Significant differences remain between U.S. GAAP and International Financial Reporting Standards, but cooperation and progress continues on some remaining joint projects, according to a new report from Fitch Ratings.
The pipeline of new standards promises increasing commonality between the two platforms over coming years. Progress continues to be made on a new joint approach to accounting for financial instruments, although consensus cannot currently be reached on crucial enhanced rules for impairment losses, revenue recognition and leases. Fitch said it believes these should enhance comparability in a number of key areas, although minor differences will remain.
Notably, the two boards are working together on a new standard for lease contracts. On May 16, 2013, an exposure draft was published for public comment by Sept. 13, 2013. The new standard will have potentially far reaching effects. For example, removing the preferential off balance sheet treatment for operating leases is being proposed. This could serve to increase leverage and potentially affect issuer covenants.
Multi-employer pension plans moved to the forefront in light of the ongoing liquidation of Hostess Brands Inc., a major employer in a large plan. A Fitch case study provides more clarity about overall MEPP underfunding concerns.
Accounting updates in 2012 for non-financial corporations were fairly minor and centered on further refining impairment reviews. Issuers now have the option of first using a qualitative approach in reviewing for impairments for all indefinite life intangibles rather than mandatorily going straight to a quantitative test. Trends in the cushion between fair value and the carrying value of related assets could be a signal to potentially reduce revenue and cash flow expectations.
As part of its report, Fitch provides case studies on three issuers where goodwill and intangibles represented at least 49 percent of total assets in 2012. Business lines or units were identified with cushions of less than 10 percent in 2012. In two of the three cases, these lines or units were spun off or packaged for sale by mid-May 2013.
The full report "Scrutinizing Topical Accounting Issues" is available at www.fitchratings.com.
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