Lisa Thomas receives inaugural TrEAT Award

All year we’ve been collecting nominations for our first-ever TrEAT Award, designed to honor the RoseRyan consultant who best represents our values of trustworthy, excel, advocate and team throughout the year, with clients and with colleagues, in ways big and small.

Lisa Thomas, this year’s TrEAT honoree, embodies so many of these qualities we considered giving her the award in duplicate. Lisa excels at her work and gamely ventures outside her comfort zone to learn new skills and tackle stretch assignments. A team member-and-a-half, she forges the same strong, collegial relationships with clients that she builds inside RoseRyan, where she is a frequent instigator of social activities.

Lisa pitches in for more than the fun stuff. She never shies away from the harder work of culture-building, for example, honest communication about difficult issues. It takes courage to speak up and ask the tough questions, and Lisa has both the moxie and the finesse to do it. Congrats, Lisa, and thank you for living our values every day.

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Enforcement and executive comp top list at SEC conference

The economy must be picking up, judging by the attendance at last week’s 27th Annual Reporting and FASB forum put on by the SEC Institute. It was a packed house. The two-day seminar was not for the claustrophobic because every chair was taken and we were elbow-to-elbow at lunch.

They covered a lot of information during the two days, but as we head into 10-K season what I found most interesting were the current developments at the SEC and recent hot buttons with SEC comment letters.

The SEC continues to consider new ways to disclose executive compensation in proxies, so we need to review the latest rules when preparing them later in the year. They suggested that there is heightened SEC oversight and enforcement, particularly as it pertains to disclosure of revenue recognition, contingencies, income taxes and warrants.

Who knew? Non-GAAP disclosures
It was surprising to me that several speakers suggested that you shouldn’t be afraid to disclose non-GAAP measures in your 10-K. I had always believed that the SEC disapproved of these disclosures, but the speakers said that this wasn’t the case; in fact, the SEC often looks to earnings releases, and if the company had non-GAAP measures in its 8-K, they would expect the same type of disclosure in the 10-K.

I found the MDA discussion interesting because the speaker was good and he had a thoughtful presentation, but I also wonder how many companies will follow the suggestions. The speaker suggested starting with a blank piece of paper every three years to keep the information fresh, and not to be afraid to disclose forward-looking statements rather than just reciting the same old historical information. He suggested that you could discuss the same type of information that is in some of your risk factors and, unlike the risk factors, you can use qualifying language. (Good luck with getting everyone to sign on for more disclosure.)

How dumb can people be?
I don’t plan to ever have to worry about how to stay out of trouble, but the session on enforcement was entertaining. People never cease to amaze me: the regional director of the SEC said that recently someone under investigation for insider trading continued to deny that he knew anyone in the company—even the person with the same last name. It was his brother, and he was convicted.

There were several discussions on the U.S. convergence with IFRS, as there were when I attended the conference two years ago. The timeline is longer, with some speakers suggesting five to six more years. Everyone has finally acknowledged that it is going to be a lot harder than anyone thought. It shouldn’t be surprising; I am still waiting for the United States to adopt the metric system as I was promised when I was in the sixth grade.

Overall, it was an informative two days. Even if you closely follow new accounting literature, you will still hear a few things you can’t get from just reading recent pronouncements.

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RoseRyan guru elected to XBRL US committee

Congratulations to Lucy Lee for her recent election to XBRL US’s Domain Steering Committee. The committee’s primary goal is to oversee the development of taxonomies that meet the business reporting needs of key U.S. markets.

“This committee is at the forefront of driving and shaping XBRL standards, so this is a unique opportunity to gain insight into taxonomy development,” says Lucy. “I’m excited to share the latest developments with our clients and my colleagues. Likewise, I look forward to contributing to the committee by providing it with meaningful input from RoseRyan’s work in the field.”

Lucy, who spearheaded the development of RoseRyan’s XBRL practice, will serve two consecutive one-year terms representing the analyst community. Her committee colleagues include representatives from Big 4 firms and leading software and service providers. Responsibilities of the committee include reviewing and establishing the business requirements for the XBRL specification, participating in the development of global taxonomy architecture best practices and participating in the development of taxonomy development and approval processes.

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Why is a 3-way match important in XBRL?

