PwC's weekly alert highlighting current financial reporting developments (including accounting, auditing and regulatory matters). This week's topics include:
The quarter close: A look at this quarter's financial reporting issues — Q4 2012
As an eventful quarter winds down, it’s full speed ahead toward another year-end financial reporting season. The quarter close—Q4 2012 and related video perspectives include the latest updates and some timely reminders to help you navigate the path ahead. Topics featured in this edition include: (1) highlights from the AICPA National Conference on Current SEC and PCAOB Developments; (2) insights into the FASB's project on disclosure effectiveness; (3) accounting hot topics, including Eurozone crisis update, fair value, asset impairments, pensions, valuation allowances, and more; (4) the latest FASB releases and updates on key standard-setting projects; and (5) lots more!
Dataline: Highlights of the 2012 AICPA National Conference on Current SEC and PCAOB Developments
Dataline 2012-22 highlights the topics discussed at the 2012 AICPA National Conference on Current SEC and PCAOB Developments (the Conference) held on December 3, 4, and 5. Conference presenters included representatives from regulatory and standard-setting bodies, auditors, users, preparers, industry experts, and an investor panel.
The status of potential incorporation of IFRS into the U.S. financial reporting system was discussed throughout the Conference. Many presenters supported a single set of high-quality global standards, but discussed the practical challenges of achieving this goal in the near term. The FASB and IASB indicated they will work together to complete the revenue recognition, financial instruments and leases projects (the joint priority projects), and continue to collaborate on future standard-setting.
Representatives from the SEC provided an update on regulatory and financial reporting matters including comment letter trends and rule-making activities. Another theme of the Conference centered on the critical importance of independence, objectivity, professional skepticism, and the role of audit quality in the capital markets.
Dataline: Financial instruments classification and measurement — An update on the FASB's tentative approach to be exposed in Q1 2013
Classification and measurement is an important part of the FASB and IASB’s joint project on financial instruments. Prior to this year, the boards worked independently, made varying levels of progress, and reached different conclusions on this topic. The IASB finalized amendments to its classification and measurement standard, IFRS 9, in 2010, but the FASB continued to redeliberate its 2010 proposal.
In 2011, the IASB decided to consider further targeted amendments to IFRS 9, after it delayed the effective date of the standard to 2015. This provided an opportunity for the FASB and IASB to achieve a more converged solution. They have now agreed on proposed changes that will broadly converge the approach for debt investments.
The FASB expects to issue a revised exposure draft in the first quarter of 2013 for public comment. The board will likely ask for feedback on the amount of time needed to implement the changes before deciding on an effective date for the final standard. The IASB issued an exposure draft of its proposed changes to IFRS 9 in late November 2012 with a proposed effective date of January 1, 2015. The exposure draft has a 120-day comment period.
Dataline 2012-21 provides a summary of the boards' decisions that is based on the project summaries posted on their websites, our observations of their meetings, and our understanding of their intent.
Regulatory and standard setting developments
The regulatory and standard-setting environment continues to be fluid with new regulations and standards emerging from the SEC, the FASB, the PCAOB, and others. Companies will want to stay ahead of the changes potentially impacting their businesses and may want to provide feedback to regulators and the FASB. Some changes will likely increase the demands on their people, including their audit committees, and processes, systems, and internal controls.
This issue of Regulatory and Standard-Setting Developments provides a high-level summary of some of the relevant regulations, standards, and guidance that were recently issued or are on the horizon, both in and outside of the U.S., and other information that may be of interest to audit committees, companies, and others.
In brief: FASB agrees on changes to reporting of discontinued operations
On December 12, the FASB met to resume redeliberations on its discontinued operations project. The project had been inactive since early 2010 while the board focused on its higher priority projects. At the meeting, the board reaffirmed its previous decision about the definition of a discontinued operation, modified certain disclosure requirements, and directed its staff to issue a revised exposure draft as soon as possible. This In brief article provides an overview of those decisions and what's next.
M&A snapshot: Financial risk management considerations in an acquisition
The acquisition of a business can have a significant impact on both the risk exposures and risk management strategies of the combined entity. In many cases, an acquirer’s financial risk exposure will increase as a result of the acquisition. However, there may be situations in which the acquiree’s operations reduce the acquirer’s current risk exposure. In any event, identifying potential changes in enterprise risks, creating an action plan to address them, and managing changes to risk management strategies post-acquisition are critical to developing short- and long-term solutions for integrating financial risk management considerations in an acquisition.
This edition of Mergers & acquisitions — a snapshot, provides insight on financial risk management considerations an acquirer should evaluate prior to the acquisition as well as steps to consider in developing a financial risk management plan post-acquisition.
