Top ten financial reporting challenges.

The top ten financial reporting challenges companies face in 2005 were identified by Financial Executives International (FEI), a professional association of CFOs, treasurers, and controllers based in Florham Park, New Jersey. Commenting on the survey findings, FEI CEO and President Coleen Cunningham said, "The continuing and collective effort to improve the clarity, consistency, and transparency of financial reporting as well as the continuing effort towards convergence with international standards promises to keep the CFO's job interesting and challenging in 2005."

The challenges will have an impact on the way companies manage their businesses, report financial results, and compensate employees. For CPA firms, these challenges offer opportunities to assist company decision makers in meeting them.

The challenges include:

1. Stock option expensing. The Financial Accounting Standards Board (FASB) has mandated that all stock compensation be expensed beginning June 30, 2005, for most public companies. Smaller public companies and private firms have until the first annual reporting period after December 15, 2005.

2. Complying with Sarbanes-Oxley Section 404. The requirement for reporting on internal controls is already in place for accelerated Securities and Exchange Commission (SEC) filers with years ending after November 15, 2004. During 2005, however, all companies must comply. Increasingly, lenders and state regulators are asking private companies about the status of their internal controls environment. Private companies may also see audit procedures used by their external auditor become more "integrated" with internal controls as the audit firms change their procedures.

3. Revenue recognition. The FASB is deliberating over a new approach that would recognize revenue in terms of changes in assets and liabilities, rather than an earnings process. Although effecting such a major change may take years to accomplish, it is vital that stakeholders join the debate now in response to the FASB's Preliminary Views being developed for issue in the fourth quarter of 2005.

4. Assessing sustainability of tax benefits. The FASB seeks to clarify that the tax benefits recorded in an entity's tax returns must be "probable of being sustained" before they are recorded in financial statements. A final statement is expected in the third quarter of 2005 following an exposure draft to be issued in the first quarter of 2005.

5. Recording taxes on repatriated earnings...