Year-End: Three Key Reporting Issues. (Domestic).

Looking ahead to calendar year-end 2001, Financial Executive asked Paul Munter to highlight the key financial reporting issues that should be "top of mind." Munter is a CPA, the KPMG professor of accounting and chairman of the department of accounting at the University of Miami, and a frequent contributor to FE.

Munter says while there is always an array of issues that come to the forefront when dealing with year-end matters, there are three broad areas that those involved in the financial reporting process need to be attuned to. One involves the business combinations issue -- due to the totally new standards coming into play. The other two relate more to disclosure that is being sought by investors about segments, and about credit and market risk elements.

1. The New Standards on Business Combinations and Intangibles: Those who have dealt with this know that goodwill that was previously reported has been subject to amortization and also to an impairment test. Starting Jan. 1, 2002, calendar-year companies can no longer amortize goodwill, but must subject it to an impairment test on an annual basis. Several issues and questions arise from that, Munter says, including a transition issue, in the determination of whether the existing goodwill is impaired or not, and to be prepared to explain why it's impaired. If it's deemed to be impaired at Jan.1, 2002, that would take it to a below-the-line charge, as opposed to Dec. 31, which would require an above-the-line charge. This is crucial in light of the deteriorating economic circumstances during the third and fourth quarter of calendar 2001. Stated differently, the question that will arise is: "Why was the goodwill impaired on Jan. 1 as a below-the-line charge when it wasn't impaired on Dec. 31 as an above-the-line c harge?"

2. Segment Reporting: A second issue involves the reporting unit concept of FAS 142 for goodwill impairment testing. Statement No. 131, the segment reporting document for public companies, has been in the literature for three-plus years, Munter notes. In its reviews of periodic filings, and in particular on segment reporting, the Securities and Exchange Commission has asserted that in many cases companies were not disaggregating information appropriately -- partly stemming from the reluctance that some have to lay out all of the information because they may be providing some sensitive information that could hurt the company economically. Thus, in some instances, Munter says there's been reluctance by companies to break out all of their segments in the manner prescribed in FAS 131. The SEC reviews have been focusing on that quite intently, and some companies have been compelled to restate their segment data.

3. Disclosures About Credit and Market Risks: This issue, too, relates to the SEC's reviews of filings, particularly in the area of derivatives activities for companies -- why they have derivatives; what credit and market risk elements they're managing with the derivatives; and the success of their process of trying to manage risk. Munter says that now, before getting into an informed discussion about derivatives, companies are expected to disclose the purpose and the effectiveness of derivatives in managing risk. This description should include: What are the key credit and market risk elements that the company faces? What are the company's overall strategies and objectives for managing those risk factors and trying to carry out its operations?