While speaking at the 2011 Year-End SEC Conference in Phoenix earlier this month, and this week at the same program here in Silicon Valley, an interesting question came up. Despite filers’ efforts to match their HTML financial submission to the rendered version (vendor’s viewer or reviewers’ guide), the SEC and XBRL US continue to report numerous data quality and consistency issues on XBRL submissions.

Where is this disconnect? This two-way comparison is akin to comparing two static spreadsheets without regard for a third element: the underlying raw data and interrelationships of the facts. As a result, XBRL data may be entered incorrectly with the wrong mapping or signage, or unit or calculation errors.

The importance of a three-way match
In accounting, we substantiate a financial obligation by matching three documents: an invoice, a valid purchase order and a receiving document. Similarly, in the world of XBRL, a three-way match of the three key documents—HTML submission, SEC Private Previewer and the metadata, with final verification against the metadata (the underlying raw data in the instance document)—is key to a successful filing. As the SEC says, “the rendered version of the Interactive Data File may be a useful tool to help determine the completeness of your data, but is not the best mechanism to check the accuracy of the tags selected or other underlying details.”

What you see is not always what you get
Often the signs in your HTML and viewer are presented with brackets due to negated labels, but the raw data in the instance document should almost always be tagged as positive numbers. The U.S. GAAP taxonomy is designed to reflect a natural or absolute balance. Think about general ledger systems, which show debits and credits rather than positives and negatives. It’s helpful to think about XBRL in this way. If you see a negative number in the raw data, ask whether it makes sense for the balance to be negative. Always check the definition and determine if this element should be one-way (always positive, like revenue and expense) or two-way (increase/decrease, gain/loss, proceeds/payments, profit/loss and so on).

Three-way match = completeness + accuracy
Whether you use a bolt-on or a built-in solution, the three-way match is critical to the XBRL control process. Work with your service providers or software tool to extract contextual metadata from the instance and other linkbases to perform the following common errors review: (1) negative values, (2) units and (3) negated labels and calculation links. This will allow a complete review of selected elements and determination of whether the data has been entered correctly.

Quality XBRL data is of paramount importance as key stakeholders (such as regulators, data aggregators, analysts, investors, filers and auditors) begin to use and rely upon XBRL data for business decisions. It is ultimately the filer’s responsibility to ensure that the underlying metadata is complete, accurate, and consistently mapped to allow data consumption software to tell the right story.

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RoseRyan flexes muscles at Second Harvest Food Bank

Last week, a dozen RoseRyan consultants and family members sorted 14 crates of food—approximately 11,000 pounds!—at the Second Harvest Food Bank in San Jose.

As we arrived at the warehouse, we were amazed at the rows and rows of pallets with food stacked on shelves, all the way to the ceiling. Once we signed in, our tasks entailed checking expiration dates, putting food items into categories (protein, vegetables, fruit, cereal, etc.), boxing them up, labeling them and stacking them on pallets. As we went through this process, the things we learned: don’t tie the plastic bags you donate the food in, it slows down the process; if the item is past its expiration date, don’t donate it—we ended up throwing lots of food away; and items without an ingredient listing on the package aren’t accepted.

RoseRyan is proud to be a part of this community program and help fight local hunger. The Second Harvest Food Bank is one of the largest food banks in the nation, providing food to an average of a quarter million people a month. Throughout the year, volunteers contribute almost 300,000 hours of service to the food bank, saving more than $5.7 million in labor costs. Food is distributed to low-income families and the homeless from Daly City to Gilroy through shelters, pantries, soup kitchens, children’s programs, senior meal sites and residential programs.

It helps us too. As we are a dispersed workforce and don’t have much opportunity to interact with each other, the Nov. 30 activity also gave us a chance to get know each other better, build a sense of teamwork, and have fun! Some comments from those who attended: “It was one of the most rewarding and enjoyable experiences,” “Thanks for organizing this, I would have never tried it otherwise” and “Thank goodness for kettlebell workouts!”

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Latest revenue recognition guidance: throw out the recipe box

It’s been more than a decade in the making, but the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are in the final throes of issuing a global revenue recognition standard to replace all others, including the mirage of industry-specific guidance the United States follows today. The new guidance is “principles-based,” so you’re not going to find specific rules or instructions—no more recipes for that special occasion. Instead, the new guidance is about substance, judgment and transparency.

