At-A-Glance
With the
prospects of
a single set
of worldwide
financial
reporting
standards no
longer a
priority,
the FASB and
IASB are
moving
forward, but
not always
on the same
path.
Displaying
solidarity
for the new
monumental
revenue
accounting
standards,
the
IASB/FASB
Joint
Transition
Resource
Group has
begun work,
as has the
AICPA.
Initial
efforts are
summarized
in our first
article.
In contrast
to those
efforts,
long,
protracted
attempts to
converge
lease and
financial
instrument
reporting
have found
the two
boards
parting
ways. Our
second
article
reports that
while their
individual
approaches
move in
similar
directions,
the results
are
different.
Finally, in
our third
article we
return to
the ongoing
push for
enhanced
audit
quality.
With
initiatives
from several
sources
targeting
the audits
of public
companies,
the AICPA
has turned
its
attention to
private
companies,
with a new
discussion
paper
addressing
both
auditors and
their peer
reviewers.
Editor Gerald E. Herter, CPA |
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In This Issue
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Revenue Recognition Standard
– Early Issues and Resources
The long rollout begins
After taking fourteen
years to reach agreement
about revenue
accounting, the FASB and
IASB anticipated that
questions would arise,
even allowing for three
years prior to
implementation.
Elimination of the
multitude of detailed,
industry-specific rules,
will also add to the
challenge. Consequently,
a joint Transition
Resource Group (TRG) was
established to assist
with addressing issues
as they arise. Also, the
AICPA has moved quickly
to create an online
presence of helpful
implementation resources
within its Financial
Reporting Center.
The new standard is
technically not
effective until 2017 for
public companies and
2018 for nonpublic
companies. However, if
full retrospective
application is elected,
years as early as 2015
will need to be
presented on a
comparative basis in the
year of adoption.
The aids on the AICPA
website can facilitate
the transition. Task
forces for sixteen
industries have been set
up to coordinate
discussions of
application issues, as
well as to develop new
industry-specific
accounting guides. Along
with links to articles
and educational
opportunities, the
following documents are
now available:
- Financial
Reporting Brief: Roadmap to
Understanding the New
Revenue Recognition
Standards -provides
guidance that follows the
five step process of the
revenue recognition model,
and describes the minor
differences from IFRS 15.
- New
Revenue Recognition
Accounting Standard—Learning
and Implementation Plan
- is a detailed roadmap of
what needs to be
accomplished, and when,
along with references to
other resources that can be
employed.
- Brief:
Revenue Recognition Primer
for Audit Committees
- is a short summary of
considerations for audit
committees.
- Financial
Reporting Brief: Tax Effects
of ASU 2014-09 -
while not having all the
answers yet, provides a list
of questions and areas that
companies should be looking
at, as well as the
possibility of requesting a
change in the tax accounting
method to conform more
closely with the standard.
Meanwhile, the TRG will
seek out, consider and
discuss implementation
issues, but will not
release authoritative
interpretations on its
own. If needed, the FASB
and IASB will act on
implementation matters
requiring additional
attention.
The TRG held its first
meeting on July 18,
2014. The four main
issues presented at this
meeting were:
- Gross versus net
revenue
- Gross versus net
revenue: amounts billed to
customers
- Sales-based and
usage-based royalties in
contracts with licenses and
goods or services other than
licenses
- Impairment testing
of capitalized contract
costs.
Discussions on these
topics centered around
the following:
- The gross versus net
revenue issue has to do with
whether the entity is a
principal or agent with
regards to the goods or
services provided. For items
such as gift cards or video
gaming, questions arise as
to what extent the principal
or agency relationship
applies, how to allocate the
transaction price in mixed
situations, and how to
gross-up net amounts.
- Certain amounts
billed to customers, such as
shipping and handling fees,
reimbursements of other
out-of-pocket expenses, and
taxes or other assessments,
may or may not be included
in the transaction price,
depending on whether they
are collected on behalf of
third parties.
- Royalty contracts
that bundle licenses with
other goods or services,
such as training, support or
equipment, need
clarification as to when and
how to apply the royalty
revenue.
