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Audit & Accounting Alert Newsletter

Issue 2 | March 2012


Gerry Herter

Parallel struggles proceed in the world of accounting standards at the snail’s pace the profession is known for. Small versus large and local versus global characterize the challenges in the march towards universal standards that are both relevant and credible for all interested parties. We start this issue with an article that highlights the debate in the US over separate standards for smaller companies as opposed to one-size-fits-all. Then we turn to the status of international standards, where the US appears to be the laggard. Finally, we look at how the world is dealing with the lofty goal of marrying these two struggles by way of IFRS for SMEs.

Editor Gerald E. Herter, CPA

In This Issue 

Private Company Financial Standards

The Ongoing Saga

For several decades, the vast majority of CPA firms have clamored for standards that are relevant and practical for their private clients. Yet once again this past October, after an extensive process with widespread input, the Financial Accounting Foundation (FAF), parent body of the FASB, rejected the call. A blue ribbon panel’s recommendation for a new authoritative body for private company standards was turned aside for the establishment of a council subject to the FASB.

Recognizing the failure of a previous attempt to address this issue through the formation of the Private Company Financial Reporting Committee (PCFRC) in 2006, FAF along with the AICPA and NASBA set up the broad based eighteen member panel to study and report back. As if to hedge their bets, the FAF at the same time had their all-powerful FASB implement specific measures designed to give attention to previously marginalized private company stakeholders. These efforts eased the board’s way for rejecting the panel’s advice, by inferring that the issue had been satisfactorily addressed by a supposedly more responsive FASB.

In fairness, recent tangible efforts by the FASB to consider the plight of private companies were evident in the updated standard on testing for Goodwill Impairment, a new project to consider easing disclosure requirements for fair value measurement, and attention to simplified disclosures and testing exceptions in the revenue recognition deliberations.

Going even further, a Senate sub-committee in January expressed opposition to all changes in the status quo, even challenging the formation of the FASB proposed council, fearing the undermining of GAAP, reduction of financial transparency, conflicts with international standards, and complicating accounting practices.

However, speaking for many AICPA members, President Barry Melancon in October stated: "Without an autonomous board with standard-setting authority, we end up with nothing more than a continuation of what we’ve already had that didn’t work. The proposed process, with FASB veto power at its core, is what we have today.”

The FAF allowed for a comment period (ended in January) on the proposed FASB controlled Private Company Standards Improvement Council (PCSIC). Well over 6,000 responses were received, most echoing the AICPA position specified by Melancon.

A series of four roundtables around the country took place from January through March 1. From listening to parts of the first roundtable in Atlanta, I found that proponents from the two sides of the issue sound eerily like major political parties, hopelessly at odds, while the usefulness of CPA-reported-on financial statements continues to decline, in favor of other data that users find more pertinent to their needs. Hopefully after the roundtables, the FAF will give further consideration before imposing a divisive plan that further polarizes the profession. A compromise measure is attainable that, while not totally satisfying to either side, would address the concerns of major stake holders.

For further information, see Plan to Establish the Private Company Standards Improvement Council

IFRS: Adoption, Convergence, Condorsement?

The World Waits on the USA

The International Accounting Standards Committee was founded in 1973 for the purpose of establishing and promoting worldwide accounting standards. Sensing a need for a more credible and specific focus, in 2001 the IASB took up the cause, pushing for a single enforceable set of standards that all countries would follow.
After almost 40 years of effort, where does this noble endeavor stand today? Over 120 countries now require or permit IFRS in some format. However, the proverbial elephant in the room is the USA, which still has not weighed in on its final plan. At the Integra International World Meeting in Melbourne last October, Integra AAA president, and A & A guru, Steve Austin predicted a major announcement on IFRS in early December by the SEC. Sure enough, the announcement came. Unfortunately, the decision was in effect to “kick the can down the road.”

To help put in perspective the status of IFRS, the various alternatives should be clarified. Adoption, or endorsement, means that a country accepts IFRS fully without modification. Convergence is where a country harmonizes its own GAAP standards to agree with IFRS over a period of time. Condorsement, a term coined in 2010 by SEC Deputy Chief Accountant, Paul A. Beswick, is a hybrid of the other two alternatives. Under condorsement, a country has its own GAAP in place at a given point in time and agrees that all IFRS issued from that point forward will be adopted without modification. Meanwhile, the country’s remaining GAAP is gradually converged with IFRS, standard by standard.

