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Audit & Accounting Alert Newsletter

Issue 10 | December 2016

At-A-Glance

Gerry Herter

The 18th annual world conference of Integra International, held recently in Cape Town, South Africa, proved once again the value that this association brings to members from all over the globe. In an increasingly interconnected world, issues that impact one region often display a far reaching ripple effect. Two examples are covered in this issue of the Audit & Accounting Alert.

The implications of the Brexit vote in the United Kingdom will be widely felt for a long time. Specific aspects of Brexit were aptly covered in the Cape Town meeting. Our first article recaps the discussion, while also relating potential repercussions for financial reporting and the accounting profession in the European region and beyond.

The Cape Town conference also emphasized the concerted effort Integra is making to build upon the presence the association has established on the African continent. Now with ten offices there, the Integra footprint continues to grow. This endeavor coincides with the work of the International Federation of Accountants (IFAC), whose initiatives are devoted to expanding the capacity of the accounting profession. Our second article reports on a new sustainability study published by IFAC that showcases the role and contribution of the accounting profession in all parts of the world, including Africa.

Finally, our quarterly Worldwide Update covers news from organizations across the globe.

Editor Gerald E. Herter, CPA

In This Issue 

Brexit and Financial Reporting

Short and long term implications

An unexpected benefit of the drive my wife and I took across the heart of the United Kingdom this past June was the first-hand opportunity to hear reactions of British citizens before and after the Brexit referendum, the UK’s vote on whether to remain a part of the European Union (EU).

At breakfast in a Glastonbury B & B, a guest complained that neither side had explained the rationale for their positions clearly. In Wales, an older man, a Leave supporter, yearned for the old days before Britain entered the EU, while his children saw their future with the Remain camp. In Cornwall’s Port Isaac, a fisherman’s brother lamented of lost business from the diminished fishing water rights that the EU had imposed on the UK.

In a similar way, membership in a worldwide association like Integra International provides opportunities to gain first-hand insights from events that take place in parts of the world other than your own. At Integra’s October annual meeting in Cape Town, South Africa, Integra London member, Robert Coe, summarized Brexit, the current effect, and what to expect next. Coe noted that the vote to leave the EU came as a surprise. I can attest to that. Just before retiring on the night of the vote, we watched on the BBC news where the Leave leader, Nigel Farage predicted a loss for his side. How astonishing to awake the next morning to learn that just the opposite had happened.

The implication of this outcome was echoed by Integra member, Richard Cant, speaking on Brexit at the Hot Topics Conference sponsored by Integra firm, Swenson Advisors, in San Diego, this past September. As Cant remarked, “Neither side had a plan for the future. Both thought Remain would win.” This circumstance contributed to the uncertainty as to what lay ahead. Though the initial market collapse recovered to new heights, the British pound exchange rate has been unfavorable to the UK since the vote, as Coe noted. Two aspects of Brexit that accountants will want to follow are the impact on financial reporting standards and how to take into account the potential impact of Brexit on financial statements, regardless of which standards are in place.

The Financial Reporting Council (FRC), the UK’s independent regulator, addressed Brexit in the Annual Review of Corporate Reporting 2015/2016, issued on October 21, 2016. While continuing to “support the application of a single set of high quality global financial reporting standards,” and deferring judgment until negotiations with the EU are completed, the FRC stated that “support for IFRS is contingent on the standards being of the requisite quality and capable of implementation at an appropriate cost. The UK should continue to be influential in their development post exit from the EU to ensure they can be adopted in the UK.” With the UK’s new financial Reporting Standards having just gone into effect in 2015, and the monumental, international revenue accounting and lease standards on the near horizon, uncertainty will prevail over the next few years for those responsible for financial reports in this region.

Uncertainty also presents challenges with attempts to discern potential adjustments and disclosures that may be required to factor in the effects of Brexit. Some areas that preparers and auditors of financial statements will want to consider from a Brexit standpoint are asset valuations, going concern, foreign exchange rates, related disclosures from the newly emerging risks, and resulting impacts on debt covenants.

