At-A-Glance
The joint
release by
the FASB and
IASB of the
comprehensive
new revenue
accounting
standard was
a triumph
for
international
cooperation.
Unfortunately,
the
successful
decade-long
effort is
seen by many
as more of a
grand
finale,
rather than
as the
decisive
steppingstone
toward the
ultimate
goal of a
single
worldwide
set of
financial
reporting
standards.
Our first
article
explores the
differing
attitudes
that have
risen in
recent
months.
There is a
more
positive
feel for the
early
efforts of
the FASB in
working with
the Private
Company
Council to
address long
held
concerns of
nonpublic
entities. An
example is
the
alternative
treatment
approved for
goodwill
accounting.
Our second
article
describes
how the new
goodwill
option will
ease the
burden for
SMEs. The
reception
has been so
favorable
that the
FASB is
considering
the
possibility
of offering
the option
to public
companies as
well.
Finally, our
quarterly
Worldwide
Update
covers news
from
organizations
across the
globe.
Editor Gerald E. Herter, CPA |
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In This Issue
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End of the Road for IFRS/US
GAAP Convergence?
Landmark revenue
standard may be a final
tribute to the troubled
joint effort
The joint release by the
FASB and the IASB of the
new standard, Revenue
from Contracts with
Customers, in May, 2014,
was met with great
fanfare. Considering
that the two standard
setting groups required
fourteen years to work
out an agreeable
pronouncement, the
result is nothing short
of remarkable. Even so,
the protracted process
foretells an ominous
road ahead for the cause
of convergence.
Voices on both sides of the Atlantic were quick to sound the death knell
to the prospect of the
United States ever fully
converging with IFRS.
Former Securities and
Exchange Commission
Chair Christopher Cox
speaking in June 2014 to
a conference in
California stated
bluntly: “The prospect
of full scale IFRS in
our lifetimes has ceased
to be. It is bereft of
life. It rests in
peace.” Integra
International Global
Board member Steve
Austin’s firm attended
the conference. Steve
indicated that Cox’s
presentation as the
keynote speaker was
“stunning and surprising
to the audience”… “We
were riveted to our
chairs.”
Subsequently, Ian Mackintosh, vice chairman of the IASB, at an IFRS
Foundation Conference in
London, accused the FASB
of “turning back the
clock.” He characterized
the current FASB
approach as “remarkably
similar” to the pre-IASB
effort that after 25
years “failed
miserably.” That effort
was intended to reduce
differences between
national accounting
standards, but did not
succeed. Each of the
nine participating
countries retained their
unique preferred
standards in areas of
divergence, rather than
work toward a common
goal.
The IASB was formed in 2001 to replace the failed effort with a determined
path to a single
universally shaped and
accepted set of
accounting standards. At
present, with 105
countries already
requiring most public
entities to use IFRS,
the cause has
accomplished much.
Macintosh indicated that country differences in IFRS application are few
and generally temporary.
Those results appear to
contradict Jim Kroeker,
Vice Chairman of the
FASB, who Macintosh
quotes as saying “…we
recognize that one size
may not fit all. By
that, I mean that we
understand that
differences in standards
will persist because of
the legal, regulatory
and cultural differences
among different
jurisdictions.” Also,
the IFRS Foundation and
IOSCO, the international
network of securities
regulators, are working
jointly to make IFRS
application more
consistent.
The final three formal areas of the IASB/FASB convergence effort reflect
the futile nature of the
process. After years of
deliberating accounting
for leases, financial
instruments, and
insurance, the Boards
have practically
resigned themselves to
the prospect that each
will issue their own
standard, which will
show agreement in some
areas, but may differ in
others.
Similarly, FASB member Thomas Linsmeier, in a June 2014 speech to the
rate-regulated utilities
industry, stated that
“While we have pledged
to work with the IASB to
make our standards as
comparable as possible,
our primary
responsibility – and
obligation – is first to
improve and protect the
quality of GAAP. That
may well mean that we
opt to diverge with the
IASB rather that adopt
their model on
rate-regulated
accounting.”
