Securities Mosaic® Blogwatch
November 26, 2014
New York Appeals Court Applies Business Judgment Rule to Going Private Transaction
by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation

Editor's Note: The following post comes to us from Tariq Mundiya, partner in the litigation department of Willkie Farr & Gallagher LLP, and is based on a Willkie client memorandum by Mr. Mundiya, Sameer Advani, and Benjamin McCallen.

On November 20, 2014, the New York Appellate Division, First Department, in a case of first impression under New York law, ruled in favor of Kenneth Cole in a litigation where minority shareholders had challenged the fashion designer's transaction to take private Kenneth Cole Productions, Inc. Mr. Cole controlled approximately 89% of KCP's voting power and owned a 46% economic interest in KCP. Willkie Farr & Gallagher LLP represented Mr. Cole in the transaction and the class action litigation.

The Appellate Division found that the business judgment standard of review - and not the heightened entire fairness standard - applied to judicial review of breach of fiduciary claims because the transaction had been structured at the outset with dual protections of an independent special committee review and the vote of a "majority of the minority" (that is, non-Cole) shareholders. The judicial standard of review can have important litigation consequences, as cases governed by the business judgment rule can be dismissed at an early stage, as occurred here, whereas transactions governed by the "entire fairness" standard generally require discovery and further proceedings, which can be burdensome and expensive.

Factual Background

On February 24, 2012, KCP announced that Mr. Cole had proposed a transaction to take KCP private and to pay the public stockholders $15.00 per share, which reflected a 17% premium to KCP's unaffected share price. KCP's board created a special committee of four independent directors to negotiate with Mr. Cole, who conditioned his bid on the approval of the special committee and the affirmative vote of a majority of the minority stockholders. Mr. Cole made it publicly clear that he would not entertain any offers to sell his shares in a third-party transaction and was only interested in buying shares from the minority stockholders. After several months of negotiations, Mr. Cole agreed to pay $15.25 per share. 99.8% of KCP's shares unaffiliated with Mr. Cole that voted ultimately voted in favor of the transaction.

Plaintiffs, on behalf of a putative class of KCP minority stockholders, filed lawsuits alleging that the KCP directors breached their fiduciary duties by agreeing to a price that was unfair to the minority stockholders and had resulted from an unfair process because, among other things, the special committee was not truly independent. The stockholders further claimed that Mr. Cole breached his fiduciary duties because he had bargained hard with the special committee to pay as little as possible and had announced that he was unwilling to sell his shares to a third party, thus negatively impacting the value that the minority stockholders could receive for their shares.

The Trial Court's Ruling

The trial court dismissed the complaint against all defendants. Although the issue of what standard of review should apply to the board's decision was extensively briefed by all sides, the trial court did not squarely address whether the "entire fairness" standard applied and simply applied the business judgment rule to the board's decision to recommend and approve the transaction. The trial court ultimately dismissed the complaint because it found that the allegations for breach of fiduciary duty against Mr. Cole simply amounted to a claim that the controlling stockholder had acted in his own economic interest, which was not sufficient to state a claim. As to the director defendants, the trial court confirmed that special committees are not required to engage in futile acts and the special committee did not breach its fiduciary duties by failing to solicit other offers because it was clear that Mr. Cole would reject them (as he was entitled to do).

Applying the business judgment rule, the trial court concluded that "even assuming that a higher price might have been possible, that does not render the special committee's actions a violation of their fiduciary duties. At most, plaintiffs have alleged that they disagree with the manner in which the special committee pursued negotiations with Cole and are dissatisfied with the result. However, such dissatisfaction does not suggest that the process was unfair or demonstrate that a duty of trust was violated..." The trial court reiterated that "absent a showing of specific unfair conduct by the special committee, the Court will not second guess the committee's business decisions in negotiating the terms of a transaction."

