In July 2013, the Financial Accounting Standards Board issued two final accounting standards updates and three proposed updates.  

 On July 17 the FASB issued ASU 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.

This was immediately effective and creates a third U.S. benchmark interest rate for hedge accounting purposes, in addition to U.S. Treasury rates (UST) and London Interbank Offered Rate (LIBOR) as well as removing the restriction on using different benchmark rates for similar hedges. Unlike FASB’s ASUSs, under International Financial Reporting Standards, a hedge of interest rate risk is not explicitly limited to specified benchmark interest rates but, rather, is described in terms of a rate that is both a separately identifiable component of a financial instrument and reliably measurable.

 On July 18 FASB issued ASU 2013-11, Income Taxes (Topic 740) Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, giving explicit guidance on how entities are required to present certain unrecognized tax benefits in financial statements.

The update requires that entities present in the statement of financial position an unrecognized tax benefit, or a portion of an unrecognized tax benefit “as a reduction to a deferred tax asset” for a net operating loss carryforward or a tax credit carryforward, in most situations.

The guidance in the ASU provides that in situations where the tax position was disallowed by the taxing authority at the reporting date, the unrecognized tax benefit would be presented in the statement of financial position “as a liability and should not be combined with deferred tax assets.

The FASB July 19 also issued three proposed accounting standards updates : Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Collateralized Mortgage Loans upon a Troubled Debt Restructuring; Service Concession Arrangements (Topic 853); and Consolidation (Topic 810): Measuring the Financial Liabilities of a Consolidated Collateralized Financing Entity.

 Of the three, probably the greatest impact will be from the troubled debt restructurings proposal because of its effect on financial institutions. The proposal seeks to clarify the timing for when banks can reclassify a collaterized mortgage loan to foreclosed residential real estate property in their financial statements, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, so that either the total or some portion of the loan should be derecognized  and the real estate property recognized.

 In its summary the proposal addresses the different operational and economic risk to creditors of holding foreclosed real estate property compared with holding an impaired loan. The questions posedby the proposal include whether this should be extended to commercial real estate mortgage loans and whether to include loans collateralized by nonfinancial assets other than real estate, such as auto loans.

 On July 18 the International Accounting Standards Board issued its discussion paper on the future of its conceptual framework. IASB uses the conceptual framework when it develops new IFRSs. It must address such basics as the definition of assets, liabilities, and equity, as well as principles for the measurement, recognition, and presentation of items in an entity's financial statements.  IASB said it will consider comments received on the discussion paper and then issue an exposure draft of proposals for a revised conceptual framework. IASB aims to publish that document in 2014 ahead of finalizing the project in 2015.

 The Securities and Exchange Commission Chairman Mary Jo White June 18, 2013 announced her agency would alter its longstanding controversial no admit, no deny settlement policy, under which entities charged with violating securities laws enter into settlement agreements without admitting or denying the government's allegations, and in some cases demand some settlements include an admission of misconduct. The SEC chairman said that going forward, the commission will try to obtain admissions in certain limited instances, including where the defendant engaged in egregious intentional conduct, or where the alleged misdeed harmed large numbers of investors.

 This is quite a victory for supporters of Judge Rakoff’s rejection of the $285m settlement between the SEC and Citicorp in November 2011. 

Members of the U.S. defense bar June 19 criticized the decision saying it could have a detrimental effect on SEC enforcement actions, complicate settlement negotiations and make defendants more likely to litigate rather than face the consequences of making  voluntary admissions.  They also questioned the types of cases in which the SEC can obtain admissions.

 At a July 30 insider trading webcast sponsored by the American Law Institute’s Continuing Legal Education Group, attorneys expressed the view that the SEC would be more likely to demand admissions in insider trading cases rather than in accounting cases. 

 Top of the July 2013 “auditing highlights” category is the passage July 25 by the International Auditing and Assurance Standards Board (IIASB) of proposals for transformation of international auditing standards (ISAs). Among other enhancements, the IAASB is proposing that auditors include specific statements about going concern in their reports, make an explicit statement about the auditor’ s independence from the audited entity, and, for listed entities, disclose the name of the engagement partner in the auditor’s report.

 As far as this relates to efforts in the U.S. to make audit reforms—the House of Representatives on July 8 attempted to thwart and preempt the Public Company Accounting Oversight Board’s mandatory auditor rotation proposal by voting 321-62 to pass the Audit Integrity and Job Protection Act (H.R.1564).

                 Compiled by Laura Tieger-Salisbury, Accounting Policy and Practice Report Copy Editor