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Audit & Accounting Alert - June 2020 (Issue 5)
 


AT-A-GLANCE 


As the COVID-19 pandemic enters the next phase, profound changes are emerging in the way the people and establishments of the world operate. The accounting profession is no exception to these changes. As the California firm where I spent most of my career carefully reopened, 75% of the personnel preferred to continue working from home. Also, the office building that the firm expected to grow out of in the next few years, now appears adequate to fulfill the firm’s space needs indefinitely. Not because of a reduced revenue stream, but as a result of the newly honed efficiencies and technologies, fine-tuned in large part from the expanded use of remote communication options. 
Amidst an uncertain future, the world of financial reporting as well wrestles with the issues of preserving the concepts of fair presentation, while coping with the monetary effects of the deadly virus on businesses and organizations. Regulators are voicing particular concern over the presentation and disclosures of the COVID-19 impact on earnings report and financial statements. The article in this issue highlights measures taken by the United States Securities and Exchange Commission (SEC) and the European Securities and Markets Authority (ESMA) to guide and direct companies with how to proceed.
Our Worldwide Update is again split into two sections The first covers COVID-19 news from organizations across the globe, while the second covers other news.
Special Note: The United States of America is going through a difficult time of self-examination in response to the deeply troubling events perpetrated this past month (and extending back four hundred years) on people of color. The first article in the Additional A & A News section below was published by CIMA and the Association of International Certified Professional Accountants on June 5, 2020, titled Diversity & inclusion is imperative now and always A statement, AICPA is Committed to Equitywas also issued on June 5, 2020.


Gerald Herter - Editor

Regulators Issue Cautions for COVID-19 Financial Statement Adjustments


Will EBITDAC (earnings before interest, taxes, depreciation, amortization and coronavirus) fly?

 
In 2013 and again in 2016, the Audit & Accounting Alert covered the ongoing challenge presented by the proliferation of non-IFRS and non-GAAP financial presentations. These are recastings of profitability that have been adjusted to remove items that the preparers consider out of the ordinary with regard to a company’s normal operations. The justification is that readers will not view the company in the proper light because of distortion caused by an unusual occurrence. If such actions were objectively taken, the expectation would be that some cases would increase profitability while others would decrease profitability.
 
In reality, a 2018 study by the America Accounting Association showed that adjustments increasing earnings were routinely included while adjustments that would decrease earnings were excluded. Or to put it in today’s vernacular of “fake news,” they might be called “fake earnings.” The same study noted that about 90% of companies on the S&P 500 index used at least one non-GAAP measure in earnings releases.
 
Efforts have been made over the years by the regulators to rein in such profit manipulation. The United States Securities and Exchange Commission (SEC) with Regulation G in 2003 and subsequent updates established rules governing non-GAAP financial measures. The European Securities and Markets Authority (ESMA) issued Guidelines on Alternative Financial Measures (APM) in 2015, followed by various Questions & Answers for the European Union.
 
The latest challenge has risen in the midst of the COVID-19 crisis. ESMA, in a statement issued May 20, 2020, warned companies against manipulating financial statements to disguise the impact of COVID-19 on profitability. The SEC had earlier, on March 25, 2020, published disclosure guidance for addressing the unforeseen pandemic. Despite the prior releases that specifically addressed alternative financial measures, the potential magnitude of COVID-19 dictated renewed attention and clarification in the judgement of the regulators. 
 
The March, 2020 SEC Staff Disclosure Guidance, while not a formal rule, is designed to steer companies in the right direction, to avoid subsequent questions from the agency. In the April, 2020 Audit & Accounting Alert, asset impairment and going concern were described as areas requiring renewed attention and assessment from the unique perspective of the pandemic. The SEC Guidance offers ten bullet points with questions delving into all aspects a company’s operation and standing that COVID-19 may affect. Considering near and long-term impacts, issues are raised as to future revenue demand, access to capital, financial, material, and human resources, as well as supply chain and distribution channels, determination of fair value and asset impairment, limitations imposed such as by remote work arrangements on operations, reporting systems and controls, and changing travel and border restrictions.
 
