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Audit & Accounting Alert Newsletter

Issue 9 | December 2012


Gerry Herter

 With the United States SEC having taken a step back from IFRS consideration during the election season, the IASB put the ball right back in the SEC’s court, with a detailed response to the SEC staff’s July report. The IASB staff made their case for the importance of moving forward, agreeing with the SEC in some cases and offering strong rebuttal in others. Our first article covers the main points in these ongoing exchanges.

Recognizing the importance of this development, Integra International Global Board members, Mark Saunders and Steve Austin, as announced at Integra’s World Conference in Madrid, met with a senior member of the IASB staff in London on November 1st, shortly after the release of the IASB response. Both Integra Global Board members walked away with a much better understanding of the current status of the IFRS process, and of the remaining challenges faced by the IASB, as global standard setting adoption moves toward completion while at the same time addressing concerns raised by the SEC. The Global Board members were also able to invite the IASB representative to serve as our keynote Speaker at Integra’s Bristol England EMEIA conference in June 2013.

 Realizing that IFRS in any form will not be practical for many smaller companies, the AICPA presented a simplified financial reporting framework blending accrual and US-tax-based principles, as highlighted in our second article.

Finally, even as IFRS gains acceptance, the goal of worldwide comparability in financial reporting will only be realized if the technology tools are in place for accurate and uniform implementation. Our third article describes the status of some of these endeavors.

Editor Gerald E. Herter, CPA

In This Issue 

IFRS: Moving Forward or Backward?

International Board Weighs in on SEC Staff Report

The Worldwide movement toward global accounting standards has received broad coverage in this publication during 2012. As evident from the discussions concerning leases, revenue recognition and financial instruments, the myriad of challenges and controversies surrounding IFRS have led to further delays and uncertainties. Consequently, the lack of a definitive recommendation by the SEC staff in its July report, while disappointing, should not have been a surprise.

After careful consideration of the SEC report, the IFRS Foundation staff published a response at the request of their Trustees that evaluated the report from an international perspective, and sought ways to enhance the Foundation’s work, taking into account academic research and results from other jurisdictions.

The 85 page document analyzes the SEC’s take on:

  1. the functioning of the IASB as a global standard setter,
  2. IFRS as global accounting standards,
  3. transitional challenges of adoption and endorsement of IFRS, and
  4. other jurisdictional challenges involving regulations, investors, entity size, people readiness, and cost. 

1) The functioning of the IASB as a global standard setter

While the SEC staff felt that from a governance standpoint, there is a reasonable balance between oversight and independence of the IASB, the US may still need its own means of protecting US investors and capital markets with regards to the impact of future pronouncements. The IASB staff reiterated several substantive steps that have been taken over eleven years to assure independence.

The SEC staff questioned funding. Since the IFRS Foundation cannot compel financial support, the SEC staff contends that the IASB relies heavily on the large public accounting firms, along with less than 30 of the more than 100 countries that use IFRS. The IASB staff countered that 69 countries financially support the IFRS Foundation, and that the US financial contribution is far less than its size and representation would call for.

The SEC staff reviewed favorably the comprehensiveness of the IASB standard setting process, which the IASB staff appreciated and further noted that its Due Process Oversight Committee provided additional assurance that the process was following the prescribed framework in an independent manner.

2) IFRS as global accounting standards

Both SEC and IASB staff acknowledged the high quality of standards issued as US GAAP and IFRS. The SEC staff emphasized the number of differences that still exist, while the IASB staff noted how much less the differences are than when the convergence process began a decade ago. However, frustrations have grown over this lengthy period, straining relations between the IASB and FASB. They now each appear to be going their separate ways in finding solutions for remaining differences, which could serve to unravel the gains that have been attained.

US GAAP has extensive industry-specific guidance, most significantly for utilities that engage in rate-regulated activities, oil and gas, investment companies and broker-dealers. The IASB opposes industry-specific guidance as adding unnecessary complexity and potential conflicts. Also, the SEC is accused of contradicting its earlier commissioned report that recommended elimination of industry-specific guidance.

The need for more timely IFRS interpretations was agreed to, as had been noted to the IASB in a prior Trustees’ review. The recommendations of that review have been implemented according to IASB staff.

The SEC staff recommended that the IASB expand the work it already does with national standard setters, to have greater involvement in standards development and implementation. Responding to a similar recommendation from the prior Trustees’ review to formalize these relationships, an Accounting Standards Advisory Forum is being formed. The IFRS Foundation recently issued an Invitation to Comment on a proposal for the Forum.

Both staffs recognize the importance of consistent enforceability in order for a global IFRS to be effective. While clear, understandable standards are a start, the authority for enforcement lies with the individual countries. Therefore, cooperation between national regulatory agencies will be critical for success.

