At-A-Glance
Accounting
standards
resulting
from the
Enron
collapse and
the recent
financial
crisis have
added to the
undue
reporting
burden of
small
companies.
The Private
Company
Council was
formed by
the FASB to
relieve that
burden. Our
first
article
covers a
significant
step,
exempting
U.S. SMEs
from the
requirement
to
consolidate
related
entities
that lease
facilities
to the SME.
Meanwhile,
administrative
and
political
stumbles
reveal
vulnerability
as the IASB
pushes the
world toward
globally
accepted
financial
accounting
standards.
Our second
article
details the
shortcomings
and the
related
fallout.
Finally, the FASB’s latest installment in the comprehensive conceptual
framework
project
focuses on
financial
statement
disclosures.
Our third
article
describes
the approach
taken to
facilitate
development
of
effective,
yet
practical,
standards in
the future.
Editor Gerald E. Herter, CPA |
|
In This Issue
|
|
Relief for SMEs that Lease
from Related Variable
Interest Entities
FASB endorses PCC
proposed alternative
In response to the Enron
disaster, the FASB in
2003 issued an
accounting
interpretation that
required the
consolidation of
variable interest
entities (VIE). The
purpose of this
directive, known as FIN
46(R), was to stop the
abuse that allowed Enron
to leave substantial
obligations off of its
financial statements.
Though Enron technically
had less than majority
voting interest in
certain VIEs, the
company bore the risks
that arose when the VIEs
failed. Basically, the
“form over substance”
weakness of rules-based
standards was exposed
with devastating effect.
Unfortunately, the
overreaction of the
blanket requirement for
consolidation called for
by FIN 46(R) has caused
significant unwarranted
headaches for non-public
SMEs. A common tax and
financial strategy for
an SME business owner is
to acquire and maintain
the business property in
a separate entity from
the business itself.
While lenders are
familiar with and
agreeable to this
practice, compliance
with FIN 46(R) resulted
in additional unneeded
cost and confusion for
SMEs and their lenders.
Consolidation takes more
time and analysis, as
well as potentially
causing loan covenant
violations.
Consequently, many SMES
opted to ignore FIN
46(R), and accepted
instead a qualification
of their audit report.
Of course, this solution
was not ideal either,
since a qualified
opinion casts a shadow
and more confusion on
the company financials.
The FASB effectively
eliminated this issue
for SMEs on February 19,
2014, by endorsing a
Private Company Council
recommendation for
alternative treatment.
By complying with the
following conditions,
private companies can
elect not to consolidate
leasing VIE’s:
- The private
company lessee and the
lessor entity are under
common control
- The private company
lessee has a leasing
arrangement with the lessor
entity
- Substantially all
of the activity between the
two entities is related to
the leasing activity between
the lessor entity and the
private company lessee
- Any obligation of
the lessor that is being
guaranteed or collateralized
by the private company
lessee could, at inception
of the obligation, be
sufficiently collateralized
by the asset(s) leased to
the private company.
In developing the VIE alternative, the PCC overcame a potential snag that
could have rendered the
new pronouncement
useless for many SMEs.
The original condition
d. above provided that
the lessor obligation
could only be
collateralized by the
assets leased to the
lessee. Since lenders
often require additional
assets of the lessee to
serve as collateral, the
PCC answered user
concerns by modifying
the provision to its
current form which is
more practical.
If a company elects the new alternative, the VIE disclosures about the
lessor entity would be
replaced with:
- disclosures about
the amount and key terms of
significant liabilities
recognized by the lessor
entity that expose the
private company to having to
provide significant
financial support to the
lessor entity, and
- a qualitative
description of significant
arrangements not recognized
that expose the private
company to having to provide
significant financial
support to the lessor
entity.
These disclosures would be
used in conjunction with other
related party disclosures
required of the lessor entity.
The official Accounting
Standard Update that covers this
issue, ASU No. 2014-07, was
issued on March 20, 2014, and is
effective for the 2015 calendar
year, with the option of early
election for 2013.
The expeditious
disposition of this troublesome
standard, by the FASB and PCC on
behalf of private companies,
validates the resolve of the
Board and Council to make
Financial Accounting Standards
effective and useful for all
parties.
For further information, see
Applying Variable
Interest Entity Guidance
to Common Control
Leasing Arrangements
|
| |
New Challenges for the IASB
European Parliament concerns overshadow
US vacillation on IFRS adoption
The onward push of IFRS towards
dominance as the worldwide
accounting standard has been
reported in great detail over recent
years. Though over 100 countries
have signed on, a sore point has
been the continued indecision on the
part of the SEC.
However, the attention until now has
been on the complex and thorny
differences in how accounting
principles should be applied in
areas such as financial instruments
and leases. As if that were not
enough, criticism has lately
expanded to seemingly mundane issues
of governance.
In the midst of the European
Parliament’s (EP) debate over future
funding for the IASB, Britain’s The
Telegraph reported discrepancies in
filings by the IFRS Foundation. A close
reading indicates that the mistakes were
primarily late disclosures of director
changes, more an administrative
technicality rather than a major
indiscretion. Nevertheless, critics
pounced on the revelation to bolster
their allegation that IFRS were the
cause of the recent financial crisis.
Critics’ contention was that the fair
value International Accounting Standard,
established for banks to evaluate losses
on potentially bad loans, led to an
understatement of the risk. The IFRS
Foundation has responded that there is
an opposing opinion by “most of the
academic evidence available, that the
claim that fair value accounting
exacerbated the financial crisis appears
to be largely unfounded.”
