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Audit & Accounting Alert Newsletter

Issue 8 | October 2015

At-A-Glance

Gerry Herter

While supporters extol the virtues and apparent widespread acceptance of International Financial Reporting Standards, critics deplore the futile drive toward worldwide standardization, which they perceive as unattainable in the near term future, following the current approach of the International Accounting Standards Board (IASB). Our first article contrasts the opposing viewpoints in this ongoing struggle.

Our second article illustrates just how difficult finding common ground can be, when dissimilar political, economic and cultural systems are considered. The joint release last year, by the IASB and the US Financial Accounting Standards Board, of the standard, Revenue from Contracts with Customers, was hailed as a victory for international cooperation. However, implementation issues in recent months have given rise to differing amendment proposals that may serve to undermine that triumph.

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

Editor Gerald E. Herter, CPA

In This Issue 

The Elusive Goal of Global Accounting Standards

Standard setters realign their strategies.

How quickly times change. Several years ago, accountants were asking when, not if, they would need to implement International Financial Reporting Standards (IFRS). Today, the march toward world domination by the International Accounting Standards Board (IASB), the promulgator of IFRS, appears to have slowed to a crawl, if not a complete stall, at least for the foreseeable future in the United States and elsewhere. Yet voices pro and con can still be heard, though the language used by some appears to have changed.

Russell Golden, Financial Accounting Standards Board (FASB) Chairman, recently disclosed the shift in direction of the FASB. Golden stated that “we want to work toward the goal of developing more comparable standards that are truly global--and not simply international.” At first glance, some may contend that Golden just replaced one word, “international,” with another word of essentially the same meaning, “global.”

However, a closer reading reveals a subtle difference. The wisdom of leaving the world’s accounting standards in the hands of one organization is questioned, as well as the feasibility. Even now, many countries adopting IFRS have carved out nationally-based exceptions. (The IASB contests this allegation, stating that modifications are few and temporary. See the Feature, The global reach of IFRS is expanding, on the IASB website, IFRS.org). Also, even though, numerically, well over a hundred countries have moved to some form of IFRS, major population centers such as Japan, China and India allow other standards, while the USA doesn’t even allow IFRS for American companies. (The IASB maintains that the standards followed in Japan, China and India are substantially similar to IFRS. Also, the US Securities and Exchange Commission (SEC) does allow certain foreign registrants to use IFRS).

Golden has not come out against the IASB. Indeed, he applauds the shared accomplishments of the IASB and the FASB. (See the next article in this issue for current efforts on the jointly developed standard, Revenue from Contracts with Customers). Also, the FASB has been invited to sit on the Accounting Standards Advisory Forum (ASAF), which is an advisor to the IASB. Nevertheless, Golden affirms the FASB’s view that “the best way to develop more comparable global standards is through a broad-based, inclusive, collaborative effort in which national standard setters from jurisdictions comprising the world's major capital markets play an important role-along with the IASB.”

Concerns over the FASB’s efforts at convergence with IFRS were raised by then US Senator Carl Levin in a letter to the FASB last October. Levin feared “that the convergence project as a whole, as well as FASB's most recent efforts to converge revenue recognition standards, are undermining U.S. financial reporting integrity…Shifting from a detailed rules-based approach to a more generalized principles-based approach creates greater opportunities for abuse…The convergence standards simply offer less investor protection and may return us to a time when financial reporting fraud was more prevalent.”

These ideas were echoed by Paul Miller and Paul Bahnson in the new edition of their book, FASB: The People, the Process, and the Politics, as quoted in recent Accounting Today articles: “converged standards are based on compromised compromises, and that certainly doesn’t seem like a good way to get useful information into financial statements.” The authors argue the futility of “promoting global capital market efficiency through uniform, high-quality reporting standards.” They show that uniform standards do not necessarily produce comparable financial reporting between companies, particularly since the historic cost basis of accounting will yield different results for the same assets, depending on when they are acquired. Also, factors such as stability, cultural norms, and local regulatory requirements will lead to differences that IFRS is not designed to consider. Therefore, they conclude that the objective of converged IFRS leading to efficient capital markets around the world is unrealistic.

