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FASB clarifies public business entity

Oct 30, 2013

The FASB met today to discuss feedback received on proposed Accounting Standards Update (ASU), “Definition of a Public Business Entity: An Amendment to the Master Glossary.” The Board agreed on additional refinements and clarifications to the proposed definition of a public business entity.

In addition, the Board decided to (1) grant permission to an entity that does not meet any of the criteria in the definition of a public business entity to use financial reporting alternatives within U.S. GAAP, (2) provide examples of “publicly available” in criterion (e), (3) move discussions about whether to amend existing definitions of a nonpublic entity and a public entity within the Codification to a later date, and (4) establish an effective date of the final definition of a public business entity to be concurrent with the first final ASU that uses the definition.

The Board has directed the staff to begin drafting a final ASU for a written ballot vote.

For more information, please see:

  • Deloitte's October 31, 2013, Accounting Journal Entry: FASB redeliberates the proposed definition of a public business entity.
  • The FASB's minutes on definition of a nonpublic entity.

SEC updates financial reporting manual

Oct 29, 2013

The SEC's Division of Corporation Finance has issued an update to its Financial Reporting Manual (FRM).

Revised sections of the FRM have been updated as of June 30, 2013. The updates:

  • Incorporate guidance on the Jumpstart Our Business Startups Act into the manual.
  • Clarify the guidance on a registrant's requirements related to the age of interim financial statements for an acquired business.
  • Expand guidance to include the SEC staff's interpretive views on how a registrant should consider the effects of retrospective accounting changes in the income significance test for its equity method investees.

The updated FRM is available on the SEC's Web site.

FASB chair remarks on the future of GAAP

Oct 29, 2013

At the October 28, 2013, meeting of the National Association of State Boards of Accountancy, FASB Chairman Russell Golden gave his views regarding the FASB’s responsibility to “preserve and evolve” GAAP standards and the responsibilities it has to its stakeholders.

Mr. Golden explained that the key principle of preserving GAAP while ensuring that it evolves is “to find common ground while recognizing that in some cases, we may need to maintain some differences.” He stated that the goal of the international standard-setting process is to develop converged standards, but  acknowledged that jurisdictions may have different needs due to national regulatory laws or business culture. For domestic standard setting, the FASB has to identify the different needs of different types of companies.

Next, Mr. Golden discussed three areas the FASB will focus on to achieve its goal of improving financial reporting in the United States while also improving and converging international financial reporting:

  • Improvements to U.S. GAAP when necessary.
  • Participation in the development of IFRSs.
  • Cooperation with other national standard setters.

Lastly, Mr. Golden noted the work done by the FASB domestically. Concerning private companies, he mentioned the progress made by the Private Company Council (PCC), including the PCC’s advisory role on FASB projects and in the development of proposed alternative GAAP for accounting for interest rate swaps and goodwill for private companies. Also, he noted that the FASB is working on a disclosure framework project that will improve the effectiveness of disclosures in notes to financial statements by communicating information that is most important to users of financial statements.

Full text of the speech is available on the FASB's Web site.

Deloitte comment letter on insurance contracts

Oct 29, 2013

We have published our comment letter on FASB Proposed Accounting Standards Update (ASU), “Insurance Contracts.” We support the Board’s objectives of improving, simplifying, and enhancing the financial reporting requirements for insurance contracts and of increasing the comparability and decision-usefulness of information about such contracts, but believe some modifications can help advance these objectives.

These suggested modifications include:

  • The exceptions for warranties, financial guarantee contracts, and certain fixed-fee contracts should be further amended and clarified.
  • Entities using the building block approach should be required to unlock the margin each reporting period to reflect its revised assumptions about the ultimate expected profitability of an insurance contract portfolio.
  • Entities should not be compelled to recognize the effects of changes in expected cash flows attributable to changes in the discount rate in other comprehensive income.
  • Revenue for a portfolio of contracts accounted for under the premium allocation approach should not be recognized fully over the coverage period when the liability for incurred claims is measured without any provision for risk during the settlement period.

Further, we support the FASB and IASB in their convergence efforts, but understand the challenges on agreeing to a completely converged model. We also recommend that the Board conduct field testing and establish an implementation group before issuing a final ASU.