The Appellate Division Ruling

The central question on appeal was whether the trial court correctly applied the business judgment rule to the defendants' actions. Affirming the trial court's dismissal of the complaint against all defendants (including Mr. Cole and KCP's directors), the Court found that "the motion court was not required to apply the 'entire fairness' standard to the transaction[.]" Rather, it was appropriate to apply the business judgment standard of review. Applying that standard, the Appellate Division affirmed the trial court's finding that plaintiffs had failed to allege facts supporting a claim that Mr. Cole or the independent directors had breached their fiduciary duties. In so holding, the Appellate Division distinguished the New York Court of Appeals' decision in Alpert v. 28 Williams St. Corp., 63 N.Y.2d 557 (1984), which had applied the entire fairness standard to a freeze out merger. The Appellate Division noted that Mr. Cole's going-private transaction, unlike the transaction at issue in Alpert, "required approval of the majority of the minority (i.e., non-Cole) shareholders."

The Appellate Division's decision in Kenneth Cole puts New York law in line with recent Delaware law. In Kahn v. M&F Worldwide, 88 A.3d 607 (Del. 2014), the Delaware Supreme Court recently held that the business judgment rule would apply to judicial review of a going-private transaction that is approved by a fully empowered independent special committee and a fully informed vote of a majority-of-the-minority stockholders. As the M&F Worldwide court held, such protections result in a going private transaction closely resembling a third party arms' length deal.

The Kenneth Cole decision makes clear that properly structuring a going-private transaction at the outset - including with appropriate protections for minority stockholders - can be critical in ensuring that such transactions receive business judgment rule protection in subsequent litigation. That can result in the dismissal of litigation at the pleadings stage, before the burdens of discovery.

November 26, 2014
Guest Post: Cyber Security Indeed: Derivative Action Dismissed Where Board Proactively Addressed Cyber Risks and Exposures
by Kevin LaCroix

The derivative lawsuit filed against the board of Wyndham Worldwide Corporation in connection with the series of cyber breaches the company had experienced was being closely watched as possibly representative of a potential new area liability exposure for corporate directors and officers. However, as I discussed in a prior post (here), on October 20, 2014, the Court granted the defendants' motion to dismiss the complaint.

In the following guest post, Rick Bortnick of the Traub Lieberman law firm takes a look at the court's dismissal of the Wyndham Worldwide derivative suit. This post previously appeared on the CyberInquirer blog (here). I would like to thank Rick for his willingness to publish his post on this site. I welcome guest post contributions from responsible authors on topics of interest to this blog's readers. If you think you would like to submit a guest post, please contact me directly. Here is Rick's guest post.

 

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In the first of what is certain to become a cottage industry of derivative lawsuits involving alleged inadequate cybersecurity and deficient public disclosures, on October 20, 2014, a New Jersey federal court granted a motion to dismiss filed by Wyndham Worldwide Corporation's directors and officers based on its finding that Wyndham's Board has duly considered and dismissed the plaintiff's demand that the company sue its directors and officers. Palkon v. Holmes, et al, Case 2:14-cv-01234-SRC-CLW.

In Palkon, plaintiff presented the demand following a series of three security breaches through which hackers obtained personal information of over 600,000 Wyndham customers. (This is the same series of events that gave rise to the well-known lawsuit where Wyndham is challenging the FTC's jurisdiction).

Wyndham's Board met to discuss plaintiff's demand as well as the status of the FTC action. At that time, the Board voted unanimously not to pursue a fiduciary duty lawsuit and thereby rejected plaintiff's demand.

Plaintiff thereafter sued, alleging that the security breaches, together with the Board's and management's inadequate handling, damaged Wyndham's reputation and cost it significant fees.

In moving to dismiss, defendants relied on the business judgment rule. They also asserted that plaintiff had failed to state a claim and that the damages alleged were speculative in any event.

Ruling on Delaware law, the court granted Wyndham's motion, finding that plaintiff had failed to meet his burden of rebutting the business judgment rule. In other words, plaintiff was unable to raise a reasonable doubt as to whether Wyndham's D&Os had acted (1) in good faith, or (2) based on a reasonable investigation.