As would be expected, Hans Hoogervorst, Chairman of the IASB, has a different perspective. Speaking at a June 2015 IFRS Conference in Paris, Hoogervorst illustrated his position by reference to an intriguing episode in French history. Apparently, the unprecedented publication of a financial report on the government’s finances played a key role leading up to the French Revolution in 1789, and the demise of King Louis XVI. Noting how that earlier financial report served to focus public attention on governmental excesses, Hoogervorst reiterated, on behalf of the IASB, that “Our mission is to develop International Financial Reporting Standards that bring transparency, accountability and efficiency to financial markets around the world. Our work serves the public interest by fostering trust, growth and long-term financial stability in the global economy.”

In describing the IASB’s recently published Exposure Draft for a new Conceptual Framework, Hoogervorst defended the Board’s decision to retain the historical cost basis for valuing certain assets instead of fair value. In so doing, he has presented the practical argument for standard setting, over and against what may be a more useful, but potentially unrealistic theoretical approach advocated by Miller and Bahnson. Hoogervorst noted that fair value is not always relevant, may cause distracting fluctuations, and may require subjective determinations.

The work of the IASB did receive some support from a recent speech by James Schnurr, SEC Chief Accountant, at the USC 34th Annual SEC and Financial Reporting Institute Conference, in June 2015. While Schnurr recognized that there was little or no support for having the SEC mandate, or allow as an option, the use of IFRS, he felt that “in the near term, FASB and IASB should continue to focus on converging the standards. The boards should renew their commitment to cooperate and develop standards that eliminate differences between IFRS and U.S. GAAP whenever it meets the needs of its constituents and improves the quality of financial reporting. I believe that, for the foreseeable future, continued collaboration is the only realistic path to further the objective of a single set of high-quality, global accounting standards. Accordingly, how the FAF, IFRS Foundation, FASB and IASB decide to interact in the future is critical to the advancement of the objective of a single set of high-quality, globally accepted accounting standards.”

Despite the varying perspectives of the various individuals and institutions, the goal of striving toward high-quality, global accounting standards appears to be the consistent thread running through the viewpoints. Hopefully that mutuality will help to move joint efforts and collaboration forward, despite the extended timeline that entails. 

For further information, see FASB’S Simplification Initiative: an Update and FRC consults on amendments to UK and Irish GAAP.


IASB and FASB Agree to Differ on Clarifying Guidance for Revenue Accounting

Delayed effective date and principal versus agent questions find agreement

Though the road to fully uniform global standards remains bumpy, the IASB and FASB have been working hard to stand together as the jointly developed standard, Revenue from Contracts with Customers, is rolled out. Recognizing the complexities of the monumental undertaking, the Boards established the Transition Resource Group to jointly deal with issues as they arose. However, while proclaiming unity on the overall concepts, the Boards proceeded to publish differing pronouncements when clarifications were proposed recently.

As detailed in the April 2015 issue of the Audit & Accounting Alert, topics calling for further consideration were:

  1. Identifying performance obligations;
  2. Principal versus agent considerations;
  3. Licensing;
  4. Collectability; and
  5. Measuring non-cash consideration.

Also, practical expedients were requested for:

  1. Accounting for modifications to a contract that occurred before transition to the new revenue Standard;
  2. Entities electing to use the full retrospective transition method, accounting for a contract completed under previous revenue Standards before transition to the new revenue Standard; and
  3. Assessing whether a sales tax (or a similar tax) is collected on behalf of a third party.

Generally, the IASB considers the original Revenue Accounting pronouncement (IFRS15) to be substantially complete, maintaining that time and education will resolve most questions. That position is consistent with the principles based approach, relying primarily on judgment without too many detailed rules. The FASB has been more receptive to amendments adding clarifying details in order to reduce confusion.

Following those tendencies, the FASB plans amendments on all five topics, while the IASB will only amend the first three. Both will provide transition relief for modified contracts. The IASB will also issue transitionary guidance for completed contracts, while the FASB will amend for the sales tax issue.

The IASB issued an Exposure Draft (ED) on July 31, 2015 to address the above proposals. The comment period ends October 28, 2015. The FASB ED was issued on May 12, 2015 for identifying performance obligations and licensing, and on August 31, 2015 for principal versus agent considerations. The May 12, 2015 ED comment period has ended, and the August 31, 2015 ED comment period ends on October 15, 2015. An FASB ED on the other issues is expected soon.