An additional concern faces accounting firms in the UK, depending on the kind of deal the UK works out with the EU. Three models were described by Cant and Coe. The model that Coe described as “Soft Brexit” and Cant called the “Norwegian” model, maintains a right to be part of the European Economic Area (EEA). However, this model requires free movement and adherence to other EU rules, which is unlikely to be accepted. The other two models Coe described as “Hard Brexit.” Of these, the one Cant called the “Canadian” model was considered more likely, as it works through the World Trade Organization (WTO), but will take time to negotiate.

A July, 2016, study by marketing research firm, IRN Research, The Accountancy and Allied Services Market, predicts a drop in revenue for accounting firms over the next five years as a result of Brexit. According to the study, “By 2021, Brexit could cost firms between 3% (EEA style trade deal ) and 5% (WTO style trade deal ) of their turnover. The biggest consumers of accountancy services in the UK are financial and professionals services firms who will be hit by leaving the EU.”

With all the variables in play, the next few years will require accountants and auditors to pay even closer attention to political and economic developments in order for financial reporting to effectively reflect the realities of the times. 

For further information, see  Brexit may lead to divergence between EU and UK accounting frameworks and Reminders for half-yearly and annual financial reports following the EU referendum


Sustainability in the Global Community

New study lays out accountancy professions role

Extending the relevance of financial reporting into the future has been an ongoing topic of concern. Providing useful information of continuing pertinence to investors and other stakeholders is critical. One aspect the Audit & Accounting Alert has followed in recent years is the incorporation of non-traditional information that will, nevertheless, significantly impact an organization’s longer term success. Integrated reporting and measurable standards of sustainability have been evolving and gaining heightened specificity.

In response to a United Nations (UN) initiative approved in 2015, the International Federation of Accountants (IFAC) in November, 2016, issued a timely new report, The 2030 Agenda for Sustainable Development, A Snapshot of the Accountancy Profession’s Contribution. Recognizing the broad spectrum of challenges facing the world’s population as it soars past eight billion people in the next decade, the UN identified 17 Sustainable Development Goals (SDG) that need to be addressed.

The goals encompass areas that are people-oriented, such as poverty, hunger, health and education, environment-oriented, such as sanitation, energy, land, sea and climate, economic-oriented, such as infrastructure, employment, production and consumption, and justice-oriented, such as institutions, peace and inequalities, gender and otherwise. The overriding goal is a call for partnerships to tackle these challenges.

The IFAC report looks to the business community, particularly the accountancy profession, as “an essential driver of strong and sustainable organizations, financial markets, and economies. As a result, it inherently has a crucial role in achieving the SDGs and meeting the targets.” Drilling down, the report notes that “The specific professional skills of accountants including in governance, risk management and control, business analysis, and decision support, which involves measuring, reporting, and providing assurance on financial and non-financial data—will become increasingly in demand as the SDGs gain traction.”

From the 17 SDGs, the report set out eight for analysis, where IFAC felt the accountancy profession could make a contribution. These are:

  • Goal 4: Quality Education
  • Goal 5: Gender Equality
  • Goal 8: Decent Work and Economic Growth
  • Goal 9: Industry, Innovation, Infrastructure
  • Goal 12: Responsible Consumption and Production
  • Goal 13: Climate Action
  • Goal 16: Peace and Justice and Strong Institutions
  • Goal 17: Partnerships for the Goals

Quality Education – The key considerations are consistent with those mentioned in last month’s Audit & Accounting Alert as a part of the AICPA audit quality enhancement program. These include initiatives to “boost the profession’s talent pool,” improve financial literacy in society, and “address inequality in the rates of men and women entering the procession.”

On a specific level, this goal affirms Integra’s decision to hold an annual meeting in Cape Town, where the participants welcomed new member firms from Kenya and Tanzania, to join with several others across the African continent. IFAC’s Professional Accountancy Organization (PAO) Capacity Development Program has a feasibility study underway focusing on Africa, as well as significant projects taking place in Ghana, Rwanda, Uganda and Nigeria.

Gender Equality-The key considerations are to “champion diversity,” and “create partnerships and support initiatives to increase the number of women in accountancy and finance, as well as in broader finance and business leadership roles.” The report references initiatives in the USA, Canada, England, India and Nigeria, as well as with the Association of Chartered Accountants (ACCA), that support the cause of women in accountancy and business.