In so doing, the court identified the following facts as relevant to its determination that Wyndham's D&Os' investigation had been reasonable:

 

The Board discussed cyber-related issues, including the company's security policies and proposed enhancements, at fourteen meetings between October 2008 and August 2012 (the breaches occurred between April 2008 and January 2010):

 

  • The Board's Audit Committee reviewed the same matters in at least sixteen meetings during the relevant period;
  • During its series of ongoing meetings, Wyndham's Board addressed and affirmed the implementation of recommendations from the company's retained technology firms;
  • Wyndham's Board was well-versed in the substance of both the FTC litigation and plaintiff's demand;
  • There was "ample information" that that Board had at its disposal when it rejected plaintiff's demand; and
  • The Board already had investigated the issues presented by plaintiff's demand, as his attorney himself had presented an identical demand which had been rejected for the same reasons.

From the inside looking out, there is nothing special or unique about Palkon. It affirms the business judgment rule's presumption of propriety and enumerates the types of facts that one court found relevant as to whether an internal investigation was reasonable.

From the outside looking in, however, the decision sets precedent as to the types of activities of which a Board should be mindful when evaluating and implementing information governance and cybersecurity regimes as well as in responding to a cyber breach (including through public disclosures). We regularly hear from clients asking about pre-breach avoidance strategies. Now there is court guidance ratifying the value of a proactive approach in the context of a derivative litigation.

As we've said before, you can pay now or pay more later And as should now be self-evident, whether or not you're the director or officer of a private company or a public company, it will be far more costly to postpone and/or delay the employment of a robust cybersecurity regime. There no longer is an excuse for waiting. Unless, of course, you like to pay lawyers and other vendors more to be reactive as opposed to what it would have cost had management been proactive.

November 26, 2014
Hensley v. IEC Electronics Corp.: Scienter and the Core Operations Doctrine
by Jennifer McLellan

In Hensley v. IEC Electronics Corp., No. 13-CV-4507, 2014 BL 252726 (S.D.N.Y. Sept. 11, 2014), the United States District Court for the Southern District of New York granted defendants' motion to dismiss and denied plaintiffs' claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and SEC Rule 10b-5. 

According to the allegations in the complaint, IEC Electronics Corporation ("IEC" or the "Company") is a publicly traded Delaware corporation that provides electronic contract manufacturing services. In December 2010, IEC acquired Southern California Braiding, Inc. ("SCB") for approximately $26 million. Thereafter IEC began to integrate SCB into the Company. 

In late 2011 and early 2012, SCB allegedly began to show signs of trouble; however, IEC and Defendant W. Barry Gilbert, IEC's Chief Executive Officer and Chairman of its Board of Directors, allegedly continued to make statements representing SCB's performance as generally strong. In May 2013, IEC disclosed an accounting error in which work-in-process inventory was reported as inventory available for sale. The mistake, IEC indicated, required a restatement of the Company's quarterly reports and financial statements for the 2012 fiscal year. The error in SCB's consolidated financial statements "resulted in 'an aggregate understatement of cost of sales and an aggregate overstatement of gross profit during all such [r]estated [p]eriods,' totaling $2.2 million." 

Following IEC's disclosure, share prices declined approximately 13.23% in two days and continued to fall over the next few weeks. IEC explained the error by pointing to internal weaknesses in control over financial reporting. The Company also stated that, although various remedial measures had been instituted, the reporting issues could not be considered completely mitigated until the corrective processes had been in place long enough to demonstrate their effectiveness.

Plaintiffs Kevin Doherty, Raymond Jean Hensley, and Niraj Jetly (collectively the "Plaintiffs") filed a Consolidated Class Action Complaint on November 15, 2013, alleging that defendants IEC, Gilbert, Vincent A. Leo, IEC's interim Chief Financial Officer ("CFO"), (collectively the "Defendants"), violated Section 10(b) of the Exchange Act. Plaintiffs also alleged that Defendants Gilbert and Leo violated Section 20(a) of the Exchange Act through their acts and omissions as people in controlling positions of the company. In response, Defendants filed a motion to dismiss. 

