Financial Executives International has identified the top 10 financial reporting challenges for 2005. These challenges will impact the way companies manage their businesses, report their financial results, and compensate their employees.
The challenges include:
- Stock option expensing. The Financial Accounting Standards Board (FASB) has mandated that all stock compensation be expensed beginning June 30, 2005 for most public companies. Smaller public companies and private firms have until the first annual reporting period after Dec. 15, 2005.
- Complying with Sarbanes Oxley Section 404. The requirement for reporting on internal controls is already in place for accelerated SEC filers with years ending after November 15, 2004, but during 2005 all companies have to comply. Increasingly, lenders and state regulators are asking private companies about the status of their internal controls environment. Private companies may also see audit procedures used by their external auditor become more "integrated" with internal controls as the audit firms change their procedures.
- Revenue recognition. FASB is deliberating over a new approach that would recognize revenue in terms of changes in assets and liabilities, rather than an earnings process. Although it may take years to effect such a major change, it is vital that stakeholders join the debate now, in response to the FASB's Preliminary Views being developed for issue in the fourth quarter of 2005.
- Assessing sustainability of tax benefits. FASB seeks to clarify that the tax benefits recorded in an entity's tax returns must be "probable of being sustained" before they get recorded in the financial statements. A final statement is expected in the third quarter of 2005 following an Exposure Draft to be issued in first quarter of 2005.
- Recording taxes on repatriated earnings. Thanks to the American Jobs Creation Act, companies can repatriate earnings from foreign subsidiaries into the United States at an 85% deduction through the end of 2005. Companies who elect this option will be busy calculating their tax liability.
- Accounting for Business Combinations. FASB and the International Accounting Standards Board (IASB) are expected to require major changes to Business Combination accounting, moving towards a "fair value" model. Among other changes, contingent assets and liabilities associated with an acquisition would have to be recognized at fair value at the date of the acquisition with any changes reflected in earnings, and all acquisition-related costs paid to third parties would have to be expensed as incurred. An Exposure Draft is expected in the first half of 2005, with a final statement scheduled for the fourth quarter.
- Expensing Inventory Costs. FASB Statement 151 was issued in November 2004 and is effective for fiscal year-ends after June 15, 2005. It defines the term "so abnormal" with respect to amounts of idle freight, handling costs and spoilage required to be expensed currently. The clarification makes FASB's language more consistent with the IASB's inventory standards.
- Disclosing off-balance sheet items. CFOs will need to comply with the SEC's suggestions in its report due out in early 2005. It is expected to address items such as pensions and leases among others.
- Translating reports to XBRL. The SEC has asked companies to voluntarily use Extensible Business Reporting Language (XBRL), a new code designed to increase efficiency and reduce error in the electronic communication of business and financial data, for their 2004 reporting. Expect to see more companies following the trend in 2005.
- MD&A Guidance. The SEC periodically provides filing companies with guidance on making their Management Discussion and Analysis (MD&A) as informative and transparent as possible. This year's SEC reviews also indicate the commission's belief that the Critical Accounting Policy notes need further clarification. Companies will have to ensure that their disclosures of Critical Accounting Policies adequately and clearly explain the business model.
"The continuing and collective effort to improve the clarity, consistency and transparency of financial reporting as well as the continuing effort towards convergence with international standards promises to keep the CFO's job interesting and challenging in 2005," says Colleen Cunningham, President and CEO of FEI.