Keeping up with changing accounting and auditing standards is critical to every public company’s well-being. For example, recent developments include changes in the Financial Accounting Standards Board’s (FASB’s) business combination accounting and guidance on recognition and measurement of financial instruments.
Simplified business combination accounting
In September 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. Often, after a business combination, the buyer lacks information it needs to complete the initial accounting for the transaction during the reporting period in which the acquisition occurs. When that happens, the buyer records provisional amounts based on information available as of the acquisition date. The buyer may adjust these amounts during the “measurement period” — a reasonable time period (up to one year) after the acquisition date.
Under previous guidance, buyers had to recognize these adjustments retrospectively, which, the FASB concluded, added unnecessary cost and complexity to financial reporting. The ASU eliminates this requirement, and instead provides for buyers to recognize measurement-period adjustments in the period in which they determine the adjustment amounts. Buyers must calculate and disclose the effect on earnings of amounts they would have recorded in previous periods had the accounting been completed on the acquisition date.
For public business entities, the ASU takes effect for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years.
New guidance on recognizing and measuring financial instruments
In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, overhauling the reporting model for financial instruments. With certain exceptions, the guidance will require companies to measure equity investments (other than those that are accounted for under the equity method or result in consolidation) at fair value and to recognize changes in fair value in net income. A “practicability exception” provides an alternative for equity investments without readily determinable fair values.
For public business entities, the ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new guidance will affect financial institutions, such as banks and insurance companies, as well as companies with significant investments in equity securities that aren’t currently being measured at fair value through net income.
Disclosure required of audit participants
In December 2015, the Public Company Accounting Oversight Board (PCAOB) adopted new rules that require audit firms to disclose the name of the engagement partner for each audit as well as information about other accounting firms that participated in the audit. The new rules require the audit firm to file new Form AP, Auditor Reporting of Certain Audit Participants, listing the:
- Name of the engagement partner,
- Name, location, and extent of contribution of all other accounting firms participating in the audit whose work constituted at least 5% of total audit hours, and
- Number and aggregate extent of contribution of all other accounting firms participating in the audit whose individual participation was less than 5% of total audit hours.
This information, which will be available in a searchable database on the PCAOB’s website, is intended to help investors and other financial statement users evaluate the quality of audits. The PCAOB had considered requiring disclosure of the engagement partner’s name in the auditor’s report or even requiring the engagement partner to sign the report. Ultimately, the Board provided for disclosure outside the auditor’s report to assuage concerns about potential increases in auditor liability and other risks.
The standard filing deadline for Form AP will be 35 days after the date the auditor’s report is first included in a document filed with the Securities and Exchange Commission. In the case of initial public offerings, the Form AP filing deadline will be 10 days after the auditor’s report is first included in a document filed with the SEC.
This new standard is still pending SEC approval. If approved by the SEC, the disclosure requirement for the engagement partner will be effective for auditors’ reports issued on or after January 31, 2017.
Continual accounting updates are often critical to the accuracy of your company’s financial health. So be sure to work with your advisors to ensure you are aware of the changes and understand them fully.
Contact Nick Steiner at NSteiner@bpmcpa.com or (408) 961 – 6375 for more information.