On July 11, the Advisory Committee on Improvements to Financial Reporting, chartered by the Securities and Exchange Commission in July 2007, issued a draft report recommending certain reforms to increase the usefulness of financial information to investors, while reducing the complexity of the financial reporting systems for preparers and auditors. The Committee highlighted five themes underlying its recommendations:

  • Clarifying guidance on financial restatements and accounting judgments – The Committee recommended that the evaluation of the “materiality” of an error to a company’s financial statements should be made from the perspective of a reasonable investor and should be judged based on how the error affects the total mix of the information available to a reasonable investor. The Committee stated that it would not recommend changing the SEC's existing materiality guidance, contained in Staff Accounting Bulletin 99, but rather would enhance the guidelines by requiring that companies consider both qualitative and quantitative factors when determining whether errors are material to financial statements. The Committee noted that just as qualitative factors may lead to a conclusion that a small error is material, qualitative factors also may lead to a conclusion that a large error is not material. Additionally, the Committee recommended that (i) companies should be required to correct all errors promptly andshould not have the option to defer corrections of errors until future financial statements are issued, (ii) prior period financials should only be restated for errors that are material to those periods, (iii) the determination of how to correct a material error should be based on the needs of investors making current investment decisions, (iv) amendments to previously filed annual or interim reports to reflect restated financial statements may not need to be filed if the next annual or interim report will be filed in the near future and that report will contain all of the relevant information, (v) a restatement of interim period financial statements should not necessarily result in a restatement of annual period financial statements, (vi) corrections of large errors in previously issued financial statements should be disclosed even if the error is determined not be material and (vii) to limit the likelihood of “stealth restatements,” the SEC should revise the instructions to Form 8-K to state clearly that the form needs to be filed for all determinations of non-reliance on prior financial statements.
  • Increasing the usefulness of information in SEC reports – The Committee’s recommendations include (i) requiring a short summary, no more than two pages, at the beginning of a company’s annual and quarterly reports describing the company’s main business units, key metrics for its past performance and an outline of its business outlook, along with a page index showing where investors could find more detailed information on particular subjects, (ii) supporting the use of Extensible Business Reporting Language so that particular items across companies can be easily sorted and analyzed by investors and (iii) encouraging the development of key performance indicators on an activity and industry basis that would capture important aspects of a company's activities that may not be fully reflected in its financial statements or may be non-financial measures.
  • Enhancing the accounting standards-setting process – The Committee’s recommendations include increasing investor representation on the Financial Accounting Standards Board (FASB) and creating a Financial Accounting Forum where all public and private parties would be represented.
  • Improving the substantive design of new accounting standards – The Committee’s recommendations include (i) supporting the FASB’s efforts to divide the income statement into two or more sections, (ii) generally opposing all-or-nothing bright line tests and (iii) generally advocating a move away from industry-specific guidance in authoritative literature and addressing industry-specific guidance that conflicts with the general principles in U.S. GAAP.
  • Delineating authoritative interpretive guidance – The Committee’s recommendations include (i) supporting the FASB’s efforts to complete codification of U.S. GAAP into one document, (ii) advocating a single standards-setter for all authoritative accounting standards and interpretive implementation guidance of general significance and (iii) supporting the efforts of the SEC’s Division of Corporation Finance to publish its comment letters on financial reports filed by registrants.

The Committee expects to issue its final report in August 2008.

http://www.sec.gov/about/offices/oca/acifr/acifr-dfr-071108.pdf