At-A-Glance
Politics has reared its ugly head in
the world of American financial reporting.
After years of stalled efforts, the FASB
was finally making progress in addressing
the needs of smaller private companies,
with the Private Company Council (PCC).
But responding to the growing frustration
of many members, the AICPA moved ahead with
its own Financial Reporting Framework for
Small-and Medium-Sized Entities (FRF for
SMEs), a less complex alternative to US
GAAP. While some of the ruffled feathers
have now been smoothed over, our first article
explores underlying issues that prompted
the uproar.
Ironically, on the same day the
AICPA announced FRF for SMEs, the FASB endorsed
the first three PCC proposals geared toward
simplifying private company financial reporting.
Our second article discusses the alternative
treatments proposed for intangible assets
acquired in business combinations, goodwill,
and certain derivatives that are basic interest
rate swaps.
Finally, our quarterly worldwide update
provides brief highlights of new and upcoming
actions and activities of accounting organizations
throughout the world. This section enables
the reporting of items warranting a mention,
but not a full article.
Editor Gerald E. Herter, CPA |
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In This Issue
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FRF for SMEs – Panacea or Pariah?
Turf war comes to private company financial reporting
Just when the AICPA and FASB appeared to have
forged a truce in their battle for control over
small company financial reporting, the National
Association of State Boards of Accountancy (NASBA)
and the Institute of Management Accountants (IMA)
jumped into the fray. They were objecting to the
Financial Reporting Framework for Small- and Medium-
Sized Entities (FRF for SMEs), issued by the AICPA
on June 10.
The December 2012 issue of Audit & Accounting
Alert covered the unveiling of the FRF for SMEs
Exposure Draft, while the April 2013 issue reported
on the split reaction after the comment period ended.
Despite a mere 90 day exposure period, and the substantial
concerns expressed in 75 comment letters, the AICPA
proceeded to publication, just over four months
after the close of the comment period. According
to Robert Durak, AICPA Director of Private Company
Financial Reporting Standards, speaking at the AICPA
Practitioners Symposium on the day of issuance,
changes were made to the Exposure Draft, but nothing
significant.
The AICPA has asked the state CPA societies to
add their support. Interestingly enough, most of
the state societies that submitted comment letters
expressed substantial concerns with the new framework.
While they tended to agree with the general idea
and need for the framework, they felt that more
work and time was needed for improvements.
Though the AICPA initially voiced puzzlement
at the negative reactions, two obvious sources for
the concerns arise from the lack of transparency
in the process and the short timeline from exposure
to issuance of the framework. Little has been said
about how the framework was developed. The fact
that the framework is primarily the work of the
Canadian Institute of Chartered Accountants is hardly
mentioned. Also, despite the volume of concerns
with the Exposure Draft, there is scant, if any,
discussion directed at how those concerns were addressed.
The FASB’s overseer, the Financial Accounting
Foundation (FAF), subsequently clarified that while
they had earlier expressed support for the AICPA
project, the resulting framework has not been given
the FAF’s nor the FASB’s blessing. In fact, reservations
were raised in a letter from the FAF president,
Terri Polley. Polley appears to distinguish FRF
for SMEs from GAAP by stating that “financial statements
prepared in accordance with GAAP are transparent,
clear, comparable and reliable.”
With the recent progress of the FAF’s Private
Company Council (PCC) (see next article), Polley
poses that companies adopting FRF for SMEs may later
find that the move was unwarranted. Two primary
goals of the PCC are to reduce the cost and complexity
of financial reporting. She also reiterated the
objections of the NASBA and IMA that the non-authoritative
FRF for SMEs will be “difficult to regulate and
enforce,” “will cause marketplace confusion,” and
“does not require disclosure of the substantial
differences between the framework and GAAP.”
A recent Thomson Reuters survey of over 200 accounting
firms revealed that 54% were not familiar with the
new FRF for SMEs. 40% felt that the most significant
challenge to adoption would be the acceptance and
understanding by lenders and other users. But a
majority felt that some of their clients would consider
using the new framework.
The AICPA has backed up its strong support for
the FRF for SMEs by offering extensive toolkits
directed specifically at CPA firms, financial statement
users, and small businesses. These toolkits include
introductions, videos, articles, PowerPoints, illustrative
financials, and checklists, among other aids. A
helpful component that had been requested in the
comment letters is a comparison of the major differences
between FRF for SME, US GAAP, tax basis and IFRS
for SMEs. While more details would be useful at
some point, this feature is a step in the right
direction.
