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Audit & Accounting Alert Newsletter

Issue 9 | November 2013

At-A-Glance

Gerry Herter

In these last few years, attention has finally been given to the development of practical, cost-effective financial reporting standards for private enterprises. The highly successful IFRS for SMEs recently reached its third anniversary. Our opening article covers the first formal evaluation of this IFRS-based achievement, since its launch in 2009. The review found the standards to have weathered the introductory period quite well. Next, we turn to the ever growing importance of the audit committee’s role, especially in public companies, with the rapid pace of change, complexity and risk that companies and their auditors face. We share some insights from the AICPA’s National Audit Committee Forum, moderated by Integra’s own Global Board member, Steve Austin. Finally, our quarterly worldwide update returns, with highlights of news from major international accounting organizations and regulators.

Editor Gerald E. Herter, CPA

In This Issue 

Fine Tuning of IFRS for SMES

The first comprehensive review of IFRS for SMEs

IFRS for SMES was first issued in 2009 to provide a global set of standards for small and medium entities. Starting with full IFRS, the IASB, over a six year period, reworked the standards by eliminating irrelevant topics, selecting only the easier of accounting policy options, simplifying principles for recognition and measurement, reducing disclosures by 90 per cent, and using clear, easily translatable language. The result consisted of 230 pages, and was considered adequate to handle the needs of 95 per cent of all companies worldwide. During the finalization process, the IASB determined that changes would only be made after three year intervals, at which time the standards would be reviewed, input would be sought, and implementation of issues would be considered, for possible amendment.

The results of the first comprehensive review were presented in an Exposure Draft (ED) on October 3. The ED considered input from a broad cross section of financial statement preparers, users, professional and regulatory bodies, and other interested parties. .

In the Press Release announcing the Exposure Draft, Hans Hoogervorst, Chairman of the IASB said:  

“The IFRS for SMEs has already been a remarkable success, having been adopted by more than 80 countries and used by millions of companies worldwide. The initial comprehensive review is an important step in our due process as it provides a mechanism to make sure the IFRS for SMEs is working as intended. Responses to the Request for Information identified few significant new issues. However they highlighted some areas where targeted improvements to the Standard could be made.”

While the 57 proposed amendments appear like a considerable number, the major thrust is to better clarify and explain the standards for better comprehension, as opposed to modifying them. Since IFRS for SMEs is still relatively new, a goal is to minimize extensive changes, so that SMEs are not overwhelmed.   

Thirteen amendments relate to revisions and additions that have been made to full IFRS since IFRS for SMEs was issued. In most cases, these are minor clarifications, simplifications, fixes for problems or efforts to address diversity in practice. However, many of the weightier IFRS changes from the past three years, such as relating to business combinations, consolidations, fair value measurement and employee benefits, were passed over as not necessary for SMEs to deal with.

Of the five amendments that change requirements, income tax is one of the few areas that will be substantive. When IFRS for SMEs was issued, the IASB had a proposal in the works to revise the current IAS 12, Income Taxes. That proposal was incorporated in IFRS for SMEs. The proposal arose out of a joint project with the FASB to reduce the differences between IFRS and US GAAP. However, the proposal was later dropped, so the current amendment to IFRS for SMEs restores the IAS 12 recognition and measurement principles, while retaining the simplified presentation and disclosure guidance in the original IFRS for SMEs. Both IFRS and US GAAP use a balance sheet approach in recognizing deferred taxes resulting from temporary differences between book value and tax bases of assets and liabilities. But differences in application make them incomparable.

Seven amendments introduce new guidance for handling consolidation and shareholder issues, classifying financial instruments, accounting for extractive activities, and several new definitions.

Five amendments introduce new exemptions that arise from standards that would cause “undue cost or effort,” such as fair value measurement of equity investments in financial instruments, separate recognition of intangible assets in business combinations, and offsetting of income tax assets and liabilities.

Three amendments add guidance, clarifying IFRS for SMEs usage in separate parent financials, applying the “undue cost or effort” exemption, and clarifying foreign exchange differences in subsidiary disposals.

The three disclosure simplification amendments provide relief from disclosing termination benefit policy, and prior year information relating to biological assets and share capital.

Lastly, twenty one amendments are considered minor clarifications of wording, unclear sentences, scope of sections, and removal of inconsistencies.

In IFRS for SMEs, the IASB has produced a practical, simplified set of standards that is based on full IFRS, and therefore retains a fundamental relationship with the standards used by large companies in many countries. In contrast, the FASB has taken a piecemeal approach with the Private Company Council, which eventually may arrive at a similar point, but will take time. The AICPA, addressing the desire by American SMEs for a more timely, comprehensive solution, has moved ahead by issuing the Financial Reporting Framework for SMEs.

