The Financial Accounting Standards Board and the International Accounting Standards Board are targeting February 2009 to publish a discussion paper on how they plan to overhaul lease accounting.

The boards met separately this week to hash out a number of areas where they either didn’t share the same view or hadn’t yet considered the issues to try to establish fully converged views on how to write new standards for U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. FASB decided for its part that it wants to see lease terms deemed a recognition issue, which would require entities to make some upfront judgments about their likely obligations over the expected life of the lease if they have some uncertainty about their ultimate obligations.

For example, when an entity has a 10-year lease with an option to renew for another five years, a recognition approach would require the entity to decide for how long it is likely to lease the property or equipment and recognize that term at the front end of the lease. The decision would take into account all contractual, non-contractual, and business factors.

FASB staff and board members were keen to steer clear of language that would be interpreted as commanding detailed number crunching. “It’s not a purely statistically based analysis,” said board member Tom Linsmeier during the Webcast meeting. “That might be a starting point to think about things.”

The Board decided it wants to require entities to make some estimates about what they expect to pay over time when lease terms are measured on factors other than time, such as when leases are based on sales or profitability. FASB determined an entity should be expected to determine its best estimate of the range of possible outcomes and the likelihood of each, but it should not be expected to attach weighted probabilities to each of those outcomes to determine the expected lease payments. If lease terms are based on changes in an index or a rate, however, then measurement should rely on the index or rate at the time of inception with a best estimate of expected lease payments.

The two boards plan to compare notes again from their separate meetings on the various outstanding issues to determine if they can publish the discussion paper with fully converged views or if they may publish various views on specific issues asking constituents to weigh in on the areas of debate.

The leaders of the Group of 20 have tasked accounting standard setters to provide guidance on securities valuation, especially for complicated illiquid instruments that are languishing under market pressure, along with improved standards and disclosures around off-balance-sheet activity and complex financial instruments.

It was among a long list of recommendations offered by the G-20, which is made up of finance ministers and central bank governors from the 20 leading global economies, to address the root causes and prospective solutions for the global financial crisis. The G-20 also called for action to improve governance, transparency, and accountability at the International Accounting Standards Board, including action to assure “an appropriate relationship” between the independent standard setter and outside political forces.

Scores of players in capital markets worried the G-20 would recommend more direct political action, for example relaxing some fair-value requirements, as a means to minimize fallout from the lingering credit crisis and its effect on financial markets. The IASB has already caved to political pressure in the European Union to give bank-friendly guidance on the reclassification of troubled assets, a move some in the United States have seen as evidence that IASB is not independent enough to be relied on as a global standard setter.

The Financial Accounting Foundation and the International Accounting Standards Committee Foundation each sent letters to the G-20 through President George Bush pleading with national bodies to steer clear of influencing the standard-setting process and leave it to the independent due process at the Financial Accounting Standards Board and IASB. “We encourage the G-20 to support independent standard setting via a robust due process free from political interference,” wrote FAF chairman Robert Denham. “This support will do more to restore confidence in the capital markets than legislating accounting standards in a way that reduces the reliability and transparency of financial information presently available to investors.”

The G-20 said the current crisis can be attributed to a combination of factors around excessive risk taking, complex and opaque financial instruments, weak underwriting standards, and regulatory bodies failing to notice the rising tension. The group said regulatory bodies should develop recommendations to unravel the impact of declining security values from banks’ capital requirements, looking at valuation rules, leverage, bank capital, executive compensation, and other practices that “exacerbate cyclical trends.”

Action by the International Accounting Standards Board to soften the blow of fair-value accounting for banks crippled by the credit crisis has produced a serious hit to real-time comparability, according to an analysis by Moody’s.

Under pressure to act during the peak of the credit crisis, the IASB amended International Accounting Standard 39, Financial Instruments: Recognition and Measurement, to allow banks to reclassify assets from a category designated as “available for sale” to another category called “hold to maturity.” The European community reasoned that the ability to reclassify assets was already available to banks reporting under U.S. Generally Accepted Accounting Principles, so IASB saw the move as necessary to assure comparability among global banks.

Banks all over the world are clamoring to define troubled assets as longer-term holdings to avoid taking deep hits in value as a result of recent market events. The extent to which U.S. banks can reclassify assets under GAAP—and therefore whether it’s now comparable to banks reporting under IFRS—has been a subject of debate since IASB published its amendments. GAAP experts generally say the ability to reclassify is more restricted than IFRS now allows under the recent amendments.

Most problematic in Moody’s view, however, is the allowance for those reporting under IFRS to use retroactive valuation. The amendments to IAS 39 allow entities reclassifying assets to value them based on July 1, 2008, data, well before the freefall that occurred in late September and early October. Moody’s describes how the look-back feature may affect reporting in its report, which the firm makes available only to subscribers.