With regards to identifying performance obligations, the IASB proposes to amend the Illustrative Examples to clarify application of the term “distinct” when used to distinguish goods or services related to specific performance obligations. The FASB will amend the actual standard to provide for the needed clarification, while also addressing immaterial items and adding an election for the treatment of shipping and handling activities.

The principal versus agent issue found the Boards proposing the same amendments. Clarification was to show that control prior to transfer of each good or service would be the determining factor of the principal or agent decision, and specified indicators supporting that decision-making process would be further amplified. The IASB initially felt that the issue of control and details of the indicators were adequately covered elsewhere or could be dealt with through augmenting the illustrative examples. However, in the spirit of convergence, in this instance, the IASB agreed to the amendments offered by the FASB.

For licensing, the IASB proposes clarification of application guidance and illustrative examples, while the FASB amends the basic standard, distinguishing between intellectual property that is functional, calling for recognition at a point in time, versus intellectual property that is symbolic, and therefore, recognized over a period of time. From a practice standpoint, the FASB does not expect many differing results in application. With regard to sales-based and usage-based royalties, while differing on some details, the Boards generally agreed that the recognition rule should be applied whenever the predominant item to which a royalty relates is a license of intellectual property. Also, there was no need to split a royalty into portions that were subject to the general rule and portions that were not.

The IASB does not see a need for an amendment on the collectability issue, while for measurement of non-cash consideration, a future project is considered necessary. The FASB will amend implementation guidance and illustrations for collectability, and clarify when a contract is terminated. Also, the FASB is going forward with a proposal that non-cash consideration should be measured at contract inception. That change may result in a difference in practice from IFRS. The FASB is drafting an Exposure Draft on these issues.

Recognizing the challenges and need for more time and guidance, both Boards have now agreed to delay the effective date for the new revenue recognition accounting standard by one year, to allow companies more time to prepare. The IASB amendment published on September 11, 2015 sets a new effective date of January 1, 2018. The FASB published ASU 2014-14 on August 12, 2015, which generally sets 2018 as the effective date for public entities and 2019 for most other entities. 

For further information, see FASB Revenue Accounting Project Update and IASB Revenue Accounting Project Update.


Worldwide Update

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

Periodically, we summarize significant items impacting the accounting world.

International

IASBInternational Accounting Standards Board (www.ifrs.org)

  1. Exposure Draft – Conceptual Framework for Financial Reporting published May 28, 2015, is a proposed revision “to improve financial reporting by providing a more complete, clearer and updated set of concepts that can be used by: the IASB when it develops International Financial Reporting Standards (IFRS); and others to help them understand and apply those Standards.” Comment period ends October 26, 2015.
  2. Exposure Draft – Clarifications to IFRS 15 – published July 30, 2015, regarding the new revenue standard, clarifies “how to identify the performance obligations in a contract; how to determine whether a party involved in a transaction is the principal (responsible for providing the goods or services) or the agent (responsible for arranging for the goods or services to be provided to the customer); and how to determine whether a licence provides the customer with a right to access or a right to use the entity’s intellectual property.” Comment period ends October 28, 2015.
  3. Effective Date of IFRS 15, Amendment to IFRS 15 Revenue from Contracts with Customers, issued September 11, 2015, delaying the effective date to January 1, 2018.

IFACInternational Federation of Accountants (www.ifac.org)

  1. International Accounting Education Standards Board (IAESB) Framework for International Education Standards for Professional Accountants and Aspiring Professional Accountants, published July 14, 2015, “to support IFAC member bodies that have direct or indirect responsibility for the learning and development of their members and student.”
  2. International Auditing and Assurance Standards Board (IAASB) - Addressing Disclosures in the Audit of Financial Statements – published July 15, 2015, “aims at focusing auditors on disclosures throughout the financial statement audit. The changes include strengthened requirements in ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, ISA 330, The Auditor’s Responses to Assessed Risks, and ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements, as well as enhanced application material in these and several other ISAs to more explicitly address disclosures.”

