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November 2012

  The AICPA’s Auditing Standards Board (ASB) issued Statement on Auditing Standards (SAS) No. 126, The Auditor's Consideration of an Entity’s Ability to Continue as a Going Concern (Redrafted), as a result of its Clarity Project to supersede SAS No. 59, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, as amended (AICPA, Professional Standards, AU section 341 and AU-C section 570).

SAS No. 126 does not change or expand SAS No. 59, as amended, in any significant respect. A summary is available at

The ASB moved forward with the clarity redraft of SAS No. 59, as amended, so that it is consistent with the format of the other clarified SASs that were recently issued as SAS No. 122, Statements on Auditing Standards: Clarification and Recodification; SAS No. 124, Financial Statements Prepared in Accordance With a Financial Reporting Framework Generally Accepted in Another Country; and SAS No. 125, Alert That Restricts the Use of the Auditor’s Written Communication.

However, the ASB decided to delay convergence with International Standard on Auditing 570, Going Concern, pending FASB’s anticipated development of accounting guidance addressing going concern.

SAS No. 126 is effective for audits of financial statements for periods ending on or after Dec. 15, 2012. SAS No. 126 is available for purchase at by searching for product number ASASST126P.

  Proposed amendments to auditing standards issued by the ASB include changes that would clear the way for audits of financial statements prepared in accordance with the special-purpose financial reporting framework for small and medium-size entities (FRF-SME) the AICPA is developing (see related article, “Back to basics: Proposed Framework for SMEs geared for reliability and simplicity,” page 32).

The proposal, Omnibus Statement on Auditing Standards—2012, would amend SAS No. 122 section 800, Special Considerations—Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks, by defining a new, special-purpose financial reporting framework for the purpose of audits.

Currently, the other special-purpose frameworks included in the AICPA Professional Standards are:

  • Cash basis.
  • Tax basis.
  • Regulatory basis.
  • Contractual basis.

The proposal would create a new, special-purpose framework in the standards that would accommodate the special-purpose FRF-SME that was expected to be ready for exposure in October. The framework would be defined as a definite set of logical, reasonable criteria that is applied to all material items appearing in financial statements.

This definition is similar to one that previously had been deleted from AICPA auditing standards because of lack of use. The previous definition, though, gave price-level accounting as a practical example. Since price-level accounting was practiced rarely—if ever—the definition had been eliminated.

The ED also proposes to amend AU-C section 600, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors). The proposal would permit referring to the audit of a component auditor in the auditor’s report on the group financial statements when the component’s financial statements are prepared using a different financial reporting framework than that used for the group financial statements if certain criteria are met. The ASB is specifically seeking comments on this issue.

The ASB had learned that, in practice, sometimes the component auditor is unfamiliar with U.S. GAAP, and the conversion adjustments are made up by group management so that the auditor can audit the conversion adjustments without having to get involved in the work of the component auditor. In those rare circumstances, the ASB believes it is appropriate to make reference to the audit of a component auditor.

The proposal is available at The comment period ended Oct. 31.

Ethics / Compilation & review  
November 2012

Two AICPA committees extended comment deadlines to Nov. 30 on recently proposed revisions to professional standards.

The proposed change to the ethics rules would require CPAs who prepare financial statements for attest clients to apply the general requirements of Interpretation No. 101-3, Nonattest Services, to maintain their independence.

Proposed changes to the Statements on Standards for Accounting and Review Services (SSARS) would require CPAs who are associated with unaudited financial statements that they have not compiled or reviewed to request that management include a label or notation that makes clear that the financial statements were not compiled, reviewed, or audited. Alternatively, CPAs can attach a disclaimer to the financial statements to indicate that they have not been compiled, reviewed, or audited.

To provide members additional time to consider and comment on the proposed changes, the AICPA Professional Ethics Executive Committee extended the comment deadline to Nov. 30 regarding its proposed revisions to Interpretation No. 101-3 that would make clear that the preparation of financial statements is a nonattest service subject to the interpretation’s requirements. The proposed revisions are available at

Likewise, the AICPA Accounting and Review Services Committee extended the comment deadline to Nov. 30 on proposed revisions to SSARS that would revise the objective of the compilation engagement and provide requirements and guidance when an accountant is associated with financial statements that were not subjected to a compilation, review, or audit engagement. See for the proposed revisions.

The comment period for both exposure drafts originally was scheduled to end Aug. 31.

Management accounting  
November 2012

  After rising significantly at the end of 2011 and the beginning of 2012, CPA business leaders’ optimism about the U.S. economy has faded substantially in recent months, according to the latest AICPA Business and Industry Economic Outlook Survey. With an uncertain political environment in the run-up to the Nov. 6 election, CPA executives participating in the survey have soured on the economy. The percentage of respondents who reported optimism about the U.S. economy dropped 12 percentage points from the previous quarter to 22% in the third-quarter survey.

