Financial Executives International: CFOs, Treasurers, Controllers

   As companies absorb all of the financial reporting changes for 2004 financial reporting - and look ahead - FEI CEO and President Colleen Cunningham has compiled the following list of the Top 10 Financial Reporting Challenges for 2005:

   1. Stock Options. Currently, the Financial Accounting Standards Board (FASB) has mandated that all stock compensation be expensed after June 30, 2005.

   2. Internal Controls. Sarbanes-Oxley Section 404 reporting on internal controls was effective for fiscal year-ends after Nov. 15, 2004 for accelerated SEC filers. In 2005, it is effective for all other SEC filers, and more and more of its provisions are becoming applicable to private companies as well.
   More and more lenders and states are asking private companies about the status of their internal control environment. Private companies can also expect that the audit procedures used by their external audit firm may become more "integrated" with internal controls as the audit firms change their firm procedures.

   3. Revenue recognition. Monitor FASB's project on revenue recognition. The current thinking of FASB has dramatic changes to how we are used to recognizing revenue (asset/liability method vs. earnings process). While this will likely not be effective for several years, it is vital that all stakeholders get involved in the deliberation process so that we can attempt to influence the direction. FASB is currently planning on issuing a Preliminary Views document (these precede Exposure Drafts) in the fourth quarter of 2005.

   4. Uncertain tax positions. FASB has a project on its agenda, related to uncertain tax positions, that is intended to clarify that an entity's tax benefits recorded in tax returns must be probable of being sustained prior to recording in the financial statements. An Exposure Draft (ED) was expected in the fourth quarter of 2004, with a final statement expected in the first quarter of 2005.

   5. Unremitted foreign earnings. As a result of the American Jobs Creation Act, or the Tax Act, companies are permitted to repatriate earnings from foreign subsidiaries into the U.S. at an 85 percent deduction through the end of 2005. Companies will need to record the taxes on any earnings that they intend to repatriate.

   6. Business Combinations. The International Accounting Standards Board (IASB)/FASB are jointly working on a project regarding major changes to Business Combination-accounting. Once again, FASB is moving more and more towards a "fair value" model that will impact reporting.
   Among the myriad of expected proposed major changes: contingent assets and liabilities associated with an acquisition will be recognized at the date of the acquisition at fair value, with any subsequent changes reflected in earnings (not as an adjustment to goodwill); intellectual property R&D would be capitalized at the date of acquisition; acquired accounts receivable would be recognized at fair value (that is, no separate allowance for doubtful accounts); and all acquisition-related costs paid to third parties would be expensed as incurred. An ED is expected in the second quarter of 2005, with a final statement expected in the fourth quarter of 2005.

   7. Inventory costs. FASB issued SFAS No. 151, Inventory Costs, in late 2004, effective for fiscal year-ends after June 15, 2005. It amends ARB 43, paragraph 4, defining the term "so abnormal" with respect to amounts of idle freight, handling costs and spoilage currently required to be expensed.

   8. Off-balance-sheet arrangements disclosures. This would include any suggestions that the Securities and Exchange Commission (SEC) may include in its report on off-balance-sheet items, which is expected to be issued early this year.

   9. XBRL. The SEC and FASB have both added staff dedicated to eXtensible Business Reporting Language (XBRL). The SEC had asked for voluntary reporting by companies under XBRL for 2004 reporting. Expect to see more and more companies voluntarily adopt this in 2005.

   10. MD&A guidance. Comply with any MD&A guidance that may come out of the SEC. The SEC has also indicated through its reviews this year that Critical Accounting Policy notes still need work. Ensure that your disclosures of Critical Accounting Policies are robust enough for a user to understand your business model.