The core principle is “recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” The FASB provides a five-step process to achieve this: (1) identify the contract with the customer, (2) identify the separate performance obligations, (3) determine the transaction price, (4) allocate the transaction price and (5) recognize revenue when the performance obligation is satisfied. The objective: enable companies to recognize revenue based on the substance of the transaction with the customer, while providing enough guidance to help ensure consistency with other companies. This is a difficult balance, as evidenced by how long this guidance has been in the cooker.

Lots of judgment required, but no measuring cup
Principles-based guidance requires judgment—lots of judgment! Have you entered into a new contract with a customer or modified an existing contract? Which of the performance obligations can or should be separated? Not all will qualify. Special terms and pricing arrangements can create variability in the amount of revenue a company is entitled to receive, and probability has to be assessed. Companies will need to estimate the stand-alone selling price for each performance obligation—that means you too, software companies. Performance obligations are satisfied when control is transferred to the customer, but for companies that provide services, this is more complicated—services don’t come in a box, so delivery is more theoretical and an appropriate measure of progress needs to be evaluated. Finally, revenue has to be “reasonably assured” to be recognized. That’s a qualitative threshold—no measuring cup required.

Disclosure is hot: share your secret sauce
And it should come as no surprise that where significant judgment is applied in accounting, especially for revenue, transparent disclosure is vital to understanding the financial statements. At the bottom of the statements the footnote should read, “See accompanying notes to the financial statements … seriously.” The level of disclosure continues to be a hot topic as the guidance makes its way through the comment process, and the latest exposure draft also includes enhancements to interim disclosures as well. Companies will need to disclose their secret sauce, providing qualitative disclosures, including a description of the judgments involved, and also quantitative disclosures, which may require additional financial system reporting requirements. While it may be more difficult for the SEC to question the judgment applied in recognizing revenue, you can bet that they will be all over companies that do not provide adequate disclosures. For companies currently employing a “less is more” disclosure process, this will be a dramatic change.

Want to see what’s cooking? Download a PDF of the latest exposure draft from the FASB website. Comments are due March 13, 2012, and a final standard is expected in the second half of 2012. The proposed effective date is 2015.

Think you have time to prepare?
Think again. In its proposal stage, the guidance requires full retrospective application, so public companies presenting three years of financial statements will also have to present 2013 and 2014 for comparative purposes. Don’t let this overwhelm you—give us a call to see how RoseRyan can help make the transition easier.

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IASB vs. FASB: What’s the difference?

The SEC is expected to issue a recommendation before the end of the year that may require publicly held companies to adopt international accounting standards issued by the International Accounting Standards Board (IASB). If this happens, it’s not clear how the IASB and the Financial Accounting Standards Board (FASB) would work together to support and issue future international accounting standards. In a recent speech, FASB chair Leslie F. Seidman stated that FASB “should continue to have a strong role in influencing what goes on the international agenda, the process by which these issues are analyzed, the level of implementation guidance provided, and the outreach that is conducted in the United States.” Although IASB and FASB are similar—both establish and improve standards of financial accounting and reporting—there are some distinct differences.

The FASB is part of the Financial Accounting Foundation (FAF), which is overseen by a board of trustees, and is independent of all businesses and professional organizations. It is funded by fees paid by issuers. The IASB is overseen by trustees as well, but it is accountable to a Monitoring Board of capital market authorities. It also is funded by market participants, but is funded by relevant regulatory authorities as well.

The FASB currently has seven board members appointed by FAF’s board of trustees, and each may serve up to two five-year terms. The IASB currently has 15 members appointed by trustees through an open and rigorous process that includes advertising vacancies and consulting relevant organizations.

The biggest difference: post-implementation
Probably the most distinct difference between the two organizations lies in the area of post-implementation of standards. The FASB has no formal process for reviewing the effect of a newly issued accounting standard. Post-implementation issues can be dealt with through an SEC action (Staff Accounting Bulletin) or an American Institute of Certified Public Accountants action (EITF), which may result in an update to the Code. The IASB, on the other hand, has a formal, two-year post-implementation review on all standards it issues.

Last, the operating budgets for 2011 for these two organizations are vastly different. For the FASB, its budget is $53.3 million USD. For the IASB, its budget is £20.1 million (approximately $31.4 million). These amounts are incongruent given the relative size of each organization’s board.

What does it all mean?
We don’t really know how the move to international standards, with the attendant IASB oversight, will affect U.S. public companies. The IASB does have the same purpose as the FASB, but I would note the IASB has more structure when it comes to evaluating new accounting pronouncements. I think this additional structure is something public companies would welcome. It also seems that the IASB is able to operate in a streamlined manner!