Allegations of securities fraud must satisfy the heightened pleading standards of the Private Securities Litigation Reform Act ("PSLRA"). The PSLRA requires that a plaintiff plead scienter with particularity, and state facts giving rise to a strong inference that the defendant acted with the requisite state of mind. In the Second Circuit, this can be done by alleging facts showing that the defendants had opportunity and motive to commit the fraud, or by alleging facts establishing strong circumstantial evidence of conscious misbehavior or recklessness. 

Plaintiffs relied on the latter theory, basing their argument in large part on the core operations doctrine. Under the doctrine, the senior executives of the company are presumed to be knowledgeable about critical information having to do with the company's long-term viability.  As a result, allegedly false or misleading statements concerning the core operations of the company give rise to an inference that the defendants knew or should have known the statements were false when made. 

The court rejected Plaintiffs' argument.  The court declined to find that the statements about the SCB acquisition fell into the "core operations" of the Company.  Although the acquisition was expensive, SCB consisted only of about 15% of IEC's total revenue and did not, therefore, "'constitute nearly all' of IEC's business".  Additionally, the court stated the practice of accounting for work-in-process inventory was not a core operation of IEC, let alone SCB.  

The court also found that Plaintiffs fell "far short of alleging 'conduct which is highly unreasonable and which represents an extreme departure from the standards of ordinary care.'"

Therefore, the Plaintiffs merely alleged "an accounting error, however substantial, that was highly technical in nature; did not affect the company as a whole; and was discovered, disclosed, and corrected by Defendants themselves."

Accordingly, the court granted the Defendants' motion to dismiss and dismissed the complaint in its entirety.

 

The primary materials for this case may be found on the DU Corporate Governance website.

November 25, 2014
D.C. Circuit to Re-Consider Whether SEC Disclosure Rule Aimed at Curbing Human Rights Abuses in the Democratic Republic of the Congo Violates the First Amendment
by Stephen Knaster

In an interesting and uncommon intersection between securities law, curbing human rights abuses and freedom of speech under the First Amendment, the United States Court of Appeals for the District of Columbia recently agreed to re-consider whether the SEC can require companies to disclose whether their products contain "conflict minerals." The term "Conflict Minerals" is defined in Section 1502(e)(4) of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") and refers to certain minerals originating from the Democratic Republic of the Congo ("DRC"), or an adjoining country, that have been used by armed groups to help finance violent conflicts and human rights abuses in those countries. These minerals currently include gold, tin, tatalum, tungsten, and may include any other mineral the Secretary of State determines is being used to finance conflict in the DRC or an adjoining country.

In 2012, the SEC added Section 13(p) pursuant to the Dodd-Frank Act requiring about 6,000 publicly traded companies to document the source of all conflict minerals used in their products, disclosing whether they were sourced from the DRC or one of its neighbors. The SEC noted that to accomplish the goal of ending human rights abuses in the DRC by reducing the use of conflict minerals to fund armed groups contributing to the conflict, "Congress chose to use the securities laws disclosure requirements to bring greater public awareness of the source of issuers' conflict minerals and to promote the exercise of due diligence on conflict mineral supply chains." CFR Parts 240 and 249b [Release No. 34-67716; File No. S7-40-10, "Conflict Minerals"].

In April 2014, a divided three judge D.C. Circuit panel struck down the portion of the rule forcing companies to declare whether or not their products are "conflict free." National Association of Manufacturers v. Securities and Exchange Commission, 748 F.3d 359 (D.C. Cir. 2014) ("NAM v. SEC" or "NAM"). The D.C. Circuit held that this provision violated the First Amendment under the heightened scrutiny review standard articulated by the Supreme Court in a 1980 decision entitled Central Hudson Gas & Electric Corp v. Public Service Commission, 447 U.S. 557 (1980). The NAM decision explained that "by compelling an issuer to confess blood on its hands, the statute interferes with that exercise of freedom of speech." This was a partial win for business groups, led by the National Association of Manufacturers.

