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Audit & Accounting Alert Newsletter

Issue 3 | March 2014

At-A-Glance

Gerry Herter

The pathway toward acceptance of International Financial Reporting Standards (IFRS) in the United States continues to be one filled with uncertainty. Our first article describes the less than enthusiastic direction of the SEC, contrasted with the new financial support offered by the Financial Accounting Foundation. That support will be needed in order to complete the joint IASB/FASB convergence projects that have been in process the past several years. Our second article illustrates just how difficult convergence can be when it comes to accounting for leases. After two attempts with exposure drafts, the objections of the financial community are as vocal as ever. In our third article we turn to management accounting. Responding to the rapidly developing interactions between companies on a worldwide basis, the AICPA and CIMA are seeking to standardize global management accounting principles. Hopefully, those efforts will proceed more expeditiously than has been the case with IFRS.  

Editor Gerald E. Herter, CPA

In This Issue 

Will IFRS Ever be Adopted in the US?

It depends on who you ask

At KPMG’s Recent Audit Committee Issues Conference in Phoenix, I asked Dennis Beresford, former chairman of the FASB, whether he thought the SEC would address IFRS anytime soon. He just shook his head. “No, it’s a low priority.” Indeed, as mentioned in the January Audit & Accounting Alert, the SEC has blamed the volume of rulemaking required by recent legislation as the reason IFRS is on the back burner. In the SEC’s draft strategic plan, released for comment on February 3, 2014, the Commission states that it “will work to promote higher quality financial reporting worldwide.” However, IFRS is not even mentioned, and the Commission only notes that it “will consider, among other things, whether a single set of high-quality global accounting standards is achievable.”

Meanwhile the Financial Accounting Foundation (FAF), overseer of the FASB, has announced that it will make a $3 million contribution to the International Financial Reporting Standards Foundation (IFRSF), in support of the four remaining convergence projects that the IASB and FASB are jointly working toward completion. Those projects cover revenue recognition, leases, financial instruments and insurance. Of those, only revenue recognition is close to finalization, with a formal standard expected by mid-year. Once these projects are finished, the joint FASB-IASB convergence efforts will be over for now. AICPA President, Barry Melancon, commended the FAF’s move, stating “We hope it serves as a catalyst for a broader discussion by all parties in the financial reporting process on how IFRS should evolve in the United States.” 

Of course, convergence is not adoption. While outright adoption of IFRS has become less likely in the US, gradual convergence, whereby US GAAP and IFRS come closer together bit by bit over time, had been considered a more feasible approach. The already slow process may have become even slower with the unveiling of the FASB’s new agenda priorities on January 29, 2014. FASB Chairman Russ Golden stated “As our work on joint projects with the International Accounting Standards Board (IASB) comes to completion over the next year, the Board will focus on improving U.S. GAAP for our stakeholders here and abroad.” An example of the new direction is the removal from the FASB agenda of a short-term convergence project on income taxes.    

Restating the comment in our January issue, regardless of whether IFRS is ever fully implemented in the US, the global standards cannot be ignored, since foreign companies reporting in the US are allowed to use IFRS, US investors hold substantial foreign securities, and major trading partners of the US are on IFRS.      

For further information, see FAF To Provide $3 Million To IFRS Foundation To Aid Completion Of Joint Projects and SEC Strategic Plan

 

Lease Accounting, Round 3?

Feedback may lead standard setters to simplify the proposal

When the first exposure draft on a proposed new lease accounting standard was issued in 2010 after years of deliberation, the response from stakeholders was harsh. So much so that the FASB and IASB renewed the difficult debate, finally resulting in a revised exposure draft issued last May. (See the June, 2013 issue of the Audit & Accounting Alert for details). Though the revised exposure draft removed one obstacle by excluding short-term leases, the response this time has been no less harsh. The original criticisms of excessive conversion costs and negative financial statement impact are still widely expressed, as well as concerns about continued uncertainty in this area of reporting.

During the comment period ending in September, 2013, 638 comment letters were received and dozens of meetings and webcasts were held with several thousand participants. In a joint FASB/IASB staff paper summarizing the feedback, the staff acknowledged that the response was high since most entities in most industries are lessees. The overview of the comment letters stated that: 

  1. The majority commended the efforts to change existing lessee accounting, and the majority of users providing feedback “support the recognition of a right-of-use (ROU) asset and a lease liability by a lessee for all leases of more than 12 months. Most supported “a comprehensive and converged lessee accounting model for IFRS and U.S. GAAP.
  2.  Many felt that the 2013 exposure draft was a significant improvement over the 2010 exposure draft.
  3. However, many still disagreed with the lessee accounting model, and the majority disagreed with the lessor accounting model, wanting the existing model to remain unchanged.
  4.  The majority had concerns over cost and complexity.
  5. Many called for a “detailed cost-benefit analysis prior to finalizing any changes.  

From a speech given by IASB Chairman Hans Hoogervorst in Tokyo on February 5, the IASB and FASB appear to have gotten the message. Hoogervorst told the Accounting Standards Board of Japan seminar participants:

“We have already made some decisions designed to reduce implementation costs, such as the exclusion of short-term leases and most variable lease payments. We will seek further improvements by trying to exclude as much as possible what I call “small ticket” items. One possibility is whether to permit our requirements to be applied to a portfolio of leases – for example if an entity leases 100 photocopiers – then those leases could be accounted for as one item.