 

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Survey benchmarking Bay Area start-up environment reflects RoseRyan client experience

The Bay Area Council Economic Institute has just released the results of its survey that benchmarks the Bay Area environment for young companies and entrepreneur-led start-ups. The Council’s 300+ members are a “who’s who” of Silicon Valley; I was pleased to be selected as one of the partners who contributed to the study.

Although there has been improvement in the local economy over the previous year, the survey shows there are still challenges. This is consistent with RoseRyan’s experience in the marketplace. Our clients are still having a tough time raising capital, regulations are still difficult to navigate, and other geographic areas are competing for business, but I am still optimistic in this region’s ability to adapt and innovate at a great pace.

I’ve compared some of the key findings to RoseRyan’s experiences:

Listing regulations and requirements do not discourage companies from seeking public listings: Only 16 percent of respondents agree. This is key as clients usually are not prepared to handle all of the main components of preparing their S-1s and SOX requirements after an IPO.

The government has developed tax incentives to increase the amount of research and development. 36 percent disagree and 28 percent are neutral. Tax incentives play a smaller role here than other parts of the world. Most companies, like most of our clients, do not rely on government subsidies but are certainly aware of available grants and tax incentives.

Compliance with government regulations does not unfairly burden new and growing firms: 31% disagree, which is much lower than other parts of the world. This is consistent with many of our clients’ experience. They still have to deal with a labyrinth of regulations in California which are slowly getting less cumbersome.

Government programs provide high-quality services to new and growing firms: 12% agree. Unfortunately, there does not appear to be any faith in government programs. Many of my clients feel that government support is a bonus.

Most entrepreneurs personally know one or more private individual investors (i.e., “angels”): 43% agree. Most of RoseRyan’s clients are cognizant of the “start up” ecosystem of investors.  They understand the ebb and flow of the markets based on the overall economy.

Stock options are considered a positive source of compensation. 84 percent agree.  This is consistent with our business, and we expect stock options to be a strong motivator for attracting and retaining employees.

Benchmarking the Bay Area’s Environment for Entrepreneur-Led Start-ups provides many other interesting insights. You can learn more about the Bay Area Council on their website.

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Will you be ready when XBRL limited liability expires?

The SEC XBRL mandate provides for a period of limited liability of either two years following a filer’s initial XBRL filing date or October 31, 2014, whichever comes first. During this time, XBRL exhibits are deemed as “furnished” instead of “filed.” Under this modified-liability safe harbor provision, the company is protected as long as its compliance efforts are in good faith and any known errors are corrected promptly after discovery. However, when the limited liability window closes, XBRL exhibits will have the same liability provisions as regular filings under the antifraud provisions of the Securities Law. In the event of a misstatement or omission of a material fact in the XBRL files, the company along with its officers and directors can be held legally liable and be subjected to civil and criminal liability.

What should you consider before your limited liability expires? At a minimum, if your XBRL exhibits fall outside of the financial reporting process, you should have disclosure control and procedures (DC&P) in place on your XBRL creation process (see “Do Auditors Care About XBRL?”). However, as XBRL technology becomes integrated into the close process, the preparation of financial statements may become interdependent with the interactive data tagging process. When this happens, the company and its auditors should evaluate the XBRL controls under SOX 404.

Are there broader risks your CFO and audit committee need to consider? Absolutely! The Committee of Sponsoring Organizations of the Treadway Commission (COSO) expands on internal control, and provides a comprehensive framework on the broader subject of enterprise risk management.  In order to design an effective framework to meet the strategic, operations, reporting and compliance needs of XBRL, consider applying the following essential components.

Control environment: When appropriate, involve your CFO and audit committee with every aspect of your XBRL strategy, including process and controls, risk and opportunities. Be proactive and ask your audit committee for an AICPA agreed-upon procedures (AUP) to review XBRL files for accuracy and data quality. (See my earlier post on the importance of an AUP.)

Objective setting: Since XBRL technology is here to stay, how can you best leverage the power of XBRL to drive effectiveness and efficiency beyond external transparency? The logical next step is to explore opportunities that go beyond SEC compliance, such as the existing XBRL Global Ledger Taxonomy and the evolving Risk and Controls Taxonomy, to enhance internal transparency, operational performance and risk management objectives.

