate Financial Statements.

The Boards expect that redeliberations will take approximately one year and that final business combination and noncontrolling interests Statements will be issued in the first half of 2007. The Boards will review the target effective date of those Statements near the end of redeliberations.