The SEC Guidance recognizes that during the COVID-19 term, accurate GAAP financial measurements may be more difficult to determine and require more time to ascertain than usual. In such instances, non-GAAP financial measures may be used to reconcile to preliminary GAAP results that include either one or a range of reasonable estimated provisional GAAP results. While this presentation may be acceptable for earnings releases, for formal filings of financial statements, reconciliations must be to actual GAAP with no provisional estimates. Also, the release should “highlight why management finds the measure or metric useful and how it helps investors assess the impact of COVID-19 on the company’s financial position and results of operations.” The Guidance emphasizes that non-GAAP measures are not solely to be used to cast the company in a more favorable light, but to inform investors of how the COVID-19 impact has been determined.
 
The ESMA May, 2020 Statement was issued in anticipation of the half-yearly filings by companies in coming months. The Statement and a related April, 2020, ESMA Q & A, like the SEC Guidance, expresses caution with reporting during the COVID-19 pandemic, and emphasizes the importance of transparency in explaining and justifying how financial measures are devised and used. Though half-year filing disclosures are typically more condensed than in annual filings, the exceptional nature of the COVID-19 impact is likely to require a fuller description of the situation at hand. Special attention should be given to going concern and other underlying risks and uncertainties.
 
Stating that COVID-19 has had such an overall pervasive impact on issuer profit or loss statements, ESMA fears that separating out COVID-19 amounts when reporting will distort a company’s results. Instead, ESMA strongly recommends explaining the details of the impact in the disclosures, leaving the profit or loss statement intact as a whole. Where alternative financial measures are used, either within or outside of the financial statements, they are to follow previous ESMA guidance parameters.
 
The types of COVID-19 related matters that could possibly find justification for separate reporting would need to be specifically quantifiable, such as the cost of personal protective equipment or modifications to workspace required to provide social distancing. On the other hand, an area of likely significant impact, lost revenue, would not be appropriate for adjustment, since the attempt at quantifying an estimated amount would be speculative at best. However, a component increasing revenue that may be specifically quantifiable, subject to governmental examination, relates to loan forgiveness authorized under a United States Payroll Protection Program (PPP) or Coronavirus Aid, Relief, and Economic Security Act (CARES). Care (no pun intended) will need to be taken to properly disclose such forgiveness, to determine when recognizable, and whether there should be separate reporting or not.
 
Responding to emerging financial measure modifications that are being used by some entities, the European Leveraged Finance Association (ELFA), a professional trade association decried the so-called use of EBITDAC (earnings before interest, taxes, depreciation, amortization and coronavirus) as an inappropriate measure for debt capacity. ELFA called instead for maintenance of the popular EBITDA measure instead.
 
 Further details can be found at SEC COVID-19 Disclosure Guidance  and ESMA Statement on Implications of the COVID-19 outbreak.
(https://www.sec.gov/corpfin/coronavirus-covid-19) and (https://www.esma.europa.eu/sections/covid-19).
 
Covid-19 related actions and activities by audit and accounting organizations throughout the world.

 
IASB
International Accounting Standards Board (www.ifrs.org)
  1. Covid-19-Related Rent Concessions – Amendment to IFRS 16, issued May 28, 2020, “exempts lessees from having to consider individual lease contracts to determine whether rent concessions occurring as a direct consequence of the covid-19 pandemic are lease modifications and allows lessees to account for such rent concessions as if they were not lease modification.” Effective June 1, 2020, with early adoption permitted.

