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Audit & Accounting Alert - May 2020 (Issue 4)
 


AT-A-GLANCE 


In the last issue, an article was referenced that used the analogy of a blizzard, a winter and a little ice age, to characterize how the Covid-19 pandemic might impact the new reality. Most places are now past the initial blizzard stage and are somewhere in the midst of the winter stage. Some are cautiously anticipating a spring season by selectively reopening their economy, while none know for sure whether winter is completely over or whether another blizzard (second wave) is looming on the horizon. While most hope that a little ice age is not inevitable, a growing number fear that the new normal will have profound differences from the past, both in social interactions and commercial processes.
The accounting profession in general appears to have weathered the storm thus far fairly well. A recent survey by Accounting Today indicates that a majority of accounting firms expect revenue declines of 10% or less, have retained all their staff, have kept offices at least partially open with much remote activity, were prepared for remote operations albeit with some challenges, and are offering some Covid-19 related services (“The accounting profession and the coronavirus: The crisis in numbers”, accountingtoday.com, April 27, 2020).
As mentioned in the last issue, the effective dates of a variety of newer accounting and auditing standards have been delayed in response to the challenges of the Covid-19 situation. In this issue, a process is highlighted that was initiated prior to the pandemic and that will roll out over the coming year or two, hopefully beyond the period of the current crisis. The widely used and controversial lending benchmark, London Interbank Offered Rate (LIBOR), is scheduled to be replaced by a more acceptable measure. The current status related to accounting application is covered below. 
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.

Gerald Herter - Editor

LIBOR Transition
Will Have Far Reaching Impact


Controversial finance industry reference rate to be phased out by end of 2021

 
The London Interbank Offered Rate, commonly known as LIBOR, has pervaded financial markets for the past three plus decades. Regularly encountered in hedging transactions, the ill-famed LIBOR also has widespread prevalence in the more familiar contexts of adjustable-rate mortgages, auto loans, student loans and credit cards. Consequently, the implications for accounting purposes from the termination of LIBOR usage may be akin to the challenges faced with the monumental lease accounting transformation. A broad range of debt agreements, contracts and other transactional arrangements may require analysis to determine LIBOR references and the related impact of the upcoming change.
 
LIBOR is a benchmark interest rate for short-term borrowings between banks. The benchmark became a standard that other financial institutions pointed to when establishing rates to charge for a variety of financial products. LIBOR is established daily to apply to periods extending from a day up to a year ahead.
 
Questions arose as to the credibility of LIBOR, stemming from the manner in which the rate was determined. A number of prominent banks would submit estimates, based on their judgment, of the rates they would charge. An average of those rates, eliminating the extremes, became the published LIBOR. The concerns came to a head in 2012, when a scandal of fraud and collusion tracked back to Barclay’s Bank found manipulation of the submitted rates to benefit the bank.
 
Following an investigation, the Wheatley Review, and the related reforms that were implemented, the UK’s Financial Conduct Authority subsequently announced in July 2017 that LIBOR would be phased out by the end of 2021. Accordingly, the various jurisdictions whose constituents utilized LIBOR, looked for alternatives. The resulting newly recommended benchmarks are the (1) Sterling Over Night Index Average (SONIA) for transactions delineated in British Pounds, (2) Secured Overnight Financing Rate (SOFR) for transactions in US Dollars, and (3) Euro Short-Term Rate (€STR) for the Euro. Unlike LIBOR, these rates are based on actual transactions rather than the bankers’ judgments. While the new rates provide more transparency, differing financial impacts may result.
 
Because of the uncertainty until the LIBOR phase-out is complete, and the potential impact of the differences in the new benchmark rates, guidance has been forthcoming from the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) as to accounting and financial reporting. The IASB is using a two phase approach. The phase 1 pronouncement, Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7), issued on September 26, 2019, deals with the pre-replacement uncertainty issues. Basically, the amendments require that, until the benchmark rate is changed, companies assume that for hedging transactions, the projected cash flows, assessments and benchmark rate are not altered as a result of the upcoming rate reform. Related disclosures are to describe the benchmark rates, risk exposures, transition process and amounts involved. These amendments are effective generally for 2020 and 2021. 
 