Click to access the full comment letter.

PCAOB member discusses current projects

Oct 28, 2013

On October 25, 2013, at the Brigham Young University Accountancy Alumni Conference in Provo, Utah, PCAOB member Jay Hanson discussed current PCAOB projects and the effects they may have on the audit profession and public companies.

After providing a brief history of the PCAOB, Mr. Hanson gave details of several projects occurring within the PCAOB, including:

  • Audit quality indicators — Aims to help define audit quality, establish a framework, and develop quantitative indicators that may be used to measure audit quality. It may affect content/focus of inspections, influence future standard-setting projects, and help track progress of a firm over time.
  • Outreach to audit committees — Assists the PCAOB in determining how to help audit committees enhance their oversight of audit firms and establish “two-way” communication with audit committees. The goal is to raise the overall performance of audit committees.
  • Increasing the amount of information provided by auditors in their reports — Proposing a change that will require auditors to include “critical audit matters” in their reports. This will lead to investors and others having additional insight of the audit.
  • Estimates, including fair value, and supervision of specialists — Updating existing audit performance standards “to ensure that auditors are doing enough work to be able to provide appropriate assurance on what are becoming increasingly complex financial statements.”
  • Auditing revenue — Monitoring the deliberations between the FASB and IASB as they develop a new accounting standard for revenue. The plan is for the PCAOB to issue its own auditing revenue standard that would be effective concurrently with the FASB accounting standard.

The full text of the speech is available on the PCAOB's Web site.

PCAOB issues practice alert on audits of ICFR

Oct 25, 2013

On October 24, 2013, the staff of the PCAOB issued Staff Audit Practice Alert No. 11, "Considerations for Audits of Internal Control Over Financial Reporting," to note deficiencies the PCAOB has observed in audits of internal control over financial reporting during the last three years.

To address the PCAOB staff's concern about significant auditing deficiencies it has noted in audits of internal control over financial reporting, the staff has issued this practice alert to highlight the areas of concern. The alert specifically addresses the following issues:

  • Risk assessment and the audit of internal control.
  • Selecting controls to test.
  • Testing management review controls.
  • Information technology considerations, including system-generated data and reports.
  • Roll-forward of controls tested at an interim date.
  • Using the work of others.
  • Evaluating identified control deficiencies.

The alert also provides guidance to audit committees on their responsibilities surrounding the audits of internal controls over financial reporting:

Audit committees of companies for which audits of internal control are conducted might wish to discuss with their auditors the level of auditing deficiencies in this area identified in their auditors' internal inspections and PCAOB inspections, request information from their auditors about potential root causes of such findings, and ask how they are addressing the matters discussed in this alert. In particular, audit committees may want to inquire about the involvement and focus by senior members of the firm on these matters.

The practice alert is available on the PCAOB's Web site.

FASB discusses consolidation, investment companies, and NFP financial statements

Oct 25, 2013

At its meetings on October 23–24, 2013, the FASB continued its discussion of three projects: consolidation (principal vs. agent analysis), investment companies (disclosures about investments in another investment company), and not-for-profit financial reporting (financial statements).

In its discussion of the consolidation project, the Board decided to exclude from the scope of ASC 810, Consolidation, an entity’s interest in a fund that is required to operate and does operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.

The Board voted to proceed to an exposure draft on its project on disclosures about investments in another investment company. Under the proposal, an investment company would disclose its share of the dollar amounts of management fees and incentive fees paid by the investee fund and its share of income or loss from its investment in the investee fund.

The FASB also made tentative decisions on how to improve the statement of cash flows for not-for-profit entities.

For more information on the decisions reached during this meeting, click on the links below:

  • Deloitte's October 24, 2013, Accounting Journal Entry: Consolidation — FASB discusses scope exception for money market funds.
  • Deloitte's October 24, 2013, Accounting Journal Entry: Investment companies — FASB votes to issue exposure draft on expanding investment company disclosures.
  • FASB minutes on principal versus angent analysis.
  • FASB minutes on disclosures about investments in another investment company.
  • FASB minutes on the not-for-profit financial reporting discussion.