IFAC
International Federation of Accountants (www.ifac.org)
  1. COVID-19 Resources from IFAC's Network – link https://www.ifac.org/knowledge-gateway/series/COVID-19-resources-ifacs-network
  2. Approaches to Beneficial Ownership Transparency: The Global Framework and Views from the Accounting Profession, report published jointly by IFAC and CPA Canada on May 26, 2020. The COVID-19 pandemic and related large amounts of relief funding increase the threats of fraudulent activity. This report “explores a key facet of uncovering and fighting illegal activities: beneficial ownership transparency… which identifies who has controlling ownership of an entity.”
  3. Supporting Accountants in Business & Public Sector Through Uncertain Times, report published May 7, 2020, focusing on such areas as value creation and integrated thinking, recruitment trends, evolving accountancy roles, implications on learning and development, and innovation in public sector finance and accounting.
  4. International Auditing and Assurance Standards Board (IAASB) - Audit Reporting, Subsequent Events, and Going Concern Considerations Arising from Changes Due to COVID-19, staff alerts issued May 15 and April 29, 2020, “highlight some of the more significant areas that may need to be further considered in designing and performing audit procedures to obtain sufficient appropriate audit evidence, and to report accordingly.


ACCA
Association of Chartered Certified Accountants (www.accaglobal.com)
  1. Coronavirus Information and resources – link - https://www.accaglobal.com/us/en/cam/coronavirus.html

CIMA
Chartered Institute of Management Accountants (www.cimaglobal.com)
  1. Update on the Coronavirus and Impact for Association Activities – link - https://www.cimaglobal.com/Members/Update-on-Coronavirus/

IIRC
International Integrated Reporting Council
(www.theiirc.org)

No New Developments 

WORLD ECONOMIC FORUM
(www.weforum.org)
  1. Cybersecurity Leadership Principles: Lessons learnt during the COVID-19 pandemic to prepare for the new normal, report published May 26, 2020, lays out “five principles developed to help global leaders reinforce the cyber resilience and cybersecurity of their organizations in a context of rampant global change and uncertainty.”
  2. The COVID Action Platform – link - https://www.weforum.org/platforms/covid-action-platform -  focuses on three priorities: 1. Galvanize the global business community for collective action. 2. Protect people’s livelihoods and facilitate business continuity. 3. Mobilize cooperation and business support for the COVID-19 response.

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

FRC– Financial Reporting Council of the UK(www.frc.org.uk)
  1. COVID-19 Guidance for companies on Corporate Governance and Reporting (Including Interim Reports), updated May 12, 2020, to “highlight some key areas of focus for boards in maintaining strong corporate governance and provide high-level guidance on some of the most pervasive issues when preparing their annual report and other corporate reporting.”
  2. FRC guidance for companies and auditors during COVID-19 crisis – link - https://www.frc.org.uk/about-the-frc/COVID-19.
 
ICAEW- Institute of Chartered Accountants in England and Wales(https://www.icaew.com/)
  1. Coronavirus: Going concern considerations – a guide for preparers, issued May 22, 2020, to “summarise management’s responsibilities for assessing going concern and the associated practical implications for financial reporting, in light of the coronavirus pandemic. The guide is aimed primarily at entities preparing accounts in accordance with FRS 102 but includes considerations that can be broadly applied to all entities.
  2.  Coronavirus: The financial reporting implications under IFRS, guidance issued May 15, 2020, for companies to assess the impact and how to report the coronavirus.  
  3. Coronavirus – updates – link - https://www.icaew.com/insights/coronavirus.

EFRAG– European Financial Reporting Advisory Group(www.efrag.org)

No new developments

Americas, Asia, Australia & New Zealand (AAANZ)

AICPA American Institute of Certified Public Accountants(www.aicpa.org)
  1. Professional Ethics Executive Committee – Interpretations: Information Systems Services (ET 1.295.145), State and Local Government Client Affiliates (ET 1.224.020), and Leases (ET 1.260.040), issued May 6, 2020. Effective dates have been deferred as a result of the pandemic. They are now effective generally in 2022, except for Leases, which is effective generally in 2021.
  2. AICPA Coronavirus (COVID-19) Resource Center – link - https://www.aicpa.org/news/aicpa-coronavirus-resource-center.html
FASB Financial Accounting Standards Board (www.fasb.org)
  1. Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842), ASU No. 2020-05 - Effective Dates for Certain Entities, issued June 3, 2020, allows a one-year delay for private companies and not-for-profit organizations, for implementation of the revenue recognition and lease standards. Generally, the revenue standard will now be effective in 2021, and the lease standard in 2022.
GASB– Governmental Accounting Standards Board(www.gasb.org)
  1. GASB Statement No. 95 – Postponement of the Effective Dates of Certain Authoritative Guidance, issued May 8, 2020, delays for one year the effective dates for Statements 83, 84, 88-93, and Implementation Guides 2017-3, 2018-1, 2019-1 and 2019-2. Statement 87 and Implementation Guide 2019-3 effective dates are delayed 18 months. Effective immediately.
  2. GASB Response to COVID-19 – link -  https://www.gasb.org/COVID19
COSOThe Committee of Sponsoring Organizations of the Treadway Commission(www.coso.org)

