At-A-Glance
In recent
months, the
United
States and
Europe have
each found
more
cooperation
on
accounting
and audit
matters
within their
own
jurisdictions,
than they
have
internationally,
where they
are often
going in
different
directions.
Our first
article
describes
the formal
first fruits
that have
matured
since
America’s
Financial
Accounting
Standards
Board
established
the Private
Company
Council to
address
longstanding
frustrations
of the
private
sector. A
new
framework
will pave
the way for
distinguishing
financial
reporting
differences
between
public and
private
companies.
Meanwhile,
the European
Union has
given the
green light
on major
audit
reforms for
its members
to follow,
as described
in our
second
article.
Nevertheless,
as can be
gleaned from
our
quarterly
worldwide
update,
international
convergence
on financial
reporting
and auditing
matters is
still a
distant
dream. The
International
Federation
of
Accountants
rightly
expresses
concerns
about the
differences
when, for
example,
mandatory
auditor
rotation is
moving
forward in
the European
Union at the
same time
that the
United
States has
rejected it.
Editor Gerald E. Herter, CPA |
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In This Issue
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FASB and Private Company
Council Attain Milestone
Private Company
Decision-Making
Framework and Definition
of a Public Business
Entity Published
For the past two years,
we have been watching
with cautious skepticism
as the Financial
Accounting Standards
Board tried yet another
tactic to quell the
concerns of the private
company financial
reporting community. The
concerns arose out of
the ever growing cost
and complexity of
applying accounting
pronouncements that were
of questionable
relevance to private
companies. The suspicion
was warranted since
prior efforts by the
FASB fell short in the
attempt to bridge the
gap between the needs of
the public and private
sectors. However, with
the December 23 joint
issuance by the FASB and
PCC of the Private
Company Decision-Making
Framework: A Guide for
Evaluating Financial
Accounting and Reporting
for Private Companies, a
major step has been
taken in demonstrating
that the Board has
gotten the message.
When the PCC was formed
as a quasi-independent
affiliate of the FASB,
the need for a mutually
agreeable set of ground
rules was recognized.
The Framework responds
to that need.
Simultaneously, the FASB
issued Accounting
Standards Update No.
2013- 12, Definition of
a Public Business
Entity: An Addition to
the Master Glossary.
This ASU standardizes
the definition, in order
to clarify the
difference between
private and public
entities for purposes of
the new Framework, as
well as for other
objectives. Generally, a
public entity is one
that publicly files
financial statements,
either with the SEC or
as specified by law,
contract or regulation,
or whose securities are
on an exchange or
over-the counter market.
Employee benefit plans
and non-profits are
excluded from the
definition.
The Framework describes
how the financial
reporting needs of
public and private
companies differ. The
five major differences
are listed as:
- The number of
primary financial
statement users and
their access to
management -
Public companies have a
much larger number of
users, but those users
typically have little
access to management
compared to private
company users.
- The investment
strategies of primary
users - While both
are interested in cash
flow, public company
users have other means
of realizing their
investments, such as
public markets.
- The ownership
and capital structures -
Private companies
have a strong tax focus,
giving rise to
pass-through and related
entities, while public
companies are more
typically C
corporations.
- Accounting
resources - Private
companies often have
more limited and less
sophisticated accounting
resources, and therefore
are less able to take
part in standard
setting, and have less
time and skill to deal
with new standards
- The manner in
which preparers learn
about new financial
reporting guidance -
Public companies have
quarterly reporting
requirements, and
therefore tend to have
continuous education
through the year, while
private companies obtain
education less often,
thereby needing more
time and deferred
effective dates to learn
from public company
efforts.
The Framework also
elaborates on the five
areas where differing
financial accounting and
reporting approaches may
be appropriate for
public and private
companies:
- Recognition and
measurement - Is
current GAAP relevant to
private companies, and,
if so, is it cost
effective? If relevant
but not cost effective,
what alternatives might
be considered? A list of
questions is offered to
aid in analyzing
relevance and cost. The
impact of
industry-specific
guidance is also
discussed.
- Disclosures -
For areas of focus
to typical users,
consider relevance and
cost. A list is provided
of areas where
disclosure alternatives
should not be
considered, such as cash
flow, borrowings,
contingencies and
restrictions,
write-offs, related
parties, and accounting
methods and changes.
