ACCOUNTING, AUDITING HIGHLIGHTS OCT. 18- NOV. 3, 2016

 ACCOUNTING HIGHLIGHTS:

 The Financial Accounting Standards Board

 CLASSIFYING DEBT

Oct. 19: New rules are to be proposed to provide a less costly, simpler way for companies to determine whether to classify debt as “current” or “noncurrent” in a classified balance sheet, the Financial Accounting Standards Board said.

Companies have said the current approach for classifying debt is costly and complex. Classifying whether a company's debt is due in the near term, “current,” or long term, “noncurrent,” is significant. The number—sometimes billions in dollars—enables banks and other lenders or analysts to evaluate a company's financially health, and its ability to meet its obligations.  

CREDIT LOSSES

Oct. 20:  Companies should start thinking early about tax issues, IT, data management and various other functions that will change when they have to adopt the new credit losses standard, FASB Chairman Russell Golden said at the National Conference of the Securities Industry,

Companies need to begin communicating with their investor relations teams, he advised. Banks and other financial institutions, following the standard, Financial Instruments--Credit Losses (ASC 326) will need to record credit losses on loans and other financial instruments in a timelier fashion than under current rules.

INCOME TAXES

Oct. 24: FASB issued Accounting Standards Update No. 2016-16: Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. It requires companies to report the income tax consequences of transfers of assets from one unit of a corporation to another unit or subsidiary when the transfer actually occurs, as opposed to waiting until the assets have been sold.

CONSOLIDATION: VARIABLE INTEREST ENTITIES

Oct. 26: FASB issued ASU No. 2016-17—new consolidation rules, which amend earlier FASB guidance on consolidation of what are known as “variable interest entities,” represent the latest step in an ongoing effort to improve and simplify a complex area of accounting. The rules will lead to a company not having to report in its umbrella financial statements all of its indirect interests held through related parties under common control.

Oct. 27: FASB proposed ASU No. 2016-350, which would be a technical correction to ASU No. 2016-14, Not-for-Profit Entities (ASC 958): Presentation of Financial statements of Not-for-Profit Entities, to clarify one disclosure line item not-for-profits are required to provide about their endowment funds

The Securities and Exchange Commission

ENFORCEMENT: YAHOO

Oct. 20: Keith Higgins, director of the Securities and Exchange Commission's Division of Corporation Finance, declined to say whether the agency is probing Yahoo! Inc.'s disclosures over its data breach.

“To protect the integrity of the investigative process, the SEC generally does not comment on whether it has opened an investigation in a particular matter,” Higgins wrote in an Oct. 18 letter responding to a request for information from Sen. Mark Warner (D-Va.) (01 APPR, 10/4/16).

Oct. 24: More than 5,300 subsidiaries disappeared from the Securities and Exchange Commission filings of three major U.S. banks—Bank of America Corp., Citigroup Inc., and Wells Fargo & Co.—in the last eight years, according to an analysis by Bloomberg BNA.

Most of the subsidiaries still exist, but loose regulation and enforcement by the SEC allowed them to disappear from public view.

ENFORCEMENT: REVENUE INFLATION

Oct. 27:  Two Logitech International SA executives must face SEC allegations that they inflated the company's revenue, minimized the write-down of millions of dollars’ worth of parts for Revue, a television set-top device that led to large financial losses for the company.

Judge Jon S. Tigar of the U.S. District Court of the Northern District of California found that the SEC had pleaded with enough particularity to survive a dismissal challenge.

EMBEZZLEMENT

Oct. 31: A PricewaterhouseCoopers partner is facing SEC allegations he audited a venture capital fund without inquiring into payments that should have indicated a multi-million dollar embezzlement by the owner of the fund's adviser.

Adrian D. Beamish failed to scrutinize over $18 million of illegal withdrawals that biotech venture capitalist G. Steven Burrill made from Burrill Life Sciences Capital Fund III under the guise of “advanced management fees,” the SEC said.

