FASB looks to strike early adoption rule for companies emerging from bankruptcy

By Rebecca Melvin

New York, Feb. 13 - Directors of the Financial Accounting Standards Board on Wednesday decided to back a plan that will strike a longstanding requirement that companies emerging from bankruptcy adopt upcoming accounting standards early if those standards are expected to be adopted within a year after their emergence.

The directors' decision was based on the belief that early adoption opens up risk factors and that companies already in financial turmoil are likely to have difficulty adopting new standards before everyone else.

"The thought of a company in bankruptcy being the leader of the pack doesn't seem to be appropriate," one director said.

The board's 5-2 decision will be drafted into a FASB staff position and subject to a 30-day comment period during which constituents may comment on the issue.

Once the comment period ends, the board re-deliberates the issue based on consideration of comments, and if it reaffirms the consensus, the so-called FSP will become effective upon posting to the FASB website.

The decision addresses a conflict that currently exists between American Institute of Certified Public Accountants' Statement of Position, 90-7, and FASB's revised Standard 141, which expressly prohibits early adoption.

SOP 90-7 was adopted in 1990 to provide guidance on financial reporting for entities expected to reorganize as a going concern under Chapter 11 bankruptcy.

Proponents for striking the SOP 90-7 provision believe that to apply the provisions of SOP 90-7 only in cases in which authoritative standards do not prohibit early adoption is an impracticable requirement.

Examples of standards that would be very difficult to implement in a short period of time include Statement 141(R), FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, FASB Statement No. 157, Fair Value Measurements, FASB Interpretation No. 46 (revised December 2003), according to FASB staff.

They note that the requirement to early adopt also creates difficulties in financial reporting for the emerging entity when the effective date for the new standard is postponed or the standard is modified prior to its effective date.

In addition, while the effective date for certain nonfinancial assets and nonfinancial liabilities may be deferred to fiscal years beginning after Nov. 15, 2008, emerging entities would not be allowed to benefit from this deferral since the effective date would be within one year from the emergence date.

At the time SOP 90-7 was issued, new accounting standards were being issued with effective dates that encouraged early adoption. However, in recent years, new accounting standards have moved away from encouraging early adoption to prohibiting early adoption, according to FASB staff.

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