- Display -
Presentation of
financial statements in
most cases should be the
same for private and
public companies, but
provision is made for
considering exceptions
or alternatives, such as
the one that already
applies to earnings per
share.
- Effective
dates - Generally
effective dates for
private companies should
be a year later than the
first annual period for
which public companies
are required to comply,
unless there is a
compelling reason for a
shorter or longer
period.
- Transition
method - If
retrospective
application is required
for public companies,
consider whether private
companies can use
prospective application,
or an alternative if
cash, cash flow, EBITDA,
or other important areas
are concerned, or
whether there is
adequate access to
management, or systems
modification
requirements or other
costs are significant.
The FASB subsequently
issued, on January 16 of
2014, the first two
Accounting Standards
Updates that arose out
of the new FASB-PCC
relationship. Accounting
Standards Update No.
2014-02,
Intangibles-Goodwill and
Other Topics, allows
private companies to
amortize goodwill over
ten years or less, and
provides for a
simplified impairment
model. Accounting
Standards Update No.
2014-03, Derivatives and
Hedging: Accounting for
Certain
Receive-Variable,
Pay-Fixed Interest Rate
Swaps—Simplified Hedge
Accounting allows
private companies to use
a simplified hedge
accounting approach for
interest rate swaps that
converts variable-rate
interest payments to
fixed-rate payments.
For further information, see
FASB
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Audit Reforms Coming to European Union
Similar measures blocked in United
States
After several years of negotiations,
representatives of the member states
of the European Parliament in
December endorsed an agreement
calling for significant reforms of
the audit market in the European
Union. After final drafting and
formalities, the new rules are
expected to take effect in the
coming months. The press release
states that “The reform is aimed at
increasing transparency and
confidence in the audit market by
enhancing the credibility of the
audited financial statements of
public-interest entities,” as well
as “facilitating a wider choice of
audit providers,” thereby enhancing
competition. Public-interest
entities include publicly listed
companies, banks, and insurance
companies.
The primary provisions of the
agreement are:
- Mandatory rotation of auditors -
The audit firm will need to be
changed at least every 10 years
unless the audit is put out for
public tender at that time, in which
case the audit firm’s tenure can be
up to 20 years. Additionally, if the
audit is performed by multiple
firms, called a “joint audit,” the
maximum time before mandatory
rotation is 24 years.
- Prohibition and restriction on
the provision of non-audit services
- The audit firm will not be
allowed to provide certain tax,
consultancy and advisory services,
since these could compromise
independence or result in conflicts
of interest. Some of these services
may be allowed by member states if
not material and not directly
related to the audit. For non-audit
services provided that are not
prohibited, fees cannot exceed 70%
of the annual audit fee.
- Cooperation of audit oversight
bodies - The Committee of
European Auditing Oversight Bodies
will be responsible for
administering the law, with
assistance from the European
Securities and Market Authority for
facilitating international
cooperation.
These audit reforms are in response
to the financial crisis of 2008.
When first proposed, as covered in
the February 2012 Audit & Accounting
Alert, mandatory auditor rotation
was set at 6 years, extendable to 9
years for a joint audit. At the
time, Steve Haddrill, CEO of
Britain’s Financial Reporting
Council (FRC), called the proposal
“extremely damaging and threatening
to the quality of audit.” Haddrill
is more conciliatory these days. In
2012, his FRC had devised a 10 year
audit retendering plan. He is
pleased that a similar provision is
now in the EU agreement, and he
accepts the subsequent 20 year
mandatory auditor rotation as “a
good compromise.”
The United States may be headed in
the opposite direction on mandatory
auditor rotation. The Public Company
Accounting Oversight Board (PCAOB)
had considered the soundness of
mandatory auditor rotation in a 2011
concept release and in a series of
roundtables in 2012. However, as
PCAOB Board member, Jay Hanson,
mentioned at the AICPA National
Audit Committee Forum in September,
“we heard that mandatory rotation is
not a good idea. It is hard to
implement and potentially very
costly. Moreover, it is entirely
unclear whether frequent auditor
rotation would improve or harm audit
quality. In my view, it is unlikely
that we will move forward with a
proposal for mandatory auditor
rotation.”