NEW APPOINTMENT

Nov 2: The SEC announced that Mark A Panucci—who previously worked at the SEC from 2007-2010-- is returning as a Deputy Chief Accountant in the Office of the Chief Accountant later this month. He currently is a partner in Pricewaterhouse Coopers LLP’s national professional services group, and a member of the American Institute of CPA’s Auditing Standards Board. Mr. Panucci will assist the Commission in its oversight responsibility for the Public Company Accounting Oversight Board’s

INTERNAL REVENUE SERVICE

CONFLICT OF INTEREST: INDEPENDENCE

Facebook Inc.'s dispute with the Internal Revenue Service, which could end up costing the company as much as $5 billion, highlights the pitfalls of a common arrangement: hiring internal auditors to advise on tax planning.

Over the past four years, Facebook paid EY almost $23 million for auditing, plus $21 million for tax planning and other non-audit work. The strategy designed for Facebook by Ernst & Young LLP helped the social media giant slash billions from its U.S. tax bill since 2010. Part of Facebook's defense is that the plan was fully reviewed by its outside auditors. The accounting firm that signed off on EY's tax plan was also EY.

Investors rely on auditors for picture of company's financials, taxes. Critics such as the Securities and Exchange Commission and the Public Company Accounting Oversight Board say these situations may result in violating SEC independence rules. The Center for Audit Quality, an industry-funded group, says that by holding dual roles as consultant and auditor, firms gain a familiarity with the company's finances, which helps them better serve the client and the public.

AMERICAN INSTITUTE OF CPA’s

STANDARDS

Oct. 25: The American Institute of CPAs issued SSARS No.23 Accounting and Review Services No 23, Omnibus Statement on Standards for Accounting and Review Services —2016, which clarifies the standard, amends AR-C sections 60, 70, 80, and 90 in AICPA Professional Standards.

BROKER DEALERS

Nov.1 The AICPA has proposed another set of implementation guidance for the 2014 revenue recognition rules, this time for broker-dealers and depository institutions.

The Nov. 1 proposals cover commission income, including trade date versus settlement date, for broker-dealers and sale of non-operating assets—other real estate owned—for depository institutions.

INTERNATIONAL ACCOUNTING HIGHLIGHTS

MATERIALITY

Oct. 18: The International Accounting Standards Board voted unanimously to include in its proposed guidance on materiality a four-step decision tree that would require:

• identifying information that's potentially material;

• evaluating whether the information identified indeed is material;

• organizing material information within draft financial statements; and

• reviewing draft financial statements “to determine whether all material information has been identified, including consideration of materiality from an aggregated perspective,” a staff document said.

CASH FLOWS

Oct. 20: An entity's operating activities should be defined or described in its statement of cash flows instead of being a residual or default classification, the U.K. Financial Reporting Council said.

In a discussion paper on improving the statement of cash flows, the council also said that items shouldn't be excluded from operating activities simply because they are unusual or non-recurring— but should be disclosed separately.

LIMIT ACCOUNTING OPTIONS

Oct. 27:  The IASB said that it is considering placing limits on the accounting choices that preparers of financial statements can exercise.

The IASB said, in a staff paper drafted for the Nov. 3 Capital Markets Advisory Committee (CMAC) meeting, that it is assessing whether international financial reporting standards currently allow preparers too many accounting options “and whether steps should be taken to reduce the number of accounting choices in the future.”

IFRS Advisory Council 

TRANSPARENCY

Oct. 31: Primary financial statements prepared under international financial reporting standards could be used to strengthen disclosures and increase transparency, IASB visiting fellow Koichiro Kuramochi said in a presentation to the IFRS Advisory Council meeting in London. Kuramochi said the board must consider an array of challenges in carrying out its project on primary financial statements.

INSURANCE

Oct. 31: The IASB should establish a transition resource group on implementing the board's forthcoming insurance contracts standard, members of an IASB advisory panel said.