An Exposure Draft for Phase 2, Interest Rate Benchmark Reform—Phase 2 - Proposed amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16, issued on April 9, 2020, deals with the accounting and financial reporting issues when the benchmark rate is formally replaced. According to the IASB news release, “The main proposed amendments relate to:
  • modifications—a company would not derecognise or adjust the carrying amount of financial instruments for modifications required by interest rate benchmark reform, but would instead update the effective interest rate to reflect the change in the interest rate benchmark;
  • hedge accounting—a company would not discontinue its hedge accounting solely because of replacing the interest rate benchmark if the hedge meets other hedge accounting criteria; and
  • disclosures—a company would disclose information about new risks arising from the interest rate benchmark reform and how it manages the transition to alternative benchmark rates.”
 
The FASB issued Accounting Standard Update (ASU) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, on March 12, 2020. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by LIBOR refer­ence rate reform, if certain criteria are met. Recognizing that companies may have many contracts where modifications would be subject to accounting changes under the prior pronouncements, the FASB simplified the process, for example by allowing prospective application of new interest rates on contract modifications, and not requiring reassessment of lease classification or embedded derivative accounting. The treatment of hedging transactions was generally similar to the approach specified by the IFRS amendments. The ASU is effective in 2020 through 2022.
 
Further details can be found at IASB amends IFRS Standards in response to the IBOR reform  and FASB Reference Rate Reform.
(https://www.ifrs.org/news-and-events/2019/09/iasb-amends-ifrs-standards-in-response-to-the-ibor-reform/) and(https://www.fasb.org/cs/Satellite?c=FASBContent_C&cid=1176174308499&pagename=FASB%2FFASBContent_C%2FGeneralContentDisplay).
 
Covid-19 related actions and activities by audit and accounting organizations throughout the world.

 
IASB
International Accounting Standards Board (www.ifrs.org)
  1. Exposure Draft Covid-19-Related Rent Concessions, issued April 24, 2020. “The proposed amendment would exempt lessees from having to consider whether particular covid-19-related rent concessions are lease modifications, allowing them to account for these changes as if they were not lease modifications. The amendment would apply to covid-19-related rent concessions that reduce lease payments due in 2020. The comment period ended May 8, 2020.
  2. IFRS 16 and COVID-19 — Accounting for covid-19-related rent concessions applying IFRS 16 Leases,guidance published April 10, 2020. The guidance “does not change, remove nor add to, the requirements in IFRS Standards. It is intended to support the consistent and robust application of IFRS 16.” Areas addressed include assessing whether a change in payments is a lease modification, changes in payments that are not leases modifications, partial lease liability extinguishment, impairment of assets, and disclosure.

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. Going Concern in the Current Evolving Environment – Audit Considerations for the Impact of COVID-19, guidance issued April 29, 2020, “to highlight key areas of focus in the current environment when undertaking procedures relating to, and concluding on, the appropriateness of management’s use of the going concern basis of accounting in accordance with the International Standards on Auditing (ISA).”
  3. International Auditing and Assurance Standards Board (IAASB) - Audit Considerations Arising from Changes Due to COVID-19, staff alert issued March 27, 2020, “highlights 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
  2. Covid-19 Global Survey: Inside business- impacts and responses, published April 26, 2020, survey of over 10,000 members and stakeholders worldwide, “shows the severity of the pandemic’s effects, with continuity planning falling short across all sectors,” and “reveals the outbreak is particularly challenging for smaller organisations compared to their larger counterparts, with all sectors reporting distinct concerns about cash flow and growth.” Also, “the pandemic has specific implications for auditing firms, with the nature of the audit process needing engagement and direct interaction with the audited entity. Although digital advances continue to influence how audits are conducted and how evidence is gathered, as well as aspects of the reporting process, for many firms the crisis is creating a systemic shock to normal client engagement activities.”