Who will prevail in this dispute remains to be
seen. But I have learned not to bet against the
AICPA’s CEO, Barry Melancon, after watching him
survive a variety of controversies during his eighteen
year tenure at the helm. The AICPA’s marketing effort
so far has been impressive. Some of the current
misgivings may had been diffused, had the AICPA
directed some of that effort and time along the
way by more closely collaborating with stakeholders,
and addressing their concerns in a more transparent
manner.
As if sensing a need to cool down the heated
rhetoric, and to correct some of the missteps and
overreaction, the AICPA and NASBA have subsequently
come together, issuing a joint statement of cooperation.
In part, they state: “The AICPA and NASBA are committed
to engaging in an effort to ensure that the FRF
for SMEs, as a non-authoritative framework, is not
confused with GAAP and that entities that utilize
GAAP or a non-GAAP solution do so in a suitable
and transparent manner. To that end, the AICPA,
with NASBA input, will develop a decision-making
tool to assist entities with determining whether
use of the FRF for SMEs is suitable or not. Additionally,
illustrative financial statements and disclosures
will be developed to distinguish FRF for SMEs-based
financial statements from GAAP-prepared statements.”
The statement also praises the work of the PCC,
and looks to its “eventual success in developing
a GAAP-based financial reporting model for all private
companies. CPAs who report on financial statements
prepared in accordance with GAAP, or a special purpose
framework, such as the FRF for SMEs, will be held
to the highest standards of professional practice
by U.S. Boards of Accountancy.”
For further information, see
Financial Reporting Framework for SMEs
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FASB Advances three Private Company Council Proposals
Relief is finally on the way for private company financial
reporting
Making good on promises made last fall by newly appointed
Private Company Council (PCC) chair, Billy Atkinson, the
FASB on July 1 issued proposed Accounting Standard Updates
(ASU) relating to business combinations, goodwill and certain
derivatives. Though there are numerous areas of the FAS’s
that need the PCC’s attention, the three items initially addressed
convey a positive impression of the FASB’s commitment to
provide practical alternatives for private companies in
their struggle to deal with the complexities of the standards.
The first ASU reduces the number of intangible assets
that private companies are required to report separately
from goodwill in a business combination. Determining fair
value for intangibles, such as customer relationships, can
be difficult and not of much help to users of the financials.
Only in cases of intangibles arising from non-cancellable
agreements or other legal rights, are the separate identification
provisions applicable. Interestingly enough, the FAF’s post-implementation
review of the Business Combinations Topic 805 (formerly
FASB Statement 141R), the standard that all companies are
currently required to follow, found that stakeholders questioned
the credibility of the separately reported intangibles,
because of the complexity in determining their fair value.
Consequently, the FASB will reconsider whether to change
this standard for all companies. The IASB is also reviewing
this standard which is converged with the FASB version.
The second ASU allows goodwill to be amortized over the
useful life of the primary asset acquired, not to exceed
ten years, and eliminates the need for annual impairment
assessments. Impairment need only be assessed upon the occurrence
of a trigger, and then using a simplified method that determines
company-wide excess of the carrying amount over fair value.
Examples of triggering events could include significant
changes in the economy, industry, market, cost factors,
financial performance, management or personnel, customers,
potential bankruptcy or litigation.
The third ASU addresses those derivatives that are basic
interest rate swaps. Typically for private companies, the
only hedging activity occurs when a company enters into
a swap to effectively convert a variable-rate loan into
the equivalent of a fixed-rate loan. The ASU simplifies
the complex derivative provisions by providing two alternatives
to account for the swap: 1) the combined instruments approach
which considers the loan and swap as one instrument, providing
they cover the same time period; or 2) the simplified hedge
accounting approach, where the swap and loan are accounted
for separately, using settlement value in the financials
instead of fair value. Under both methods, the interest
reported on the income statement would be similar to that
of a fixed rate loan.
Along with these three proposed updates, the FASB and
PCC have approved the Private Company Decision Making Framework
for issuance. Also, during the third quarter, an exposure
draft defining a nonpublic entity is expected, and the PCC
has requested that the FASB endorse a proposal to exempt
private companies from the requirement to consolidate variable
interest entities (VIEs) arising from common control leasing
arrangements.
While the ongoing controversy over FRF for SMEs brings
out the wide scope of complexities that the FAS’s impose
on companies, the PCC’s efforts and the FASB’s support thus
far, may indicate a welcome new attitude toward the needs
of smaller companies.
For further information, see
FASB Endorses Three Private Company Council Proposals
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)
- IFRS for SMEs – A comprehensive
Fact Sheet as of July 2013 indicates that over 80 countries
have adopted IFRS for SMEs or announced plans to do
so. Training materials in various languages and workshops
in various locations are available. A comprehensive
review of the original July 2009 IFRS for SMEs is underway.
