Audit & Accounting Alert - Issue 5, September 2018

In the second article, we return to the new lease accounting standard. With the effective date rapidly approaching, time is growing short for organizations to complete the preparation necessary for effectively implementing the historic changes. Helping ease the burden, new refinements have been issued and proposed that put in place practical measures to smooth the way. Even so, there is no time to lose, especially for entities with numerous leases.

Latest Fraud Report Confirms Prior Results

The Association of Certified Fraud Examiners (ACFE), in an effort to better inform members of the characteristics of the financial crimes they were fighting, in 1996 created the first Report to the Nation on Occupational Fraud and Abuse, a comprehensive analysis of the causes and effects of occupational fraud in the United States.

The stated goal was to “compile detailed information about occupational fraud cases in five critical areas:

Now produced biennially and covering the whole world, in 2018 the tenth edition is based on survey data provided by certified fraud examiners (CFE) from 2,690 actual cases across 125 countries and 23 industry categories. The median response by CFEs of the annual loss to organizations from fraud is 5% of revenue. Applying that percentage to Gross World Product, the authors theorized that the potential cost of fraud worldwide is nearly $4 trillion annually. In comparison, the first report in 1996 reported an annual amount of $400 billion lost in the US alone.

As in the past, owners/executives only accounted for a small percentage of cases (19%), but caused a median loss of $850,000, compared to the overall median loss of $130,000. Losses of $1 million or more occurred in 22% of the cases. Losses caused by men were 75% larger than those caused by women.

Asset misappropriation schemes accounted for 89% of the cases, but only incurred a median of $114,000 in losses, while financial statement fraud schemes were present in only 10% of the cases, but incurred $800,000 of median losses. Corruption appeared 38% of the time, sometimes in conjunction with one or both of the other two types.

Lease Standard Tightened Up As Deadline Approaches

Groupwork

The long anticipated new lease accounting standards (IFRS16 and ASU 2016-2, Topic 842) finally become effective for public companies at the beginning of 2019. Non-public entities have until 2020 to comply. Considering that the Financial Accounting Standards Board (FASB) last issued a major lease accounting standard in 1976, and the joint IASB/FASB project on reforming lease accounting standards commenced in 2005, this new milestone is significant.

The broadest change is the requirement that most leases will now need to be reported on the balance sheet as assets with corresponding liabilities. In response to implementation concerns, the FASB in 2018 has issued several Accounting Standard Updates to ease the burden and to incorporate technical corrections.

In January, 2018, ASU 2018-01, Leases - Land Easement Practical Expedient for Transition to Topic 842, was issued. According to the FASB, this ASU reduces the cost of adopting the new leases standard by“providing an optional transition practical expedient that, if elected, would not require an organization to reconsider their accounting for existing land easements that are not currently accounted for under the old leases standard and clarifying that new or modified land easements should be evaluated under the new leases standard, once an entity has adopted the new standard.”

ASU 2018-11, Leases - Targeted Improvements, issued July 30, 2018, “provides

• An option to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in its financial statements, and

A practical expedient that permits lessors to not separate non-lease components from the associated lease component if certain conditions are met.”

Other practical expedients are included as well, an important one being that “an entity need not reassess whether any expired or existing contracts contain a lease.” Also, “an entity need not reassess the lease classification for any expired or existing leases”, nor the “initial direct costs for any existing lease.” Additionally, the entity may “use hindsight in determining the lease term... and in assessing impairment of the entity’s right-of-use assets.”

Worldwide Update

1. Financial Instruments with Characteristics of Equity, Discussion Paper issued June 28, 2018, responding to concerns that some complex financial instruments that exhibit aspects of both debt and equity are difficult to classify under IAS 32, Financial Instruments: Presentation. The discussion paper proposes an approach “that would:provide a clear rationale for why a financial instrument would be classified as either a liability or equity without fundamentally changing the existing classification outcomes of IAS 32; andenhance the information provided through presentation and disclosure. The comment period ends January 7, 2019.

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

1. International Public Sector Accounting Standards Board (IPASB) - Exposure Draft 66, Long- Term Interests in Associates and Joint Ventures and Prepayment Features with Negative Compensation, released August 20, 2018, “to propose amendments to IPSAS to converge with the narrow-scope amendments to IAS 28, Investments in Associates and Joint Ventures and IFRS 9, Financial Instruments,” issued in October 2017. The comment period ends October 22,2018.

2. International Public Sector Accounting Standards Board (IPASB) - IPSAS 41, Financial Instruments, issued August 14, 2019, “provides users of financial statements with more useful information than IPSAS 29, by:
• Applying a single classification and measurement model for financial assets that considers the characteristics of the asset's cash flows and the objective for which the asset is held;
• Applying a single forward-looking expected credit loss model that is applicable to all financial instruments subject to impairment testing;
• and Applying an improved hedge accounting model that broadens the hedging arrangements in scope of the guidance.
The model develops a strong link between an entity's risk management strategies and the accounting treatment for instruments held as part of the risk management strategy. The effective date is January 1, 2022, with earlier adoption encouraged.

3. International Ethics Standards Board for Accountants (IESBA) - Final Pronouncement: Revisions to the Code Pertaining to the Offering and Accepting of Inducements, issued July 19,2018, “sets out clear expectations for all professional accountants to understand and comply with laws and regulations that prohibit the offering or accepting of inducements in certain circumstances, such as those related to bribery and corruption. It also requires the application of an intent test where inducements are not specifically prohibited by law or regulation, and the application of the conceptual framework in all other circumstances.”

4. Guide to Using International Standards on Auditing in the Audits of Small - and Medium-Sized Entities – published July 17, 2018, to provide practical guidance to help “firms efficiently and proportionally apply the ISAs on SME audits and is designed for use by all practitioners.”

5. The International Auditing and Assurance Standards Board (IAASB) - Exposure Draft, ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement, released July 16,2018, “proposes more robust requirements and improved guidance to:
• Drive consistent and effective identification and assessment of risks of material misstatement;
• Modernize ISA 315 to meet evolving business needs, including information technology, and how auditors use automated tools and techniques, including data analytics, to perform audit procedures;
• Improve the standard’s applicability to entities across a wide spectrum of circumstances and complexities;
and Focus auditors on exercising professional skepticism throughout the risk identification and assessment process.”
The comment period ends November 2, 2018.

Nightmare of Indian Accounting Standard 115 comes to haunt firms in the real estate sector

(https://www.livemint.com/Money/Ijb44go3ydiY5jIUY9UZfN/Nightmare-of-Indian-Accounting-Standard-115-comes-to-haunt.html)

https://www.thisdaylive.com/index.php/2018/07/15/ican-rejects-forensic-investigative-auditor-bill/)

Move Over, Sustainability Accounting, Here Comes Purpose Accounting

(https://www.sustainablebrands.com/news_and_views/finance_investment/mark_mcelroy/move_over_sustainability_accounting_here_comes_purpos)

(http://ww2.cfo.com/auditing/2018/08/16-years-later-sox-compliance-continues-to-evolve/)

Focus on blockchain's risks before the rewards

Audit & Accounting Alert September 2018 (Issue 5)

At-A-Glance

Latest Fraud Report Confirms Prior Results

Lease Standard Tightened Up As Deadline Approaches

Worldwide Update