As we pass the mid-year point of 2007,
it’s a good time to perform a status
check on the various financial processes your small company has in place
to meet the reporting requirements you’ll
face. Staying up-to-date with the ever-changing landscape of financial reporting
standards can be a challenge.
Smart Business asked Sheldon D.
Zimmerman, CPA, audit principal of
Tauber & Balser, P.C., about the top financial reporting challenges for CFOs of small
SEC filers.
When will small public companies be
required to comply with Sarbanes Oxley?
The Public Company Accounting
Oversight Board (PCAOB) recently adopted Auditing Standard No. 5, An Audit of
Internal Control Over Financial Reporting
that is Integrated with an Audit of Financial
Statements, to replace its previous internal
control auditing standard, Auditing
Standard No. 2. The new standard, known
as AS5, is less burdensome for smaller public companies and will put small businesses on track for compliance with section
404 of Sarbanes Oxley, possibly as early as
this summer.
AS5 is principles-based and written to be
simpler than AS2, which has been criticized as being too difficult to adhere to,
especially for smaller public companies.
The Securities and Exchange Commission is expected to approve AS5 this summer, which would require compliance for
small businesses [market capitalization of
less than $75 million]. Companies would
have to begin complying with the management assessment portion of 404, although
full compliance would not begin until
March 2009.
What are some of the other financial reporting challenges for CFOs of small companies?
There are a number of areas on which
small company CFOs should focus, including:
Uncertain tax positions — FASB’s
(The Financial Accounting Standards
Board) FIN No. 48, Accounting for
Uncertainty in Income Taxes, became
effective for public companies beginning
the first quarter of 2007. Many have already
started the process, however, we have seen
a number of cases where the process has
been implemented in a rather cursory manner, so there will need to be fine-tuning
before the end of this year.
XBRL — Interactive data technologies
based on eXtensible Business Reporting
Language (XBRL) provide a way to
improve the timeliness, accuracy and
accessibility of business information. The
SEC and other regulators around the world
are launching initiatives to encourage companies to report in XBRL.
Complex debt and equity transactions — Many smaller companies have
complex debt and equity structures that
typically contain complicated provisions
such as beneficial conversions. Since these
transactions are so complex, they need to
be evaluated by the accountants to make
sure the company’s management team
understands the financial statement implications before they enter into the agreements.
Fair value — FASB issued a new standard this year, Statement of Financial
Accounting Standards No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities, which provides companies with an option to report selected
financial assets and liabilities at fair value.
The standard aims to reduce both complexity in accounting for financial instruments and the volatility in earnings caused
by measuring related assets and liabilities
differently. Statement No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different
measurement attributes for similar types of
assets and liabilities.
The standard requires companies to provide additional information that will help
investors and other users of financial statements to more easily understand the effect
of the company’s choice to use fair value
on its earnings. It also requires entities to
display the fair value of those assets and
liabilities for which the company has chosen to use fair value on the face of the balance sheet. The new statement does not
eliminate disclosure requirements included in other accounting standards, including
requirements for disclosures about fair
value measurements included in FASB
Statements No. 157, Fair Value Measurements, and No. 107, Disclosures about Fair
Value of Financial Instruments. Statement
No. 159 is effective as of the beginning of
an entity’s first fiscal year beginning after
Nov. 15, 2007.
Guarantor’s accounting and disclosure requirements for guarantees —
These disclosure requirements, along with
variable interest entities, require a careful
analysis of the underlying relationships
that don’t necessarily involve ownership
interests. But if companies issue a guarantee or make advances, which, in essence,
funds the losses of another entity, they may
be required to consolidate those as if they
were a subsidiary.
SHELDON D. ZIMMERMAN, CPA, is an audit principal at
Tauber & Balser, P.C., providing accounting and auditing services to private and public companies. He is experienced in bankruptcy matters, corporate restructurings, lender negotiations and
cash-flow enhancements. Additionally, he has experience with
strategic initiatives involving acquisitions along with hands-on
experience in managing the finance and treasury operation
of a large corporation. Reach him at (404) 814-4958 or
[email protected].