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A Leaner, Faster FASB; Pension Rules; More

Tammy Whitehouse | January 8, 2008

The body that oversees the Financial Accounting Standards Board has floated the idea of cutting FASB from seven board members to five, and simplifying vote procedures to make adoption of new accounting rules a speedier process.

The board of trustees of the Financial Accounting Foundation, which sets funding for and approves appointments to both FASB and the Government Accounting Standards Board, has asked for public comment on a series of ideas to improve efficiency and effectiveness at the boards. Chief among the proposals is scaling back to a five-member FASB and allowing a simple majority vote to approve standards or other guidance.

FAF says reducing the size of FASB would make the Board more “nimble and responsive.” The proposals also include giving the Board chairman, currently Robert Herz, sole discretion over FASB’s agenda instead of requiring a Board vote to determine what projects will be added to the agenda. That would let the Board initiate projects more quickly, FAF says.

In its nine-page proposal, FAF acknowledges FASB’s future role is uncertain given the fast-growing use of International Financial Reporting Standards and the movement toward a single set of global accounting standards. The broad debate over how to move to a global set of accounting rules “must include a realistic assessment of how IFRS will work in actual application across the world, and what contributions can be made by FAF and FASB to the quality and consistency of those standards,” the proposal says. “The outcome of this debate will affect the future role, structure, and influence of the FAF and FASB on the global standard-setting process.”



Ferguson

Lewis Ferguson, of the law firm Gibson Dunn and former general counsel for the Public Company Accounting Oversight Board, says the proposal addresses a persistent criticism of FASB: that it is too unwieldy and slow to act. “It reduces the Board to the same size as the PCAOB and gives comparable administrative and agenda setting powers to the FASB chairman that the SEC and PCAOB chairmen now have,” he says. “That is a good thing.”

The Foundation is accepting comments to the proposal through Feb. 10.


Report Calls for Higher Discount Rates in Pension Accounting

Companies generally can expect to use an increased discount rate in calculating their pension expense for year-end 2007, likely resulting in an improved funding status, according to research from investment consulting firm SEI.

In a 2008 update to SEI’s Pension Accounting Series, SEI chief actuary Jon Waite offers guidance on determining discount rates to be used in several pension plan accounting items, including the service cost and projected benefit obligation. The assumed discount rate is an important component of complying with Financial Accounting Standard No. 87, Employers’ Accounting for Pensions, and FAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.

Pension accounting rules require plan sponsors at the end of each fiscal year to select a discount rate to value the accounting liabilities of their pension plans, according to the SEI report. The rate must be based on current market conditions and must be disclosed in financial statements. In addition to determining the accounting liabilities, the disclosed discount rate will also determine plans’ FAS 87 pension expense for the 2008 fiscal year.



Waite

Waite says changes in pension accounting and administration rules, as well as changes in market conditions, demand a closer review of the specific indices or yield curve matching that which will be used to set discount rate assumptions. “We’ve looked at how the yields have changed on a number of indices for high-quality corporations,” he says. “For the most part those indices show an increase in yields, and therefore, for pension purposes we would generally say the discount rate should increase.”

An increase in the discount rate could mean declines in pension liabilities of “perhaps 5 to 8 percent,” Waite predicted, resulting in either a reduction in a pension deficit or an increase in a pension surplus. “Now that the surplus or deficit resides directly on the balance sheet of the sponsoring company, that can be a significant or material item for a plan sponsor,” he says. “So generally we’re going to see a reduction in the debt load or an increase in assets that plans are providing.”


IFAC Offers Views on Audit Firm Oversight

The International Federation of Accountants is offering some advice on how audit firms should govern themselves and how they should be regulated.

In a paper summarizing current practice in several of the largest international accounting firms, IFAC says setting the right tone at the top can have a positive influence on audit quality. IFAC says the tone must be embedded into an accounting firm’s values, code of conduct, training, and reward policies to become a driver of professional behavior.

The paper describes five areas where management can address “tone issues:” strategy, communication, job descriptions, performance appraisals, and monitoring. The paper also provides examples of policies and procedures that are being put into place and the corresponding system of rewards and sanctions.



Guthrie

Russell Guthrie, IFAC’s director for quality assurance, says firms have been attentive to tone at the top in the past few years, especially as a result of new international quality control standards and regulatory measures. In the United States, for example, tone at the top is a common remark in inspection reports published by the Public Company Accounting Oversight Board, he notes.

IFAC issued the report in response to requests from firms to help assure they could adequately document and demonstrate tone at the top to the satisfaction of regulators, Guthrie says. “Firms wanted to look inward and ask what are we all doing? They wanted to be responsive to regulators and to have something to show of substance when they came in to do inspections.”

Separately, IFAC also issued a policy position on regulating the accounting profession. It advocates that national professional accounting groups, such as the American Institute of Certified Public Accountants, should play a strong role in the regulation of the profession, even when government regulators have legal authority over the profession.



Ball

IFAC chief executive Ian Ball says IFAC’s recommendation is generally consistent with the model that’s been established in the United States, but that doesn’t mean the U.S. model is best in every country.

“The paper points out there’s really no single regulatory model for all countries,” he says. “The model of regulation for a particular jurisdiction should be a factor of a number of things, including the country’s experience with self-regulation and history of financial reporting failures.”

For any jurisdiction, Ball says, the model chosen should be consistent with good regulation; that means it should be proportionate and cost effective. It also should be cooperative between the public sector and the professional association. “There is still a role for the professional association to play,” he says. “They’re still responsible for the conduct of their members.”