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Accounting & Auditing Update – Third Quarter, 2012


October 15, 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


Note: Issuance of Final Standards in 2012 has been limited as the result of FASB/IASB ongoing work on the major convergence topics. As we move toward the end of 2012 and into 2013 there should be more activity

There were no final standards adopted by the FASB during the third quarter of 2012. However, a number of previously issued standards became effective earlier in 2012.


Pronouncements Effective in the Third Quarter of 2012


FASB & IASB Major Proposals


The FASB and IASB are working toward a target that has now slipped to the fourth quarter of 2012 and 2013 for their major convergence projects. This could mean that the effective dates may slip to 2016-2017 with some possibility of going to 2018.



Convergence - Overall


The SEC Staff has issued its Final Report on its work plan related to adoption of IFRS without presenting a conclusion, recommendation or policy decision. We understand that the Commission will use the Final Report and other information to decide whether to incorporate IFRS into the US financial reporting system; and if so, how and when. We do not expect a decision to be made in the remainder of 2012, but when it is made we expect it to be in some form of endorsement process.


Revenue Recognition – Update


The FASB and IASB have been in redeliberations of the revenue standard during this quarter, resulting mostly in enhancements or clarification to proposed guidance – with one exception:

The boards decided to remove the "onerous" loss contract guidance. However the boards still need to address the topics of transition and disclosure, as well as other aspects of the proposal such as collectability, contracts including certain seller-based financing, and the time value of money.

A final standard is expected in the first half of 2013.


Leases - Update


The Boards have reconfirmed that all leases with a maximum lease term of more than 12 months are to be recognized on the balance sheet. There will be two approaches to recognizing lease expense in the income statement, initially determined by a practical expedient of the nature of the underlying asset:

  • Front-loading or amortizing expense recognition would apply for leases presumed to be "Equipment Leases."
  • Straight-line expense recognition would apply for leases presumed to be "Property Leases."

The dividing line, in principle, will depend on whether a lessee acquires or consumes a significant portion of the underlying asset.

The Boards decided that there should be symmetry between lessors and lessees in how they determine which approach to apply.

There are some final remaining issues before they prepare a revised exposure draft, which is expected towards the end of this year. If they can issue a final document in 2013, the earliest transition date would probably be the beginning of 2016.


Accounting for Financial Instruments - Update


As a result of stakeholder concerns about the understandability, operability and auditability of the FASB/IASB jointly developed "three-bucket" model, the FASB is independently crafting a new impairment model called the "Current Expected Credit Loss" (CECL) model. The CECL model retains several key concepts of the three-bucket model such as the main concept of expected credit loss and the current recognition of the effects of credit deterioration on collectability expectations.

However, unlike the three-bucket model, the CECL uses a single-measurement objective, which is the current estimate of expected lifetime credit losses. Therefore, the CECL model would avoid use of the dual-measurement approach which requires a transfer concept under the three-bucket approach. The transfer concept was devised to distinguish between the credit impairment measurement objectives of financial assets: 12 months of expected credit losses versus lifetime expected credit losses.

The Board also tentatively decided that the CECL model should apply to (1) receivables that result from revenue transaction, (2) lease receivables recognized by lessors and (3) loan commitments that are not measured at FV-NI.



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 with initial three-year terms, meeting at least five times a year. The first meeting will be held later this year in which they will begin discussion and deliberation of the initial recommendations for a Private Company Decision-Making Framework developed by staff assigned to support PCC by the FASB. Overall, the structure and relationship of the PCC will be similar to the EITF.

The overarching objective of the FAF, FASB and PCC is to address concerns by private companies that some standards do not provide relevant information and are too complex and costly to apply while maintaining a single, comparable U.S. GAAP.

The proposed framework is structured around the following six differential factors between private and public company reporting considerations:

  1. Types and number of users
  2. Access of users to management
  3. Investment strategies
  4. Ownership and capital structures
  5. Company accounting resources
  6. Learning about new financial reporting guidance

With consideration of the differential factors, the PCC will evaluate the appropriateness of financial reporting in the five key areas of recognition and measurement, display (presentation), disclosures, effective date, and transition method.

