Accounting Impact - SOX

Accounting Impact
From an accounting perspective, the focus in the United States has been on:
• Convergence
• Moving from rules-based standards to principles-based standards
• Trending away from recording assets and liabilities at historical cost and moving to fair value.

Convergence
With the global environment in which companies operate, the FASB and the International Accounting Standards Board ("IASB") have dedicated themselves to improve financial reporting by evaluating the differences between US GAAP and IFRS and reducing those differences where possible. The two bodies are currently in the short-term phase of a longer-term convergence project. The goal of the short-term project is to reduce a variety of differences between US GAAP and IFRS.
The short-term projects are those where significant differences do not exist and the Boards believe that they can reach agreement without a major overhaul of the current requirements.
In addition to the convergence project, the FASB and IASB have joint projects where, from the beginning, they are working together to find the best accounting answer. One such project is business combinations.

Rules-based standards to Principles-based standards
Historically, the accounting standards in the US have been very detailed and rules-based; sometimes to the detriment of properly reflecting the economics of the transaction. Consequently, businesses have sometimes structured transactions to achieve a desired accounting treatment.
A study performed by the SEC entitled, Study Pursuant to Section 108(d) of the Sarbanes-Oxley Act of 2002 on the Adoption by the United States Financial Reporting System of a Principles-Based Accounting System (dated 25/7/2003) indicated that principles-based standards would result in more transparent information for financial statement users, and provide information that conforms to the spirit or objective of the accounting standard versus meeting detailed rules.
Principles-based standards, however, will require company management and auditors to use more judgement in applying a standard as there will no longer be a list of rules to check-off, but the spirit of the standard and the economics of the transaction must be reflected appropriately.

Historical Cost to Fair Value
A trend in US standard setting has been a move to recording transactions at fair value versus historical cost. While this determination is currently being made on a standard-by-standard basis, the FASB has found that more frequently, fair value is proving to be the most relevant and reliable measure of financial value.
The trend toward fair value is not isolated to standard setters in the US. The IASB has also been trending toward fair value and seeing the benefit of recording financial statement items at fair value.
Fair value versus historical cost is causing quite a bit of debate within the financial community. Some question the reliability of fair value as often it is the result of management's estimate and judgment versus an observable market transaction or contract price. Others question the cost/benefit of providing such information. Determining fair value can be more costly and time consuming for companies than determining historical cost.
Regardless of the debate, standard setters are seeing the benefit of fair value accounting and many new standards are requiring its use.