Accounting & Auditing Update – Second Quarter, 2012
July 7, 2012
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This is the BPM Technical Update, providing you with current information about recent publications or significant activities of the standard setting bodies, including:
- FASB Final Accounting Standards Updates
- Convergence - Major Proposals
- Other Major Proposals
- PCAOB Releases
- AICPA Statements
- SEC Releases; Effect on Disclosures in Filing
- U.S. Congress - JOBS Act
FASB Final Accounting Standards Updates
Note: Issuance of Final Standards in early 2012 has been limited as the result of FASB/IASB ongoing work on the major convergence topics. An increase in activity is expected later this year.
There were no final standards adopted by the FASB during the second quarter of 2012. However, a number of previously issued standards became effective for the first quarter of 2012.
FASB & IASB Major Proposals
The FASB and IASB are working toward a target that has slipped into the second half of 2012 and possibly into early 2013 for their major convergence projects.
Convergence - Overall:
SEC staff continue to indicate that an IFRS work plan is in progress, but overall it appears unlikely that a single adoption date or option to adopt will occur. FASB Chairman Leslie F. Seidman has stated, “I am in favor of some form of incorporation of international standards, but we do not have a compelling, urgent need to adopt IFRS.” The current expectation is that if the SEC moves forward with adoption it may be through some form of a FASB endorsement process.
Revenue Recognition – Update
While the final standard is expected in early 2013, re-deliberation continues for the following areas:
- Identification of performance obligations
- Performance obligations satisfied over time
- Revenue constraint on variable consideration
- Customer credit risk
- Time value of money
- Onerous performance obligations
- Disclosure requirements
- Transition and effective date.
Leases - Update
The Boards have reached a make-shift compromise on expensing that allows re-deliberation work to go forward. They are now expected to make progress toward a revised exposure draft to be completed later this year.
Tentatively, the boards have concluded that a lessee should account for some leases using an approach similar to that proposed in the 2010 exposure draft, and other leases using an approach that results in a straight-line lease expense. Also, they tentatively concluded that a lessee should distinguish between the categories based on whether the lessee acquires and consumes more than an insignificant portion of the underlying asset over the lease term.
As a practical expedient, leases of property (land or a building—or part of a building—or both) should be accounted for using the straight-line approach unless the lease term is for the major part of the economic life of the underlying asset; or the present value of the fixed lease payments accounts for substantially all of the fair value of the underlying asset.
Leased assets other than property should be accounted for using an approach similar to that proposed in the 2010 Exposure Draft unless the lease term is an insignificant portion of the economic life of the underlying asset; or the present values of the fixed lease payments are insignificant relative to the fair value of the underlying asset.
The Boards tentatively decided a lessor should distinguish between leases to which the receivable and the residual approach apply and leases to which an approach similar to operating lease accounting applies, using the same criteria as noted above for lessee accounting. Accordingly, a lessor would apply the receivable and residual approach to leases for which the lessee acquires and consumes more than an insignificant portion of the underlying asset over the lease term.
Accounting for Financial Instruments - Update
The Boards have adopted a ‘three-bucket’ model for approaches to financial instrument reporting:
- Measurement: 1) Amortized cost; 2) Fair value through OCI; 3) Fair value through net income. No bifurcation if embedded derivatives in hybrid financial assets (still required for financial liabilities)
- Impairment of financial assets: 1) Insignificant deterioration in credit quality; 2) More than insignificant deterioration in credit quality; 3) Individual assets with a more than insignificant deterioration in credit quality.
- Unresolved convergence issues: 1) Accounting for equity investments; 2) Presentation of a secondary measurement on the face of the balance sheet; 3) Financial liabilities to be discussed.
Other Major Proposals
Standards for Private Companies:
In May 2012 the Financial Accounting Foundation (FAF) approved establishing the Private Company Council (PCC) whose purpose is to determine where exceptions to and modification of U.S. GAAP are needed for private companies. Proposals by the PCC will be subject to endorsement by the FASB. The PCC will have 9 to 12 members and will meet five times a year. Nominations close June 30, 2012.
Current related FASB projects include
- Definition of a Nonpublic Entity; and
- The Private Company Decision –Making Framework.
