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NEWS DIGEST
FYI  
September 2013

Former SEC Chief Accountant Jim Kroeker is joining FASB in a new vice chairman position designed to reduce the burden on board Chairman Russell Golden.

Kroeker fills a vacancy on the board created by the June 30 retirement of Leslie Seidman, who was FASB’s chairman. FASB had a vice chairman early in its history, but later did away with the position.
   
The trustees of the Financial Accounting Foundation (FAF), which oversees FASB, decided to reinstate the position because of the increasing demands on the FASB chairman’s time, according to a FAF news release.
   
Kroeker’s term will begin Sept. 1 and conclude on June 30, 2018, when he will be eligible for appointment to a second five-year term.
   
“During his tenure as chief accountant, Jim demonstrated an unwavering concern for the interests of investors as well as those of preparers of financial statements,” FAF board of trustees Chairman Jeffrey Diermeier said in a news release. “The combination of his deep technical expertise and his extensive experience working with a wide range of accounting constituents will make him an exceptionally able board member.”
   
As vice chairman, Kroeker will help Golden represent FASB with external stakeholders and will stand in for Golden as needed in guiding the board’s internal operations, according to FAF President and CEO Terri Polley.


NEWS DIGEST
Government  
September 2013

  GASB proposed a two-approach system to guide standard setting for measuring assets and liabilities of state and local governments. The board also issued its preliminary views regarding the measurement of fair value and the application of fair value, including note disclosures.

The two-approach system is described in the proposed concepts statement Measurement of Elements of Financial Statements, available at tinyurl.com/kexxdyx. Initial amounts and remeasured amounts form the two approaches described in the proposal.

Initial amounts are determined when an asset is acquired or a liability is incurred. Remeasured amounts are determined anew as of the date of each year’s financial statements. GASB also is proposing four measurement attributes or characteristics of assets or liabilities that are being measured:

  • Historical cost is the price paid to acquire an asset or the amount received when a liability is incurred in a transaction.
  • Fair value is the price that would be received to sell an asset or paid to transfer a liability at the measurement date.
  • Replacement cost is the price that would be paid to acquire an asset with equivalent service potential at the measurement date.
  • Settlement amount is the amount at which an asset could be realized or a liability could be liquidated with the counterparty, other than in an active market.


The Fair Value Measurement and Application preliminary views document, available at tinyurl.com/mh43eaa, describes:

  • How fair value should be defined and measured.
  • What assets and liabilities should be measured at fair value.
  • What information about fair value should be disclosed in the notes to the financial statements.


Stakeholders can visit gasb.org to comment on the proposals through Sept. 30.


  GASB issued a proposal that is designed to eliminate a potential source of understatement during a state or local government’s transition to the board’s new pension standard.

Under the current transition provisions, a GASB news release states, there is potential for understatement of restated beginning net position and expense during the first year that a state or local government implements GASB Statement No. 68, Accounting and Financial Reporting for Pensions.

GASB’s proposed statement, available at tinyurl.com/k2qw53o, would require, during transition, recognition of a beginning deferred outflow of resources for a state or local government’s pension contributions made between the measurement date of the beginning net pension liability and the beginning of the initial fiscal year of implementation.

The provisions would take effect simultaneously with Statement No. 68, which is required to be applied in fiscal years beginning after June 15, 2014. Comments on the proposal were due Aug. 26.


  GASB’s standard regarding the impairment of capital assets and insurance recoveries will be the subject of a Financial Accounting Foundation (FAF) post-implementation review.

A FAF team will review GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, according to a FAF news release. The standard provides measurement guidance for capital asset impairments.

State and local governments are required by the standard to report impairments when they occur. Before GASB No. 42 was issued in 2003, some state and local governments reported impairments as part of the ongoing depreciation expense for the capital asset, or upon disposal of the asset. GASB No. 42 also provides uniform reporting guidance for insurance recoveries of state and local governments.

Stakeholders who would like to participate in surveys on the standard can register at tinyurl.com/c467dkj.


NEWS DIGEST
Financial planning  
September 2013

Issuers of certain private securities, including hedge funds, will be able to advertise to the general public under a rule the SEC adopted.

But only “accredited investors” will be permitted to invest in these private securities offerings as a result of rules adopted by the SEC. Accredited investors have:

  • An individual net worth or a joint net worth with their spouse of $1 million or more, excluding the value and any related indebtedness of their primary residence; or
  • Individual annual income of more than $200,000 or a joint income with their spouse of more than $300,000 in each of the last two years, with expectation of the same income level in the current year.


Certain “bad actors”—including convicted felons and those who have received certain disciplinary sanctions from federal securities and banking regulators—will be disqualified from participating in these securities offerings under a rule the SEC adopted that was required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The previous ban on advertising by hedge funds, private-equity firms, and certain other private investments was lifted as a result of rules implemented under the Jumpstart Our Business Startups (JOBS) Act of 2012. The provision was intended to make it easier for companies to raise capital, but there was concern that lifting the ban would pave the way for more fraud, SEC Chairman Mary Jo White said in a statement and at an open meeting.