Decent Work and Economic Growth-The key considerations are to enhance accountants’ awareness of the sustainability goals, to continue to build the capacity of the accountancy profession all over the world, and to promote global standards for financial reporting, auditing and ethics.

Industry, Innovation, Infrastructure-The key considerations are to “facilitate the profession’s contribution to integrated reporting,” explore promising new technology and infrastructure sustainability opportunities, and strengthen the role of promoting sound governance and financial management.

Responsible Consumption and Production-The key considerations are to provide leadership, assistance, and support services to encourage longer-term perspectives and integration of sustainable practices.

Climate Action-The key considerations support market-based policies to encourage efficiency gains and cleaner energy, useful climate-related reporting, and keeping accountants informed of means to promote climate-friendly efforts.

Peace and Justice and Strong Institutions-The key considerations are to “advocate for good governance,” help accountants get more involved in governmental efforts to reduce fraud, corruption and money-laundering, and “promote the public sector auditing in monitoring and reporting on national efforts to implement” the sustainability goals.

Partnerships for the Goals-The key consideration is to “collectively consider where the profession can contribute” best and through what structures.

To help further these goals, Integra held sessions with regional authorities in Cape Town, to gain a better understanding of conditions throughout the African continent. Integra member Tunde Adaramaja, from TAC Professional Services in Lagos, Nigeria, gave a comprehensive presentation, “Investing in Africa (Identifying Business Opportunities in Africa),” expanding on the abundance of potential in a variety of industries there.

IFAC maintains a website, MOSAIC, http://www.ifac.org/mosaic, where a wealth of resources can be found spelling out initiatives and opportunities for pursuing these goals in all parts of the world. The acronym MOSAIC stands for Memorandum of Understanding to Strengthen Accountancy and Improve Collaboration. Integra members may find useful information there for developing services to assist clients in achieving their goals. 

For further information, see  The 2030 Agenda for Sustainable Development


Worldwide Update

Quarterly roundup of recent and upcoming actions and activities by audit and accounting organizations throughout the world

International

IASBInternational Accounting Standards Board (www.ifrs.org)

  1. Amendments to IFRS 4 — Insurance Contracts – issued on September 12, 2016, to address temporary volatility from implementing IFRS 9-Financial Instruments.

IFAC International Federation of Accountants (www.ifac.org)

  1. International Auditing and Assurance Standards Board (IAASB) - ISA 250 (Revised), Consideration of Laws and Regulations in an Audit of Financial Statements – published October 5, 2016, amends ISA 250 to be consistent with the new IESBA requirements requiring the auditor to consider the impact of noncompliance with laws and regulations on the audit. Effective for audit periods ending on or after December 15, 2017.
  2. The 2030 Agenda for Sustainable Development: A Snapshot of the Accountancy Profession’s Contribution, IFAC report published November 9, 2016, addresses the role of accountants in achieving the United Nation’s global sustainable development goals See the second article in this issue of the Audit & Accounting Alert for a discussion of this report.

ACCAAssociation of Chartered Certified Accountants (www.accaglobal.com/)

  1. Market change is faster than ever – is your finance function in the race? – Joint ACCA and PwC report issued September 22, 2016, is the first in a series where the “objective is to have a practical discussion about what’s changing in finance as a result of digital disruption, and how we respond to these changes.”

Africa, Europe, India, and the Middle East (AEIME)

FRCFinancial Reporting Council of the UK (www.frc.org.uk)

  1. Corporate Reporting Thematic Review: Tax Disclosures – issued October 31, 2016, provides “detailed findings from the targeted review of certain aspects of companies’ tax reporting, against which companies can assess and enhance their own disclosures to ensure they provide high quality information to investors in their annual reports and accounts.”
  2. Lab Project Report: Business Model Reporting – report issued on October 27, 2016, “provides valuable insight for companies on the importance of business model information to investors, and the type of information they are seeking” in the annual report.
  3. Audit Quality Thematic Review: Root Cause Analysis – issued September 16, 2016, summarizes the findings and recommendations from reviewing the processes for assessing the root causes of audit failures in the six largest UK audit firms. The purpose is for firms to find ways to prevent such failures in the future by better understanding the causes.