Linsmeier points out an issue in the utilities industry that strikes to
the very core of the
overall difficulty with
bringing IFRS and US
GAAP into synch. US GAAP
has a well worked out
set of industry-specific
rules for utilities to
follow, while IFRS does
not. IFRS is principles
based, while US GAAP is
rules based. At the
height of the US
enthusiasm for moving to
IFRS, the country was
reeling from the Enron
and related financial
disasters, which were
enabled by unscrupulous
exploitation of the
“bright lines” of US
GAAP rules. That caused
suspicion which clouded
all of US GAAP, evoking
calls to move to a more
principles based set of
standards, where
judgment would replace
form with substance.
After these many years of efforts at convergence, the furor from the
financial crises has
calmed somewhat. Also,
there is a realization,
at least in some
circles, that there is
value in the vast depth
of rules developed over
decades in forming US
GAAP. Principles based
standards are not immune
from abuse or bad
judgment.
A possible solution would be to have standards based on an overall set of
principles where
judgment prevails as the
ultimate test, but which
are underpinned by
detailed rules that
minimize confusion or
deceptive practices. The
recent ‘True and Fair’
Statement published by
the Financial Reporting
Council of the United
Kingdom touches on this
concept from a slightly
different direction. The
Statement acknowledges
that in a “vast majority
of cases” the standards
as written will provide
a “true and fair” view.
But there could be
particular situations
where the application of
a standard causes the
accounting to be
misleading. In such
cases, the “standard
should be overridden” to
assure that the
financial statements are
true and fair.
For further information, see
IASB's Macintosh speech-
Turning back the Clock?
and
FASB’s Linsmeier speech
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Simplified Goodwill Reporting for US
SMEs
Relief provided from the complex
impairment rules
Before creation of the Private
Company Council (PCC), the FASB
tried, unsuccessfully, to address
private company concerns through its
normal standard setting process. The
FASB standard for Goodwill had been
especially onerous and costly. Prior
to 2011, all entities were required
to first determine, quantitatively,
the fair value of goodwill annually.
Then, if goodwill was less than
carrying value, a second step would
be required to determine the amount
of impairment. Valuations usually
necessitated the use of an outside
appraiser, which was burdensome for
smaller companies. Furthermore, the
users of their financial statements,
typically lenders, often eliminated
goodwill from their analysis,
anyway.
Accounting Standard Update 2011-08
introduced the option of first
qualitatively assessing whether it
was more likely than not that the
fair value of goodwill was less than
the carrying value. If not, then
there was no need to perform the
costly and often useless valuation.
An express purpose of this amendment
was to address private company
concerns. However, the qualitative
assessment still had to be done
annually, and the calculation of
impairment, if needed, was still
complicated.
The establishment of the PCC
eliminated the difficult task of
attempting to forge standards that
would apply to public and private
companies alike. In some regards,
the tables have been turned. The
private company alternative devised
for goodwill has been so well
received that the FASB is
deliberating whether it should be
extended to public companies.
The private company alternative,
Accounting Standards Update (ASU)
2014-02, Accounting for Goodwill,
allows a private company to elect to
amortize goodwill over ten years, or
a lesser term if appropriate. Under
this election, impairment testing is
required only if a triggering event
occurs, and then can be performed at
the company or reporting unit level.
Also, a simplified method is allowed
for computing the difference between
fair value and the carrying amount.
Sample triggering events include:
1. Macroeconomic conditions like a
deterioration of the general economy
2. Industry conditions like the
competitive environment
3. Cost factors affecting earnings
4. Decline in revenue, earnings or
cash flow
5. Changes in management or key
personnel.
Disclosures required include total
goodwill, amortization period,
current and accumulated amortization
expense and accumulated impairment
loss. If an impairment loss has
occurred, related details, amounts
and determination methods are
required. A tabular reconciliation
of goodwill changes during the year
is not required.
While ASU 2014-02 is expected to
significantly reduce costs in this
area for adopters, companies should
evaluate whether other factors need
to be considered before moving
forward. If a company contemplates
going public at some time in the
future, any current cost savings
from adoption may be more than
offset by the added costs required
to retroactively restate financials
later to meet public GAAP standards.