The PCAOB’s position is a practical
one, since the US Congress House of
Representatives passed a bill in
July prohibiting the PCAOB from
doing any such thing as mandatory
auditor rotation. For better or
worse, the Big Four accounting firms
and others wielded their significant
clout in the process.
Nevertheless, there are potential
problems with the EU agreement that
US companies may have to address.
The impact on audits of US
subsidiaries of European companies
and European subsidiaries of US
companies remains to be seen.
For further information, see
Audit Reform EU Press
Release
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 Study on IFRS
adoption – See January 2014
Audit & Accounting Alert for article
describing global expansion of IFRS
to well over 100 countries, but not
including the United States.
- IFRS for SMEs
Comprehensive Review –
Deadline for Comments on Exposure
Draft is March 3, 2014. See article
in November 2013 Audit & Accounting
Alert.
- Revenue
Recognition and Lease Proposal
Status – The proposed joint
IASB-FASB standard, Revenue from
Contracts with Customers, is in
final drafting with planned first
quarter 2014 release. The proposed
joint IASB-FASB standard, Leases, is
being redeliberated in light of
substantial resistance to the
proposal, which would require most
leases to be reported on the
financial statements as assets with
corresponding liabilities, and then
generally have equipment and vehicle
lease costs divided each period
between liability interest expense
and asset amortization, while real
estate lease costs are simply
amortized on a straight-line basis.
Consequently, the timing for
finalization of the proposal is
currently unclear.
IFAC –
International Federation of
Accountants (www.ifac.org)
- IPSASB Publishes
Exposure Draft 54—Recommended
Practice Guideline on Reporting
Service Performance Information
– The International Public Sector
Accounting Standards Board develops
standards for governmental entities.
Providing service is a primary
function for these entities.
- IFAC Calls for
Renewed Focus on Global Regulatory
Convergence to Advance Sustainable
Economic Recovery – As the
global body representing the
profession, IFAC “reiterated its
call on global policymakers to
refocus on regulatory convergence,
and said their failure to do so is
stifling business confidence,
economic stability, and ambitions
for a sustainable recovery.” IFAC
decried the continued instances of
countries going their own way on
specific issues of financial
reporting and auditing.
- The IAASB’s
Proposed Strategy for 2015–2019 and
Proposed Work Program for 2015–2016
– The International Auditing and
Assurance Standards Board proposal,
titled Fulfilling our Public
Interest Mandate in an Evolving
World, states the following
objectives: 1) develop and maintain
high-quality ISAs that are accepted
as the basis for high-quality
financial statement audits; 2)
ensure the IAASB’s suite of
standards continues to be relevant
in a changing world by responding to
stakeholder needs; and 3)
collaborate and cooperate with
contributors to the financial
reporting supply chain to foster
audit quality and stay informed.
Comments are requested by April 4,
2014.
- IAESB Proposes
Revised Standard, IES 8, on
Professional Competence of the Audit
Engagement Partner –
Proposal calls for “learning
outcomes that engagement partners
need to demonstrate in areas
relating to technical competence,
professional skills, and
professional values, ethics, and
attitudes. As the career of an
engagement partner progresses,
practical experience also becomes
increasingly important in
maintaining and further developing
the necessary depth and breadth of
professional competence.” Comments
are due by April 17, 2014.
IIRC -
International Integrated Reporting
Council (www.theiirc.org)
- Integrated Reporting
Framework Released – on
December 9, 2013. See article in
January, 2014 Audit & Accounting
Alert. As the Framework states: “The
primary purpose of an integrated
report is to explain to providers of
financial capital how an
organization creates value over
time.” the Framework sets out
guiding principles and content
elements for development of the
report.
- Memorandum of
Understanding – between
IIRC and the Sustainability
Accounting Standards board signed
December 17, agreeing to cooperate,
with the IIRC developing a framework
for integrated reporting and the
SASB developing industry-specific
sustainability standards that will
be mutually compatible.
ACCA –
Association of Chartered Certified
Accountants (http://www.accaglobal.com/)
- Big data: its power and
perils – Report issued in
conjunction with the Institute of
Management Accountants in November
to assess the opportunities and
challenges for the accounting
profession over the next 5 to 10
years in working with Big data.
Though the transition will not be
easy, the report states that “Big
data can offer accountants and
finance professionals the
possibility of reinvention, the
chance to take a more strategic,
‘future-facing’ role in
organizations.”
