SEC panel issues recommendations for improving financial reports

The Securities and Exchange Commission’s Advisory Committee on Improvements to Financial Reporting called for a “judicious” approach in expanding the use of fair-value accounting as part of 25 recommendations it unveiled Aug. 1 to improve the usefulness of financial information to investors and reduce the complexity of the financial reporting system.

Chaired by Robert C. Pozen, chairman of MFS Investment Management, the committee’s recommendation on measuring value includes urging more disclosure on what part of earnings are derived from historical cost accounting and what part comes from fair value measure.

“The committee didn’t try to resolve the debate” between historical accounting and fair-value measure, Mr. Pozen said at a webcast briefing Aug. 1 with Christopher Cox, SEC chairman, unveiling a 172-page report containing the recommendations.

“There are people strongly in favor of having everything in fair value and people who say we have gone to far” in using fair value in accounting measures, Mr. Pozen said, noting the committee heard testimony from all sides on the issue at open meetings.

The committee advised the SEC to recommend the Financial Accounting Standards Board “be judicious” in expanding the use of fair-value accounting.

The Council of Institutional Investors is “concerned that the recommendations should not tie the hands of FASB and hinder progress to fair-value accounting,” said Amy Borrus, CII deputy executive director, in an interview. In general, “preparers, companies and banks have not been supportive of fair-value accounting,” Ms. Borrus added. CII supports moving to fair-value accounting, she added.

Jeff Mahoney, CII general counsel, testified before the committee last May.

At the briefing, Mr. Pozen said the recommendations are consistent with what FASB is doing on fair-value accounting.

The “recommendation is not intended to delay the revision” of pension accounting standards related to fair-value measurement, the report noted.

Messrs. Pozen and Cox declined to set a priority among the 25 recommendations.

The committee, chartered by the SEC in 2007, focused on recommendations addressing shortcomings in financial reporting that could be addressed within a reasonable time by the SEC, the FASB, or the Public Company Accounting Oversight Board, and without requiring legislation.

“I don’t know if the SEC will be able to address all the recommendations (applicable to it) in this report by year end but we will start immediately” to examine them, Mr. Cox said at the briefing.

Mr. Cox said he has instructed SEC staff to analyze the recommendations to come up with proposals to present to SEC commissioners.

Among other recommendations, the committee called for:

• doing away with financial restatements for any accounting error. Instead, the committee recommends financial statements should only be amended if the error would be material to investors making current investment decisions.

• FASB to be the single standards-setter for all U.S. GAAP accounting standards, while the SEC should focus on registrant-specific guidance. The “SEC staff should refrain from issuing broadly applicable interpretive implementation guidance that would change U.S. GAAP and instead should refer such matters to the FASB,” according to the report. “If the SEC staff identifies accounting issues of relatively broad significance in the process of reviewing filings by registrants, the SEC staff should refer such issues to the FASB.”

• the SEC to, “over the long-term, mandate the filing of interactive data-tagged financial statements after the satisfaction of certain preconditions,” such as successful testing of eXtensible Business Reporting Language, or XBRL, with U.S. GAAP taxonomy.

• the inclusion of summaries at the beginning of annual 10-K and quarterly 10-Q financial statements that “would describe concisely the most important themes or other significant matters with which management is primarily concerned, along with a page index showing where investors could find more detailed information on particular subjects,” or, in the case of electronically available corporate financial reports, hyperlinks to details.

• “encouraging the private sector to develop key performance indicators … that would capture important aspects of a company’s activities that may not be fully reflected in its financial statements or may be non-financial measures.”

• increased investor representation on the FASB and the Financial Accounting Foundation, which oversees and financially supports the FASB, “to assure that financial reports will be useful to investors.”

Other members of the 17-member committee included Scott C. Evans, executive vice president-asset management, TIAA-CREF; Jeffrey J. Diermeier, president and CEO, CFA Institute; Joseph A. Grundfest, professor of law and business at Stanford University’s Law School; and Dennis R. Beresford, professor of accounting, University of Georgia.

Contact Barry B. Burr at [email protected]