Also, debt covenants should be
reviewed for conditions that may be
affected.
ASU 2014-02 is effective for 2015,
but may be adopted earlier.
Meanwhile, the FASB is considering
whether to extend applicability of
ASU 2014-02 to public companies and
non-profits. Though no decision has
been made as of yet, four
alternatives are being addressed:
1. Terms consistent with ASU 2014-02
2. Amortization of goodwill with
impairment testing over the useful
life up to a maximum number of years
3. Direct writeoff of goodwill at
acquisition date
4. Nonamortization approach using a
simplified impairment test.
Separately, the FASB is deliberating
whether to simplify, for private
companies, the accounting for
intangibles when initially acquired
in a business combination. A
possibility would generally allow
intangibles to be lumped together
into one goodwill amount, rather
than requiring a potentially costly
analysis to separate the intangibles
into components. This project is at
the discussion and research stage.
Internationally, IFRS for SMEs is
similar to ASU 2014-02, requiring
goodwill to be amortized over its
useful life, with the provision that
if an entity is unable to make a
reliable estimate of the useful
life, then ten years is used. For
full IFRS, IAS 3 has a generally
similar approach to US GAAP, using
nonamortizable fair value subject to
impairment testing. IAS 3 is also
currently under reconsideration.
Interestingly, the UK, through its
new FRS 102 standard will be going
from a maximum 20 year goodwill
amortization period to a 5 year
maximum, when a specific, reliable
useful life cannot be estimated.
For further information, see
FASB
Accounting Standard Update 2014-02 -
Goodwill
Worldwide Update
Roundup of recent and upcoming
actions and activities by audit and
accounting organizations
Periodically, we summarize
significant items impacting the
accounting world.
International
IASB – International
Accounting Standards Board (www.ifrs.org)
- Revenue Recognition:
IFRS 15 - Revenue from Contracts
with Customers - The final
converged standard was jointly
issued with the FASB on May 28,
2014, designed to improve the
financial reporting of revenue and
improve comparability of the top
line in financial statements
globally. A five step process
includes identifying the customer
and the separate performance
obligations, determining and
allocating the transaction price,
and recognizing revenue upon
satisfaction of performance
obligations. Also, on June 3, 2014,
the two boards formed the Joint
Transition Resource Group for
Revenue Recognition (TRG), which
will assist with implementation
issues that arise. Effective
generally for years beginning in
2017. Early adoption is permitted.
See the June 2014 issue of the Audit
& Accounting Alert for a discussion
of this topic
- Charter: The IASB
and other accounting
standard-setters - Working
together to develop and maintain
global financial reporting standards
– updated in May 2014 to reinforce
cooperation between the IASB and the
International Forum of Accounting
Standard Setters (IFASS), consisting
of national and regional accounting
standard setters.
- IAS 16 and IAS 38
amendments – published in
May 2014, establishes that the basis
of depreciation and amortisation
should be the expected pattern of
consumption of the future economic
benefits of an asset, and generally
not revenue-based methods.
- Exposure Draft -
Investment Entities–Applying the
Consolidation Exception (Proposed
amendments to IFRS 10 and IAS 28).
– published in June 2014 to clarify
the application of the requirement
for investment entities to measure
subsidiaries at fair value instead
of consolidating them. Comment
period ends September 15, 2014.
- IFRS 2013 Annual
Report: “Charting progress towards
global accounting standards”
– published in May 2014, highlights
required use of IFRS by more than
100 jurisdictions worldwide.
IFAC – International
Federation of Accountants (www.ifac.org)
- 2013 IFAC Annual Review:
“Delivering on
our Global Advantage”
– published in June 2014, highlights
the impact of a new business model
that supports standards development,
quality and capacity, the global
accountancy profession, and global
representation and advocacy.