“Giving companies the ability to look back to July gives firms the opportunity to cherry pick which instruments to reclassify on the balance sheet,” said Mark LaMonte, vice president for Moody’s. “It enables them to avoid losses that would have occurred from the first of July to the end of September.”

Moody’s says investment and credit professionals need to look closely at how entities are applying the “look-back” feature of the IAS 39 amendments to assure they can see where managements may be avoiding recognition of writedowns to assets where market prices have plunged or disappeared in recent months. The firm says users can at least take heart in knowing IASB required disclosure regarding where entities are reclassifying, allowing users to “understand the impact of the reclassification on current and future financial statements.”

Despite calls for more time, the Financial Accounting Standards Board will proceed with planned disclosure requirements around off-balance-sheet activity to take effect for fiscal periods ending after Dec. 15, 2008. That means calendar-year companies will be expected to begin making the new disclosures in their 2008 financial statements.

FASB determined at its regular meeting this week that it will make some changes and proceed to a final vote on FSP FAS 140-e and FIN 46(R)-e, Disclosures about Transfers of Financial Assets and Interests and Variable Interest Entities, with a final verdict soon to follow. The measure is intended to draw out more information about where entities may have invisible or opaque risks in off-balance-sheet entities while FASB and the International Accounting Standards Board work further on amending standards to make more comprehensive accounting changes.

The projects have been in the works for some time, but they took on a new level of urgency when sub-prime mortgages began failing at alarming rates last year, raising questions about where risky mortgage-backed financial instruments were hiding in complex securitization structures. FASB stepped up the pace on its work to revise Financial Accounting Statement No. 140: Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and to revise Financial Interpretation No. 46R: Consolidation of Variable Interest Entities.

FASB slogged through nearly two dozen questions and concerns raised in relation to the disclosure requirements, establishing final requirements that members agreed would be meaningful to investors, yet also achievable for entities under a tight implementation timeline. The determinations addressed sticky issues around defining “continuing involvement” in an off-balance-sheet entity, the scope of disclosures that would be required for entities that have continuing involvement, fair-value disclosures in FAS 140, disclosures for secured borrowings, and disclosures regarding any gain on sale.

When the Financial Accounting Standards Board finalizes its proposed staff position on pension plan disclosures, it will call for a lot more information about where and how fair value is used to measure pension plan assets.

FASB is working on amendments to Financial Accounting Standard 132R: Employers’ Disclosures About Post-retirement Benefit Plan Assets. The board accepted comments on the proposal through May, then reached some decisions at a recent meeting about what the final guidance will require.

FASB determined it will require employers to disclose where within the three-level hierarchy for measuring fair value a particular plan’s assets fall. The three-tier hierarchy is described in Financial Accounting Standard 157: Fair Value Measurements. The guidance will require information about the inputs and valuation techniques that were put to use to establish fair values for plan assets along with a reconciliation of beginning and ending balances for “Level 3” assets, or those measured using little or no market data but relying instead on significant unobservable inputs and assumptions.

The board also determined it will give entities an extra year to implement the guidance, making it effective for fiscal years ending after Dec. 15, 2009.

Jon Waite, chief actuary at consulting firm SEI, said an increasing number of pension plans have at least some percentage of assets tied up in instruments like private equity or hedge funds that are being measured at Level 3 in the fair-value hierarchy given persistent market illiquidity. He estimates most plans are measuring somewhere from 7 percent to 12 percent of plan assets at Level 3, with public sector pension plans among the most heavily invested in such “alternative” asset categories.

“It’s been growing over the past several years,” he said. “Before the turn of the century, there was probably a nominal amount of plan assets in alternative investments. Now we’re seeing a growing group of plans with at least 5 to 10 percent allocation.”

Just as financial institutions have railed over the difficulty in measuring instruments at fair value when market activity has evaporated, pension plan sponsors have hit the wall on measuring this hard-to-measure category of their plan assets as well. “In the past, you might have valued them just at book value,” he said. Recent guidance from FASB and from FASB and the Securities and Exchange Commission combined—emphasizing companies are not required to use fire-sale pricing but can also take into account cash flows and other factors—has helped calm jitters, according to Waite.

New auditor independence rules taking effect are compelling audit committees to update their proxy reports and their charters.

Howard Berkenblit, an attorney with Sullivan & Worcester, said a number of audit committees are just getting up to speed on what they need to do to comply with the new rule, and they’re finding it requires some quick document editing.

