As potentially game-changing new rules emerge from the Financial Accounting Standards Board and the Securities and Exchange Commission, companies are struggling to stay ahead of the curve and craft plans to implement the new rules and numerous modifications.

As such, much of a panel discussion dedicated to SEC regulatory updates at Compliance Week 2012 in Washington D.C. earlier this month, focused on what regulators and standard setters are considering and how those decisions could affect compliance.

Of the many accounting changes in the works, perhaps none will have a bigger impact on financial statements than plans for new standards on lease accounting. Last week, FASB and the International Accounting Standards Board announced that new lease accounting rules would contain two models for different types of leases. Unlike an initial proposal to bring all leases on the balance sheet, treating all of them alike, the compromise tasks lessees with determining whether acquiring an insignificant portion of the underlying asset allows them to recognize the expense evenly in the income statement over the lease term, or if they will be required to capitalize the lease.

Speaking at the conference, ahead of the recent announcement on lease accounting, Bruce Pounder, director of professional programs for Loscalzo Associates, which provides training on accounting and auditing, said that new accounting standards for leases will significantly impact lessees and lessors, especially as the “very definition of what constitutes a lease, from a financial reporting perspective,” changes.

“Some of the contracts that you have outstanding today, that you think are leases, might not be leases for accounting purposes going forward, and vice versa,” Pounder said.

The boards plan to publish a revised exposure draft of the standard in the third quarter of 2012 with a target to finalize the standard in 2013.

Revenue Recognition

Also on the horizon is a new, core principle for recognizing revenue. Pounder said what is being considered is completely unlike anything in either U.S. Generally Accepted Accounting Principles or International Financial Reporting Standards today.

“It will be a whole new ball game,” he said. “A big part of this project is to have one model that works for all kinds of entities, in all kinds of industries, when it comes to revenue. What we see is a lot of industry-specific revenue guidance from a lot of industries that have their own ways of accounting for revenue under GAPP today. That would largely, if not completely, be eliminated.”

Pounder said the changes level a “major impact on contract negotiations” and “how you write contracts with your customers.”

“The language in those contracts is something you had a degree of control over,” he said. “You may make different choices going forward in terms of what you bake into those contracts in order to achieve the accounting outcomes you feel are in the interest of your company and stakeholders.”

Blurring the Line

Another challenge to companies and their compliance programs is what Pounder described as “blurring the line between public and private companies.”

“The JOBS Act is creating this new class of public company, the Emerging Growth Company, that gets to, if they choose to, act for accounting purposes like a private company and they also get to be exempt from having to do auditor rotation, if that ever happens” he said.

FASB is working to define what constitutes a non-public entity. The result, Pounder says “could make an organization that is considered a public entity for accounting purposes today, a non-public entity going forward and vice versa.”

SEC Offers Advice

Speaking to a broad array of issues, Nili Shah, deputy chief accountant for the SEC's Division of Corporate Finance, said recent staff comments have addressed issues around loss contingencies, realization of deferred tax assets, segment disclosures, pension accounting and disclosures, consolidation, and non-GAPP measures.

Shah offered suggestions for companies dealing with the ever-changing world of regulations and accounting standards. Among them, was to avoid “surprise” disclosures, especially on loss contingencies.

Bruce Pounder, director of professional programs at Loscalzo Associates, and Nili Shah, deputy chief accountant-policy in the SEC's Division of Corporation Finance, take audience questions during the session on SEC financial reporting.

“You want to make sure the disclosures provide advance warning to investors,” she said. “We don't want to see situations where a company has no disclosure and then, immediately in the following period, there is a settlement. We certainly have seen situations where things move so rapidly that you go from minimal disclosure to being settled all in one quarter. That's understandable, but it is something to keep your eyes on.”

Shah said that if a non-GAPP measure is “misleading” the SEC will not “allow it anywhere.”

“Not in the filing, not on Websites, not on press releases, nowhere,” she said. “No amount of disclosure is going to make that OK. In situations where the measure is not necessarily misleading, but it is just not clear what a company is doing, we are asking for additional disclosures.”

When faced with confusion or concerns, corporations should always consider a formal or informal consultation with the SEC staff at either the Division of Corporate Finance or, for U.S. GAPP application matters, the Office of the Chief Accountant.

Shah said comments issued by the SEC can have a variety of motivations. Although some ask for a change to future disclosures or correction of an error, others are merely exploratory and corporations should make sure they understand the intent behind them.

“Sometimes a comment is just asking for additional information,” she said. “We see situations where we are just asking for information, but the registrant believes we have identified an error and goes through restating their financials. Once we have worked through the comment process, we realize everything was fine the first time around and they have to restate a second time to get back to their original accounting. It is obviously not very helpful to investors to see all those changes, and it is extremely expensive for a company to go through all that.”

Shah also provided some insight into the SEC's thinking on overall disclosure practices. “I think there tends to be a lot of focus on recognition and measurement within the financial statements, and I think disclosure may be a second priority,” Shah said when asked why so many companies get in hot water over disclosure matters.

“We have to keep in mind that disclosure should continually evolve,” she added. “It might be more efficient to take last year's disclosures and update them for this year, but sometimes it might be necessary to do a wholesale revision.”

Pounder blamed a “game-oriented mentality” shared by many SEC registrants.

“To them, there is a calculated game—a business risk if you will,” he said. “If we say this much, this is what could go wrong. If we say more, less could go wrong in one way, but more could go wrong in terms of consequences, capital market reaction, and so forth. There is—in a lot of managements' minds—this game of calculated risk taking that draws the line between what they disclose and what they don't.”

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