That is far higher than the 9% who identified themselves as optimistic a year ago, when 61% said a double-dip recession was somewhat or very likely. But it is also down significantly from the first quarter this year, when 43% of respondents were optimistic about the economy.

“People are very cautious about what’s going to happen in the next 12 months,” said Jim Morrison, CFO of Pawtucket, R.I.-based materials science company Teknor Apex and chairman of the AICPA’s Business & Industry Executive Committee.

Declines in optimism from the second quarter of 2012 were observed in virtually every measure. The CPA Outlook Index, a broad indicator that is the composite of nine individual economic measures, dipped to 63, down from 67 in the previous quarter and 69 in the first quarter of 2012. Each of the individual indicators in the index, including expansion plans and forecasts for revenue, profits, and additional employment, also dropped.

Concerns were reflected in most every indicator measured in the survey:

- Those indicating that they have too few employees and are planning to hire fell three percentage points from the previous quarter to 9%. The average percentage by which respondents expect their number of employees to increase in the next 12 months was 0.8%, the lowest number since the fourth quarter of 2010.

- The average expected changes for the next 12 months in revenue (up 2.6%) and profits (up 2.2%) dropped to their lowest marks since the third quarter of 2011.

To read more about the survey, visit

  In an environment where risks are growing—and growing in complexity—few companies are fully considering risk in their business strategies.

The percentage of companies adopting enterprisewide risk oversight has almost tripled in three years but remains small; implementation has yet to take place in more than three out of four organizations, a recent survey done for the AICPA shows.

Fewer companies still have integrated enterprise risk management (ERM) into their overall business strategy. Just 15% of CFOs and senior executives surveyed believe “mostly” or “extensively” that their organization’s risk management process is a proprietary strategic tool that provides a unique competitive advantage.

Almost half (49%) of the organizations in the survey fail to meaningfully consider existing risk exposures when evaluating new strategic initiatives. And just 35% have “mostly” or “extensively” articulated the organization’s appetite or tolerance for risks in their strategic planning. The survey of 618 U.S. executives was conducted for the AICPA’s Business, Industry and Government team by North Carolina State University’s ERM Initiative. The full survey is available at

Mark Beasley, CPA, Ph.D., a professor of enterprise risk management who directs the ERM Initiative at the university, said that, at many organizations, the paths of risk management and strategy seldom cross.

“What they’ve forgotten is the fundamental relationship of risk and return,” he said. “They’re hand in glove.”

Beasley recommends that businesses implementing an ERM process start from a strategic perspective. He said a senior executive team should begin risk management by listing the “crown jewels” of their organization—the products or services that generate the most revenue. Then they must determine the biggest risks to those crown jewels, and adjust their strategy accordingly.

Financial reporting  
November 2012

  The SEC approved disclosure rules designed to increase transparency around companies’ use of so-called “conflict minerals” and payments to governments for access to natural resources for extraction purposes.

The rules, advocated by certain human rights groups, will implement two sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, P.L. 111-203. But they contain disclosure provisions that divided the SEC commissioners’ votes and have been criticized by some business groups as being unworkable, in the case of conflict minerals, and likely to put U.S. companies at a competitive disadvantage, in the case of the natural resource payment reporting requirements.

Section 1502 of the Dodd-Frank Act requires yearly reporting on whether U.S. public companies use conflict minerals originating in the Democratic Republic of the Congo (DRC) or neighboring countries. Section 1504 requires U.S. public companies that extract resources to disclose in an annual report how much they pay the U.S. and foreign governments around the world for access to oil, natural gas, and minerals.

The conflict minerals statute was included in the Dodd-Frank Act with the intent of cutting off funding for armed groups in the DRC accused of atrocities against local populations and funding their activities by using forced labor to mine for gold and other minerals used in products ranging from jewelry to cellphones.

By requiring companies that use conflict minerals to document their chain of custody, the statute aims to choke off the market for raw materials produced in mines using forced labor. The regulation intends to use transparency to prompt companies to shun conflict minerals.

Businesses will be required to determine if the products they manufacture or contract to manufacture contain “conflict minerals,” including tin, tantalum, tungsten, or gold. If they use such minerals, they will need to determine whether they financed armed groups in the DRC or its adjoining countries.

Due diligence requires an independent private-sector audit of a conflict minerals report companies will file with the SEC. The audit must be conducted in accordance with standards set by the Government Accountability Office (GAO), according to testimony SEC Special Counsel John Fieldsend gave at an open meeting.

Fieldsend said that for the required audit of conflict mineral reporting, the GAO staff has indicated that it plans to refer issuers to its existing government auditing standards (commonly referred to as the Yellow Book) so that the auditor can perform either an attestation engagement or a performance audit.

