FEI's Top 11 Financial Reporting Issues For 2004
In a year of unprecedented regulation, FEI President and CEO Colleen Sayther offers the following list of 11 financial reporting issues that require the attention of financial executives during 2004. She notes they are not listed in any particular order, as the level of importance is certain to vary among companies.
- Internal Controls. Ensure that you have complied with Sarbanes-Oxley Section 404, which requires management to assess its internal control environment and the external auditor to attest to the internal control environment.
- Variable Interest Entities (VIEs). Comply with FIN 46, which requires that companies consolidate variable interest entities. The rule was issued in response to Enron's off-balance-sheet treatment of such entities. It was originally supposed to take effect in the third quarter, but on October 8, FASB extended the deadline due to the significant implementation issues companies and their auditors were dealing with. There have been numerous FSPs issued related to FIN 46 attempting to address the myriad of implementation issues; review those as well (as we go to print we were at FSP #46-7). In mid-December, FASB was still looking at overhauling FIN 46 prior to the effective date of the first reporting period after Dec. 15, 2003.
- Pension Disclosures. Comply with new pension disclosures. FASB is due to issue a final statement before year-end 2003 as FASB Statement No. 132 (revised 2003, rather than FASB Statement No. 51), but has tentatively decided to require additional disclosures for 2003 calendar year end companies based on comments received from its recent exposure draft.
- MD&A Guidance. Comply with MD&A guidance. As we go to print, the SEC is planning to issue some additional guidance before the 2003 reporting season, which will likely suggest an "Executive Summary" section intended to highlight the important items in the MD&A. Also, ensure that your disclosures of Critical Accounting Policies are robust enough for a user to understand your business model.
- Revenue Recognition. Comply with EITF 00-21, Revenue Arrangements with Multiple Deliverables. Also, monitor FASB's Revenue Recognition project.
- Off-Balance Sheet Arrangements Disclosures. Comply with FR-67, Disclosures of Off-Balance Sheet Arrangements and Contractual Obligations. The SEC issued this in January 2003 for compliance for 2003 year-ends. This requires SEC registrants to provide an explanation of their off-balance sheet arrangements in a separately captioned subsection of the MD&A, and to provide an overview of certain known contractual obligations in a tabular format.
- Embrace Transparency. Use judgment in determining items that are important for investors to better understand your company's financial position and future trends. Don't wait for rules to come out specifically requiring good disclosure.
- Audit Committee Governance. Disclose your audit committee financial expert in accordance with Sarbanes-Oxley. Ensure that audit fees and
non-audit- related expenses with your auditor are within independence guidelines and are appropriately approved.
- Financial Instruments with Characteristics of Both Liabilities and Equity. Comply with FAS 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This statement requires that many financial instruments that may have previously been classified as equity, be classified as debt. It is effective in 2003, but deferred indefinitely is the effective date for certain provisions relating to certain mandatorily redeemable financial instruments.
- Stock Options. Monitor FASB's project on stock options, in particular the deliberations on valuation.
- International Convergence. Monitor what's going on at the International Accounting Standards Board (IASB). Whatever projects are on the IASB agenda are likely to be on FASB's agenda in the near term (including pension accounting, insurance accounting, lease accounting). In mid-December, FASB issued several Exposure Drafts identifying short-term convergence issues.
Reprinted with permission from FINANCIAL EXECUTIVE, (January/February 2004). Copyright (2004) by Financial Executives International (FEI), 200 Campus Drive . Suite 200 . Box 674 Florham Park, NJ 07932-0674 . 973.765.1000; www.fei.org.