By Laura A. Hay, CPA, CAE
- Look for 2011’s debates over financial reporting models for use in the United States to continue to shape the accounting and auditing landscape this year.
- Though the SEC has not provided a clear timeframe and method on IFRS incorporation, some variation of the “condorsement” approach seems likely to be adopted.
- Look for the FAF to establish the Private Company Standards Improvement Council subject to FASB ratification.
- While the final direction the PCAOB will take on audit quality proposals is not yet clear, it is certain changes are coming.
2011 will be remembered for a historic level of activity in accounting standards setting, and for the year’s debates over financial reporting models for use in the United States. These debates will continue to shape the accounting and auditing landscape for 2012 in a number of key areas.
Incorporating IFRS in the U.S. financial reporting model
In early December, the SEC announced a deferral “for a few months” in its decision of whether to incorporate IFRS in the U.S. financial reporting model, awaiting the completion of its work plan. In earlier staff papers, the SEC observed that:
- The IASB/FASB convergence process is behind schedule, with standards remaining far apart in fundamental ways.
- In a sampling of 183 SEC filings by foreign companies, there was wide divergence in the practice of implementing IFRS, and transparency and clarity of the financial statements could be improved.
In a May staff paper, the SEC signaled that one approach under consideration was a combination of continued convergence and FASB endorsement of future international standards, commonly referred to as “condorsement”. Under this approach, the U.S. would look to the IASB to set new accounting standards, but the SEC and FASB would retain the authority to establish exceptions and implementation guidance for unique U.S. circumstances. The label “U.S. GAAP” would be retained.
Given the number of rulemaking priorities on its agenda, the SEC has not provided a precise schedule for when a final determination on IFRS incorporation will be made. Also uncertain is whether an option for U.S. companies to report under IFRS will be permitted, as advocated by the AICPA and others providing comment letters.
Achieving clarity on a timeframe and method in 2012 would be an asset for U.S. filers and investors, however indications seem to be that some variation of the “condorsement” approach as proposed by the SEC is most likely to be adopted. Such an approach effectively would mean complete incorporation would be years away, and a U.S. modified version would most likely differ from IFRS as applied in non U.S. locales.
Private company accounting standards
After decades of questioning the relevance of U.S. GAAP for private companies, in 2010, the FAF, AICPA and NASBA jointly appointed a Blue Ribbon Panel on Standard Setting for Private Companies. The Blue Ribbon Panel was charged with developing recommendations for whether users of private company financial statements would benefit from differential GAAP, and if so, how differential private company GAAP should be accomplished. The panel delivered its report to the FAF in January 2011 recommending:
- Differences within U.S. GAAP for private companies.
- An independent board under FAF to establish accounting standards for private companies.
In October 2011, the FAF issued a proposal supporting differential standards, but without establishing a separate board. The FAF proposal would create a Private Company Standards Improvement Council to recommend exceptions or modifications to U.S. GAAP for private companies, subject to ratification by the FASB. Comments on the proposal were due January 14 and the FAF Trustees plan to make a final decision following the end of the comment period.
Given the scope of the convergence projects on the FASB’s schedule, many in the profession have commented that the concerns of private companies cannot be sufficiently addressed without an independent board. As of press date, an AICPA letter writing campaign in support of an independent board was in full force.
FASB and the FAF have signaled interest in retaining FASB’s authority over GAAP. Look for the FAF to establish the Council subject to FASB ratification.
Interesting to watch will be AICPA action on a comment letter sent to the FAF from AICPA Council. The AICPA Council response suggests that if an independent board is not established by the FAF for private company accounting standards, the profession will assume this responsibility itself. What form this response will take has not been specified.
PCAOB scrutiny of audit quality
As PCAOB Chair Jim Doty’s comments on audit quality became increasingly more skeptical, PCAOB Concept Releases issued during 2011 signaled that changes are coming in public company auditing.
The comment period ended Dec. 14, 2011 on a controversial PCAOB Concept Release proposing mandatory audit firm rotation for public companies. While the focus of the proposal is on improving audit quality by enhancing auditor independence, objectivity and professional skepticism, Doty has conceded in public comments that implementation of auditor rotation as a solution could be difficult.
In an earlier Concept Release, the PCAOB took aim at the auditor’s report, proposing alternatives for revisions to the opinion, including additional qualitative analysis from the auditor. The comment period on this Concept Release ended Sept. 30, 2011.
While the final direction the PCAOB will take on these proposals is not yet clear, it is certain changes are coming. In addition to proposals included in formal Concept Releases, Doty’s public comments in recent months have been critical of other aspects of the audit, including auditor testing of internal controls. Public roundtables are to be scheduled in the first half of 2012 to discuss enhancing auditor independence, objectivity and professional skepticism.
FASB/IASB accounting standards activity
An initially aggressive schedule of standard setting projects originally targeted for completion in June 2011, in accordance with the FASB/IASB Memorandum of Understanding (MOU) was adjusted in response to an outcry from users and preparers that quality standards and quality constituent feedback could not be achieved on the projected schedule. Convergence work was completed on priority MOU projects, including consolidated financial statements, fair value measurement and presentation of other comprehensive income. Three priority projects targeted for completion in the second half of 2011 have extended into 2012:
This standard was re-exposed in November 2011, with a 120-day comment period, and a final standard is projected by the end of 2012. Progress on this standard should be monitored, as it will have significant effects on any business that has contracts with customers.
Currently scheduled to be re-exposed in the first half of 2012, this standard would require asset and liability recognition for all leases, with the possible exception of very short-term leases.
In response to significant political pressure due to the role of financial instruments in the financial crisis, FASB continues to determine its position on the classification and measurement of financial instruments, and on impairment. FASB decisions should be monitored, as all entities with financial instruments would be affected by this potential standard. Additional projects originally included on the June 2011 timetable have been deferred indefinitely, including significant changes in financial statement presentation.
In a December statement, the heads of both FASB and IASB said a new convergence model that is both manageable and effective is needed. However, both said clarity is needed on the SEC plan for the use of IFRS in the U.S.
What does this all mean?
2012 is expected to be another year of significant regulatory evaluation and decision making that will have future significance to accounting standards in the U.S. Given the initial goals set for 2011 and the delay from the financial crisis distractions and constituents demanding that quality of accounting and auditing standards be paramount, the revised plans and related timetables for 2012 will be challenging. Active constituents, such as the OSCPA Accounting and Auditing Committee, are monitoring and commenting on these issues, with the common goal being insuring the final decisions of these regulatory bodies preserve the level of quality in reporting/auditing standards that U.S. CPAs have come to expect.
Laura Hay, CPA, CAE is COO of The Ohio Society of CPAs and staff liaison to the Accounting & Auditing Committee. She can be reached at email@example.com or 800.686.2727, ext. 322.
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