- International Ethics
Standard Board for Accountants
(IESBA) Exposure Draft - Proposed
Changes to Certain Provisions of the
Code Addressing Non-Assurance
Services for Audit Clients
– published in May 2014, proposes
changes aimed to enhance the
independence provisions in the Code
of Ethics for Professional
Accountants by 1) providing
additional guidance and
clarification regarding what
constitutes management
responsibility, including enhanced
guidance regarding how the auditor
can gain better satisfaction that
client management will make all
judgments and decisions that are the
responsibility of management, when
the auditor provides non-assurance
services to an audit client; 2)
providing better guidance and
clarification on the concept of
“routine or mechanical” services
relating to the preparation of
accounting records and financial
statements for non-public interest
entity audit clients; and 3)
removing the provision that permits
an audit firm to provide certain
bookkeeping and taxation services to
public interest entity audit clients
in emergency situations. Comment
period ends August 18, 2014.
- International Auditing
and Assurance Standards Board
(IAASB) Exposure Draft -Proposed
Changes to the International
Standards on Auditing
(ISAs)–Addressing Disclosures in the
Audit of Financial Statements
– published in May 2014, proposes to
clarify expectations of auditors
when auditing financial statement
disclosures. The proposals include
new guidance on considerations
relevant to disclosures—from when
the auditor plans the audit and
assesses the risks of material
misstatement, to when the auditor
evaluates misstatements and forms an
opinion on the financial statements.
IIRC - International
Integrated Reporting Council (www.theiirc.org)
- Corporate
Reporting Dialogue (CRD)
was launched in June, 2014. The CRD
is an initiative to promote greater
coherence, consistency and
comparability between corporate
reporting frameworks, standards and
related requirements relevant to
<IR>, leading to improved efficiency
and effectiveness. The CRD brings
together nine organizations that
have significant influence on the
corporate reporting landscape,
including the IASB, FASB,
Sustainability Accounting Standards
Board and Climate Disclosure
Standards Board.
- Unlocking Investment in
Infrastructure-Is current accounting
and reporting a barrier? –
report issued in June 2014,
commissioned by the B20, the
business forum that advises G20
governments, and prepared by the six
largest international accounting
networks. The report identifies
"Integrated reporting principles as
a means by which improved corporate
reporting could be achieved" and
says that the <IR> Framework "has
been designed to achieve a more
holistic view of how value is
created over time by providing more
insight into business strategies,
performance and prospects in
corporate reports."
ACCA – Association
of Chartered Certified Accountants (www.accaglobal.com/)
- Business and investors:
providers and users of natural
capital disclosure – report
issued in June 2014 by ACCA, KPMG
and Flora & Fauna International
calling for “robust reporting on the
management and use of key
commodities including commitments to
reduce impacts on natural capital.”
Key commodity usage covered includes
beef, cotton, palm oil, soya and
sugar. The report links an
organization’s strategy for managing
the use of these commodities with
the impact on the natural world, and
points out the corporate risk
associated with unsustainable use.
- Sustainability
Matters – ACCA Policy Paper
issued in May 2014, setting out ACCA
thinking and the role accountants
have in making organizations more
accountable on six
sustainability-related issues:
sustainability reporting; integrated
reporting; the assurance of
non-financial reporting and
disclosure; climate change; natural
capital and the green economy.
CIMA – Chartered
Institute of Management Accountants (www.cimaglobal.com)
- Accounting for
Natural Capital: the elephant in the
boardroom – report issued
in July 2014 by CIMA, EY and IFAC
“examines the business issues
associated with natural capital
erosion, arguing that action is
needed to account for the growing
risks this poses to business
sustainability.” “Accountants and
finance professionals… have a vital
role to play in helping companies
navigate the challenges and
opportunities which natural capital
depletion will bring. Accountants
have the skills, experience and
oversight to draw out the
connections between natural capital,
commercial opportunity and business
risk, and, ultimately, financial
performance.”
- Building clinical
engagement with costing –
report issued in July 2014, based on
interviews with England’s National
Health System costing and clinical
personnel, assessing the status and
the need that “the clinical and
financial professions must work
together to drive efficiency and
deliver better-quality patient
outcomes. In order to achieve this
goal, greater clinical ownership of
costing information is essential.”