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. Redesigning Trust: Blockchain Deployment Toolkit, released April 28, 2020, “enables leaders to maximize the benefits and minimize the risks of the technology. Resilience in supply chains depends on trust, transparency and integrity, which can be improved through the responsible deployment of blockchain technologies that offer a “shared truth”.”
  2. Workforce Principles for the COVID-19 Pandemic: Stakeholder Capitalism in a Time of Crisis, White Paper published April 2, 2020. “The guiding principles and the four workforce management imperatives outlined in this document are a preliminary response to the unfolding crisis. They are intended to serve as a tool for Chief Human Resources Officers (CHROs) and other business leaders. While businesses may need to adjust measures according to different policy environments, the concept of stakeholder capitalism can provide a framework for a responsible course of action at this pivotal moment.”
  3. The COVID Action Platform – link - https://www.weforum.org/platforms/covid-action-platform - will focus 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. Modifications of Independent Auditor’s Opinions and Reports, guidance issued April 21, 2020, addressing that the “need for a modified opinion may arise because certain audit procedures cannot be performed (for example physical inventory testing because of travel restrictions), and no other procedures can be undertaken to produce the required volume or quality of reliable audit evidence. Alternatively, management’s key judgements in areas such as asset and liability valuations, or the assumptions and cashflow estimates underpinning the use of the going concern basis of accounting, may be difficult to support in the light of wider economic and political uncertainty, or not agreed by the auditor.”
  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 – 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. Auditing Standards Board – Statement on Auditing Standards 141 - Amendment to the Effective Dates of SAS Nos. 134–140, issued March 1, 2020, defers for one year the effective dates of these SAS’s, which will now be effective for periods ending on or after December 15, 2021, with earlier adoption permitted. SAP 141 is effective immediately.
  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. Staff Q & A Document, issued April 28, 2020, addressing effects of the COVID-19 pandemic on cash flow hedge accounting.
  2. Exposure Draft - Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842) - Effective Dates for Certain Entities, issued April 21, 2020, “would grant a one-year effective date delay for certain stakeholders applying leases and revenue recognition guidance… The leases effective date deferral would be limited to private companies, private not-for-profit organizations, and public not-for-profit organizations that have not yet issued their financial statements. It would provide near-term relief for certain entities for whom the leases standard is currently effective who have rapidly approaching year-end dates and for entities for whom the leases effective date is imminent… The proposed effective date deferral for revenue recognition would be limited to private company franchisors.”
  3. Staff Q & A Document, issued April 10, 2020, addressing accounting application questions regarding lease concessions related to the COVID-19 pandemic.
GASB– Governmental Accounting Standards Board(www.gasb.org)
  1. Exposure Draft - Postponement of the Effective Dates of Certain Authoritative Guidance, issued April 15, 2020, proposes “to postpone the effective dates of provisions in almost all Statements and Implementation Guides due to be implemented by state and local governments for fiscal years 2019 and later,” for one year. The comment period ended April 30, 2020.
  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. COVID-19: Reminders for Audits Nearing Completion, issued April 2, 2020, “to provide important reminders to auditors of issuers and broker-dealers for audits nearing completion.”
  2. 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. Temporary Amendments to Regulation Crowdfunding, issued May 4, 2020, “providing temporary, conditional relief for established smaller companies affected by COVID-19 that may look to meet their urgent funding needs through a Regulation Crowdfunding offering…will expedite the offering process for eligible companies by providing relief from certain rules with respect to the timing of a company's offering and the financial statements required.  To take advantage of the temporary rules, a company must meet enhanced eligibility requirements and provide clear, prominent disclosure to investors about its reliance on the relief. The relief will apply to offerings launched between the effective date of the temporary rules and Aug. 31, 2020.” Instead of CPA reviewed financial statements, issuer financial statements plus certain Federal income tax information certified by the principal executive officer can be submitted. 
  2. 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. Exposure Draft - Interest Rate Benchmark Reform—Phase 2 - Proposed amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16, issued on April 9, 2020. See article in this issue for details. The comment period ends on May 25, 2020.

IFAC
International Federation of Accountants (www.ifac.org)
  1. Practice Transformation Action Plan - A Roadmap to the Future, issued May 1, 2020, “highlights key areas and initiatives for small- and medium-sized practices (SMPs) as trusted advisers to small- and medium-sized entities (SMEs).
  2. International Auditing and Assurance Standards Board (IAASB) - Exposure Draft -  International Standard on Auditing (ISA) 600 (Revised), Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors), issued April 27, 2020, “proposes more robust requirements and enhanced guidance” on a wide variety of areas. The comment period ends October 2, 2020.
  3. International Audit and Assurance Standards Board (IAASB) - Conforming Amendments to the IAASB International Standards as a Result of the Revised IESBA Code, issued April 8, 2020, are intended to ensure that the IAASB International Standards can continue to be applied together with the IESBA Code. Effective July 15, 2020.
  4. International Audit and Assurance Standards Board (IAASB) -  International Standard on Related Services (ISRS) 4400 (Revised), published April 3, 2020, revises the agreed-upon procedures engagement standard for clarification, and to address needs of stakeholders, transparency in reporting, and consistency of performance. Effective in 2022.

