Upfront: Top 10 Reporting Challenges for 2005

Upcoming FASB and SEC initiatives will ensure that companies' reporting burden will continue to grow.

Companies' financial reporting burden has grown decidedly heavier in the last couple of years, and upcoming FASB and SEC initiatives will ensure that the trend continues. Financial Executives International (FEI), based in Florham Park, N.J., has published a list of the critical financial reporting challenges companies can expect to face in 2005. The list was compiled by FEI's CEO and president Colleen Cunningham.

1. Stock options. The challenge of reporting share-based payments tops the list. The FASB has mandated that all stock compensation be expensed after June 30, 2005.

2. Internal controls. Companies' continuing need to comply with Sarbanes-Oxley will ensure that their internal controls remain a priority. More and more lenders and state governments are asking companies about the status of their internal-control environment. Private companies may see greater emphasis on control mechanisms in their audit firm's procedures.

3. Revenue recognition. Current FASB thinking may lead to dramatic changes in the ways companies recognize revenue. The focus will likely shift from realization and earnings to assets and liabilities. Although the changes may not materialize for several years, Cunningham encourages stakeholders to join the deliberation process and attempt to influence the direction. The FASB plans to release a Preliminary Views document on this topic in the fourth quarter of 2005.

4. Uncertain tax positions. The FASB is also writing an interpretation of its Statement No. 109, "Accounting for Income Taxes," that will help clarify the procedure that companies will follow to recognize tax benefits.

5. Foreign earnings. The American Jobs Creation Act of 2004 allows companies to repatriate earnings from overseas subsidiaries at an 85 percent tax deduction through the end of 2005. Companies will need to carefully record the taxes on any earnings they intend to repatriate.

6. Business combinations. The International Accounting Standards Board and the FASB are jointly writing changes to rules that govern accounting for mergers and acquisitions, including methods for capitalizing certain types of intellectual property.

7. Inventory costs. FASB's Statement No. 151, "Inventory Costs," becomes effective for fiscal year-ends after June 15, 2005. It affects the way companies expense idle freight, handling costs and spoilage.

8. Off-balance-sheet arrangement disclosures. The SEC is expected to issue a report on off-balance-sheet items later this year.

9. Extensible Business Reporting Language (XBRL). The SEC asked companies to voluntarily adopt this XML-based data exchange tool for their 2004 reporting. Cunningham expects more and more companies to adopt XBRL in 2005.

10. MD&A. Companies will need to ensure they comply with SEC guidance on management's discussion and analysis of financial condition and results of operation (MD&A). The agency recently called on companies to address what it sees as deficiencies in their disclosure of critical accounting policies, a component of MD&A.