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

  1. SoMoClo technologies: Transforming how and where business takes place – research report issued jointly by ACCA and the Institute of Management Accountants (IMA) on September 15, 2015, offering “predictive insights about the effects of social, mobile, and cloud technologies.”
  2. The Future Today –research initiative and related website launched jointly by ACCA and IMA on September 15, 2015, to explore the future of the accounting profession.
  3. The robots are coming? Implications for finance shared services – report issued September 9, 2015, describing “robotics process automation” and “what some see as the next step in the evolution of business process delivery – fewer people in favour of machine-based learning technologies.”
  4. Consolidated government accounts: How are they used? –report issued July 2, 2015, compares usage in the UK, Australia, New Zealand, Canada and Sweden. “A key finding was that a combination of overly complex financial reporting and a lack of financial literacy among parliamentarians is making it more difficult for policy makers to take advantage of the potential benefits available from consolidated government accounts."

CIMAChartered Institute of Management Accountants (www.cimaglobal.com)

  1. Incentives, accountability and myopic decision making: a neuroscientific investigation, study released in July 2015, investigates how imposing accountability on managers may affect their myopic tendencies, helping to overcome the tendency to overly emphasize short-term results to the detriment of long-term implications.

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

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

1. EFRAG Endorsement Advice on IFRS 9 Financial Instruments, issued on September 15, 2015, gives EFRAG’s endorsement to the new IFRS Financial Instruments Standard, stating that “EFRAG assesses that IFRS 9 meets all technical endorsement criteria of the IAS Regulation. In respect of its conclusion on the European public good, the endorsement advice concludes “that overall IFRS 9 is conducive to the European public good, except for the impact on the insurance industry of applying IFRS 9 before the finalisation of the forthcoming insurance contracts standard. The IASB is working on one or more solutions for the insurance industry and is expected to make tentative decisions in the next two months.”

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

  1. Exposure Draft: Providing Assurance on Client Assets to the Financial Conduct Authority – issued May 14, 2015, proposes to “support and challenge auditors when reporting on compliance, by regulated firms, with the Financial Conduct Authority’s (FCA’s) Client Asset (CASS) rules designed to ensure the effective safekeeping of client assets and client monies.” Comments were due by July 31, 2015.
  2. FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime, and Amendments to FRS 100, FRS 101 and FRS 102 including new Section 1A Small Entities of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland all issued July 16, 2015, to simplify accounting standards for small and micro entities. See June 2015 Audit & Accounting Alert for details.

Americas, Asia, Australia and New Zealand (AAANZ)

FASBFinancial Accounting Standards Board (www.fasb.org)

  1. Fair Value Measurement ASU 2015-08: Business Combinations: Pushdown Accounting—Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115 — issued May 15, 2015, for consistency with SEC directive.
  2. Financial Services—Insurance ASU 2015-09: Disclosures about Short-Duration Contracts – issued May 21, 2015, for insurance contracts, such as auto and homeowners, “focuses on providing additional information about insurance liabilities to help users understand the nature, amount, timing, and uncertainty of future cash flows related to insurance liabilities; and the effect of those cash flows on the private companies. Effective generally in 2016 for public companies and 2017 for private companies.
  3. Technical Corrections and Improvements ASU 2015-10 - issued June 12, 2015, including various insignificant items that are 1) amendments related to differences between original guidance and the codification; 2) guidance clarification and reference corrections; 3) simplification; or 4) minor improvements. Effective dates are various from immediate to generally for 2016, with early application permitted.
  4. Inventory ASU 2015-11: Simplifying the Measurement of Inventory - issued July 22, 2015, will ease inventory valuation for US companies. The prior “lower of cost or market” provision has been streamlined to “lower of cost or net realizable value.” According to the ASU, “net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” This change also aligns treatment more closely with IFRS. Under the prior standard, market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. With several potential outcomes, the old standard was considered unnecessarily complex. Effective generally in 2016 for public companies and 2017 for private companies, with early application permitted.
  5. Plan Accounting ASU 2015-12: Defined Benefit Pension Plans, Defined Contribution Pension Plans, Health and Welfare Benefit Plans: (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient (consensuses of the FASB Emerging Issues Task Force) - issued July 31, 2015, to reduce complexity, fully benefit-responsive investment contracts will be measured, presented, and disclosed only at contract value. A plan will continue to provide disclosures that help users understand the nature and risks of fully benefit-responsive investment contracts. Effective generally for 2016.
  6. Derivatives and Hedging ASU 2015-13: Application of the Normal Purchases and Normal Sales Scope Exception to Certain Electricity Contracts within Nodal Energy Markets (a consensus of the FASB Emerging Issues Task Force) - issued August 10, 2015. Effective immediately.
  7. Revenue from Contracts with Customers ASU 2015-14: Deferral of the Effective Date – issued August 12, 2015, allows for a one year deferral, generally to 2018 for public companies and 2019 for private companies.
  8. Interest—Imputation of Interest ASU 2015-15: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements—Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting  (SEC Update)– issued August 18, 2015, states that “the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.”
  9. Exposure Draft - Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) - issued August 31, 2015. See the second article in this issue for further details. The comment period ends October 15, 2015