While the SEC in early 2010 had indicated that a determination on IFRS could come “as soon as 2011,” SEC Chief Accountant, James L. Kroeker, on December 5, 2011, quantified the timeline as “a few additional months” for the staff “to produce a final report.” A recommendation of “an approach for Commission consideration” would also be forthcoming. While Kroeker is highly enthusiastic about the progress made thus far, he stressed that the key issues of assuring both high quality standards and a vital ongoing role for the United States in setting and enforcing the international standards were more important than timing of a decision. Mary Shapiro, SEC Chairman, recently echoed the concern for reaching a satisfactory outcome rather a quick one.

For the IASB take on where the US stands, IASB chairman, Hans Hoogervorst, noted at a January seminar in Moscow that the if, when and how of the US with respect to IFRS, was the question he was most often asked. While acknowledging the complexities facing the US in this decision, he emphasized that “both I and my counterpart at the FASB have made it clear that a continued program of convergence by another name is not an acceptable way forward. I do believe that the US will ultimately come on board. Quite simply, they need us and we need them.” He seemed to be alluding that a US approach that continued to make exceptions to established IFRs pronouncements should not be sanctioned. However, many of the countries that are already using IFRS in some form have modifications specific to their own needs.

Another voice from the financial world, the Fitch rating service, in its annual commentary, agreed that the US would eventually embrace IFRS, but that the decision would not come easily. Also, some form of condorsement was considered the only approach that could succeed.

This brief summary just scratches the surface of the struggle toward universal standards. Stay tuned as this worldwide dance continues over the coming months.

For further information, see IASB Chairman Speech on Global Standards


Relief for Small Companies?

While the US grapples contentiously with accounting standards for public and private companies, the IASB has answered the plea from countries around the world for a robust set of pronouncements paralleling IFRS that smaller entities can apply. But the call for a mini-IFRS does not carry the level of urgency that IFRS for public companies does. Many smaller companies have no need to tap into the world’s capital markets. Typically, countries already have local accounting standards in place that serve the needs at this level.

IFRS for SMEs, released in 2009, would appear to appeal to companies that have relationships outside of their national jurisdiction, or plan to move into the public arena. These standards are “built on an IFRS foundation” according to IASB Board member Paul Pacter’s update to the European Financial Reporting Group in January. He indicated that over 70 countries have adopted IFRS for SMEs or plan to do so.

Along with simplifying the full IFRS principles, the SME version eliminates irrelevant sections, reduces required disclosures and limits modifications to once every three years. An example of relevancy is the smaller company focus on short-term cash flows, liquidity, and solvency, as opposed to the public company emphasis on earnings per share and longer term forecasts.

To further facilitate the move to IFRS for SMEs, the SME Implementation Group (SMEIG) was formed in September 2010 to assist, by way of a series of questions and answers (Q&A). Three Q&A’s have been issued with seven more under consideration. The issued Q&A’s primarily clarify whether or not a company is a public entity, for purposes of determining if IFRS for SMEs can be used. The draft Q&A’s cover other issues, such as defining terms that indicate when exemptions from requirements are allowed, when full IFRS can be used where the SME standards are silent, and dealing with departures from IFRS for SMEs. A full review of IFRS for SMEs is scheduled for 2012.

Though the Blue Ribbon Panel, mentioned in the earlier article on Private Company Standards, does not favor IFRS for SMEs, the AICPA has provided endorsement and considers IFRS for SMEs acceptable as a form of GAAP in the US. Before employing this set of standards, a company would want to assure that the users of its financials approve, as well as the local state’s accountancy board. If so, these standards may well be easier to apply than traditional US GAAP. However, the cost of converting to IFRS for SMEs needs to be considered, also.

The current state of affairs invites confusion, with the US allowing alternative versions of GAAP. In Great Britain, a current proposal has large companies required to use IFRS, middle tier companies required to use IFRS for SMEs, and micro-companies no larger than about $1 million in revenue and $500 thousand in assets allowed to continue with yet another set of Financial Reporting Standards for Smaller Entities (FRSSE). Extrapolating the US and UK approaches to the rest of the world leads to the conclusion that, on an international basis, standards for non-public entities are much further from universality than even their public counterpart.

For further information, see IFRS for SMEs

Additional A&A News

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

  1. Foot-Dragging on IFRS Decision Could Strip SEC of Power
  2. Canadian Bank IFRS Transition Was Easy Sailing
  3. PCAOB Penalizes E&Y $2million for Audit Failure
  4. Private Equity Industry Attracts S.E.C. Scrutiny
  5. FASB and Japan Accounting Standards Board Meet
  6. Groupon CFO Defends Use of Non-GAAP Measures
  7. Congress Considers Impact of Accounting on Tax Reform
  8. Snack CEO Ousted in Accounting Inquiry

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]