For further information, see IFRS for SMEs


The Key Role of the Audit Committee 

The AICPA’s National Audit Committee Forum

One of the ways Integra International benefits the accounting profession and its members is by taking a leadership role. Last month we covered interactions of Integra Board Members with the International Accounting Standards Board. This month we cover the AICPA’s National Audit Committee Forum in New York, at which Integra Global Board Member, Steve Austin, served as moderator. At this Forum, Steve was joined by a PCAOB Board Member, the Institute of Internal Auditors President, and a Delaware Supreme Court Justice, among other authorities and professionals, in covering the latest issues impacting audit committees.

Jay Hanson, one of five PCAOB Board Members, emphasized the PCAOB’s “goal to enhance the PCAOB’s transparency and communications with our stakeholders, including, in particular, investors and audit committees.” That goal was elaborated in the six priorities the PCAOB has adopted for attainment in the next few years:

  • Improving the timeliness, content and readability of the reports we issue on firm inspections;
  •  Improving the timeliness of determinations we make about whether a firm has addressed quality control deficiencies to our satisfaction and providing additional information on the Board’s remediation evaluation process;
  • Initiating a project to identify and report on audit quality indicators;
  •  Enhancing our processes and systems to improve analysis and usefulness of inspection findings in order to better understand audit quality and better inform standard-setting and other regulatory activities;
  •  Enhancing the framework for our standard-setting efforts in order to improve the effectiveness of the process and the project tracking information provided to the investing public; and
  •  Enhancing the Board’s outreach to and interaction with audit committees. 

Criticism has been made for how long the PCAOB takes to issue inspection reports, and for the negative tone in the reports. Hanson pointed out that the PCAOB is required to report on deficiencies. While some would like to see positive comments as well, the PCAOB is not set up to evaluate “best practices” on a comprehensive basis. However, he feels that the current project to develop “audit quality indicators” (AQI) may be helpful in this regard. AQI’s, for example, could be 1) output-based, such as reporting on the number of frauds or restatements occurring during an audit firm’s tenure, 2) input-based, such as relating to auditor processes and procedures, and staff experience levels, or 3) results based, such as gauging the veracity of auditor reports, disclosures and assurances.

 Hanson also felt, based on feedback, that the proposal for mandatory auditor rotation would not move forward. Nevertheless, he called on audit committees to be vigilant in insisting on strict auditor independence from the client. The auditor is not to talk of being the “client’s business partner,” and auditor client social interactions should be evaluated for inappropriate activities or benefits. In the UK, actions have been taken on similar issues. As mentioned in last month’s Audit & Accounting Alert, Britain’s Financial Reporting Council (FRC) has codified in its standards the vital role of the audit committee by requiring that audit committees, boards of directors, and auditors report on their interactions. Also, Britain’s Competition Commission recently issued its final report that calls for auditors to compete for public company audits every ten years, by requiring companies to issue mandatory tenders for the work, though actual auditor rotation is not mandatory.

Steve Austin led a session on the new COSO internal control guidance that audit committees need to be familiar with in their oversight capacity. Some have wondered why the widely accepted framework, first issued in 1992, should be tampered with. But when considering the monumental changes that have taken place in the past twenty years, the need for the update becomes obvious. Technology applications alone look radically different from the systems in place in the nineties. Requirements of governance and the demands on accountability have also been ratcheted up significantly, in no small part due to financial crises and failures in recent years. Organizational structures and relationships have become more complex and interdependent, as well. The new COSO Framework addresses the changes, codifies the principles, and increases the focus on operations, compliance and non-financial reporting objectives.

 Other topics covered at the Forum included recent accounting pronouncements, SEC activities, relationships with senior management and the board of directors, working with the internal auditors, IT issues, and audit committee best practices illustrated through the presentation of a mock audit committee meeting. Barbara Berlin, Director of the PriceWaterhouseCoopers Center for Board Governance, discussed audit committee member concerns, including increasing time commitments, challenges keeping up with technology complexities, compliance obligations, and overall heightened risks.