“The new rule doesn’t change audit committees’ duties at all, but it is catching some people’s eyes because a lot of audit committee charters and proxies refer to the old rule,” he said. “If the documents refer to the old standard, you have to update those to refer to the new standard.”

The Public Company Accounting Oversight Board adopted Ethics and Independence Rule 3526 to require audit firms to provide audit committees with dialogue and written disclosure about where they may have relationships that could affect the firm’s independence. The rule places the burden of disclosure on the audit firm, not the audit committee, said Berkenblit, but it does require the audit committee to take note of how its communication with audit firms will change as a result of the rule and to update their proxies and charters to reflect the new rule.

As a result of the new rule, the Securities and Exchange Commission adopted a conforming change to proxy rules so that audit committee reports need to make reference to the PCAOB’s independence rules. The rules do not require audit committees to reference the rule by name and number, however, to simplify things in the event of future rule changes, Berkenblit said. However, firms need to check their documentation, the law firm advises, to assure it reflects the current rules.

Buried in more urgent priorities around measuring financial instruments at fair value, the Financial Accounting Standards Board has decided to abandon a project that sought to define where entities could elect fair-value measurement for nonfinancial instruments.

In early 2007, FASB adopted Financial Accounting Statement No. 159: The Fair Value Option for Financial Assets and Financial Liabilities to allow entities to make some choices about where they would measure instruments at fair value. The intention was to simplify accounting for derivatives and resolve a mismatch in measurement approaches that led to artificial earnings volatility.

FASB was still toiling on a second phase of the fair-value option project, however, in trying to define when companies could also elect fair value to measure non-financial instruments, such as commodities. FASB representative Chris Klimek said the board decided to suspend the project “based on the board’s priorities and resources,” including the current fury over using fair value to measure financial instruments. “The board is taking a look at all of its priorities and deciding what it should be taking care of immediately,” she said.

The board has not suspended work on a separate fair value project related to non-financial assets, Klimek said. The board is redeliberating a proposed staff position to amend ARB No. 43, Restatement and Revision of Accounting Research Bulletins, to require that inventories included in an entity’s trading activities be initially and subsequently measured at fair value, with changes in fair value recognized in earnings.

U.S. and international rulemakers will hold the first of three global roundtables on Nov. 14 in London to try to get their arms around what kinds of financial reporting issues they can expect to arise from recent unprecedented market events.

The U.S. Financial Accounting Standards Board and the International Accounting Standards Board are hoping to hear from a wide variety of players in capital markets to get an idea of what accounting issues may command immediate attention and where the boards should consider focusing longer-term attention.

In response to growing demands for guidance on reporting issues emanating from the credit crisis, the International Accounting Standards Board published its staff’s views on how to establish fair value measures for financial instruments when markets are largely inactive.

The guidance says inactive markets are characterized by a significant decline in the volume and level of trading activity, significant variation in pricing, or pricing that is not current. “An active market is one in which transactions are taking place regularly on an arm’s length basis,” IASB staff said. “What is ‘regularly’ is a matter of judgment and depends upon the facts and circumstances of the market for the instrument being measured at fair value.”

FASB has resisted calls for detailed guidance around fair-value measurement, especially where the market has asked for more definitive guidelines around what constitutes an inactive market or a distressed sale. The board did, however, publish guidance in response to a crisis, third-quarter-close plea from the banking community on how to apply Financial Accounting Statement No. 157, Fair Value Measurements, when markets are inactive. The guidance did not define “inactive” for purposes of applying the standard or the guidance.

Joint guidance published by FASB and the staff of the Securities and Exchange Commission says indicators of inactive markets include a significant increase in the spread between bidding and asking prices and a low number of bidders. “The determination of whether a market is inactive or not requires judgment,” the guidance says.

Registration is required to participate in the global roundtable session. Additional roundtables will be held in FASB’s hometown of Norwalk, Conn., and in Tokyo. The boards also expect to reveal soon the make-up of an advisory group they are establishing to work toward the same objectives as the roundtable events.

In one of its most significant disciplinary proceeding to date, the Public Company Accounting Oversight Board has taken down another Big Four engagement partner and may still be working on a case against the audit firm as well.

The PCAOB slapped Deloitte & Touche Audit Partner Christopher Anderson with a one-year suspension from public company audit work, a $25,000 fine, and a one-year restriction on his audit abilities when his suspension expires for his role in the audit of 2003 financial statements for Navistar Financial Corp. The disciplinary order does not make any findings against the audit firm.

In December 2007, the PCAOB suspended engagement partner James Fazio and fined Deloitte & Touche $1 million in relation to its 2003 audit work for Ligand Pharmaceuticals.

