Financial Reporting:
Asset Impairment
Need for Assumptions in Impairment Valuations
Position: Disclosures about the impairment of long-lived assets should include the methods used to determine the fair value of the impaired asset.
Rationale: Without understanding how management determined the fair value of the impaired asset investors will have no way of deciding whether management’s valuations are adequate. Allowing companies to avoid disclosing valuation models used to determine impairment affects the ability of investors/analysts to determine the appropriateness of management’s assumptions and calculations. Therefore it affects the ability of investors to determine the valuation of the company’s securities.
Where stated: CAC Letter
Need for Sensitivity Analysis
Position: Companies should provide a sensitivity analysis to show how changes in key assumptions might affect the results.
Rationale: This information will enable investors to determine how various scenarios might affect the valuation of the company and its securities.
Where stated: SEC CIFiR 08 (PDF); CAC Letter
Goodwill Impairment Reviews
Position: Goodwill and other intangible assets should be reviewed for impairment no less than once every two years.
Rationale: To wait longer may permit management to overlook and mask significant changes in value that have occurred as a result of competitive pressures or poor management.
Where stated: FAPC - FASB Bz Combo 99
Similar Assets Should Receive Similar Accounting Treatment
Position: Harmonization should seek to treat similar assets in the same way.
Rationale: Treating similar assets differently is apt to create confusion among investors/analysts, which ultimately could lead to poor investment decisions and poor allocation of investment capital.
Where stated: SEC CIFiR 08 (PDF); CAC Letter; US Senate Goodwill Accounting
Alternative Accounting Standards
Position: Issuers should not be permitted alternatives in accounting standards.
Rationale: Accounting standards should strive to provide investors with an accurate picture of the economic reality of a company’s operations and financial condition. Alternative standards, however, give issuers an opportunity to choose the standard which presents their performance in the most flattering light, regardless of whether it conveys an accurate picture of the company’s operations or financial condition.
Where stated: SEC CIFiR 08 (PDF); IASB Business Combinations 2004
Retroactive Application of Standards
Position: Accounting standards should be applied retroactively so that all transactions in all periods are accounted for in the same manner.
Rationale: Otherwise investors will have to be told how management accounted for all transactions in the past, together with relevant assumptions and a description of how using a different standard for specific transactions could affect the financial statements and results.
Where stated: SEC CIFiR 08 (PDF); IASB Business Combinations 2004
Exception to Retroactive Application of a Standard
Position: A new accounting standard should be applied retrospectively unless that standard requires use of information that no longer exists or is no longer available.
Rationale: Retrospective application in most circumstances ensures that all transactions in all periods are accounted for in a comparable manner. However, in cases where the information no longer exists or is no longer available, the quality of the information would be unreliable and, therefore, should not be applied retrospectively.
Where stated: IASB Business Combinations 2004