In the last week the Financial Accounting Standards Board has issued two final standards and two proposed Accounting Standards Updates.

On April 12, 2013, the Financial Accounting Standards Board issued for public comment what it calls “consequential amendments” in Accounting Standards Update, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, to propose detailed changes to the wording of the earlier Financial Instrument draft rules issued February 14, 2013. These amendments also reflect FASB’s decision to eliminate the fair value options for financial instruments that are not in the scope of those proposed major rule changes. Comments are due for both the original and the consequential amendments by May 15, 2013.

On April 17, 2013, FASB issued a narrow-scoped proposal relaxing the criteria to qualify for use of what is known as the effective yield method of accounting for low-income housing tax credit investments in the proposed ASU Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. Comments are due by June 21, 2013.

 On April 19, 2013, FASB issued ASU No. 2013-06, Not-for-Profit Entities (Topic 958): Services Received from Personnel of an Affiliate, which provides that a not-for-profit entity must record the services provided gratis by personnel of an affiliate of the not-for-profit and which directly benefit the non-for-profit. The changes are effective for fiscal years starting after June 15, 2014. The ASU is to be applied prospectively with early adoption allowed.

On April 22, 2013, FASB issued ASU No. 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting modifying existing rules for when liquidation is imminent. This new rule represents a response to situations that unfolded many times over in the period that began with the financial crisis of 2008. 

Other activities by FASB included issuing an Invitation to Comment by June 21, 2013 on Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies. This is a joint effort by FASB and the Private Company Council which aims to improve financial reporting requirements for nonpublic entities without using generally accepted accounting principles.

 FASB continued to issue explanations of proposed ASU, Financial Instruments- Credit Losses (Subtopic 825-15), most recently in a podcast presentation April 17, 2013 on what it calls its “current expected credit losses model.”

 The financial instruments project was also discussed earlier that week at a joint meeting April 11, of the IASB’s parent body, the International Financial Reporting Standards Foundation and the Monitoring Board. IASB chairman Hans Hoogersvorst recognized the frustration and delay that the attempt to reach a converged impairment solution is causing.

 At the inaugural meeting of the Accounting Standards Advisory Forum, April 9, 2013, FASB chairman Leslie Seidman rejected the criticism that the model might encourage or choke off bank lending and noted that it was not part of FASB’s mission to promote loan growth or have any predetermined outcome but rather to “end up with an approach that people think reflects the economic phenomena.”

  On the auditing front, the American Institute of Certified Public Accountants on April 17, 2013 released for public comment an exposure draft Using the Work of Internal Auditors. The proposal specifies that that the external auditor assess the internal audit team’s competency, retain full responsibility for the audit and perform a sufficient amount of the audit work to ensure the audit’s independence and objectivity.   

 And for the second time in  In re Longtop Financial Technologies Ltd. Securities Litigation, S.D.N.Y.; 11 Civ. 3658, 4/8/13, the U.S. District Court for the Southern District of New York dismissed Deloitte Touche Tohmatsu CPA Ltd. as a defendant in the securities fraud class suit brought by investors.

Judge Shira Sheindlein concluded that the amended allegations against DTTC failed to create a strong inference of scienter but rather the amended complaint strengthened the earlier inference that DTTC was “duped by Longtop,” not that it recklessly enabled Longtop.

 The first time the case was heard in November 2012, the court stated that an auditor is not expected to be clairvoyant, and therefore the recklessness standard of scienter cannot be met by alleging “fraud by hindsight.”  Adequacy and good faith are the standards required.     

On April 11, 2013 the related SEC v. Deloitte Touche Tohmatsu CPA, LLP hearing---the Securities and Exchange Commission’s lawsuit, ­­ ongoing since September 2011----returned to court on the issue of re-imposing a stay on the SEC’s request to enforce the subpoena in the U.S. District Court for the District of Columbia.

The hearing was scheduled by Judge Gladys Kessler to review whether Magistrate Judge Deborah Robinson had properly lifted the stay of the proceedings on March 4, 2013. DTTC’s counsel Miles Ruthberg continued to argue that the Securities and Exchange Commission’s case is not an ordinary subpoena enforcement action but an illegal reach into the People’s Republic of China.

In response to DTTC’s request of a  stay until the separate omnibus administrative proceeding against BDO China Dahua CO. Ltd, et al  is resolved, SEC Assistant Chief Litigation Counsel David Mendel asserted his previous argument that the administrative case is a separate proceeding seeking different relief and that the work papers are a key part of the SEC's investigation of DTTC's client Longtop Financial Technologies Ltd., a PRC-based issuer whose securities were listed and traded in the United States until it was deregistered by the SEC in December 2011.

On April 22, 2013 Judge Kessler, in accordance with Magistrate Judge Robinson, found that the DTTC had failed to show any ‘hardship or inequity’ it would suffer from simultaneous litigation of the administrative proceeding with this case.

She also stated that there was “little danger of inconsistent rulings on Deloitte’s underlying concern about application of Chinese law,” since both the administrative proceeding and the court action could ultimately be appealed to the U.S. Court of Appeals for the District of Columbia. 

Judge Kessler agreed with the SEC that its interests in obtaining the Longtop documents would be hindered by a stay, particularly an indefinite one, given that DTTC was challenging the legality of the service in the administrative proceeding.

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