On November 18, 2014, the original D.C. Circuit three judge panel granted a rehearing in NAM v. SEC. The rationale for the rehearing was a July 2014 D. C. Circuit en banc opinion involving country-of-origin labeling of meat. In that case, American Meat Institute (AMI) v. U.S. Department of Agriculture, 760 F.3d 18 (D.C. Cir. 2014) (en banc), the court held that a congressionally-mandated disclosure requirement concerning where an animal is born, raised, and slaughtered does not violate commercial free speech protections. In reaching this result, the AMI court held that a "rational basis" review should be applied to First Amendment challenges regarding the commercial disclosure of "purely factual and uncontroversial" commercial information. This standard was originally set forth by the Supreme Court in Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626 (1985), but was limited by the D.C. Circuit in 2012 only to cases involving consumer deception. See R.J. Reynolds Tobacco Co. v. FDA, 696 F.3d 1205 (D.C. Cir. 2012). In American Meat, the D.C. Circuit overruled cases interpreting Zauderer narrowly, and clarified that rational basis review applicable to disclosure mandates is much broader and not limited to cases merely involving deception.

In May, while the July 2014 AMI decision was still pending, the SEC petitioned for rehearing of the NAM decision on the First Amendment disclosure issue, but requested that the Court hold the petition in abeyance pending issuance of the en banc AMI decision. After the AMI ruling, Amnesty International submitted a brief in support of the SEC's petition in NAM, arguing that the NAM court erred in failing to apply the "rational basis" standard for commercial speech set forth in Zauderer. In particular, Amnesty argued that the conflict minerals disclosure is constitutional because it is "purely factual and uncontroversial" within Zauderer's scope. In opposing the petition, NAM and other appellants argued that the SEC's conflict-free disclosure rules are neither factual nor uncontroversial; therefore, the rational basis review applied in AMI should not impact the NAM decision.

The D.C. Circuit, in granting the rehearing petition, asked the lawyers on both sides to address the following questions in supplemental briefs:

  1. What effect, if any, does this court's ruling in AMI have on the First Amendment issue in the NAM case regarding the conflict mineral disclosure requirement?
  2. What is the meaning of "purely factual and uncontroversial information" as used in the Zauderer and AMI decisions?
  3. Is determination of what is "uncontroversial information" a question of fact?

The parties' supplemental briefs are due in December. The D.C Circuit's ultimate decision in NAM will likely have a significant impact on the many public companies subject to the conflict minerals rule. If NAM is reversed, companies whose products contain conflict minerals would be required to bear the costs associated with tracing the origin of minerals in their products in order to determine their country of origin. The NAM decision will also no doubt impact the controversial debate over the scope of SEC mandatory disclosure requirements, which have expanded from its original mission aimed at investor protection to include humanitarian ambitions and curbing human rights abuses like those seen in the debate emerging around conflict minerals rules.

November 25, 2014
Proskauer discusses Disclosure of Whistleblower Identity
by Steven J. Pearlman

On November 12, 2014, in Halliburton, Inc. v. Admin. Review Bd., 5th Cir. No. 13-cv-60323, the Fifth Circuit affirmed an ARB's decision that disclosing the identity of a whistleblower may constitute an "adverse action" under Section 806 of SOX. This decision presents a number of risks for employers - even when they are acting conscientiously and in good faith - and is mandatory reading for in-house employment counsel and compliance professionals.

Background

Anthony Menendez (Plaintiff), an employee of Halliburton (Company), used the Company's internal procedures to submit a complaint to management about what he allegedly believed to be "questionable" accounting practices. He also lodged a complaint about the Company's accounting practices with the SEC, which led the SEC to contact the Company and instruct it to retain certain documents during the pendency of the SEC's investigation. Although the SEC did not specify who had reported the Company's accounting practices, the Company allegedly inferred from Plaintiff's internal reports that Plaintiff must have also reported his concerns to the SEC. The Company thereafter sent an e-mail to Plaintiff and his colleagues, instructing them to retain certain documents because "the SEC has opened an inquiry into the allegations of [Plaintiff]." Plaintiff claimed that after his identity as a whistleblower was disclosed, his colleagues began treating him unfavorably.