- Where renewal or
extension periods are part
of a contract, the question
was presented as to whether
the revenue expected from
such periods should be
considered in the impairment
testing of the capitalized
costs.
The next meeting of the
TRG is scheduled for
October 31, 2014.
Between now and then,
the FASB and IASB will
be informed of the
discussions on the above
issues, and may or may
not have further input
on them at that time.
Other issues that have
arisen in the meantime
will also be considered
for discussion at the
October meeting.
For further information, see
FASB and IASB Joint
Transition Resource
Group for Revenue
Recognition
and
AICPA Revenue Accounting
Resources
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Leasing and Financial Instruments: Where
Convergence Failed
Conceptual agreement thwarted by
methodology
As was the case with revenue
accounting, the IASB and FASB
struggled for years to work out
their differences when reforming
lease and financial instrument
accounting. But while consensus
triumphed in the former, frustrating
divergence has been the result with
the latter. However, since both
boards agree on the overarching
goals in each case, that commonality
may prove beneficial in the long
run, despite the impact of the
differing methodologies.
A key objective in lease accounting
reform was to reflect most leases on
the balance sheet, showing both the
asset and the related liability,
rather than have this information
relegated to the footnotes, as is
currently done. Both boards will
accomplish this goal, while also
agreeing to exempt lease of 12
months or less. But their currently
proposed models for achieving the
objective, and the corresponding
profit impact, will differ.
The FASB has thus far retained the
proposed two model approach for
lessees that both boards had
embraced in the 2013 exposure draft.
Under this approach, leases, which
current accounting considers capital
or purchase leases, would have the
right-of-use portion of the balance
sheet asset amortized as an expense
using a straight line basis. The
financing portion of the balance
sheet liability would produce a
separately reported interest
expense. Leases currently considered
operating leases would have the
periodic lease costs amortized as a
single expense using a straight-line
method.
The IASB approach considers all
leases the same, using a one model
approach. The lease costs would all
be reported in a similar fashion as
the FASB capital or purchase leases
with both amortization and interest
expenses reported on the income
statement.
For financial instrument accounting,
the recent financial crisis
spotlighted the need to report
expected loan impairment losses
sooner. That objective differed from
the prevailing standard, which
required loan losses to be recorded
only when incurred and measurable.
The old standard, while taking
longer to report losses, did serve
to deter the practice of smoothing
earnings. Using that practice in
good years, some companies would be
tempted to overstate loan loss
reserves, so that in bad years loan
losses could be understated by
merely reducing the prior
established reserves, thereby
distorting the true earnings picture
in any given year.
The new loan loss proposals by both
boards would accelerate the
reporting of the impact of problem
loans. However, the methodologies
differ.
The FASB model would record, at the
start of the loans, the expected
loan losses for the whole life of
the loans. Since the precise future
results would not be known when
loans were originated, past
experience could be considered, such
as the kind employed when an
operating company evaluates the
anticipated proportion of bad debts
on accounts receivable. Such
experience would be tempered with a
forward looking approach that
considered differing current
economic conditions or other future
dynamics that could be expected to
have an effect.
The IASB model, which was finalized
with the issuance of IFRS 9,
Financial Instruments, on July 24,
2014, would require recording
initially, only the proportion of
anticipated losses on loans that
would relate to the first twelve
month period. However, if future
conditions indicated a deterioration
of certain loans, then at that time,
the loan loss expectation for the
entire life of the loan would be
recorded.
While the approaches to the two
standards will require an element of
discernment for both boards, the
financial instruments proposals will
require a significant exercise of
judgment under either scenario,
considering the uncertainty involved
in future estimations.
For further information, see
Leases
see
Financial
Instruments
Enhancing Audit Quality of Private
Entities
AICPA discussion paper weighs in
The PCAOB and the Center for Audit
Quality, as well as international
bodies, have been seeking a formal
approach to address the need for better
public company audit results, as
reported in our May and June issues of
the Audit & Accounting Alert. Now the
AICPA, on August 7, 2014, has issued a
discussion paper, Enhancing
Audit Quality, Plans and Perspectives
for the U.S. CPA Profession,
that focuses on audits of privately
owned entities.
