The Sarbanes-Oxley (SOX) legislation brought the need to have transparency in financial statements to the forefront of corporate issues. And though many companies continue to look at SOX as a “Financial Department Issue”, related regulatory action and interpretations by the Financial Accounting Standards Board (FASB), connected to ‘Retired Assets’ accounting, has complicated the life of investment recovery managers. The main issue is that companies must now report asset value data related to possible future
facility retirement in current statements. Keep in mind that the impetus or thrust of SOX is to improve integrity – to force accounting accuracy and clarity.
(just before or just after the event, when costs and liabilities are essentially certain).
• Then in December 2005 came FASB’s ‘FIN 47’ (Financial Interpretation No. 47) “Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143”. This
interpretation established that companies must book future retirement liabilities now, according to certain standards, and keep the books updated through event actuality. According to the introductory summary in the ruling document: “Diverse accounting practices have developed with respect to
For instance, Ford Motor Co. recorded a $251 million after-tax charge to net income for 2005 and an accompanying 11 cent reduction in earnings per share. United Technologies Corp. posted a $95 million charge, which shaved 9 cents off annual EPS. Similarly, USG Corp. and ConocoPhillips
saw their annual net incomes cut by $11 million and $88 million respectively. USG’s per-share earnings dropped 25 cents, and ConocoPhillips’s fell by 7 cents. The longer-term effect of FIN 47, however, will not be apparent until companies that are bound by the new rule issue their annual
reports later this year. That’s when investors will get a look at the effect that estimated future cleanup costs will have on balance sheets. The standard is a new interpretation of FAS 143, Accounting for
Asset Retirement Obligations, which was issued in June 2001. Under the new reading, affected companies must recognize on current financial statements future environmental liabilities associated with permanently shutting down a facility. In the past, companies interpreted FAS 143 differently.
They reckoned that the liability only had to be booked when the cleanup cost and the timing of the facility closing were relatively certain. Independent auditors agreed, but the Financial Accounting Standards Board continued to mull the practical application of the rule.
No Sweat on the Street—The recently reported adjustments didn’t seem to bother Wall Street. Nicole Decker of Bear Stearns, for instance, didn’t mention it in her evaluation of ConocoPhillips. JSA Research’s Paul Nisbet says that despite being surprised by the United Technologies disclosure, the
charge would not hurt the company’s futureshare price in any material way. Companies that haven’t reported the charges yet,however, could face greater risks. Such companies might, for example, receive audit opinions marred by a statement of material weaknesses in their financial controls if they
“Some companies may be asleep at the switch on minor accounting issues like FIN 47,” says Jay Hanson, national director of accounting at McGladrey and Pullen LLP. The sudden awareness of that kind of sleepiness might spook investors. Indeed, a study released last year by shareholder-advisory
firm Glass, Lewis & Co. revealed that on average, the day after a company disclosed a material weakness in its financial controls, its share price dropped 0.67 percent relative to market movement. After a week, the share price dropped 0.90 percent; and after 60 days, the price tumbled 4.06 percent.
A number of auditors confirm that clients come to them with questions about the FIN 47 infrequently. “Frankly,” says McGladrey’s Hanson, “most companies are consumed by efforts to comply with the new stock-option accounting rules under FAS 123R”. For now, “independent auditors are driving
this first round of FIN 47 disclosures,” says Greg Rogers, president of Advanced Environmental
Audit firms routinely look to each other for rule interpretation precedents and apply them in such a way that they eventually become industry wide practices, he says. But not every company needs such
Nevertheless, Reynolds points out that any company with an official pact obligating it to clean up before shuttering a site could be affected, including tiny neighborhood dry cleaners or home-heating-oil companies with oil storage tanks. Further, financially troubled companies may not
Under the new regime, however, those companies must disclose to shareholders that estimating future clean-up liabilities is virtually impossible for them. The upside to such a statement is that the charge, if there’s pay, could likely be low-balled. The downside is that admitting that future liabilities
Asset Lifecycle Accounting and Sarbanes-Oxley Compliance: New Opportunities
The door is open for organizations to improve the accuracy of their financial statements, reduce administrative costs and minimize taxes. Fixed assets accounting is in the spotlight like never before. Sarbanes-Oxley Section 404 brings complex requirements that demand new methodologies and new
While most industry analysis has focused on the cost/effort required to comply with these new regulatory and legal requirements, asset lifecycle accounting is an area where these efforts can be leveraged to provide measurable and sustainable operational benefits to an organization,
- Assets are properly capitalized,
- Appropriate depreciation amounts are calculated and charged to expense, and
- Assets are removed from financial statements in the appropriate reporting period.
Adapting to Changing Financial and Tax Requirements: The ability to identify changes needed in financial or tax accounting requirements for fixed assets and to efficiently integrate the changes into
Emerging Best Practices: As organizations complete initial Sarbanes- Oxley compliance efforts and
Reassessment of existing systems: As risks are identified and new controls are put in place, companies are starting to assess whether their existing system is the correct solution for their business. Are controls mainly detective or does the system provide preventive controls. Does the system allow for adequate examination and testing of controls? Companies spending large amounts of administrative time working around systems with material control weaknesses are beginning to
A Golden Opportunity: The world of corporate accountancy has become the world of corporate accountability. One of the most significant developments has been the extension of audit and assessments work to the systems used by corporations to manage and record financial data. As the scope of the audit has grown, areas such as fixed assets management and depreciation calculations
are subject to much closer scrutiny, additional reporting requirements, and more in-depth testing.