FASB issues two proposed ASUs on share-based payment awards and hybrid financial instruments

Oct 23, 2013

On October 23, 2013, the FASB issued two proposed Accounting Standards Updates (ASUs) on (1) accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period and (2) determining whether the host contract in a hybrid financial instrument issued in the form of a share is more akin to debt or to equity.

The proposed ASUs were issued in response to consensuses-for-exposure reached at the EITF’s September meeting (link to the FASB's Web site). Comments on the proposed ASUs are due by December 23, 2013.

Click on the links below for more information:

  • Proposed ASUCompensation — Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force) (link to the FASB's Web site).
  • Proposed ASUDerivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force) (link to the FASB's Web site).
  • Deloitte's October 23, 2013, Accounting Journal Entry: EITF — FASB Issues Two Proposed ASUs in Response to EITF Consensuses Reached.
  • Deloitte's September 2013 EITF Snapshot.

SEC issues proposed rule on crowdfunding

Oct 23, 2013

At today's open meeting, SEC Chair Mary Jo White announced that the SEC has issued a proposed rule on crowdfunding, a method of raising capital through small investment amounts from a large number of investors, such as over the Internet or through social media. The rule would exempt qualifyied crowdfunding transactions from registration and prospectus delivery requirements.

The proposed rule (link to SEC's Web site) includes a number of parameters aimed at facilitating capital formation while protecting investors, such as:

  • Crowdfunding transactions must be done through broker-dealers registered with the SEC or a new intermediary called a "funding portal."
  • The maximum amount raised or invested through crowdfunding is limited to $1 million in any 12-month period.
  • Issuers must file financial statements with the SEC and provide them to investors and intermediaries. The financial statements must cover the shorter of the: (1) issuer’s two most recent fiscal years or (2) length of time the issuer has been in existence.
  • Specified disclosures must be provided to investors and potential investors, including information on the business, owners, use of proceeds raised, and certain related-party information.
  • The inclusion of certain “bad actor” restrictions that bar certain issuers from taking advantage of the crowdfunding exemption.

Comments on the proposed rule are due by February 3, 2014.

See Deloitte's October 29, 2013, Accounting Journal Entry: SEC proposes rule on crowdfunding for more details.

Speeches from today's open meeting on crowdfunding are available on the SEC's Web site:

Mary Jo White discusses compliance

Oct 22, 2013

SEC Chair Mary Jo White gave a speech today at the National Society of Compliance Professionals National Membership Meeting in Washington, D.C. She emphasized the SEC's support for compliance officers and discussed collaborative efforts to empower compliance professionals to be more effective at detecting and preventing compliance infractions.

Ms. White praised compliance officers, describing them throughout her speech as "invaluable," "a critical line of defense," and "extremely important." She noted how heavily the SEC relies on compliance professionals because the Commission's resources are finite and often stretched. The SEC works to support compliance officers' efforts to create a comprehensive compliance environment within their respective firms. Ms. White stated, "We work to proactively provide you with the information that helps you focus and target your resources in vulnerable areas that we believe may be overlooked. And we work to structure the most effective exams we can to supplement your efforts."

Ms. White discussed how the SEC empowers compliance officers:

  • SEC outreach initiative assessing the "tone at the top" — Senior examiners and other SEC officials engage with firms' executives and boards to see how the role of compliance officer is woven into the fabric of the firm, promoting the role of compliance and ensuring that firms recognize and acknowledge its importance. 
  • Transparency —
    • The SEC publishes risk alerts, highlighting practices, policies, and procedures that show or suggest a pattern of noncompliance throughout the industry. 
    • In February 2013, the examination program published a list of its current priorities, which included broad areas of focus critical to all SEC registrants.
  • Sophisticated examination program — The SEC utilizes Risk Analysis Examination (RAE), which efficiently and effectively identifies and addresses significant compliance issues. Some of its other new tools should allow the SEC to detect and inform compliance officers about activities, trends, and issues they may not be aware of.

Ms. White also discussed the relationship between the SEC's examination team and enforcement staff. She also emphasized that compliance officers who perform their responsibilities diligently, in good faith, and in compliance with the law are not at risk of enforcement action. Compliance officers do not become supervisors solely because they provide advice concerning compliance issues to business line personnel.

The full text of the speech is available on the SEC's Web site.

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