3) Transitional challenges of adoption and endorsement of IFRS

The IASB staff affirmed that the method and timing for individual countries to make the transition to IFRS was for each country to decide based on its own circumstances. The SEC staff discussed the pros and cons of a “big bang” method, versus a gradual transition, versus an indirect incorporation approach to IFRS. These alternatives were considered from the standpoint of regulators, preparers and users of financial statements, taking into account the cost, knowledge and awareness, legalities and availability of resources.

Having taken so long to arrive at this juncture, the SEC has the benefit of learning from the experiences of the over 100 countries that have gone through the process of changing over. The IASB staff spells out some of the methods and results. Fast or gradual transitions can work, but the IASB staff feels that a piecemeal or standard-by-standard approach may be more costly and problematic over the long run, since the lack of comparability and the need for reconciliation between standards will continue for an extended period, leading to confusion and misunderstanding.

4) Other jurisdictional challenges involving regulations, investors, entity size, people readiness, and cost.

The SEC staff reported the concern of various industry regulators that have specific financial reporting needs that are not envisioned in IFRS. Acknowledging that this concern is not limited to the US, the IASB staff presented examples from Brazil, the European Union, Australia, and Canada to describe how they have dealt with these regulatory issues. Similarly, differences between tax and financial reporting have been addressed in various countries, and can be in the US as well.

Investor preparation for a change to IFRS is a concern throughout the world. Institutional investors tend to be more familiar with the prospect of IFRS than the small, private investors. Time and education are called for in order to equip the investment community for the ramifications that come with a move to IFRS. The IASB has an Investor Liaison Programme set up to provide resources for investors, as well as various committees and councils to provide ongoing connections to the investor community.

Addressing company size and cost, the IASB staff indicated that the experience with the 120 or so countries that have required IFRS has not found the cost to be prohibitive or problematic, as the SEC staff suggest. Similarly, finding and preparing the human resources needed to accomplish the transition also has not been a significant problem in other countries.

Finally, the IFRS Foundation commissioned an academic study to quantify the benefits that have accrued from adopting IFRS. Generally, that study found that capital markets benefitted in the areas of market efficiency, investment decisions, quality of financial information, foreign investment, capital market integration, and development of the infrastructure to support IFRS.

For further information, see Trustees publish IFRS Foundation Staff Analysis of SEC Final Staff Report on IFRS

AICPAs Unveils New Financial Reporting Framework for SMEs

Exposure Draft would free companies from GAAP complexities

This past month, the AICPA made good on President Barry Melancon’s earlier declaration that a new resource would be forthcoming to provide long sought relief for smaller companies. With the continued trend toward standards that bear less and less relevance, coupled with unimaginable complexity for all but the largest companies, the AICPA could no longer stand idly by, but had to respond to the calls from the multitude of its constituents and their clients.

The Exposure Draft, Financial Reporting Framework for Small-and Medium-Sized Entities (FRF for SMEs), was issued for comment on November 1. No lightweight endeavor, the ED weighs in at 252 pages and will be available for review through January 30, with a final release expected in the second quarter of 2013. Developed by a task force drawn from CPAs and AICPA staff experienced in the SME arena, the FRF for SMEs presents a comprehensive resource, substantial portions of which are drawn from the Canadian Institute of Chartered Accountants’ CICA Handbook.

Though the FRF for SMEs will not be authoritative, the AICPA is hopeful that it will gain wide acceptance from preparers and users who do not require GAAP or IFRS reporting standards. FRF for SMEs will be considered a “special purpose framework” (SPF), the term that replaces “other comprehensive bases of accounting” (OCBOA). Using historical cost as the basis, the AICPA states that “familiar traditional accounting and accrual tax accounting principles will comprise the FRF for SMEs and only financial reporting topics that are pertinent and have meaning to most SMEs and their financial statement users will be included.”

While not specifically defining SME, the FRF for SMEs is targeted at owner-managed entities whose financial statement users “have direct access” and where “the owner-managers rely on a set of financial statements to confirm their assessments of performance, and of what they own and what they owe, and to understand their cash flows,” according to the AICPA’s list of Frequently Asked Questions.

The FRF for SMEs approach follows the common sense accounting that prevailed prior to the myriad of complexities of recent decades. Fair value accounting, variable interest entities, other comprehensive income, and similar modern concepts are left behind. Leases, goodwill, and inventory, for example, can follow methods allowed for tax purposes, to minimize differences between financial statements and tax returns. The general idea is to record economic transactions when they occur and follow the matching concept. Disclosures are reduced to presenting only the relevant and understandable. The framework is principles based so that preparers will still need to exercise judgment in its application. However, FRF for SMEs is not to be confused with IFRS for SMEs, since FRF for SMEs is intended to be more focused on the needs of U.S. companies, will be more tax friendly, and hopefully better understood, since it is not tied to GAAP.