With release of the discussion paper,
AICPA President Barry Melancon stated
“EAQ is a holistic effort to consider
auditing of private entities – including
private companies, not-for-profit
organizations, employee benefit plans
and governmental entities – through
multiple touch points, especially where
quality issues have emerged. Many AICPA
committees, boards and staff contributed
to the EAQ. The goal is to align the
objectives of all audit-related AICPA
efforts and collectively improve the
quality of audit services delivered by
the profession.”
The paper proposes a near-term and
longer term approach. In the near term,
initiatives already approved or planned
will immediately address areas of the
current peer review and practice
monitoring standards that need
improvement. In the longer term, the
paper seeks a “transformation of the
current peer review program for firms’
accounting and auditing engagements into
a practice monitoring process that
marries technology with human oversight,
and makes a closer, more real-time
connection among a firm’s accounting and
auditing engagements, the AICPA and the
individuals performing the practice
monitoring.”
The paper organizes the efforts into
five areas, as more fully described
below:
- Competence and Due Care
- Auditing and Quality
Control Standards
- Guidance, Tools, Learning
and Resources
- Practice Monitoring (Peer
Review)
- Ethics Enforcement
1. Competence starts with continually
evaluating and updating the CPA exam, so
that it retains relevance and responds
to the quickly changing business
environment. For practicing CPAs, the
AICPA Code of Professional Conduct
stresses integrity and excellence as
guiding virtues for maintaining
competence and exercising due care,
including recognition of the limits of
one’s capabilities.
2. The usage of the auditing
standards will be monitored and
necessary revisions and additional
assistance will be provided. Audit
deficiencies will be identified and
better understood. Added specificity of
quality control standards will also be
considered.
3. All aspects of instruction will be
upgraded, with an emphasis on areas
where difficulties are experienced. A
robust competency framework will be
issued. Additional resources will be
developed in response to peer review
concerns.
4. The peer review process will be
overhauled to be more preventative of
audit problems, by responding on a
continual basis rather than after the
fact. In the near term, several
initiatives will be pursued. Peer review
procedures will be beefed up for risky
and complex areas. Low-volume auditors
with material deficiencies in these
areas will be required to have pre- or
post-issuance reviews and closer
supervision by a new body. Evaluations
between peer reviews will be called for
when new industries are entered. A
credible system for identifying the
population of firms and engagements
subject to peer review will be
developed. Peer review reports will be
more meaningful. Qualifications for peer
reviewers will be strengthened, and
speedier discipline will be initiated
for sub-standard peer reviewers.
5. Enforcement measures will be
enhanced by employing various accessible
resources for detecting deficient
audits, requiring corrective actions,
and disciplining firms that circumvent
the process of selection for engagements
that fall under the purview of peer
review.
Feedback is requested by November 7,
2014 to
[email protected].
Despite the significant changes that
have already taken place in audit
processes and techniques, spurred on by
Enron and the financial crisis, the
culpability of the auditors is still up
for question by some. (See Holding
Auditors Blameless, in our
Additional A
& A News below). The public company
auditor initiatives hope to achieve
better results by focusing on more in
depth content and transparency in audit
reporting, while the European Parliament
has even gone so far as to enact harsh
auditor rotation and service restriction
legislation The AICPA proposals for
private company auditors are also
specific in nature, which should
facilitate implementation and scrutiny.
For further information, see
Enhancing Audit Quality Initiative
Additional A&A News
The following links provide a selection of current articles
devoted to highlighting other A&A topics currently making
news.
-
Holding Auditors Blameless
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PCAOB: Deficiencies Continued in
2013 Broker-Dealer Audits
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Ethics Board Aims to Strengthen
Auditor Independence during Long
Client Associations
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UK - One in seven FTSE
350 companies to tender audit in
2014
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Alibaba unit finds possible
accounting irregularities
-
PwC Fined $25 Million for
Altering Client Bank Report to
Regulators
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