No new developments

PCAOB– Public Company Accounting Oversight Board(www.pcaob.org)                                
  1. PCAOB Response to COVID-19 – link https://pcaobus.org/Pages/response-to-COVID-19.aspx
SASB– Sustainability Accounting Standards Board(www.sasb.org)                               

No new developments

SEC– Securities and Exchange Commission(www.sec.gov)                      
  1. SEC Coronavirus (COVID-19) Response – link - https://www.sec.gov/sec-coronavirus-covid-19-response
Periodic roundup of recent and upcoming actions and activities by audit and accounting organizations throughout the world.
 

IASB
International Accounting Standards Board (www.ifrs.org)
  1. Amendments to IFRS 3 – Business Combinations, IAS 16 – Property, Plant and Equipment. And IAS 37 – Provisions, Contingent Liabilities and Contingent Assets, issued May 14, 2020. These are narrow-scope amendments and annual improvements “which are changes that clarify the wording or correct minor consequences, oversights or conflicts between requirements in the Standards.” The amendments are effective January 1, 2022.

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

No new develoments

ACCA
Association of Chartered Certified Accountants (www.accaglobal.com)
 
  1. Insights into integrated reporting 4.0: The story so far, report published May 19, 2020, “summarises the findings from reviews of the reports of 48 members of the International Integrated Reporting Council (IIRC) Business Network carried out in 2019 by ACCA in collaboration with the IIRC with the intention of creating a picture of the current state of integrated reporting <IR>.”

CIMA
Chartered Institute of Management Accountants (www.cimaglobal.com)

No new develoments

IIRC
International Integrated Reporting Council
(www.theiirc.org)

1.  International <IR> Framework revision, Consultation Draft issued May 21, 2020, is the first proposed update of the Framework originally issued in December, 2013. The comment period ends August 19, 2020.

WORLD ECONOMIC FORUM
(www.weforum.org)

1.  Transformational Investment: Converting Global Systemic Risks into Sustainable Returns, White Paper published May 28, 2020, “identifies six systemic risks and establishes a governance framework to enable the investment community to address risks related to water security, climate change, population growth, geopolitical uncertainty, negative interest rates and technology disruption.”

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

FRC– Financial Reporting Council of the UK(www.frc.org.uk)

No New Developments  

ICAEW- Institute of Chartered Accountants in England and Wales(https://www.icaew.com/)

1.    Assurance reporting on Master Trusts (TECH 05/20 AAF, Technical Release published April 3, 2020, “provides guidance on the performance of assurance engagements on governance control activities established by trustees of Master Trusts (multi-employer occupational pension schemes). Effective for periods beginning after March 31, 2020.

EFRAG– European Financial Reporting Advisory Group(www.efrag.org)

No New Developments

Americas, Asia, Australia & New Zealand (AAANZ)

AICPA American Institute of Certified Public Accountants(www.aicpa.org)

No New Developments

FASB 
Financial Accounting Standards Board (www.fasb.org)
  1. No New Developments
GASB– Governmental Accounting Standards Board(www.gasb.org)

1.  GASB Statement No. 96 – Subscription-Based Information Technology Arrangements (SBITAs)issued June 5, 2020. Based on Statement 85, Leases, this statement addresses “cloud computing and other subscription-based forms of software applications and data storage. The new guidance should remedy existing inconsistencies in accounting and financial reporting for SBITAs. Effective for fiscal years beginning after June 15, 2022.