AAA – Americas, Australia & Asia
FASB
– Financial Accounting Standards Board
(www.fasb.org)
- Revenue Recognition:
ASU 2014-09 - Revenue from Contracts
with Customers - The final converged
standard was jointly issued with the
IASB on May 28, 2014, designed to
improve the financial reporting of
revenue and improve comparability of the
top line in financial statements
globally. A five step process includes
identifying the customer and the
separate performance obligations,
determining and allocating the
transaction price, and recognizing
revenue upon satisfaction of performance
obligations. Also, on June 3, 2014, the
two boards formed the Joint Transition
Resource Group for Revenue Recognition
(TRG), which will assist with
implementation issues that arise.
Effective generally for years beginning
in 2017 for public companies and 2018
for private companies. Early adoption is
permitted. See the June 2014 issue of
the Audit & Accounting Alert for a
discussion of this topic
- Development
Stage Entities: ASU 2014-10 -
Elimination of Certain Financial
Reporting Requirements, Including an
Amendment to Variable Interest Entities
Guidance – issued June 10, 2014, removes
all incremental financial reporting
requirements from GAAP for development
stage entities, and adds an example of
how information about the risks and
uncertainties related to current
activities can be disclosed. Also, an
exception for consideration as a
variable interest entity is removed.
Effective generally for years beginning
in 2015.
- Transfers and Servicing: ASU
2014-11 - Repurchase-to-Maturity
Transactions, Repurchase Financings, and
Disclosures – issued on June 12, 2014,
requires the transactions to be
accounted for as secured borrowings,
along with disclosures that reflect the
transferor’s obligations and risks.
Effective generally for years beginning
in 2015.
- Compensation—Stock
Compensation: ASU 2014-12 - Accounting
for Share-Based Payments When the Terms
of an Award Provide That a Performance
Target Could Be Achieved after the
Requisite Service Period - issued on
June 19, 2014, to fill a lack in
specific guidance, providing that a
performance target achievable after the
requisite service period, that affects
vesting, be treated as a performance
condition. Effective generally for years
beginning in 2015, with early adoption
permitted.
- Exposure Draft - Business
Combinations: Pushdown Accounting -
issued April 28, 2014, would allow an
acquired entity to apply pushdown
accounting (a new accounting and
reporting basis) in its separate
financials upon occurrence of an event
in which the acquirer obtains control of
the acquired entity. The comment period
ends July 31, 2014.
- Exposure Draft –
Inventory: Simplifying the Measurement
of Inventory - issued July 15, 2014,
proposes that inventory be measured at
the lower of cost or net realizable
value, as opposed to current GAAP which
requires that inventory be measured at
the lower of cost or market, where
market could be net realizable value,
replacement cost, or net realizable
value less a normal profit margin when
measuring inventory. The comment period
ends September 30, 2014.
- Exposure
Draft - Income Statement–Extraordinary
and Unusual Items: Simplifying Income
Statement Presentation by Eliminating
the Concept of Extraordinary
Items-issued July 15, 2014, proposes to
lower cost and complexity by eliminating
the concept of extraordinary items. The
comment period ends September 30, 2014.
- Financial Accounting Foundation 2013
Annual Report – issued on May 8, 2013,
with the theme, The Road Ahead,
highlights accomplishments, and
addresses future goals to work toward
more comparable global accounting
standards, to provide accounting
alternatives for private companies while
preserving the strength and consistency
of GAAP, and to make the financial
position of governments more transparent
for taxpayers, bond buyers and other
users of financial statements.
AICPA –
American Institute of Certified Public
Accountants (www.aicpa.org)
- Auditing
Standards Board (ASB) –two more
interpretations to Statement on Auditing
Standards No. 122: Clarification and
Recodification, issued in June 2014,
relating to audit evidence, and special
considerations for single financial
statements, and specific elements of a
financial statement. These
interpretations are in response to the
new GASB standards that impact
governmental multiple-employer pension
plans and their participants.
- Enhancing Audit Quality Initiative –
announced in May 2014, represents a
comprehensive approach by the AICPA to
improve monitoring and evaluation of
audit and peer review practices, along
with the development of new tools and
resources in support of members.
Discussion and concept papers detailing
the initiative are expected in coming
months.