The EP ultimately approved funding
of the IASB for the next six years,
but indicated that each year’s
allotment would be subject to
satisfactory performance in the eyes
of the EP. That performance may be
evaluated in relation to
recommendations from an examination
by the European Union (EU) conducted
by Commissioner Phillippe Maystadt.
Maystadt was asked to determine how
best to further the EU’s involvement
in the development of IFRS and
governance of the IASB.
One recommendation was to reform the
European Financial Reporting
Advisory Group (EFRAG), an advisor
to the EU on how IFRS are
assimilated into the EU. The IASB is
asked to extend comment periods to
give EFRAG more time. The IASB feels
that the process and time for
approving standards is extensive
already, and would be hindered by
further delay. Also, having the EU
decide whether to endorse each
standard that comes out is contrary
to the global purpose of IFRS.
In addition, the Maystadt report
expressed concern about the
influence of the US on IFRS
development. However, judging by the
impasse that the FASB and IASB have
reached on certain issues, the IASB
has stood firm, and does not appear
to be intimidated by the US.
Interestingly enough, the IFRS
Foundation is a US based non-profit
corporation. Though originally
founded in the US, the IFRS
Foundation and IASB are based in
London, and have an international
scope.
Finally, Maystadt is also concerned
that the IASB pays more attention to
gaining new adopters of IFRS and the
convergence process, rather than
addressing issues of current users.
The IASB disputes that claim as
well, citing work on the Conceptual
Framework and other priorities
emphasized by the EU. In any event,
the three year review of the work
program that the IASB is required to
perform will be open to all parties,
so that there is broad coverage of
pressing issues.
The EP is not alone in
expressing concerns about funding
the IASB. After the FASB’s parent
organization recently pledged $3
million to the IASB, various critics
in the U.S. have questioned the
wisdom and propriety of the
contribution. If that funding were
not made, the IASB’s financial
status would be further weakened.
For further information, see
EP reaches last-minute
agreement on IASB funding
see
IFRS Foundation Comments
on the Maystadt Report
Shaping Financial Disclosure Standards
FASB takes another step with
Conceptual Framework
An early casualty of joint FASB/IASB
convergence projects, the Conceptual
Framework for Financial Reporting is
now being pursued separately by the
two Boards. A key element of the
Conceptual Framework will address
financial statement disclosures. In
July 2012, the FASB issued an
Invitation to Comment (ITC),
Disclosure Framework. The response
to the ITC, covered in the February,
2013, Audit & Accounting Alert,
indicated broad support for
disclosure reform, but wide
differences in how to achieve the
goal. A debate ensued over the use
of relevance versus materiality as
the driving factor. The need for
structure in format versus
flexibility brought differing
viewpoints as well.
The broadly stated ITC also caused
confusion by attempting to cover the
disclosure decision making processes
of both the FASB and the individual
reporting entity together.
Recognizing that these are separate
issues, the FASB decided in June,
2013, to divide them into two
parallel projects. Consequently, on
March 4, 2014, the FASB issued an
Exposure Draft to describe the
Board’s decision making process:
Conceptual Framework for Financial
Reporting: Chapter 8: Notes to
Financial Statements (ED). In the
case of the entity’s decision making
process, the FASB is conducting a
field study to weigh companies’
ability “to exercise discretion over
which disclosures they provide in
notes to financial statements.” The
results of that study along with
feedback from the ITC will be used
formulate that part of the
framework.
The purpose of the ED is first to
guide the FASB in assessing the
types of information that should be
taken into account when considering
disclosure requirements. Then the
next steps are to:
- Identify information to be
disclosed in the notes that is
likely to be helpful to those making
decisions about providing resources
and that would be relevant to a
significant number of the
organizations to which it applies,
- Eliminate disclosures of
certain types of future-oriented
information that may have negative
effects on the cash flow prospects
of the reporting organization and
its investors and creditors, and
- Consider the costs and
potential consequences of providing
a disclosure in the notes.
The ED also discusses how the
disclosure criteria should be
applied to interim periods.
One of the concerns raised in the ITC was a hesitance to proceed without
input from the SEC, since their
regulations drive the content of
public company disclosures. In
December, 2013, the SEC issued a
staff report recommending evaluation
of disclosure requirements in order
to make them more effective and
efficient for companies and
investors alike. The SEC indicated
that the FASB would be consulted
during the evaluation. In the ED,
the FASB also stated its plan to
coordinate with the SEC for this
purpose, as well as to reduce
overlapping disclosures.
As mentioned, the IASB is working
separately, and has two concurrent
projects underway. The IASB Conceptual
Framework project considers high-level
principles related to presentation and
disclosure, while its Disclosure
Initiative takes a more comprehensive
detailed look at the concepts.
For further information, see
Proposed Statement of Financial
Accounting Concepts—Conceptual
Framework for Financial Reporting:
Chapter 8, Notes to Financial
Statements
Additional A&A News
The following links provide a selection of current articles
devoted to highlighting other A&A topics currently making
news.
-
PCAOB’s Franzel Sees Shortage of
Women among Accounting Firm
Leaders
-
GASB Declines to Delay
Implementation Date of Pension
Standards
-
IASB looks to bridge gaps
between Islamic, conventional
accounting
-
Defending the
Usefulness of XBRL
-
Hog Feed Company Charged in
Accounting Fraud From China
Operation
-
Killing off Britain's Audit
Commission is bad for the
taxpayer
|