We may also look to further simplify the distinction between what we call ‘type A’ and ‘type B’-leases. We will probably also limit the changes to lessor accounting, as many do not consider lessor accounting to be especially broken. These are all decisions we will look to take in the coming months."

When the final standard is eventually issued, the addition of lease assets and liabilities to the balance sheets of lessees is bound to impact the financial ratios in loan covenants. Lenders already make adjustments in their loan analyses to take into account lease terms, according to their specific needs. Consequently, changes in the standard may result in different adjustments for some, provided that the same basic information is still available, albeit in different places. Companies will need to dialogue with their lenders to prevent unexpected outcomes as a result. Changes in EBITDA may occur, also, if rent expense is recharacterized as amortization.

For further information, see Lease Project Update


New Guidance for Management Accountants Proposed

AICPA and CIMA jointly offer company accounting principles with a global reach

Much attention and emphasis has been placed in recent years on the pursuit of standardized global financial reporting standards. Now two major accounting bodies, the American Institute of Certified Public Accountants and the Chartered Institute of Management Accountants, have joined forces to promote the establishment of Global Management Accounting Principles (GMAP). This endeavor follows in the wake of their joint effort that created the worldwide designation, Chartered Global Management Accountant (CGMA).

Along with the recently updated COSO frameworks on internal control and risk management, the International Integrated Reporting Council’s framework focusing on sustainability, and the International Federation of Accountants’ Professional Accountants in Business Strategy and Work Plan for 2013-2016, there is a wealth of new material for consideration. As stated in the GMAP exposure draft, “Globalisation and technological progress are making change harder to predict and organisations more vulnerable. Large and small, public and private, must compete in an increasingly inter-connected and international market. Innovation is delivered faster, and the very concept of long-term competitive advantage is being undermined as both the volume and velocity of information flows increase, and intellectual property becomes further commoditised.”

For those reasons, and since there is a wide diversity of management accounting technique worldwide, GMAP was developed to synthesize the best practices into a uniform set of principles. Differing from financial accounting’s focus on the past, effective management accounting can provide management with tools for looking ahead and enhancing decision making. A sound business model is crucial for the success of an organization over the long term.

Management accounting plays a key role in the development and implementation of the business model. The GMAP framework quantifies this role into three overriding principles:

  1. Preparing relevant information: To ensure that organizations plan for their information needs when creating tactics for execution.
  2.  Modeling value creation: To simulate different scenarios that demonstrate the cause-and-effect relationships between inputs and outcomes.
  3.  Communicating with impact: To drive better decisions about strategy execution at all levels. 

The GMAP framework further elaborates on twelve practice areas for which the principles are applied: 

  1. Budgeting
  2.  Cost transformation and management
  3.  External reporting
  4.  Financial controls
  5.  Investment appraisal
  6.  Price and product decisions
  7.  Project management
  8.  Regulatory adherence and compliance
  9.  Resource allocation
  10.  Risk management
  11.  Strategic tax management
  12.  Treasury and cash management

While the GMAP lays out a general framework for management accounting principles, several other groups focus on specific areas of those principles. The COSO frameworks expand on the financial control and risk management aspects. In February, 2014, COSO issued a thought paper, “Improving Organizational Performance and Governance: How the COSO Frameworks Can Help.” COSO indicates that the purpose of the paper is “to relate the COSO frameworks to an overall business model and describe how the key elements of each framework contribute to an organization’s long-term success.” Enterprise risk management and internal controls demonstrate how risks can be identified and controlled in order to enhance an entity’s ability to achieve its objectives. The paper details why the frameworks are important to governance, strategy setting and business planning, execution, monitoring and adapting.

The International Integrated l Reporting Council’s framework issued in December, 2013, focuses on the external reporting area, providing guidance and a format for describing the business model and incorporating all internal and external factors that will impact the entity’s creation of value now and into the future.

The International Federation of Accountants (IFAC), through its Professional Accountants in Business Strategy, supports management accounting through resources that address all aspects of the requirements for success in this arena. The GMAP stresses that undergirding the principles of management accounting are the values of the profession, which are professionalism, relevance, innovation, diligence and ethics. These values are echoed and reinforced in IFAC’s Work Plan.

The challenge for management accountants, to assimilate the abundance of recent guidance, is similar to the challenge public accountants face. While conceptual frameworks are necessary to set the parameters, accountants are used to dealing with concrete measures. Hopefully, detailed policies and procedures will develop expeditiously, so that the admirable goals of the frameworks are not lost in the theory. 

For further information, see Global Management Accounting Principles


Additional A&A News 

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

  1. Audit in their hands: what China can tell us about rotation
  2. IAASB Releases New Framework for Audit Quality
  3. Finance Execs Need to Get More Involved in Sustainability
  4. Unnecessary disclosures targeted by SEC
  5. Frauds on the Rebound in US
  6. HP/Autonomy investigation: Tangled web of hardware and resellers

 

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