Plaintiff filed a complaint with OSHA, alleging that the Company retaliated against him in violation of Section 806 of SOX by disclosing his identity as the whistleblower to his colleagues. An ALJ dismissed his complaint, reasoning that the disclosure was not an adverse action. On appeal, the ARB ruled that the ALJ erred in determining that the disclosure was not an adverse action, and remanded to the ALJ for findings on whether the Plaintiff's protected activity was a "contributing factor" in the Company's disclosure of his identity and whether the Company met its burden of establishing an affirmative defense that the disclosure of the Plaintiff's identity was mandated by "legitimate business reasons." On remand, the ALJ ruled that the Company established its affirmative defense and demonstrated a legitimate business reason for disclosing the Plaintiff's identity as a whistleblower.

The ARB reversed, ruling that the Company failed to prove "by clear and convincing evidence that [the Company's] disclosure of [Plaintiff's] identity was dictated by a legitimate, non-discriminatory business reason unrelated to his protected activity." The Company appealed to the Fifth Circuit Court, arguing that the disclosure was not an adverse action, and it also requested that the Fifth Circuit set aside the ARB's award of "noneconomic compensatory damages."

Fifth Circuit's Ruling

The Fifth Circuit upheld the ARB's ruling, affirming that the disclosure of a whistleblower's identity may constitute an adverse action for the purposes of a SOX whistleblower claim. According to the Court, "[i]t is inevitable that such a disclosure would result in ostracism," and when the identity of a whistleblower is identified, "the boss could be read as sending a warning, granting his implied imprimatur on differential treatment of the employee, or otherwise expressing a sort of discontent from on high." In so ruling, the Fifth Circuit embraced precedent from outside of the SOX whistleblower context standing for the proposition that a whistleblower need not show that the employer's challenged action was driven by an improper motive.

The court also held that non-economic compensatory damages (emotional distress damages) are available under SOX even though such relief is not specifically enumerated in the statute. SOX provides that "an employee prevailing in [an anti-retaliation action] shall be entitled to all relief necessary to make the employee whole" and that relief "shall include" (i) reinstatement; (ii) back pay, with interest and (iii) "compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees and reasonable attorneys' fees." According to the court, the word "include" indicates that the three forms of relief listed are non-exhaustive and thus "the plain language of SOX's text relating to remedies for retaliation affords noneconomic compensatory damages."

Implications

This decision creates a quandary for employers because maintaining absolute confidentiality of a whistleblower's identity may often conflict with an employer's ability to create a rock solid litigation hold; it may create a catch-22 for employers seeking in good faith to preserve evidence to the greatest extent possible. Still, given the risk this decision creates, employers need to be closely familiar with this ruling when crafting litigation holds in this context. What's more, the conclusion that a whistleblower need not show a retaliatory motive to establish a whistleblower retaliation claim is curious indeed. By definition, retaliation means a desire to exact retribution for particular conduct.

The full and original memo was published by Proskauer Rose LLP on November 17, 2014, and is available here.

November 25, 2014
FASB Chairman Responds to Levin on IFRS, Rev Rec
by Edith Orenstein

The FASB Chairman's November 19 letter to the current chairman of the Permanent Subcommittee on Investigations of Congress's Committee on Homeland Security and Government Affairs was sent in response to Sen. Levin's letter to the FASB dated Oct. 14, 2014 (see our earlier report: Levin Lobs Challenge to FASB, SEC on Rev Rec).

In his response, obtained by FEI Daily, Golden emphasizes, "FASB's highest priority has always been to develop accounting standards that serve the best interests of investors and others who participate in U.S. capital markets - and other markets around the world that use or reference Generally Accepted Accounting Principles (GAAP)."

Listing a number of major projects on which the FASB and IASB succeeded in issuing converged standards, including business combinations, fair value measurement, segment reporting, and others, Golden states these "are just some of the areas where we have improved and aligned standards."