White said the commission needed to act promptly on the JOBS Act requirement, but will pursue additional investor safeguards, if necessary. A proposal the SEC made would require issuers to provide more information about these securities offerings to help the SEC monitor the market in an effort to provide new safeguards as new market practices develop. To submit comments or read the full text of the proposal or the rules that were approved, visit tinyurl.com/jvvclge.

The rule amendments take effect 60 days after publication in the Federal Register. The rule proposal will be available for public comment for 60 days after it is published in the Federal Register.


FINANCIAL REPORTING
Financial reporting  
September 2013

  FASB proposed an updated standard for the financial reporting of all insurance contracts, not just those written by insurance companies, and asked stakeholders to comment on it by Oct. 25.

The proposal aims to bring consistency to the existing standards under U.S. GAAP, including measurement of insurance liabilities and the related effect on the statement of comprehensive income. Existing GAAP standards evolved over the years in response to the introduction of new products, which led to inconsistencies.

FASB’s proposed standard is the result of a joint insurance contracts project with the International Accounting Standards Board (IASB), which also released a revised exposure draft of proposals meant to improve accounting for insurance contracts. The long-term goal of the joint project is to work toward a converged international standard. The FASB proposal is available at tinyurl.com/kpfapls, and the IASB proposal is available at tinyurl.com/mr5x4h5. Comments on the proposals can be submitted by Oct. 25 at the boards’ respective websites, fasb.org and ifrs.org.

“The proposed standard is intended to bring greater consistency and relevance to the accounting for contracts that transfer significant risk between parties,” Leslie Seidman, whose term as FASB’s chairman ended in June, said in a statement.

The FASB proposal includes significant changes. Among other things, it would:

  • Require contracts that transfer significant insurance risk to be accounted for as insurance, regardless of the type of institution that issued the contract. Therefore, the proposed standard would apply to banks, guarantors, service providers, and other types of insurers, in addition to insurance companies.
  • Establish the principles that an insurer would apply in the recognition, measurement, presentation, and disclosure of insurance contracts issued and reinsurance contracts held in its financial statements.
  • Limit the number of measurement models to two. The building block approach would be applied to most life, annuity, and long-term health contracts. The premium allocation approach would be applied to most property, liability, and short-term health contracts, and some guarantees and service contracts.


  FASB issued a proposal designed to improve disclosures of uncertainties related to an organization’s ability to continue as a going concern.

Under U.S. GAAP, financial statements are prepared under the inherent presumption that the reporting organization will be able to continue as a going concern. FASB explained in a news release that the going-concern presumption is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities.

But there is no current guidance in U.S. GAAP about management’s responsibilities in evaluating or disclosing going-concern uncertainties, or when or how uncertainties should be disclosed in an organization’s footnotes.

The Proposed Accounting Standards Update, Presentation of Financial Statements (Topic 205): Disclosure of Uncertainties About an Entity’s Going Concern Presumption, seeks to provide such guidance in an effort to reduce diversity in financial reporting about these uncertainties. The proposal, available at tinyurl.com/k5ukatu, also aims to improve the timeliness and quality of footnote disclosures about uncertainties.

It would do so, FASB said, by incorporating many of the principles currently in the auditing standards, and by:

  • Requiring management to evaluate going-concern uncertainties more frequently.
  • Prescribing a threshold and related guidance for starting disclosures.
  • Requiring an assessment period of 24 months after the financial statement date.
  • Providing a threshold for SEC filers to determine whether there is substantial doubt about an organization’s ability to continue as a going concern.


The proposed guidance would apply to all reporting organizations, including public companies, private companies, and nonpublic not-for-profit organizations, FASB said. Additionally, a public company that is an SEC filer would be required to evaluate and determine whether there is substantial doubt about its ability to continue as a going concern and, if there is substantial doubt, disclose that determination in the footnotes.

Comments on the proposal may be submitted until Sept. 24.


  The AICPA Financial Reporting Executive Committee (FinREC) expressed significant objections to FASB’s financial instruments impairment proposal.

The high-profile project is designed to address some of the causes of the recent financial crisis and calls for measurement and reporting of expected losses rather than incurred losses.

Although the project began as a convergence effort with the IASB, FASB took a different path from the IASB in developing a current expected credit loss (CECL) method for impairment.

In a comment letter to FASB, FinREC said the proposed CECL model, as well as the current IASB proposal, requires significant work to be operational and result in improved, faithful financial reporting. The letter is available at tinyurl.com/n8qrxko. FinREC is a senior committee of the AICPA for financial reporting and is authorized to make statements on behalf of the AICPA on financial reporting matters.

According to FinREC, FASB’s proposed model:

  • Lacks a strong enough conceptual basis for sound financial reporting;
  • Departs significantly from the incurred loss model;
  • Creates two incompatible loss contingency models;
  • Double counts expected losses; and
  • Unjustifiably increases the accounting and financial reporting burden for smaller financial institutions and nonfinancial services entities.