For its part, the AICPA has publicly stated approval of the FAF move but also announced its own plan to begin developing what it calls an “other comprehensive basis of accounting financial reporting framework” for privately held companies and their investor and creditors.
PCAOB
There has been no recent standard setting activity by the PCAOB. However, the two following significant Concept Releases remain outstanding and are the subject of periodic public meetings.
Concept Release, Auditor Independence and Audit Firm Rotation (August 2011):
The objective was to evaluate alternatives to enhance auditor independence, objectivity, and professional skepticism.
Recent public meeting in San Francisco on June 28, 2012
Read the Statement on the Recent Public Meeting 6/28/2012 in San Francisco
Concept Release, Auditor Reporting (June 2011)
The objective was to discuss alternatives that could increase auditor transparency and audit quality through the possible use of Auditor Discussion and Analysis, expanded use of emphasis paragraphs and clarification of the auditor’s report language. A proposed standard is expected to be released in the third quarter of 2012.
Read the Entire Release
AICPA
Audit and Accounting Guides Issued
- Assessing and Responding to Audit Risk in a Financial statement Audit (May 2012)
- Government Auditing Standards and Circular A-133 Audits (May 2012)
- Not-for-Profit Entities (May 2012)
- Analytical Procedures (May 2012)
- Compilation and Review Engagements (May 2012)
- Reporting on Controls at a Service Organization Relevant to Security, Availability, Processing Integrity, Confidentiality, or Privacy (May 2012)
Audit Risk Alerts Issued
- Employee Benefit Plans Industry Developments (May 2012)
- Not-for-Profit Entities Industry Developments (May 2012)
- Understanding the Responsibilities of Auditors for Audits of Group Financial Statements (May 2012)
Trust Services Principles
- Section 200 (New Section): Trust Services Principles and Criteria for Certification Authorities Version 2.0 supersedes the 2000 version (Version 1.0) (May 2012)
SEC-Related
This section includes only SEC Releases and proposals that are deemed to have relevance to disclosures in filing documents we would be reviewing. There were no final rules of accounting significance during the first quarter of 2012. However as a result of the passage of the JOBS Act the SEC issued interim guidance on filing of confidential registration statement for qualifying Emerging Growth Companies (EGCs) and two sets of Q&A related to compliance with and interpolations of the JOBS Act’s rules.
U.S. Congress - JOBS Act
The JOBS Act is legislation aimed at creating jobs by relaxing the registration and reporting requirements for Emerging Growth Companies (EGCs) thus making it easier for them to raise capital; and provides capital market access to a broader base of investors. Generally a company qualifies as an EGC if its gross annual GAAP revenues are less than $1 billion and it is not an issuer whose first sale of common equity securities under an effective registration statement that occurred on or before December 8, 2011.
A company will continue to qualify as an ECG until it does any of the following:
- Generates gross annual GAAP revenues of $1 Billion or more
- Issues more than $1 Billion of debt securities and any rolling three-year period
- Becomes a large accelerated filer (public float of $700 million or more)
- Reaches the 5th anniversary of the first sale of the issuer’s common equity in a registered offering under the Securities Act.
Accommodations:
The JOBS Act provides accommodations for EGCs in several areas: Reporting, Accounting, Auditing, and Disclosure.
Reporting: As an EGC the company may have confidential submission of registration material to SEC staff and the review process, it may present only 2 years of audited financial statements rather than 3 years, and may present 2 years of selected financial data rather than 3 years.
Accounting: An EGC may adopt new or revised timeframe standards; however, should an EGC elect to follow non-EGC accounting that election is irrevocable.
Audit: The company is temporarily exempted from SOX Section 404(b) internal control, and temporarily exempted from any future PCAOB rules related to mandatory audit firm rotation and/or supplemental auditor discussion and analysis reporting.
Disclosure: An EGC should comply with the executive compensation disclosures requirements on the same basis as a Smaller Reporting Company. It is not subject to conduct the nonbinding “say on pay” or “say on golden parachute” or future requirements regarding “pay for performance” and “CEO pay ration.”
This publication contains information in summary form and is intended for general guidance only. It is not intended to be a substitute for detailed research nor the exercise of professional judgment. Neither BPM nor any member of the BPM firm can accept any responsibility for loss brought to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.