And although convergence across the board is no longer an currently option due to divergent decisions of the two standard-setting boards, Golden stated "In these cases, FASB believes that full convergence would not be in the best interests of those who invest and otherwise participate in U.S. capital markets."

Projects on which FASB currently expects to diverge from the International Accounting Standards Board's (IASB) IFRS include impairment of financial instruments and the project on Leases.

Regarding Revenue Recognition

Focusing on the concerns expressed by the Senator regarding FASB's converged revenue recognition standard, including existing U.S. Securities and Exchange Commission guidance originally contained in Staff Accounting Bulletin No. 101 (SAB 101), Golden notes, "The FASB believes that the new revenue standard is an improvement to GAAP," and that existing revenue recognition standards under both U.S. GAAP and IASB's IFRS 'were in need of improvement.'

Citing the "piecemeal approach to revenue recognition" in existing U.S. GAAP, under which "different guidance for different industries sometimes resulted in inconsistent accounting for economically similar transactions," Golden observes that "a significant portion of guidance relating to revenue recognition was developed outside of the standard-setting process through accounting firm publications, industry practices, SEC staff interpretive guidance, and other activities, " which, he points out, are "generally not subject to due process."

On the Senator's question regarding the probability threshhold for revenue recognition in the new FASB standard vs. SAB 101, Golden states, "[SAB 101.] and SAB 104 stipulate that revenue can be recognized only if collectibility is reasonably assured."

He continues, "[FASB's] new revenue recognition standard also requires a company or organization to meet a collectability threshhold to recognize revenue. That collectibility threshhold, which is very similar to the threshhold in SAB 101 and SAB 104, would not allow revenue recognition until it is probable that the company or organization will collect the consideration to which it will be entitled in exchange for the good or services that will be transferred to the customer."

In addressing what may be perceived by some as a lessening of the collectibility threshhold, Golden points out that in the FASB's principles-based standard the use of judgment will be key, and that "Prescriptive rules in accounting standards can reduce the need to apply judgment, but cannot eliminate judgment."

To assist preparers, auditors and others in applying professional judgment subject to the consistent set of principles in the new standard, more than sixty examples are contained in implementation guidance issued concurrent with the new standard, and the FASB (together with the IASB) formed a joint Transition Resource Group to identify implementation issues, Golden added in his letter.

He emphasizes that "The [TRG] meets in public to discuss potential implementation issues," and that their discussion is used both to inform the two accounting-boards, and educate constituents. Further, he adds "The FASB stands ready to be responsive to concerns raised by our stakeholders during implementation, and to work with the SEC if the Commission identifies any areas where the standard does not deal robustly with practice issues."

Unsurprisingly in a letter to Congress, the closing paragraph highlights how transparency and neutrality (traditionally defined as freedom from 'bias' or 'undue influence'), which states, "Transparent and neutral financial reporting is the bedrock of the global capital markets and is ta the core of the FASB's mission."

Full text of the FASB's response to Sen. Levin can be viewed here.

The post FASB Chairman Responds to Levin on IFRS, Rev Rec appeared first on Financial Executives International Daily.

11/26/2014 posts

HLS Forum on Corporate Governance and Financial Regulation: New York Appeals Court Applies Business Judgment Rule to Going Private Transaction
The D&O Diary: Guest Post: Cyber Security Indeed: Derivative Action Dismissed Where Board Proactively Addressed Cyber Risks and Exposures
Race to the Bottom: Hensley v. IEC Electronics Corp.: Scienter and the Core Operations Doctrine
Securities Litigation and Regulatory Enforcement Blog: D.C. Circuit to Re-Consider Whether SEC Disclosure Rule Aimed at Curbing Human Rights Abuses in the Democratic Republic of the Congo Violates the First Amendment
CLS Blue Sky Blog: Proskauer discusses Disclosure of Whistleblower Identity
Financial Executives International Daily » Financial Reporting: FASB Chairman Responds to Levin on IFRS, Rev Rec

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