ICAEWThe Institute of Chartered Accountants in England and Wales (http://www.icaew.com)

  1. Audit insights: Cyber Security Taking control of the agenda – report published in October 13, 2016, based on input from auditors from the top six audit firms. The “report focuses on why change here seems so difficult and highlights how organisations can get on top of their cyber risks. It builds on three themes: Seeing cyber risks as real and dynamic…taking behavioural change seriously…and recognising cyber security as a precondition for operating.”

Americas, Asia, Australia and New Zealand (AAANZ)

FASB Financial Accounting Standards Board (www.fasb.org)

  1. Exposure Draft - Compensation—Stock Compensation: Scope of Modification Accounting – issued November 17, 2016, “to provide clarity and reduce diversity in practice, as well as to reduce cost and complexity, when applying the guidance in Topic 718, Compensation—Stock Compensation, about a change to the terms or conditions of a share-based payment award.” The comment period ends January 6, 2016.
  2. Exposure Draft - Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities – issued September 8, 2016, “with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition to that main objective, the amendments in this proposed Update would make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP.” The comment period ends November 22, 2016.
  3. Exposure Draft - Financial Services—Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts – issued September 29,2016, proposes to make “targeted improvements to the existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity.” The comment period ends December 15, 2016.
  4. Statement of Cash Flows: Restricted Cash – ASU 2016-18 – issued November 17, 2016, “require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.” Effective generally in 2018 for public companies and 2019 for private companies and organizations, with early application permitted.
  5. Consolidation: Interests Held through Related Parties That Are under Common Control – ASU 2016-17 - issued October 26, 2016, “to amend the consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE.” Effective generally in 2017, with early application permitted.
  6. Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory – ASU 2016-16 – issued October 24, 2016, “to improve the accounting for the income tax consequences of intra-entity transfers of assets,” by requiring “that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.” Effective generally in 2018 for public companies and 2019 for private companies and organizations, with early application permitted.
  7. Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments – ASU 2016-15 – issued August 26, 2016, to reduce diversity in practice of classifying the following eight types of transactions: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate owned life insurance policies, including bank owned life insurance policies; 6) distributions received from equity method investments; 7) beneficial interests in securitization transactions; and 8) separately identifiable cash flows and application of the predominance principle. Effective generally in 2018 for public companies and 2019 for private companies and organizations, with early application permitted.

GASBGovernmental Accounting Standards Board (www.gasb.org)

  1. Exposure Draft - Implementation Guide No. 201X-X, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans – issued October 5, 2016, “to provide guidance that clarifies, explains, or elaborates on the requirements of Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans.” The comment period ended November 23, 2016.
  2. Exposure Draft - Omnibus 201X – issued September 13, 2016, “addresses a variety of topics including issues related to component unit presentation, goodwill, fair value measurement and application, and postemployment benefits (pensions and other postemployment benefits” The comment period ended December 19, 2016.

AICPAAmerican Institute of Certified Public Accountants (www.aicpa.org)

