SEC suggests 25 steps to reduce complexity

The US regulator has called on standard setters to change their approach in
the design of accounting rules after criticising standards whose objectives are
sometimes ‘obscured by dense language, detailed rules, and numerous
exemptions.’

The comments in a report – compiled by the Securities and Exchange
Commission’s Advisory Committee on Improvements to Financial Reporting – detail
recommendations which can be implemented by the SEC, the Financial Accounting
Standards Board and the Public Company Accounting Oversight Board.

The committee called for improved rules on off-balance sheet accounting and
fewer situations where alternative accounting standards exist for the same
transaction.

Companies have also been told to provide better disclosure to investors about
what portion of their earnings constitutes cash or accrued income based on
historic cost accounting and what portion represents unrealised gains or losses
based on fair value estimates.

The committee’s report included recommendations about the use of technology
to benefit users, which were proposed in May, so as to allow investors access to
important information faster, more reliably and at a lower cost. US companies
will be required to provide such interactive data as early as next year.

Addressing concerns about the complexity of company filings, the Advisory
Committee recommended the inclusion of a short executive summary at the
beginning of a company’s annual report that would describe concisely the main
aspects of its business and its key performance metrics.

The committee also made a call for more investor participation in accounting
standard setting by increasing investor representation on the FASB and Financial
Accounting Foundation (FAF).

The SEC committee has also made recommendations to reduce the creation of
more US GAAP rules, in support of the FASB’s efforts to complete the
codification of all authoritative accounting literature into one document.

The committee also called for increased correction of accounting errors and
more disclosures about those corrections to investors but warned that the
correction of every accounting error should not automatically result in a
lengthy process of restating financial statements for several prior years.

The committee said that in the ‘dark period’ during restatements when
companies generally cease filing current financial reports, companies usually do
not provide investors with much information. The committee said it believes that
restatements of prior years should be undertaken for the correction of
accounting errors that are material to current investors.

SEC chairman Christopher Cox commended the work of the advisory committee. He
said: ‘I have asked the commission staff to immediately begin analysing these
recommendations, and to prepare regulatory actions based on them wherever
appropriate.’

Further reading:

Final
report of the Advisory Committee on Improvements to Financial Reporting