PwC shares views on Omnibus proposal to revise certain definitions in the AICPA code
PwC submitted comments on the AICPA Professional Ethics Executive Committee (PEEC) exposure draft proposing revisions to the definitions of practice of public accounting and professional services under ET section 92, Definitions, of the AICPA’s Code of Professional Conduct (AICPA Code). PEEC believes that members should be required to comply with the AICPA Code, regardless of whether they are holding out themselves as a CPA. Thus, the definitions have been revised to delete the “holding-out” requirement. Additionally, the revised definition of professional services provides additional examples of the types of services that would be considered professional services, while the term practice of public accounting has been replaced by public practice. Based on these revisions, PEEC has also proposed to delete the definition holding out from the AICPA Code and make a number of other conforming changes.
We support the PEEC's stated objective of clarifying the circumstances under which the AICPA Code applies to services provided by its members. We recommend, however, that prior to adopting its proposal, the PEEC should further consider three things: (1) whether the PEEC's proposed revision to the definition of professional services will have the unintended effect of sweeping in services that have no connection with or relationship to the practice of accountancy; (2) the potential impact of eliminating "holding out" from ET Section 92 on Statement on Standards for Consulting Services No. 1 and subsequent SSCSs, which apply only to AICPA members "holding out" while providing consulting services; and (3) whether the proposal, as presently designed, has any additional consequences to the profession generally that should be fully vetted prior to adoption.
FASB and CAQ issue summary of disclosure effectiveness forums
The FASB, in conjunction with the CAQ, published a summary of observations from two forums on disclosure effectiveness held in October. The forums were designed to encourage dialogue among a wide range of financial reporting stakeholders on improving the effectiveness of disclosures in the notes to financial statements and other parts of the financial reporting package. The discussion focused on aspects of the FASB’s recent Invitation to Comment—Disclosure Framework, as well as financial reporting issues beyond the scope of that document.
Forum participants—including financial statement preparers and users, corporate board and audit committee members, auditors, attorneys, regulators, standard setters, and academics—provided insight and feedback on a number of topics, which included such things as: (1) the flexibility of disclosure requirements and the role of the financial statement notes, (2) the overlap of notes and Management’s Discussion and Analysis (MD&A), and (3) the cost benefit of disclosure effectiveness.
Private Company Council holds its inaugural meeting
On December 6, the Private Company Council (the Council) held its inaugural meeting with the FASB. Key agenda items for the meeting included (1) discussion of stakeholder feedback on the Private Company Decision-Making Framework, (2) the direction of the Council's technical agenda, and (3) the official transition from the Private Company Financial Reporting Committee (PCFRC) to the Council.
At the meeting, the Council identified four areas to research for agenda consideration. The areas include (1) accounting for uncertain income tax positions, (2) consolidating variable interest entities, (3) accounting for "plain vanilla" interest rate swaps, and (4) recognizing and measuring various intangible assets acquired in a business combination.
Note: PwC has issued an In brief article that provides an overview of the key items discussed at the meeting.
FASB meetings and project updates
Meeting summary: The FASB met on December 12 and discussed its projects on (1) accounting for financial instruments: classification and measurement, (2) investment companies, (3) liquidation basis of accounting, (4) reporting discontinued operations, and (5) transfers and servicing: repurchase agreements and similar transactions. See the FASB’s website for a summary of the decisions reached at the meeting.
Next open board meetings: The FASB has the following meetings scheduled for next week:
December 17: Joint FASB/IASB meeting
The boards plan to discuss their project on revenue recognition.
December 19: Joint FASB/IASB meeting
The board plans to discuss its project on presentation of comprehensive income: reclassification out of accumulated other comprehensive income.
See the FASB’s website for more information on the meetings.
Project updates: The FASB has updated the following project summaries:
PCAOB issues report on inspection observations re: audits of internal control over financial reporting
The PCAOB released a report summarizing inspection observations related to deficiencies in registered public accounting firms' audits of the internal control over financial reporting (ICFR) at public companies. The report — titled Observations from 2010 Inspections of Domestic Annually Inspected Firms Regarding Deficiencies in Audits of Internal Control over Financial Reporting — provides information about the nature and frequency of deficiencies in firms' audits of internal control over financial reporting detected during the PCAOB's 2010 inspections of eight domestic registered firms that have been inspected every year since the PCAOB inspection program began.
The report is based on PCAOB inspections that examined portions of approximately 300 audits. It describes the most pervasive deficiencies identified in those audits and also includes information on the potential root causes of the deficiencies.
Flashline is a weekly alert highlighting current financial-reporting developments (including accounting, auditing and regulatory matters) and is produced by the National Professional Services Group of PwC. It is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. To access additional content on financial reporting issues, register for CFOdirect Network (www.cfodirect.pwc.com), PwC’s online resource for financial executives.