The PCAOB says Anderson gave Navistar a clean audit opinion even after discovering shortly before the filing of the company’s 10-K that Navistar overstated assets, revenues, and earnings as a result of $19.7 million in errors. The board’s disciplinary proceeding says Anderson accepted a materiality threshold that he believed to be inflated, accepted the company’s adjustments to offset the overstatements, and authorized the clean opinion before the company completed a reconciliation of the affected accounts.

Claudius Modesti, PCAOB director of enforcement and investigations, could not comment on why the order focused solely on Anderson and not Deloitte as well. “We do not comment on considerations involved in whether to charge firms or persons other than named respondents,” Modesti told Compliance Week. “The Board’s order only finds violations relating to Mr. Anderson.”

Lewis Ferguson, a partner with Gibson Dunn and former counsel to the PCAOB, said the case likely is “highly fact specific,” though he’s not familiar with the details. “The firm tends to be the subject of disciplinary action when there is a failure of oversight or supervision,” he said. “Where a particular partner simply makes an error but the firm was not negligent, only the partner may get named in the proceeding.”

Deloitte representative Deborah Harrington said Anderson remains with Deloitte “with responsibilities consistent with the settlement.” The disciplinary action suspends him “from being associated with a registered public accounting firm,” which specifically is Deloitte & Touche LLP, the firm that is registered with the PCAOB.

The PCAOB has finalized fewer than two dozen disciplinary actions since its first finding in mid-2005. Deloitte is the only Big Four firm to be fined directly, although Susan Birkert of KPMG and Stephen J. Nardi and Ann Marie Fitzpatrick of tier-two firm BDO Seidman were named in 2007 cases.

The Financial Accounting Standards Board is bowing to outcry from preparers and attorneys that accounting requirements around pending legal actions in business combinations are unworkable.

In its regular weekly meeting Oct. 29, the board determined it will publish a staff position to amend Financial Accounting Statement No. 141R, Business Combinations. The amendment will try to sort out the collision that is occurring with the controversial new standard on business combinations, the highly controversial requirements around measuring fair value, and the continued quest to make U.S. rules more like international rules even when the U.S. has a far different legal system than most other countries.

When accounting for a merger or acquisition, FAS 141R requires that any contractual and non-contractual contingencies, or uncertain events like lawsuits that might result in assets or liabilities, be measured at fair value on the date of the acquisition. The standard is set to take effect for calendar-year companies in 2009. FASB’s handout for the meeting describes a number of concerns from constituents about the difficulty in valuing such contingencies, including difficulty in determining whether a contingency is more likely than not to lead to a liability, distinguishing between contractual and non-contractual contingencies, accounting for expected settlement, how to derecognize a liability, and how to account for legal feels.

Chairman Bob Herz lamented that in the current U.S. legal environment, where litigation is far more prevalent than in other countries, companies are in a tough spot. FAS 141 was adopted in tandem with an international rule on business combinations as part of the U.S. effort to move U.S. rules closer to international rules. “We’re going to have to admit that unless we change our (legal) system here, we almost have to have a U.S. carve-out,” he said. That’s a tough pill for U.S. rulemakers or regulators to swallow when they have pledged to move U.S. capital markets toward the international platform on a condition that all countries follow the same rules and resist the urge to adopt national variations.

The board determined it will specify that initial recognition and measurement of assets and liabilities arising from contingencies should follow a model similar to the one in the original rule on business combinations, FAS 141. They’ll offer additional clarification of situations where fair value is “reasonably estimable,” modeled after the guidance contained in FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations.

The Board also agreed it will stand its ground on FAS 141R’s requirements for subsequent measurement for assets and liabilities initially recognized at fair value, but will provide additional clarification to address questions around derecognition. That may help answer concerns some constituents have raised about acquiring assets that it plans to discard following an acquisition, for example.

FASB also determined that disclosures should include the nature of the contingency and an explanation for how its value was measured. If not at fair value, the company should be expected to say why it couldn’t measure according to fair value. Any additional disclosures would depend on the initial measurement attribute applied.

In a roundtable on fair value at the Securities Exchange Commission this week, an executive for publicly held KeyCorp said the intersection of FAS 141R with Financial Accounting Statement No. 157, Fair Value Measurements caused Key to abandon an otherwise viable acquisition. “The ramifications (of FAS 141R and FAS 157) caused Key not to consider this particular acquisition and others throughout the year,” said Charles Maimbourg, senior vice president of accounting policy and research for KeyCorp.

That was a zinger for regulators and rulemakers, who contend accounting rules should reflect business decisions, not drive them. SEC chief accountant Wayne Carnall did an audio double take. So even though the economics were there, “the accounting drove the decision?” he asked. Indeed, Maimbourg confirmed.