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

  1. AICPA Financial Reporting Center - Revenue Recognition Task Force Status of Implementation Issues, issued on September 1, 2015, summarizes the status of the industry issues arising from the new Revenue Accounting standard. Since the standard does not address industry-specific issues, the AICPA established the task force to consider issues impacting sixteen different industries.
  2. Assurance Services Executive Committee (ASEC)

a) The Use of Information Technology in Risk Management-white paper published on September 10, 2015, “written for risk professionals and CPAs engaged in operating, managing, and evaluating the effectiveness of risk management functions and their investments in risk information technology (IT). This report contains general information on current trends in technology tools (those becoming more visible to risk managers) and covers simple and more sophisticated risk applications and explains how they can be useful in enhancing the maturity of risk management overall.”

b) Audit Data Standards-Base Standard, General Ledger Standard and Subledger Standards-updates issued on July 15, 2015, consisting of “voluntary, uniform audit data standards that identify the key information needed for audits and provide a common framework covering: (1) data file definitions and technical specifications, (2) data field definitions and technical specifications, and (3) supplemental questions and data validation routines to help auditors better understand the data and assess its completeness and integrity.”

PCAOBPublic Company Accounting Oversight Board (www.pcaob.org)

  1. The Auditor's Use of the Work of Specialists– Staff Consultation Paper (2015-01), issued May 28, 2015, “seeks input on potential changes to standards for the auditor's use of the work of specialists, specifically the objectivity and oversight of specialists and the use of their work in audits. The comment period ended July 31, 2015.
  2. Improving Transparency Through Disclosure of Engagement Partner and Certain Other Participants in Audits – Supplementary Request for Comment (Release 2015-004), released June 30, 2015, “on whether to require firms to file a new PCAOB form to make public the name of the audit engagement partner and information about certain other participants in the audit.”
  3. Audit Quality Indicators (AQI) – Concept Release (2015-005), released July 1, 2015, seeking comment on the content and possible uses of a group of potential ‘audit quality indicators.’” The 28 potential AQI’s are described and grouped by the three categories of audit professionals (“measures dealing with the availability, competence, and focus of those performing the audit”), audit process (“measures concerning an audit firm's tone at the top and leadership, incentives, independence, investment in infrastructure needed to support quality auditing, and monitoring and remediation activities”), and audit results (“measures relating to financial statements -such as the number and impact of restatements, and measures of financial reporting quality, internal control over financial reporting, going concern reporting, communications between auditors and audit committees, and enforcement and litigation).” The comment period ended September 28, 2015

SASBSustainability Accounting Standards Board (www.sasb.org)

  1. Consumption I Sector Provisional Standards – issued June 30, 2015, to address sustainability disclosure topics relevant for companies in the following industries: 1) Agricultural Products, 2) Meat, Poultry & Dairy, 3) Processed Foods, 4) Non-Alcoholic Beverages, 5) Alcoholic Beverages, 6) Tobacco, and 7) Household & Personal Products Eight more sectors in the Consumption II Sector are in the works.

Additional A&A News 

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

  1. Investors Trust Auditors the Most
  2. IFRS and US GAAP: similarities and differences
  3. EY Sees Boost in Voluntary Audit Committee Disclosures
  4. FIFA audit chair calls for huge governance overhaul
  5. Deflategate, Binkygate & Disclosing Open Tax Years
  6. When accounting meets Big Data

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