The AICPA is hopeful, that by exposing the FRF for SMEs for public comment, the process will instill credibility. Also, the expectation is that changes will be infrequent, enhancing the sense of stability. Three or four years are expected to pass prior to considering any significant changes. A companion volume is in the works to provide examples, checklists and other tools.

For further information, see Financial Reporting Framework for Small-and Medium-Sized Entities

The Role of Technology Tools in Global Accounting Standards Implementation

XBRL, ADS, CA/CM continue to evolve

The logistics of implementing global accounting standards has not received nearly the attention as the debate over concepts. But the ultimate success in attaining comparable financial reporting across continents will depend as well on the effectiveness of the technology tools in place to accurately reflect the standards. Some of the tools in various stages of development are eXtensible Business Reporting Language (XBRL), Audit Data Standards (ADS), and Continuous Auditing/Continuous Monitoring (CA/CM).

XBRL is basically a standardized method of converting financial statement information into a computerized language format that can be accessed, sorted, processed and then returned to a readable format in order to facilitate analysis and comparison to similar information from other companies or established benchmarks and evaluation tools. Specific items of financial data are identified by “tags” that are drawn from a standard dictionary, called a “taxonomy.”

XBRL has been in development for about 15 years, with significant support from the AICPA. It has matured to the point that all U.S publicly traded companies are required to report their financial statements to the SEC in XBRL format. However, the development of XBRL for companies issuing IFRS based financial statements is further behind, and consequently, has not yet been approved by the SEC or the European Union for filing purposes. The delay may have to do with different perceptions of responsibility between the SEC and the IFRS Foundation, and the fact that the GAAP taxonomy has over 15,000 tags, which is about four times the number currently found in the IFRS taxonomy.

A concern with XBRL is the proper tagging of data, so as to produce correct, usable results. SEC studies have shown a frequency in errors. Some data may not have been tagged, or was given the wrong tag, or the tag was inconsistently applied. To address the problem, a new Technical Practice Aid, AICPA Principles and Criteria for XBRL-Formatted Information, provides guidance for designing and maintaining XBRL files. Also, the AICPA SOP 09-01, Performing Agreed-Upon Procedures Engagements that Address the Completeness, Accuracy or Consistency of XBRL-Tagged Data, originally issued in April 2009, is being updated to track with the new Technical Practice Aid.

While the AICPA’s Assurance Services Executive Committee (ASEC) tackles the XBRL issues through its XBRL Assurance Task Force, a related endeavor directed at the audit process is the focus of ASEC’s Emerging Assurance Technologies Task Force. This task force established the Audit Data Standard Working Group, which according to the AICPA is “to help develop new technologies that will contribute to the effectiveness, timeliness, and efficiency of the audit process.” In July, the Audit Data Standard Exposure Draft was issued with the specific purpose “to establish a standardized data model… that management, as well as internal and external auditors could utilize for enhanced analytics that would contribute to the timeliness and effectiveness of the audit process. The challenges that auditors face, in the effort to obtain needed data in an automated technology environment, are addressed by offering a detailed set of uniform structures for data that both IT and accounting personnel can jointly work from.

The comment period for the Exposure Draft has ended. A sampling of comments has the New York Society of CPAs supportive with some suggested changes, while the Pennsylvania Institute of CPAs feels that acceptance will be lacking, since the cost of implementing would fall on audit clients.

Taking a look back and forward, an October AICPA white paper explores the status and prospects of CA/CM, Continuous Auditing and Continuous Monitoring. This topic had been introduced by the AICPA in 1999. The current study indicates that while not much has been done in this area since 1999, the potential is even greater now. The concept is to move away from traditional auditing techniques, which focus on sampling and that take place after the fact, and evaluate data as it is produced and by monitoring that data throughout the year.

The reality today that can have an impact on the future of CA/CM is the advent of “Big Data.” Big Data is the immense wealth of data that is generated daily by a multitude of sources, and the technological capabilities to “slice and dice” that data in increasingly sophisticated ways, all at a breathtaking pace. No need to sample. All of a company’s data are put in the mix, and trends, ratios, unusual occurrences and exceptions are exposed for immediate evaluation, on an ongoing basis.

What is obvious in all the technologies described in this article, is the increasing need for more and better trained professionals who can use these new and developing tools to best advantage.

 For further information see AICPA Resources for XBRL, ADS and CA/CM

Additional A&A News

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

  1. Women on Corporate Boards Encourage Better Financial Reporting
  2. Credit raters, regulators failed MF Global
  3. U.S. sees talks with China on audits 
  4. Diamond Foods: When Accounting Goes Wrong
  5. Emergence-of-social-stock-exchanges-and-other-market-drivers-of-sustainability
  6. KPMG conducted due diligence of Deloitte audit at Autonomy

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: [email protected]