 For further information, see PCAOB Board Member Addresses National Audit Committee Forum and Updated COSO Framework will Help Audit Committees


Worldwide Update

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

International

IASB – International Accounting Standards Board (www.ifrs.org)

  1. IFRS Foundation – IOSCO Protocol – A Statement of Protocols was announced on September 18 between the IFRS Foundation and the International Organization of Securities Commissions for further cooperation on International Financial Reporting Standards. The IOSCO, whose membership includes securities regulators overseeing 95% of the world’s securities markets, and the IFRS Foundation, will add to their current interactions involving the development and implementation of IFRS, by exchanging information about the progression of IFRS usage around the world, identifying implementation aspects of mutual interest, organizing annual IFRS enforcers’ gatherings around issues and standards, and agreeing to promptly address urgent implementation issues.
  2. The IFRS Foundation Education Initiative – A set of Framework-based IFRS teaching materials was announced on October 7, available free for download. The materials are compiled in three stages to correspond with the typical CA/CPA training progression. Separately, a set of 35 stand-alone training modules, one for each section, is available for IFRS for SMEs
  3.  IFRS for SMEs Comprehensive Review – Exposure Draft issued on October 3. See article above.
  4.  Revenue Recognition and Lease Proposal Status – The proposed joint IASB-FASB standard, Revenue from Contracts with Customers, is in final drafting and deliberation stages, with hoped for fourth quarter 2013 release. The comment period for the proposed joint IASB-FASB standard, Leases, has ended, and the proposal is being redeliberated in light of the comments. There has been substantial resistance to the proposal, which would require most leases to be reported on the financial statements as assets with corresponding liabilities, and then generally have equipment and vehicle lease costs divided each period between liability interest expense and asset amortization, while real estate lease costs are simply amortized on a straight-line basis. Consequently, the timing for finalization of the proposal is currently unclear.

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

  1.  Enhancing Organizational Reporting – IFAC Policy Position 8 was, issued on October 11, to emphasize the importance and usefulness of reporting broad-based information beyond that which is provided in traditional financial reporting. Such reporting promotes transparency and accountability, assists decision making by management and governance, provides a more complete view of organizational performance and sustainability, and provides shareholders with key information, such as the perceived value of human resources, intellectual capital, and other intangibles. IFAC supports the Integrated Reporting Framework (<IR>), the development of IAASB assurance standards, global consistency and the role of the accountancy profession.
  2.  The Role and Expectations of a CFO: A Global Debate on Preparing Accountants for Finance Leadership – IFAC Discussion Paper, issued on October 10, focusing on implications from changes that now find that “In addition to being the financial gatekeeper, CFOs are now expected to participate in driving an organization toward achieving its objectives. As part of the leadership of the organization, CFOs are expected to increase their support of strategic and operational decision making in a “business partnering” capacity in addition to fulfilling traditional stewardship responsibilities relating to governance, compliance and control, and business ethics.”
  3.  Professional Accountancy Organization Global Development Report – issued on October 2 by MOSAIC, the Memorandum of Understanding to Strengthen Accountancy and Improve Collaboration, of which IFAC is a signatory. The report was created to provide an assessment of professional accountancy organization (PAO) development at the global, regional, and national levels. The report’s key findings include the importance of undertaking PAO development comprehensively at the national level; strengthening legal and regulatory foundations; furthering implementation of international standards; and supporting internal strengthening of PAOs.

AAA – Americas, Australia & Asia

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

  1.  Two PCC Proposals sent to FASB for Approval – On October 1, the Private Company Council voted to request FASB approval of private company GAAP alternatives for the accounting for interest rate swaps and goodwill. The simplified hedge accounting approach would be allowed for interest rate swaps that convert variable rate interest payments to fixed rate payments. Also, fair value disclosures would not be required of these swaps. Goodwill acquired in a business combination could be amortized over ten years or less, and a simplified test for impairment would be allowed.
  2.  FASAC Survey Results – The Financial Accounting Standards Advisory Council in September issued stakeholder survey results regarding the FASB’s future agenda that listed the following top projects needing completion in the next 3-5 years: disclosure framework, accounting for financial instruments: hedging, conceptual framework, financial instruments with characteristics of equity, pensions, and financial statement presentation.
  3.  Revenue Recognition and Lease Proposal Status – See IASB above.
  4.  Disclosure Framework Project – In October, a Q & A fact sheet was issued. The framework is designed to lead to disclosures that clearly communicate the information that is most important to the users of financial statements. It is intended to promote consistent decisions by the FASB about disclosure requirements and guide reporting organizations when making disclosure decisions. The IASB has also instituted a Disclosure Initiative.
  5.  Insurance Contracts – Public roundtables are scheduled for December to hear feedback on the Exposure Draft that was issued on June 27, 2013, for which the comment period has just ended.