COSOThe Committee of Sponsoring Organizations of the Treadway Commission(www.coso.org)
 
  1. Risk Appetite – Critical to Success - Using Risk Appetite to Thrive in a Changing World, guidance published May 19, 2020. “The guidance focuses on linking risk appetite with strategies and objectives and applying appetite as part of managing an organization for success, given the amount of risk the organization is willing and needs to take.”

PCAOB– Public Company Accounting Oversight Board(www.pcaob.org)                                
 
  1. Guide to Reading the PCAOB’s New Inspection Report, published June 1, 2020. The guide recasts the 2018 inspection reports for the six largest U.S. audit firms in a new format that “streamlines the report’s content to enhance readability and utilizes new charts and graphs to make the information more digestible and accessible for users. It also includes new information not previously communicated in inspection reports to enhance transparency, which is one of the Board’s strategic goals.”
  2. Audits Involving Cryptoassets, information for auditors and audit committees, published May 26, 2020, to respond to “the need for a greater focus by some auditors on the identification and assessment of the risks of material misstatement to the financial statements related to cryptoassets, as well as the planning and performing of an appropriate audit response.”
SASB– Sustainability Accounting Standards Board(www.sasb.org)                               

No New Developments

SEC– Securities and Exchange Commission(www.sec.gov)                      
 
  1. Amendments to Financial Disclosures About Acquired and Disposed Businesses, rules and forms amendments issued May 21, 2020, “intended to assist registrants in making more meaningful determinations of whether a subsidiary or an acquired or disposed business is significant, and improve the financial disclosure requirements applicable to acquisitions and dispositions of businesses, including real estate operations and investment companies.” These are the first comprehensive updates to the rules since their adoption over 30 years ago. Effective January 1, 2021, with early compliance permitted.


ADDITIONAL
A&A NEWS


Diversity & inclusion is imperative now and always
(https://bit.ly/3hE3G7K)

The Data-Driven Audit:  How Automation and  AI are Changing the  Audit and the Role  of the Auditor 
(https://www.aicpa.org/content/dam/aicpa/interestareas/frc/assuranceadvisoryservices/downloadabledocuments/the-data-driven-audit.pdf

COVID-19 and the new business imperatives for CPA firms
(https://www.accountingtoday.com/opinion/covid-19-and-the-new-business-imperatives-for-cpa-firms)

Finance basics to beat the coronavirus
(https://bit.ly/37DYtbj)

Stressed accountants: the mental health impact as practices adapt to a new reality
(https://www.accountancyage.com/2020/06/02/stressed-accountants-the-mental-health-impact-as-practices-adapt-to-a-new-reality/)

From tyranny to salvation: the credibility of common metrics for ESG reporting
(https://www.accountancyage.com/2020/06/01/from-tyranny-to-salvation-the-credibility-of-common-metrics-for-esg-reporting/)

Accounting Today's complete coverage of the coronavirus impact
(https://bit.ly/2zELWYA)

Accountancy Age's Resource on UK regulations on accountancy during coronavirus
(https://bit.ly/2N2LhU2)

California CPA Society Coronavirus Resources and Information
(https://bit.ly/37EGhhQ)

Accountingweb's Coronavirus Content Series
(https://www.accountingweb.com/content/coronavirus-content-series)

Accountancy Daily Corona Virus Resources
(https://www.accountancydaily.co/coronavirus-0)

China Briefing's Coronavirus Insights for Your Business in China
(https://www.china-briefing.com/landing/coronavirus-updates)
 
 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.This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice.  Please refer to your advisors forspecific advice.


Editor Gerald E. Herter ~ HMWC CPAs & Business Advisors, 17501 E. 17th Street, Suite 100, Tustin CA
email:  gerry.herter@integra-international.net
     
Integra International is registered in London at 1st Floor Sackville House, 143-149 Fenchurch Street, London, EC3M 6BN, United Kingdom
 
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