 

AUDITING HIGHLIGHTS

Oct. 17: the Public Company Accounting Oversight Board’s announced the renewal of the joint audit inspections and data protection agreement with Finland. Five of the approximately 900 audit firms currently registered with the PCAOB outside of the U.S. in 86 jurisdictions are located in Finland,

Oct. 26: The PCAOB announced the renewal of joint audit inspections with Norway and Luxembourg.

NON-GAAP METRICS

Oct. 27: Members of the PCAOB's Investor Advisory Group. discussed worrisome trends in the continuing spike in companies use of alternative performance options that depart from generally-accepted accounting principles (GAAP). Non GAAP financial measures are not calculated nor presented in accordance with U.S. GAAP and so they are not subject to auditor review.

Some investors at the meeting expressed grave concerns that the average “retail investor” relies on these measures, which are not standardized or comparable between companies, often to the exclusion of the GAAP measures, without understanding their limitations.

INTERNAL REVENUE SERVICE

CONFLICT OF INTEREST: INDEPENDENCE

Facebook Inc.'s dispute with the Internal Revenue Service, which could end up costing the company as much as $5 billion, highlights the pitfalls of a common arrangement: hiring internal auditors to advise on tax planning.

Over the past four years, Facebook paid EY almost $23 million for auditing, plus $21 million for tax planning and other non-audit work.

The strategy designed for Facebook by Ernst & Young LLP helped the social media giant slash billions from its U.S. tax bill since 2010. Part of Facebook's defense is that the plan was fully reviewed by its outside auditors. The accounting firm that signed off on EY's tax plan was also EY.

Investors rely on auditors for picture of company's financials, taxes. Critics such as the Securities and Exchange Commission and the Public Company Accounting Oversight Board say these situations may result in violating SEC independence rules. The Center for Audit Quality, an industry-funded group, says that by holding dual roles as consultant and auditor, firms gain a familiarity with the company's finances, which helps them better serve the client and the public.

AUDITOR OVERSIGHT:

Nov.1: A 2016 annual report issued jointly by the Center for Audit Quality (CAQ) and Audit Analytics reveals an increase in companies’ voluntary disclosure in the pivotal areas of external auditor oversight, such as auditor appointment, auditor rotation, and audit fees.

“Audit committees play important roles in enhancing audit quality and representing investor interests, so it is encouraging to observe how public companies continue to shed more light on audit committee practices,” said CAQ Executive Director Cindy Fornelli.  

U.K. AUDITORS

INTERNATIONAL AUDITING HIGHLIGHTS

Oct. 19: Auditors must seize the initiative in highlighting concerns about the companies they audit to boards of directors, the chief executive officer of the U.K. Financial Reporting Council told Bloomberg BNA. Speaking on the sidelines of FRC's 2016 open annual meeting in London, Stephen Haddrill said that “auditors should draw boards’ attention to risks” identified in audits as part of a broader effort to build a corporate culture that encourages public trust in companies and fosters ethical behavior.

The council sets accounting, auditing and actuarial standards for the U.K. and Ireland.

INFORMATION TECHNOLOGY FRAUD DETECTOR

Oct 21: Assa Abloy's Chief Executive Officer said paper-based accounting made it possible for managers to cook the books in China, and the company will switch to using an Information Technology system.

Assa Abloy, a Swedish lock maker with a global presence, said that it will pursue legal action against managers involved in the faulty book-keeping that artificially inflated revenue in its Chinese affiliate.

ISAs U.K.

Oct. 25: The U.K. Financial Reporting Council said Oct. 24 that it intends to adopt two revised international standards on auditing for the U.K. (ISAs UK)

FRC will implement ISA 800 in the UK with one modification and ISA 805 with no changes, which together are designed “to support the provision of high quality assurance over public regulatory reports, in order to underpin user confidence in the information contained therein,” the council said.

In addition, FRC proposed in an Oct. 25 exposure draft to revise its guidance for applying international auditing standards to some U.K. insurers.

 

Composed and Compiled by Laura Tieger Salisbury, Accounting Policy and Practice reporter and editor

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