ACCA
Association of Chartered Certified Accountants (www.accaglobal.com)

No new develoments

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

No new develoments

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

No new develoments

WORLD ECONOMIC FORUM
(www.weforum.org)

No new develoments

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)
  1. Auditing Standards Board – Statement on Auditing Standards No. 140, Amendments to AU-C Sections 725, 730, 930, 935, and 940 to Incorporate Auditor Reporting Changes From SAS Nos. 134 and 137, issued May 1, 2020, regarding enhanced audit report disclosures and other matters. Effective in accordance with SAS 141 described above.
FASB Financial Accounting Standards Board (www.fasb.org)
  1. No New Developments
GASB– Governmental Accounting Standards Board(www.gasb.org)
  1. Implementation Guide 2020-1, Implementation Guidance Update—2020, issued April 23, 2020, provides guidance on a variety of topics.
  2. GASB Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements, issued April 20, 2020, provides “guidance to improve accounting and financial reporting for public-private and public-public partnership arrangements (commonly referred to as P3s) and availability payment arrangements (APAs).” Effective for years beginning after June 15, 2022, with early adoption encouraged.
  3. GASB Statement No. 93, Replacement of Interbank Offered Rates, issued April 2, 2020, “to assist state and local governments in the transition away from existing interbank offered rates (IBORs) to other reference rates.” Effective for reporting periods beginning after June 15, 2020, except for removal of LIBOR which is effective for reporting periods ending after December 31, 2021.
COSOThe Committee of Sponsoring Organizations of the Treadway Commission(www.coso.org)

No New Developments

PCAOB– Public Company Accounting Oversight Board(www.pcaob.org)                                

New Developments

SASB– Sustainability Accounting Standards Board(www.sasb.org)                               

No New Developments

SEC– Securities and Exchange Commission(www.sec.gov)                      

No New Developments


ADDITIONAL
A&A NEWS


Our profession has changed forever
(https://www.accountingtoday.com/opinion/our-profession-has-changed-forever)

U.S. Public Companies Slow to Implement New FASB Cloud Computing Accounting Standard
(https://www.cpapracticeadvisor.com/accounting-audit/news/21137066/us-public-companies-slow-to-implement-new-fasb-cloud-computing-accounting-standard)

the-economic-crisis-will-expose-a-decades-worth-of-corporate-fraud
(https://www.economist.com/business/2020/04/18/the-economic-crisis-will-expose-a-decades-worth-of-corporate-fraud)

SMEs face increased cybersecurity risks, phishing attempts
(https://www.accountancyage.com/2020/04/24/smes-face-increased-cybersecurity-risks-phishing-attempts/)

Auditors displaying dedication during pandemic, CAQ’s Lindsay says
(https://www.journalofaccountancy.com/news/2020/apr/caq-auditors-displaying-dedication-during-coronavirus-pandemic.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=27Apr2020)

CIMA - Professional judgment: 5 ways finance can help in a crisis
(https://www.cimaglobal.com/Members/Insights/Professional-judgment-5-ways-finance-can-help-in-a-crisis/?utm_source=mnl:cpald&utm_medium=email&utm_campaign=24Apr2020)

Accounting Today's complete coverage of the coronavirus impact
(https://www.accountingtoday.com/coronavirus?utm_source=newsletter&utm_medium=email&utm_campaign=ACT_Weekly_IRS+Watch_reset20200101%2B%27-%27%2B04012020&bt_ee=UFThhPnxqwgF6drHIeCA4zKTxxilQnMChK%2Bu7UcHs1OB9lm8aLso1E6Ek1HHMcwk&bt_ts=1585756935482)

EY's Accounting and reporting considerations for the effects of the coronavirus outbreak (https://www.ey.com/en_us/assurance/five-financial-reporting-issues-to-consider-as-a-consequence-of-covid-19)

Accountancy Age's Resource on UK regulations on accountancy during coronavirus
(https://www.calcpa.org/sitecore/content/Sites/Public/home/news-and-resources/coronavirus2?utm_source=ESP&utm_medium=email&utm_campaign=calcpa%2Deducation%2Dfoundation&_zs=PoR2g1&_zl=ttUe6)

California CPA Society Coronavirus Resources and Information
(https://www.calcpa.org/sitecore/content/Sites/Public/home/news-and-resources/coronavirus2?utm_source=ESP&utm_medium=email&utm_campaign=calcpa%2Deducation%2Dfoundation&_zs=PoR2g1&_zl=ttUe6)

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)

Pandemic-specific guidance for auditors and preparers
https://www.journalofaccountancy.com/podcast/coronavirus-guidance-for-auditors-and-financial-statement-preparers.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=08Apr2020

 
 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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