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

  1.  Accounting and Review Services Committee (ARSC) – Exposure Drafts are to be issued titled Preparation of Financial Statements, Compilation Engagements, and Association With Financial Statements. A compilation report would be required when the accountant is engaged to perform a compilation. When the accountant prepares financial statements, but does not perform a compilation, review or audit, a legend would be required on each page stating that no assurance is provided, but no report is required. When an accountant agrees to permit use of his or her name in a document that includes financials for which the accountant did not issue a compilation, review or audit report, the financials need to indicate that no CPA provides any assurance.
  2.  Assurance Services Executive Committee – published Assurance Services: A White Paper for Providers and Users of Business Information in September promoting how independent, third-party assurance services provide value and confidence, and describing factors to consider in selecting an assurance provider.
  3.  ASEC XBRL Assurance Task Force – published SOP 13-2, Performing Agreed-Upon Procedures Engagements That Address the Completeness, Mapping, Consistency, or Structure of XBRL-Formatted Information in September to assist accountants that submit XBRL files to the SEC.

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

  1.  New Broker-Dealer Attestation and Auditing Standards – In response to the Dodd-Frank Act, the PCAOB on October 10 adopted two new attestation standards: Examination Engagements Regarding Compliance Reports of Brokers and Dealers and Review Engagements Regarding Exemption Reports of Brokers and Dealers. These standards, subject to SEC approval, will bring broker-dealers under closer PCAOB purview for engagements with year ends after May 31, 2014. Also, a new auditing standard: Auditing Supplemental Information Accompanying Audited Financial Statements delineates the auditor’s responsibilities with regard to supplemental information.
  2.  Proposed Auditor Reporting Standards – On August 13, the PCAOB issued two proposals: The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, and The Auditor's Responsibilities Regarding Other Information in Certain Documents Containing Audited Financial Statements and the Related Auditor's Report. The comment period ends on December 11, 2013. See the October Audit & Accounting Alert for a discussion of these proposals.

CSA - Canadian Securities Administrators (www.osc.gov.on.ca)

  1.  Auditor Oversight Proposals – On October 17, the CSA issued proposals requiring accountants to report to the regulator any significant remedial actions imposed by the Canadian Public Accountability Board, and to notify clients if the accountant is not in compliance with the remedial actions.

 Europe, Middle East, India & Africa

 EFRAGEuropean Financial Reporting Advisory Group (www.efrag.org)

  1.  Conceptual Framework – In a draft comment letter and three draft bulletins, EFRAG supports the practical approach employed by the IASB, but is not in complete agreement and calls for a more conceptual approach to some issues. The bulletins cover complexity, measurement and the distinction between equity and liabilities.
  2.  Leases – A final comment letter expresses concerns with complexity and disagrees with the introduction of a dual measurement model and believes the conditions of transfer of control of the right of use must be revisited to capture only in-substance purchases.

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

  1.  Exposure Draft: Guidance on the Strategic Report – The ED, issued on August 15, addresses the narrative reporting requirement. The Strategic Report replaces the Operating and Financial Review in the annual report, and is designed to provide information relevant to shareholders. The guidance covers, placement of information, materiality, means of communication, and added disclosures regarding the business model, strategy, human rights issues, and gender diversity.
  2.  Conceptual Framework – published two bulletins in September, one questioning the omission of stewardship/accountability as a specific objective of financial reporting, and the other questioning the asset/liability approach which defines assets and liabilities first, such that equity, income and expense rely on those definitions.
  3.  Corporate Reporting Review Annual Report – The 2013 report found that although reporting by larger companies remains at a good level, reporting by some smaller listed companies suffers from a lack of sufficient or appropriate resource, and therefore FRC will consider actions to strengthen reporting going forward.
  4.  The Independent Auditor’s Report on Financial Statements – revisions to ISA 700 (UK and Ireland) issued on June 4, 2013, requiring auditors to explain more about their work to investors.

 EPEuropean Parliament (http://www.europarl.europa.eu/)

  1.  Committee on Economic and Monetary Affairs (ECON) – On October 1, ECON proposed a regulation that would tie the funding arrangements for the IASB and EFRAG to their showing that they comply with European laws. Also, funding would be subject to an annual assessment of whether these criteria are fulfilled, rather than the current six year arrangements. The IASB and EFRAG are protesting this proposal as a challenge to their independence.

 


Additional A&A News

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

  1. Anti-Fraud Collaboration Report: Expectation Gaps Exist within Financial Reportings
  2. Could accountants deflate the 'carbon bubble'?
  3. Audits Differ by Engagement Partner, Research Say
  4. Good and bad news in reporting season
  5. UK Competition Commission finalizes measures to open up audit market
  6. Big data? Great - so long as you get the analysis right

 

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