AAA – Americas, Australia & Asia
FASB – Financial
Accounting Standards Board (www.fasb.org)
- FASB and PCC Issue
Private Company Framework; FASB
Issues Definition of Public Business
Entity – See first article
above.
- FASB issues
Accounting Standards Updates on
Goodwill and Interest Rate Swaps
See first article above.
- Revenue
Recognition and Lease Proposal
Status – See IASB above.
AICPA – American
Institute of Certified Public
Accountants (www.aicpa.org)
- Accounting and Review
Services Committee (ARSC) –
issued proposal for reporting on
compilation and review engagements
that would redraft standards to use
the same structure and conventions
that have been adopted by the
Auditing Standards Board out of the
clarity project.
PCAOB – Public
Company Accounting Oversight Board
(www.pcaob.org)
- Report on Implementation
of Auditing Standard on Engagement
Quality Review – issued in
December describing issues noted in
inspections concerning Auditing
Standard No. 7. See PCAOB article in
January, 2014 Audit & Accounting
Alert
- PCAOB Reproposes
Amendments to Improve Transparency
by Requiring Disclosure of the
Engagement Partner and Certain
Participants in the Audit -
See PCAOB article in January, 2014
Audit & Accounting Alert
- Dodd-Frank
Conforming Amendments for
Broker-Dealer Audits and Certain
Other Updates and Clarifications
approved– The amendments
insert references to audits and
auditors of broker-dealers in
relevant PCAOB rules, and call for
broker-dealer audit client
information on the PCAOB's
registration, withdrawal, and
reporting forms. The amendments also
require that registered firms that
audit broker-dealers comply with
certain of the PCAOB's professional
practice standards; update a number
of PCAOB rules and forms based on
the PCAOB's experience administering
and enforcing PCAOB rules; and make
certain updates to the Board's
ethics and independence
requirements.
SEC
- Staff Report on Review
of Disclosure Requirements for
Public companies – issued
December 20 as required by the 2012
JOBS Act, recommending that SEC
disclosure rules be evaluated to
determine how to make them more
effective and efficient for
companies and investors. The SEC
will coordinate with the FASB as
part of the process.
Europe, Middle East, India & Africa
EFRAG – European
Financial Reporting Advisory Group
(www.efrag.org)
- Research Paper: The Role
of the Business Model in Financial
Statements – issued
December 18 in conjunction with the
FRC, promoting greater use of the
business model concept in the
Conceptual Framework. “The business
model provides insight into how
value is captured and net cash flows
generated through income in the
normal course of a business.” The
impact of the business model should
be considered when setting
standards.
FRC – Financial
Reporting Council of the UK (www.frc.org.uk)
- Review of Conceptual
Framework – response issued
in January commends the IASB in many
areas, while encouraging a return to
the use of the terms prudence,
stewardship and reliability as
necessary concepts, as well as
further discussion of the
measurement of assets and
liabilities.
- Proposed Update to
Reduced Disclosure Framework (FRS
101) – issued December 17,
proposing simplification of
disclosures in reporting impairment
of assets and the international
accounting practice for investment
entities.
- Audit Quality
Thematic Review - Materiality
– report issued December 16
requiring “greater focus by auditors
on the needs and expectations of
users in setting and revising
overall materiality levels and for
audit committees to seek to better
understand the related judgments
made by auditors.”
- FRED 52: Draft
Amendments to the Financial
Reporting Standard for Smaller
Entities - Micro-entities –
issued December 10, “allow
micro-entities taking advantage of
the new legal provisions, which
permit reduced disclosure, to
continue to apply the accounting
principles of the FRSSE.”
EP
– European Parliament (http://www.europarl.europa.eu/)
- Agreement on the reform
of the audit market– See
article above.
Additional A&A News
The following links provide a selection of current articles
devoted to highlighting other A&A topics currently making
news.
-
UK Top 50 Audit analysis:
Squeezed until the pip squeaks
-
PCAOB Works to Reduce
Remediation Backlog
-
Task Force Urges Reforms in
State Financial Reporting
-
SEC charges Diamond
Foods over nutty accounting
-
Private-company GAAP
alternatives could unlock
savings
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ICAEW joins green coalition
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