US Week in Review - Week ending 1 March 2012
The US Week in Review highlights this week’s developments and emerging issues in the financial reporting world and gives you direct access to relevant technical accounting guidance and thought leadership produced by Ernst & Young.
Certain materials referenced below are available exclusively in AccountingLink. The site is available free of charge, but requires a one-time registration.
Ernst & Young publications
The FASB and the IASB remain committed to putting leases on the balance sheet, but continue to struggle with how to recognize related lease revenue and expense. This is likely to delay a new exposure draft. Our To the Point publication summarizes what you need to know about the status of the leases project.
This industry-specific publication supplements our Technical Line, Double-exposure: The revised revenue recognition proposal, and highlights some of the more significant implications that the latest revenue recognition proposal may have for the real estate industry.
In our letter to the PCAOB, we support its proposal to enhance communication with audit committees and provide additional information to help audit committees fulfill their oversight responsibilities. We believe the proposal will help enhance audit quality.
We also offer suggestions to improve the final standard, including defining certain terms within the proposal, allowing for the use of auditor judgment in determining the nature and extent of communications and modifying communications about our assessment of an entity's ability to continue as a going concern. We also offer suggestions about applying the requirements to audits of non-issuer brokers and dealers.
We have updated the following publications and prepared printed copies that you can now order online from AccountingLink:
- Business combinations FRD
- Derivative instruments and hedging activities FRD
- Share-based payments FRD
- 2011 SEC annual reports - Form 10-K
- 2012 proxy statements - An overview of the requirements
- 2012 SEC quarterly reports - Form 10-Q
- 2011 SEC Comments and Trends
If you need to order multiple copies, please contact your Ernst & Young representative.
Standard Setter updates
Financial Accounting Standards Board (FASB)
27-29 February 2012 joint FASB-IASB Board meeting
Insurance contracts - The FASB decided that the premium allocation approach (PAA) would be required, while the IASB Board decided to permit its use, for all contracts with coverage periods of one year or less, and for contracts with longer coverage periods if certain criteria are met. The Boards decided to require discounting (and interest accretion) in the measurement of the liability for remaining coverage for contracts under the PAA that have a significant financing component. As a practical expedient, for contracts with coverage periods one year or less, insurers need not apply discounting (or interest accretion) if at contract inception, the insurer expects substantially all the premium payments to be due within the coverage period. Also, the Boards decided that PAA contract acquisition costs should include directly attributable costs (limited to successful efforts for the FASB only). However, if the coverage period is one year or less, all acquisition costs could be expensed.
The Boards agreed that the measurement of the liability for onerous contracts should be updated at the end of each reporting period and (IASB only) should include a risk adjustment. The Boards confirmed their previous approaches to the measurement of infrequent, high-severity events.
The Boards decided to base the criteria for unbundling goods and services in insurance contracts on the proposed Revenue Recognition criteria for identifying separate performance obligations. The accounting for distinct performance obligations would follow the applicable IFRS or US GAAP standard.
Accounting for financial instruments: impairment - The Boards tentatively agreed that financial assets initially classified in Bucket 1 (i.e., all originated loans and purchased financial assets with no explicit evidence of credit deterioration) that are transferred to Buckets 2 or 3 would move back into Bucket 1 if the criteria requiring transfer out of Bucket 1 are no longer satisfied. Purchased financial assets with explicit evidence of credit deterioration would never be eligible to move into Bucket 1.
The Boards also tentatively agreed that trade receivables with significant financing components would follow an expected loss approach. Companies could make a policy election to either (1) fully apply the three-bucket model or (2) use a simpler approach that would require initial and subsequent classification of these receivables in Buckets 2 or 3. No decision was reached on a model for trade receivables that don't have a significant financing component.
Accounting for financial instruments: classification and measurement - The Boards tentatively decided that a financial asset could be measured in a category other than fair value through net income (depending on the business model for that asset) if its contractual terms result only in payments on specified dates of principal and interest on the outstanding principal. Principal would be the amount transferred by the holder on initial recognition. Interest would be consideration for the time value of money and the credit risk associated with the outstanding principal.
The Boards also reached tentative decisions on the effects of contingent cash flows, modifications of the economic relationship between principal and interest, and prepayment and extension options on the cash flow characteristics assessment of financial assets. The decisions would change the model the FASB is developing and require minor amendments to the application guidance in IFRS 9.
Leases - See our To the Point publication above.
For additional detail of the Boards' discussion, see the FASB's Action Alert.
Upcoming meetings and webcasts
7 March 2012 FASB meeting
The Board will discuss, as relates to its insurance contracts project, the accounting for investment contracts with discretionary participation features.
See the FASB calendar for upcoming education sessions. No decisions are made at these sessions.
Securities and Exchange Commission (SEC)
SEC staff discusses top 10 tips for IPOs
- Talk about complex or novel accounting matters with the staff before filing the initial registration statement. In addition to informal discussions or meetings, companies should consider the need for formal preclearance of accounting conclusions with the Office of the Chief Accountant or written requests for waivers, accommodations or interpretive positions from the Division of Corporation Finance's Chief Accountant's Office.