Risk assessment and response: What filing is subjected to XBRL tagging? The answer is: it depends. While the requirements for Form 10-K, 10-Q and 8-K are clear, the XBRL rules for registration statements can be tricky, especially with respect to the S-1 resale registration statement and the shelf registration statement on Form S-3. A best practice is to develop a documentation guide based on authoritative standards, such as SEC rules, the Edgar Filer Manual, SEC FAQs, SEC CD&Is, XBRL US GAAP Taxonomy Preparers Guide and resolutions from the XBRL US Best Practices/Data Quality Working Group, to ensure compliance.

In the absence of formal SEC guidance, it is important to establish a policy to assess material XBRL errors and a process to determine whether an amendment filing is required (for details, see this post.)

Control activities: To address data quality and compliance issues, stay current with the latest AICPA exposure draft on XBRL quality attributes of completeness, accuracy, proper mapping and structure. For each of these attributes, assess what could go wrong and implement a safety net and control environment to mitigate risk of errors.

Monitoring: Always keep abreast of latest developments and best practices from the SEC and XBRL US to avoid last-minute surprises. As XBRL standards evolve, monitoring is crucial to a quality filing. Likewise, when the SEC approves a new taxonomy, consider the advantages of early adoption and put a migration plan in place. Involve your internal audit function or a professional service firm to implement a continuous quality assurance program and perform corrective actions.

Information and communication: Benchmark your tag selection and extensions to your peer or industry group, thus enhancing comparability and transparency of your XBRL data. Collaborate with your industry group to collectively drive and shape the taxonomy. Communication is vital as you continue to redesign the close process and simplify SEC disclosures to streamline XBRL efficiency. (For tips, see “Less Is More: the Art of XBRL.”) Always get buy-in from internal and external stakeholders—you want to properly set expectations to avoid unwelcome surprises.

There is no one-size-fits-all approach to designing a quality XBRL filing. Regardless of limited liability protection, each company should manage XBRL risks within its risk appetite, define a comprehensive process to identify all the “what could go wrong” events, and provide an XBRL quality assurance framework.

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On the menu: IFRS and “diet” IFRS

Ever thought moving to International Financial Reporting Standards (IFRS) would make financial reporting easier for small private companies? Think again. In 2009, after several years of due diligence, the International Accounting Standards Board issued a less-robust set of accounting guidance—kind of a “diet” IFRS—for small and medium-size entities (SMEs). Just recently, the IASB requested feedback on draft implementation guidance on IFRS for SMEs. Progress.

As for the United States, it’s a slow grind. We have long been considering whether there should be a separate set of accounting guidance for private companies, sometimes referred to as “baby GAAP.” The FASB established a Small Business Advisory group in 2004 and a Private Company Financial Reporting Committee in 2007, both of which were supposed to help develop new standards, giving consideration to private companies. Neither has been very successful. In 2009, the Blue Ribbon Panel was formed, composed of members of the FASB, American Institute of Certified Public Accountants, and National Association of State Boards of Accountancy to address private company reporting needs. The panel issued a formal report last January, and based on those recommendations, the FASB has been taking steps to further address the need. Earlier this month, the Financial Accounting Foundation published a plan for addressing private company financial reporting, but the proposal doesn’t include establishing a separate board for private companies, as suggested by the Blue Ribbon Panel. And so we wait. Ho-hum.

But now (at last) the much-anticipated SEC decision regarding incorporating IFRS into the U.S. reporting structure is expected by the end of the year, which may have private companies heaving a sigh of relief. What’s different about the less-robust IFRS guidance? For one, they’ve eliminated topics that aren’t relevant for smaller entities, including EPS guidance, quarterly financial reporting and operating segment disclosures. In addition, where full IFRS guidance allows accounting policy choices, IFRS for SMEs allows only the easier option. Probably the most notable difference is simpler standards for recognizing and measuring assets, liabilities, income and expense items, such as amortizing goodwill and expensing all borrowing and R&D costs. Along with simpler standards come fewer disclosures too! And to further reduce the burden to smaller companies, the revisions to these IFRSs are limited to once every three years—an accounting guidance sabbatical, if you will. Nice.

IFRS transition guidance for SMEs is still a work in process, and that guidance may limit some of the options, but nonetheless would still mean less accounting and reporting rigor by private companies. So for U.S. private companies, relief may come from the incorporation of IFRS, before “baby GAAP” ever comes to fruition … and unexpected benefit of IFRS.

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