  1. Accounting and Review Services Committee (ARSC)
    1. SSARS No. 23, Omnibus Statement on Standards for Accounting and Review Services—2016, issued October 25, 2016, extends the applicability of SSARS to prospective financial information, pro forma financial information, and other historical financial information. Effective for prospective financial information prepared on or after May 1, 2017, and for compilation reports dated on or after May 1, 2017, respectively.
    2. SSARS No. 22, Compilation of Pro Forma Financial Information, issued September 23, 2016, revises SSARS No. 14 “by putting the requirements and guidance in clarity format. The clarified standards are designed to make the standards easier to read, understand, and apply.” Effective for compilation reports on pro forma financial information dated on or after May 1, 2017
  2. Assurance Services Executive Committee (ASEC)
    1. Exposure Draft - Proposed Description Criteria for Management’s Description of an Entity’s Cybersecurity Risk Management Program - issued September 19, 2016. “This document presents only the description criteria for use when preparing the description of the entity’s cybersecurity risk management program. In addition to the description criteria, this document also presents points of focus that represent important characteristics of the description criteria…Although the description criteria proposed in this document are for use when preparing, or evaluating the presentation of, the description of an entity’s cybersecurity risk management program, such criteria also may be used when the practitioner is engaged to provide other nonattest or advisory services to a client in connection with the entity’s cybersecurity risk management program.” The comment period ends December 5, 2016.
    2. Exposure Draft – Proposed Revision of Trust Services Criteria for Security, Availability, Processing Integrity, Confidentiality, and Privacy – issued September 19, 2016, “presents criteria…for use by practitioners when providing attestation or consulting services to evaluate controls relevant to the security, availability, or processing integrity of one or more systems, or the confidentiality or privacy of information processed by one or more systems, used by an entity. Management of an entity also may use the trust services criteria to evaluate the suitability of design and operating effectiveness of such controls.” The comment period ends December 5, 201.
  3. Financial Reporting Executive Committee (FinRec)
    1. Exposure Drafts addressing implementation issues of various industries, arising from ASU 2014-09, Revenue From Contracts With Customers,
      1. Depository and Lending Revenue Recognition Implementation Issue - Sale of Non-Operating Assets, published on October 25, 2016;
      2. Brokers and Dealers Revenue Recognition Implementation Issue - Commission Income Trade Date vs. Settlement Date, published on October 25, 2016;
      3. Brokers and Dealers Revenue Recognition Implementation Issue - Commission Income, published on October 25, 2016;
      4. Software Revenue Recognition Implementation Issue - Estimating the Standalone Selling Price of Options That are Determined to be Performance Obligations, published on October 03, 2016;
      5. Software Revenue Recognition Implementation Issue - Estimating the Standalone Selling Price, published on October 03, 2016;
      6. Software Revenue Recognition Implementation Issue - Defining and Identifying Potential Price Concessions, published on September 30, 2016;
      7. Software Revenue Recognition Implementation Issue - Determining Whether Software Intellectual Property is Distinct in Cloud Computing Arrangements (i.e., Hosting, Software as-a-Service and Hybrid Software/SAAS), published on September 30, 2016;
      8. Telecommunications Revenue Recognition Implementation Issue - Disclosure and Transition, published on September 29, 2016;
      9. Gaming Revenue Recognition Implementation Issue - Gaming Operators Accounting for Base Progressive and Incremental progressive jackpot amounts, published on September 29, 2016;
      10. Asset Management Revenue Recognition Implementation Issue - Recognition of Contingent Deferred Sales Charges, published on September 29, 2016

SASBSustainability Accounting Standards Board (http://www.sasb.org)

  1. Technical Bulletin – Climate Risk, issued October 19, 2016, “designed to help investors better understand, measure and manage their exposure to climate-related risk...Due to the ubiquity of climate risk, investors can’t simply diversify away from it; instead they must focus on managing it—and on encouraging portfolio companies to manage it—in all its forms…The foreword to the guide, authored by former Secretaries of the Treasury Robert Rubin and Hank Paulson, emphasizes the need for better disclosure.”

COSO - The Committee of Sponsoring Organizations of the Treadway Commission (www.coso.org)

  1. Fraud Risk Management Guide, released September 28, 2016, is “a new research report that offers a blueprint for helping organizations to establish an overall fraud risk-management program.”

Additional A&A News

The following links provide a selection of current articles devoted to highlighting other A&A topics currently making news.

  1. 7 times accounting changed history
  2. South Africa - Analysis-audit-quality-indicators-promoting-transparency
  3. Financial Execs Weigh Non-GAAP versus GAAP Use
  4. The banks are poised to meet their scariest competition yet: blockchain
  5. IFAC Reaches Out to Pope Francis on Role of Accountants
  6. Risky Business: SEC Focuses on Internal Controls

Audit & Accounting Alert is a publication of Integra International intended to highlight emerging issues in the profession. The goal is to give Integra members an awareness of developments impacting the practice of Audit & Accounting, enabling them to stay on the forefront of industry trends.

Editor Gerald E. Herter  •  HMWC CPAs & Business Advisors, 17501 E. 17th Street, Suite 100, Tustin, CA 92780-7924
 •  Tel: 1 714 505-9000  •  Fax: 1 714 505-9200  •  Email: gerry@hmwccpa.com