- Be aware of all information that is publicly available about the company. The staff may comment about matters that are not disclosed in the registration statement.
- Tell the SEC examiner about any prefiling correspondence with other SEC offices or divisions so the conclusions reached will be considered in the initial review of the filing.
- Write a robust Management's Discussion and Analysis. Disclosure of nonfinancial metrics or statistics that are key performance indicators, for example, should clearly indicate their importance and how they correlate to the financial statements.
- Follow SEC requirements for non-GAAP financial measures (including the Compliance and Disclosure Interpretations issued in January 2010). Companies should determine that any non-GAAP measures are not misleading and are not given undue prominence.
- Disclose any preliminary results or capsule information carefully. Companies should provide context for any discussion of preliminary results or estimates and determine that disclosure of such amounts is balanced (i.e., does not tell only the good news).
- Request a conference call with the staff to discuss comments that are difficult to resolve. An example may be when the same issue remains outstanding after more than two amendments.
- Notify the SEC examiner of the anticipated offering schedule as soon as possible. This includes the planned timing of the road show, pricing and requesting effectiveness.
- Include your estimated price range in the filing as soon as possible. The estimated price range affects disclosures such as the capitalization table, dilution calculations and pro forma financial information. The SEC staff will not be able to thoroughly review those disclosures until the price range is included.
- Always send revised material and correspondence with SEC examiners through EDGAR. EDGAR is the only official channel for communication with the SEC staff regarding a filing. However, prefiling correspondence is not required to use EDGAR.
SEC staff expects approval of the 2012 US GAAP XBRL Taxonomy this month
Subject to approval by the Commission, the SEC staff plans to update EDGAR on 26 March 2012 to support the 2012 US GAAP XBRL Taxonomy.
The 2009 taxonomy is expected to become unavailable for use shortly thereafter. Registrants may continue to use the 2011 taxonomy, but the SEC staff strongly encourages companies to adopt the latest version of the US GAAP taxonomy for their XBRL exhibits. Registrants should start planning to transition to the 2012 taxonomy for their 2012 Exchange Act reports.
Details about the taxonomies can be found on the FASB and SEC websites. The US GAAP-related tags can be viewed on the FASB website, and SEC-related tags (e.g., document and entity information) are on the SEC website.
Public Company Accounting Oversight Board (PCAOB)
PCAOB proposals focus on related parties and significant unusual transactions
The PCAOB issued for public comment a proposed auditing standard intended to help improve the auditor's evaluation of a company's relationships and transactions with related parties. The proposed standard includes audit procedures for identifying, assessing and responding to the risks of material misstatements associated with related-party transactions beyond those currently required by the PCAOB's interim standard.
The PCAOB also proposed amendments to its existing standards intended to enhance the auditor's identification and evaluation of significant unusual transactions and the auditor's consideration of a company's financial relationships and transactions with its executive officers. The proposed amendments would be effective for audits of financial statements for fiscal years beginning on or after 15 December 2012. Comments are due by 15 May 2012.
PCAOB proposes amendments related to auditors of brokers and dealers
The PCAOB issued for public comment proposed amendments to its rules and forms so they apply to auditors of brokers and dealers registered with the SEC, as authorized by the Dodd-Frank Act.
The proposed amendments include references to audits and auditors of brokers and dealers in relevant Board rules. The proposed amendments would also make the Board's auditing standards, including most of its ethics and independence requirements, applicable to broker dealer audits once the SEC directs auditors of brokers and dealers to comply with PCAOB standards. In addition, the amendments would change PCAOB registration, withdrawal and reporting forms to, among other things, require that auditors of brokers and dealers identify annually each audit report issued for a broker or dealer. Comments are due by 30 April 2012.
International Accounting Standards Board (IASB)
IFRS for SMEs Update (IASB)
The February 2012 IFRS for SMEs Update is a staff update on the latest news surrounding IFRS for Small and Medium-sized Entities (SMEs).
International Federation of Accountants/International Auditing and Assurance Standards Board (IFAC/IAASB)
IESBA Code of Ethics revised
The International Ethics Standards Board for Accountants (IESBA) has issued for public comment proposed changes to the definition of "engagement team" in the IESBA Code of Ethics for Professional Accountants.
The proposals address comments received by the IAASB on its exposure draft (ED) on ISA 610, Using the Work of Internal Auditors, which highlighted inconsistencies between the independence requirements for external auditors under the Code and the use of internal auditors to perform external audit procedures. Comments on the ED are due by 31 May 2012.
Upcoming Thought center webcasts and podcasts
Bottom-line benefits of sustainable business practices
Global survey results and discussion of action steps - a webcast by Ernst & Young LLP and GreenBiz
19 March 2012, 1:00 p.m. Eastern time
The Ernst & Young Q1 2012 financial reporting update
Co-sponsored by Financial Executives International
22 March 2012, 1:00 p.m. Eastern time