In addition to the framework discussed above, the PCC's first priorities would include turning its attention to the following issues:

  • Accounting of Uncertainty in Income Taxes, or FIN 48
  • Fair Value
  • Variable interest entity consolidation, or FIN 46(R)
  • Complexity of derivatives, including simple interest rate swaps used to convert floating rate debt to fixed
  • Accounting for warrants as liabilities
  • Elements of business combination accounting such as separately indentified intangible assets

PCAOB


There has been little standard setting activity by the PCAOB. However, the following significant releases remain outstanding and the concept release on auditor rotation is the subject of periodic public meetings.


Audit Standard (AS) No. 16, Communications with Audit Committees (August 2012):


Subject to final SEC approval, AS 16 expands and modifies existing requirements. Although it does not add any performance requirements, it requires auditors to communicate more detailed information about topics they already are required to discuss with the audit committees. The standard is scheduled to be effective for audits of fiscal years beginning on or after December 15, 2012.



Release No. 2012-003, Information for Audit Committees about the PCAOB Inspection Process (August 2012)


This release provides general information about PCAOB inspections and describes what an audit committee can do to have useful discussion with the company's external auditor.



Release No. 2011-006, Auditor Independence and Audit Firm Rotation (August 2011)


The PCAOB will host its third public meeting on auditor independence and audit firm rotation on October 18, 2012 in Houston. This follows the first meeting in March in Washington, D.C. and the second meeting in June in San Francisco.

The Board has seen substantive debate across a diverse range of views in the prior meeting and hopes to expand upon and further explore themes raised at both the D.C. and the San Francisco public meetings.



Committee of Sponsoring Organizations (COSO)


Exposure Draft for Comment – Internal Control over External Financial Reporting: A Compendium of Approaches and Examples


COSO has released a draft of this compendium, which is part of COSO's overall project to update its Internal Control – Integrated Framework (Framework). This compendium has been developed to help users apply the Framework to external financial reporting objectives.

The Compendium illustrates how entities can apply the Framework to design, implement and conduct internal control over external financial reporting. It does not replace or modify the Framework, but rather is a supplemental document that can be used together with the Framework when considering internal control over external financial reporting.


AICPA


Technical Practice Aids


Technical Q&A


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.


Proposed SEC Rule – Release No. 33-9354, General Solicitation and Advertising (August 2012)


As required by the JOBS Act, the SEC has issued proposed rules permitting companies issuing securities to use general solicitation and general advertising to sell securities provided that:

  • The issuer takes reasonable steps to verify that the purchasers are accredited investors.
  • All purchasers are accredited investors because:
    • The come within the one of the accredited investor categories under the existing Rule 501, and
    • The issuer reasonably believes they meet one of the categories at the time of the sale of the securities.

In general, a Rule 501 accredited investor has individual (or joint with a spouse) net worth that exceeds $1 million, excluding the value of the primary residence. Also qualifying are investors with individual income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same level of income in the current year.

Form D would be amended to add a separate box for issuers to check if they are claiming the new Rule 506 exemption that would permit general solicitation and advertising.


Final Rule Release 34-67716, Conflict Minerals (August 2012)


This rule was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The rule requires any company that files periodic reports under Section 13(a) or 15(d) to determine whether conflict minerals are necessary to products it manufactures or contracts to be manufactured. If so, the issuer must make a "reasonable country of origin inquiry" into the source of the minerals. The information necessary to comply with the rule must come from the issuer supply chains, which includes both public and non-public companies. Typical industries that use conflict minerals include electronics, technology, aerospace, jewelry, consumer goods, medical devices, automotive, telecom and industrial manufacturing.

If the materials are from a covered country, the company must perform due diligence procedures to determine whether the minerals obtained are "conflict free" and file a specialized disclosure report as an exhibit. The SEC has created a new Form SD that must be filed annually.

The Conflict Mineral Report must include an independent audit report covering design of the due diligence framework and description of the due diligence measures taken.

Effective for 2013 calendar year; first filing due May 31, 2014.


Final rule Release 33-9330, Listing Standards for Compensation Committee (June 2012)


This rule requires the national securities to have minimum listing standards related to compensation committees. Under these exchange listing requirements, compensation committees would:

  • Be comprised of "independent" members of the board of directors as defined by the exchange, and
  • Have the authority to retain advisers and be responsible for their appointment, payment and oversight.


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.

 

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