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Update on the current board issues: January 2016

Audit committee issues

FASB issues new guidance on the recognition and measurement of financial instruments 

On January 5, the FASB issued an Accounting Standards Update intended to improve the recognition and measurement of financial instruments. It affects public and private companies, not-for-profit organizations, and employee benefit plans.

The new guidance makes targeted improvements to existing GAAP by requiring: 

  • equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value; 
  • public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and
  • separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements.

The guidance is effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. All other entities, including certain not-for-profit entities and employee benefit plans, will have an additional year, or may early adopt coincident with the public business entity effective date.

For more information on the new guidance, read PwC’s In brief.

CAQ offers principles-based framework for auditing fair value measurements

The Center for Audit Quality recently unveiled a framework for auditing accounting estimates and fair value measurements in a letter to the PCAOB.

The framework was laid out in a December 1 addendum to the CAQ’s prior comment letters submitted in response to the PCAOB’s request for input on staff consultation papers related to auditing accounting estimates, including fair value measurements, and using the work of specialists.  

The framework is consistent with overarching principles the CAQ described in previous comment letters, which state that any enhancements to existing auditing standards should:

  • Recognize the relationship between the auditor’s risk assessment and the audit procedures designed to sufficiently and appropriately respond to that risk;
  • Consider the range of accounts that involve varying levels of measurement uncertainty and the varying levels of complexity in measurement and risk associated with different accounting estimates;
  •  Recognize that accounting estimates may be subject to a significant degree of measurement uncertainty and such uncertainty will exist irrespective of the level of effort involved in auditing the accounting estimate; and
  • Continue to recognize that auditors may use the work of a specialist when situations arise that require specialized knowledge and subject matter expertise in a field other than accounting or auditing.