- Peer Review Board – Exposure
Draft – Engagement Reviews – Pass with
Deficiencies vs. Fail, issued May 20,
2014, proposes a change whereby when
multiple engagements contain the same
deficiency, but no other deficiencies,
the peer review would result in a fail
report instead of the current pass with
deficiencies report. Comments were due
by July 5, 2014.
PCAOB – Public Company
Accounting Oversight Board
(www.pcaob.org)
- Auditing Standard No.
18, Related Parties, and Amendments on
Significant Unusual Transactions and a
Company’s Financial Relationships and
Transactions with its Executive Officers
- issued on June 10, 2014. The standard
requires specific audit procedures 1)
for the auditor's evaluation of a
company's identification of, accounting
for, and disclosure of transactions and
relationships between a company and its
related parties, 2) to improve the
auditor's identification and evaluation
of significant unusual transactions, and
to enhance the auditor's understanding
of their business purposes, and 3) to
obtain, during the risk assessment
process, an understanding of a company's
financial relationships and transactions
with its executive officers. Effective
generally for years beginning in 2015.
- Staff Guidance for Auditors of
SEC-Registered Brokers and Dealers,
issued on June 26, 2014, to assist with
the transition from GAAS to PCAOB
standards. According to PCAOB Chairman
James R. Doty, "This guidance is
tailored to help auditors of smaller
broker-dealers develop a cost-effective,
scaled approach to their audits."
Effective for fiscal years ending on or
after June 1, 2014.
- Staff Guidance on
Economic Analysis in PCAOB Standard
Setting, issued on May 15, 2014, sets
forth the elements of economic analysis
to be used for setting auditing and
related professional practice standards:
1) describing the need for a rule, 2)
developing a baseline for measuring the
effects of a rule, 3) considering
reasonable alternatives to the rule, 4)
analyzing the economic impacts of the
rule (and alternatives to the rule),
including the benefits and costs.
EMEIA
– Europe, Middle East, India & Africa
EFRAG – European Financial Reporting
Advisory Group (www.efrag.org)
- Classification of Claims – Discussion
Paper published on July 9, 2014,
addresses the distinction between equity
and liabilities on the balance sheet,
including how many elements the claims
on an entity should be classified into,
the objective of classification
requirements and how dilution can be
depicted. Comments requested by October
31, 2014.
FRC – Financial Reporting
Council of the UK (www.frc.org.uk)
- Audit Quality Inspection Reports were
issued in May, 2014, for the Big Four,
as well as the FRC’s annual report. The
annual report noted that, generally,
there had been improvement over the
prior year, with 60% of audits requiring
little or no corrections, including 86%
of FTSE 100 companies. However,
consistency is lacking across all audit
firms, since 15% of audits inspected
required significant improvements.
Audits of banks were specifically cited
as falling below standards, especially
in the area of testing of the provision
for possible loan losses. Also,
continued problems were noted for
“letterbox” companies, those whose
primary operations are outside the
country.
- ‘True and Fair’ Statement –
published June 4, 2014, to emphasize the
fundamental requirement of financial
reporting, in light of the many changes
taking place in accounting standards.
The FRC stated that “In the vast
majority of cases a true and fair view
will be achieved by compliance with
accounting standards and by additional
disclosure to fully explain an issue.
However, where compliance with an
accounting standard would result in
accounts being so misleading that they
would conflict with the objectives of
financial statements, the standard
should be overridden.
- Guidance on the
Strategic Report – published on June 9,
2014, “gives an overview of the various
components of an annual report and
considers where information should best
be placed. It aims to help companies
think innovatively about communication.
The Guidance also encourages companies
to focus on ensuring disclosures are
material, as a key step towards concise
reporting.” The guidance is the first of
several initiatives to assist with new
rules regarding the content of annual
reports.
Additional A&A News
The following links provide a selection of current articles
devoted to highlighting other A&A topics currently making
news.
-
China's audit office plays
powerful but silent role in
anticorruption
-
Just 6% of companies switched
auditors ahead of incoming rules
-
Michel Prada defends IFRS
Foundation governance
-
FASB Chairman's Update
-
The Sterner, Stricter SEC
-
House Hearing Considers Cash
Accounting for Small Biz
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