- Accounting for Insurance Contracts
– A revised Exposure Draft issued on June 20 updates
the 2010 ED that seeks to provide a consistent basis
for accounting for insurance contracts, and assisting
users in understanding the impact on financials.
- Assessment of Global Adoption of IFRS
– 1st phase completed June 5. Profiles are published
of 66 jurisdictions, including all of the G20. 95% are
committed to supporting IFRS, 80% have adopted IFRS
for public companies, few temporary, local modifications
were made, and over 50% have adopted IFRS for SMEs or
plan to.
IFAC – International Federation of Accountants
(www.ifac.org)
- Memorandum of Understanding (MoU)
with the Institute of Internal Auditors (www.theiia.org)
signed on July 17 strengthening their “commitment to
restore confidence in the general public in business
reporting and enhancing governance processes in the
private and public sectors” by joining forces for “enhanced
coordination, collaboration, and resource sharing.
- The International Accounting Education Standards
Board (IAESB) issued on July 3 an Exposure
Draft, 2014-2016 IAESB Strategy and Work Plan.
The IAESB mission is to serve the public interest by
strengthening the worldwide accountancy profession through
the development and enhancement of education. The IAESB
issues standards, promotes adoption, develops benchmarks,
and advances international debate.
- The International Auditing and Assurance
Standards Board (IAASB) on June 7 issued its
2012 annual report, Responding to the Needs
of an Interconnected World, highlighting standards
issued during the year and projects in process.
IIRC - International Integrated Reporting Council
(www.theiirc.org)
- Memorandum of Understanding (MoU)
with the World Intellectual Capital Initiative (WICI)
is signed to promote cooperation, ensuring that “intellectual
capital” is reflected as a crucial and essential source
of an organization’s value within Integrated Reporting <IR>.
Intellectual capital is organizational, knowledge-based
intangibles, including intellectual property, tacit
knowledge, systems, procedures, and intangibles associated
with the brand and reputation. Additional MoU’s were
signed in July with the Carbon Disclosure Project (CDP)
and the Climate Disclosure Standards Board (CDSB), organizations
committed to protecting natural resources and the health
of the planet by setting standards for measuring and
reporting on environmental factors and their impact
on financial reports.
ACCA – Association of Chartered Certified Accountants
(http://www.accaglobal.com/)
- Investors: directions for corporate reporting
– Survey issued in June where almost two-thirds of investors
indicated that managers have too much discretion over
the financial numbers they report and a sizeable majority
say they place more value on information generated from
outside a company, such as the news and social media,
than on traditional corporate reports.
- Understanding investors: the changing landscape
– Report issued in June reviews emerging investment
developments, such as equity markets becoming increasingly
short-term, effects of ultra-low interest rates, increasingly
complex regulation, demands for more and enhanced information
reporting, decreasing equity holdings, and focus on
risk management.
AAA – Americas, Australia & Asia
FASB – Financial Accounting Standards Board (www.fasb.org)
- Fair Value Measurement: Deferral of the
Effective Date of Certain Disclosures for Nonpublic
Employee Benefit Plans in Update No. 2011-04
– Accounting Standards Update No. 2013-09 issued July
8, 2013 defers indefinitely the disclosures of quantitative
information about the significant unobservable inputs
used in Level 3 fair value measurement, for investments
that a nonpublic employee benefit plan holds in their
plan sponsors’ own nonpublic entity equity securities.
This ASU allows private companies to avoid disclosing
proprietary information about their company’s value
in a plan’s regulatory filing.
- Three PCC proposals issued as ASU’s
– July 1, 2013 – see article above.
- Insurance Contracts – Exposure
Draft issued June 27, 2013 improves consistency in financial
reporting by bringing all contracts, that are defined
as insurance, under one standard, regardless of what
type of institution issues them. A building block approach
is applied to life, annuity and long-term health contracts,
while a premium allocation approach is applied to property,
liability and short-term health contracts. This ED is
part of a joint effort with the IASB working toward
convergence.
- Presentation of Financial Statements: Disclosure
of Uncertainties about an Entity’s Going Concern Presumption
– Exposure Draft issued June 26, 2013 intended to improve
and reduce diversity in disclosures by “clarifying management’s
responsibilities about evaluating and disclosing going
concern liabilities, while improving the timeliness
and quality of footnote disclosures about them,” according
to former FASB Chairman Leslie F. Seidman. Auditing
standard principles are incorporated, as well as frequency
and threshold guidance, and a required assessment period
extending 24 months after the financial statement date.
- Financial Services—Investment Companies:
Amendments to the Scope, Measurement, and Disclosure
Requirements - Accounting Standards Update
No. 2013-08 issued June 7, 2013 provides a set of characteristics
for use in determining whether a company is an investment
company, and fair value reporting guidance for those
investment companies. The FASB and IASB are both working
on this issue.