The audit’s objective will be to express an opinion or conclusion as to whether the design of the company’s due-diligence measures conforms with the criteria set forth in the nationally or internationally recognized due-diligence framework, and whether the company’s description of the due diligence performed is consistent with the process it undertook.

According to Fieldsend, the only due-diligence framework currently available for conflict minerals reporting is provided by the Organisation for Economic Co-operation and Development.

Companies will file their first specialized disclosure report on May 31, 2014, for the 2013 calendar year. Companies will be required to file for a calendar year regardless of when their fiscal year ends.

Section 1504 of the Dodd-Frank Act was structured to increase accountability of leaders in resource-rich countries with high poverty rates by requiring companies to disclose how much they are paying for access to those resources.

Companies that extract resources will be required to comply with the new rules for fiscal years ending after Sept. 30, 2013. The form must be filed with the SEC no later than 150 days after the end of a company’s fiscal year.

  A new FASB proposal would require preparers of financial statements to present in one place information about the amounts reclassified out of accumulated other comprehensive income (OCI).

FASB issued a Proposed Accounting Standards Update (ASU), Comprehensive Income (Topic 220): Presentation of Items Reclassified Out of Accumulated Other Comprehensive Income, for public comment. The board proposed a plan to require a tabular disclosure that would present information in one place about the amounts reclassified out of accumulated OCI and provide a road map to related financial disclosures.

The proposal is available at Its purpose is to improve presentation for users of financial statements without creating significant costs to preparers. U.S. GAAP currently requires information about amounts reclassified out of accumulated OCI to be presented throughout the financial statements, so FASB does not expect preparers to incur significant costs if the Proposed ASU is approved.

OCI includes gains and losses that initially are excluded from net income for an accounting period. Those gains and losses later are reclassified out of accumulated OCI into net income.

FASB plans to decide on an effective date for the Proposed ASU after reviewing public comments. The comment period ended Oct. 15.

  FASB began crafting a new expected credit loss impairment model in hopes of moving forward again in the joint accounting for financial instruments project the board is pursuing with the International Accounting Standards Board (IASB).

In July, IASB Chairman Hans Hoogervorst reacted with consternation when informed that FASB intended to take a step back from the so-called “three-bucket” impairment model in the project and address stakeholder concerns.

FASB Chairman Leslie Seidman vowed to move quickly to prevent the project from stalling. During an Aug. 22 board meeting, FASB made key decisions on an alternative impairment model, according to a summary of FASB decisions posted to the board’s website. FASB has invited the IASB to monitor the deliberations on the alternative model and planned to share its progress with the IASB early in the fall, a FASB document shows.

IASB spokesman Chris Welsh told the JofA that the IASB is continuing to work on the model that has been developed jointly with FASB, but will be following the progress of FASB’s additional analysis with interest. The IASB has targeted the fourth quarter of 2012 for publication of an exposure draft.

Although FASB had tentatively agreed to the “three-bucket” model with the IASB, stakeholder concerns about the understandability, operability, and auditability of that model, as well as whether it would measure risk appropriately, caused FASB to seek a different model.

The alternative approach is called the “Current Expected Credit Loss” (CECL) model, according to FASB’s summary. It retains several key concepts that have been jointly agreed upon with the IASB. These include the main concept of expected credit loss, and the current recognition of the effects of credit deterioration on collectibility expectations.

But there are differences, too, between the models. The CECL model uses a single-measurement objective—current estimate of expected credit losses—rather than the three-bucket model’s dual-measurement approach, FASB’s summary says. The dual-measurement approach, as described by FASB, requires a “transfer notion” to distinguish between financial assets that are required to use a credit impairment measurement objective of “12 months of expected credit losses” and those that are required to use a credit impairment measurement objective of “lifetime expected credit losses.”

Under the CECL model, an entity at each reporting date would reflect a credit impairment allowance for its current estimate of the expected credit losses on financial assets held. The estimate of expected credit losses is neither a “worst case” nor a “best case” scenario, but it reflects management’s estimate of the contractual cash flows that the entity does not expect to collect, according to FASB’s summary.

The credit deterioration or improvement reflected in the income statement under the CECL model described in FASB’s summary would include changes in the estimate of expected credit losses resulting from, but not limited to:

  • Changes in the credit risk of assets held by the entity.
  • Changes in historical loss experience for assets like those held at the reporting date.
  • Changes in conditions since the previous reporting date.
  • Changes in reasonable and supportable forecasts about the future.

The aim of these requirements described in FASB’s summary is to have the balance sheet reflect the current estimate of expected credit losses at the reporting date, while the income statement reflects the effects of credit deterioration or improvement that has taken place during the period.

Because the basic estimation objective is consistent from period to period, there is no need in the CECL model to describe a “transfer notion” that determines the measurement objective in each period as the three-bucket model does, according to FASB’s summary.

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