FinREC encouraged FASB to keep working with the IASB to reach a converged, high-quality model for reporting impairment of financial instruments. “Having to maintain more than one financial reporting system has significant costs and adds much complexity to entities’ reporting process,” FinREC wrote.


NEWS DIGEST
Auditing  
September 2013

  The concept of mandatory audit firm rotation received two setbacks in a two-week period on opposite sides of the Atlantic.

Two weeks after the U.S. House of Representatives approved a bipartisan bill that would prohibit the PCAOB from requiring mandatory audit firm rotation for public companies, the U.K. Competition Commission proposed statutory audit services market reforms that did not include mandatory audit firm rotation.

The U.S. bill, sponsored by Reps. Robert Hurt, R-Va., and Gregory Meeks, D-N.Y., would amend the Sarbanes-Oxley Act of 2002 to prohibit the PCAOB from requiring public companies to use specific auditors or requiring the use of different auditors on a rotating basis.

Representatives voted 321–62 in favor of the bill, H.R. 1564, the Audit Integrity and Job Protection Act. The bill would have to be approved by the Senate, which has not taken up the issue, and signed by President Barack Obama to become law.

The AICPA has opposed mandatory audit firm rotation. AICPA President and CEO Barry Melancon, CPA, CGMA, issued a statement thanking the bill’s co-sponsors and supporters.

“In the absence of evidence that mandatory audit firm rotation would enhance audit quality, the House has sent regulators in the United States and Europe a clear message that the time has come to end the debate over rotation,” Melancon said. “In Europe, there is a misimpression that the continued consideration of the PCAOB’s concept release means that the U.S. is headed toward adoption of a mandatory firm rotation requirement. Today’s House vote will go a long way toward alleviating confusion and uncertainty for policymakers and stakeholders on both sides of the Atlantic.”

Two weeks after the House vote, the U.K. Competition Commission (CC) posted proposed measures that did not include mandatory rotation. But the CC did include mandatory tendering every five years for U.K. FTSE 350 companies in its proposal, a significant shift from the 10-year retendering period U.K. Financial Reporting Council (FRC) rules currently require. The FRC’s 10-year retendering rule includes a “comply or explain” provision that provides some flexibility, but the CC proposal does not include a “comply or explain” provision.

Tendering is the process by which a company opens its audit to bidding by audit firms that seek a contract to perform the audit work.

A summary of the U.K. reforms proposed by the CC is available at tinyurl.com/k6mz7mh. The CC is aware that its proposed measures may be affected by measures the European Union (EU) is considering. But the CC proceeded because the EU had not developed definitive proposals, according to a CC news release.

A draft law that would require public-interest entities to rotate audit firms every 14 years—a period that could be extended to every 25 years if certain safeguards are put into place—was approved by a European Parliament committee in April. When this issue went to press, the draft law had several legislative hurdles to clear before becoming law.

The CC is required to publish its final report by Oct. 20.


  The U.S. Government Accountability Office (GAO) is recommending that the SEC consider requiring public companies to disclose whether they obtained an auditor attestation of their internal control over financial reporting (ICFR).

In a report to congressional committees, available at tinyurl.com/ky27s6g, the GAO said attestation reports increase investor confidence. Requiring disclosure of whether a company voluntarily included an attestation report in its annual report would increase transparency for investors, according to the GAO.

Many public companies are required to have an independent auditor attest to and report on management’s internal control over financial reporting to comply with Section 404(b) of the Sarbanes-Oxley Act of 2002.

But many companies are exempt from the attestation requirement. The Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203, enacted in July 2010, exempted companies with less than $75 million in public float from the auditor attestation requirement.

The Jumpstart Our Business Startups (JOBS) Act, P.L. 112-106, passed in 2012, defers the effective date of Section 404 compliance for the first five years after an initial public offering for companies that do not exceed certain market capitalization or revenue thresholds.

Before 2010, when certain companies were temporarily exempt from the auditor attestation requirement, the SEC required explicit disclosure of exemption status in companies’ annual reports, according to the GAO. That disclosure requirement was eliminated in 2010, the GAO report says.

Information on a company’s exempt status is available to investors, but requiring explicit disclosure would increase transparency and investor protection, according to the GAO. Required disclosures about whether a company voluntarily obtained auditor attestation over its internal controls would provide investors with an important indicator of the reliability of a company’s financial reporting, the GAO wrote.

Research performed by the GAO found that the percentage of restatements for companies exempt from the auditor attestation requirement was generally higher than the percentage of restatements for nonexempt companies from 2005 to 2011. In addition, empirical studies reviewed by the GAO suggested that auditor attestations appear to have a positive effect on investor confidence.

In a response included in the GAO report, SEC Chief Accountant Paul Beswick and Lona Nallengara, who is now the SEC’s chief of staff, wrote that they believe investors already can easily determine whether a company has received auditor attestation over its internal controls based on information currently available.


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