- Technical Corrections and Improvements Related
to Glossary Terms – Exposure Draft issued May
6, 2013 provides updates and clarification of items
in the Master Glossary of the FASB Accounting Standards
Codification.
- Inclusion of the Fed Funds Effective Swap
Rate (or Overnight Index Swap Rate) as a Benchmark Interest
Rate for Hedge Accounting Purposes - Accounting
Standards Update No. 2013-10 issued July 17, adds the
Overnight Index Swap Rate (OIS) to US Treasury obligation
rates (UST) and LIBOR as benchmarks that can be used
for hedge accounting.
- Presentation of an Unrecognized Tax Benefit
When a Net Operating Loss Carryforward, a Similar Tax
Loss, or a Tax Credit Carryforward Exists Purposes
- Accounting Standards Update No. 2013-11 issued July
18, provides that such tax benefit be presented as a
reduction to a deferred tax asset unless it is not available,
or if available, not required to be used , and the entity
does not intend to use.
AICPA – American Institute of Certified Public
Accountants (www.aicpa.org)
- Auditing Standards Board (ASB) Using
the Work of Internal Auditors – Exposure Draft
issued April 15, 2013 adapts the international standard
ISA 610 for use in the United States, introducing the
concept of requiring an evaluation before using the
work of internal audit, to assure that the internal
audit function follows a systematic and disciplined
approach, including quality control.
- Financial Reporting Framework for Small-and
Medium-Sized Entities (FRF for SMEs) – Issued
on June 10, 2013. See article above
PCAOB – Public Company Accounting Oversight Board
(www.pcaob.org)
- Enforcement Cooperation Agreement with Chinese
Regulators – Memorandum of Understanding entered
into in May, 2013 with the China Securities Regulatory
Commission and the Ministry of Finance. According to
the PCAOB, “the MOU establishes a cooperative framework
between the parties for the production and exchange
of audit documents relevant to investigations in both
countries’ respective jurisdictions. More specifically,
it provides a mechanism for the parties to request and
receive from each other assistance in obtaining documents
and information in furtherance of their investigative
duties.” The parties continue to discuss the further
possibility of an agreement to permit inspections in
China of PCAOB-registered audit firms that audit Chinese
companies trading on U.S. exchanges.
- Related Parties – Reproposal of
2012 auditing standard proposals, issued for comment
on May 7, 2013, would increase auditor focus on evaluation
of a company’s identification of, accounting for, and
disclosure of its relationships and transactions with
related parties, as well as the identification and evaluation
of a company’s significant unusual transactions. These
areas has been an ongoing concern for financial reporting
fraud.
US Congress – House of Representatives
passes bill on July 8, 2013 prohibiting the PCAOB from requiring
mandatory rotation of audit firms. The bill now goes to
the Senate for consideration.
Europe, Middle East, India & Africa
EFRAG – European Financial Reporting Advisory
Group (www.efrag.org)
- Two bulletins published in June,
2013 address the IFRS Conceptual Framework proposal,
considering whether the business model approach provides
useful information in financial reporting, and the role
of a Conceptual Framework with regards to the purpose
of the Framework for the IASB; the completeness of the
Framework for setting requirements; the role of the
Framework for preparers; the decision-making process
derived from the Framework; and the consequences of
a revised Framework for existing IFRS.
FRC – Financial Reporting Council of the UK (www.frc.org.uk)
- Code of Practice for the relationship between
the external auditor and the supervisor – issued
by the Financial Conduct Authority on Jul 12, 2013,
sets out principles for the relationship, form and frequency
of communication, and responsibilities and scope of
sharing information between the auditor and supervisor
(regulator).
- Accountancy Scheme – published
on July 1, 2013 updates the disciplinary arrangements
applying to members, so as to be more independent, efficient
and effective.
- Prohibition of use of internal audit staff
as “direct assistance” for external auditors
– announced by FRC on June 19, 2013, effective for periods
ending on or after June 15 2014.
- 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.
EC – European Commission (http://ec.europa.eu/)
- Commission Decisions on Equivalence of American
public oversight system and Adequacy of US PCAOB
– adopted on June 11 allowing EU audit regulators and
the PCAOB to rely on each other’s work.
Additional A&A News
The following links provide a selection of current articles
devoted to highlighting other A&A topics currently making
news.
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The Cost of IFRS Transition in Canada
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Australia Securities Commission - Financial Reporting
Areas of Focus
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Mandatory Auditor Rotation Coming to India?
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Effective Internal Audit in the United Kingdom
Financial Services Sector
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ABA Issues New Auditor’s Letter Handbook
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Minimize Risks in micro-entity audits
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