US Week in Review - Week ending 12 January 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
Many questions have arisen about the appropriate accounting treatment for incentive payments under the Medicare and Medicaid programs for certain eligible professionals and hospitals that meaningfully use certified electronic health record (EHR) technology. The SEC staff has informally expressed its view on the accounting treatment of these payments. Our Technical Line publication discusses the SEC staff's view and the accounting implications of these incentive payments for issuers and non-issuers that operate hospitals.
Technical Line: Revenue recognition proposal - health care and software and cloud services
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) recently re-exposed their joint revenue recognition proposal, which would converge revenue recognition guidance under US GAAP and IFRS into a single model and replace essentially all revenue recognition guidance, including industry-specific guidance.
These industry-specific publications supplement our Technical Line, Double-exposure: The revised revenue recognition proposal and highlight some of the more significant implications that the latest revenue recognition proposal may have on the (1) health care and (2) software and cloud services sectors. These publications provide an analysis of the proposed model and highlight key changes from current practice.
In coming weeks, we will issue additional industry-specific publications that will address, in further detail, how the proposal would affect those industries.
Many life sciences companies adopted Accounting Standards Update 2010-17, Milestone Method of Revenue Recognition, for the first time in their 2011 financial statements. The standard requires disclosures at the individual milestone level. While we believe entities should provide these disclosures for each material milestone, it may be appropriate for life sciences entities to aggregate disclosures for immaterial milestones. Our Technical Line publication provides questions to consider when assessing the materiality of milestones for disclosure.
Our comment letter supports the FAF's plan to establish a new council that would identify, propose, deliberate and formally vote on specific improvements to US accounting standards for private companies, subject to ratification by the FASB. However, we believe that the criteria for determining whether and when exceptions or substantive modifications to US GAAP for private companies are warranted must be developed judiciously to minimize the risk that the process will result in two sets of US accounting standards. We continue to strongly oppose a separate standard setter for privately held companies, particularly one that is not subject to oversight by the FAF.
Ernst & Young comments on PCAOB proposal to disclose engagement partner and certain other participants in audits
In our letter to the PCAOB on its proposal to improve the transparency of audits by disclosing the engagement partner and certain other participants in audits, we support additional disclosure of other participants but suggest modifications that would make the information more useful to users of financial statements and simpler for firms to compile.
We do not support the disclosure of the engagement partner's name in the audit report or PCAOB Form 2 because we do not believe it would provide meaningful or useful information to investors or improve audit quality. Additionally, we believe disclosure of the engagement partner's name would increase the likelihood that partners would be named in private litigation and increase partners' liability exposure.
Standard Setter updates
Financial Accounting Standards Board (FASB)
FAF releases post-implementation review report on FIN 48
The Financial Accounting Foundation (FAF) released a report on the first formal “post-implementation review” of a FASB standard: FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). Overall, the review team concluded that:
- FIN 48 has resulted in more information about uncertain income tax positions being reported and investors generally are using the information. But preparers may not disclose sensitive information that they perceive would be detrimental to tax settlements.
- Preparers are accounting for and reporting income tax uncertainties more consistently and the information is more relevant than it had been before FIN 48. However, consistently applying FIN 48 may not increase comparability across reporting entities due primarily to managements' judgments and tax code complexity. The information also may not be predictive of future cash flows.
- On balance, the benefits of FIN 48 outweigh its costs.
The review team also recommended ways to improve the FASB standard-setting process. The FASB's chairman said FASB members will consider the findings and provide a written response soon.
The post-implementation review process was established by the FAF as part of its oversight of the FASB and the GASB and is designed to be independent of their standard setting. The objectives are to determine whether a standard is accomplishing its purpose; evaluate implementation, compliance costs and related benefits; and recommend ways to improve the standard-setting process.
11 January 2012 FASB meeting
Disclosures about risks and uncertainties and the liquidation basis of accounting - The FASB tentatively decided not to require that management make a going concern assessment. However, the FASB decided that it will consider requiring early warning disclosures about an entity’s deterioration of resources and rise in obligations. The Board will consider whether these disclosures should include information about an entity’s reliance on mitigating factors or management’s plans to alleviate concerns about potential business failure.
Impairment of indefinite-lived intangible assets - The Board confirmed that the comment period for its upcoming Exposure Draft on testing indefinite-lived intangible assets for impairment will close in April 2012.
For additional detail of the Board’s discussion, see the FASB's Action Alert.
Upcoming meetings and webcasts
20 January 2012 FASB meeting
The Board is scheduled to discuss issues related to the business strategy criterion in the classification and measurement model for financial instruments.
See the FASB calendar for upcoming education sessions. No decisions are made at these sessions.
Securities and Exchange Commission (SEC)
SEC staff wants more disclosure of exposure to European debt
The staff of the SEC's Division of Corporate Finance issued new guidance that provides its views on disclosures that registrants, including foreign private issuers, should consider regarding their European debt exposure. The guidance emphasizes that registrants' disclosures have been inconsistent in both substance and presentation, reducing both transparency and comparability for investors.
Specifically, the SEC staff wants registrants to disclose gross funded exposure separately by country, segregated by sovereign (i.e., government entities) and non-sovereign debt (e.g., financial institutions, other companies) and by financial instrument. Registrants also should consider separately disclosing unfunded exposure (to arrive at total gross exposure) as well as the effects of credit default protection (to arrive at net exposure). Entities also should disclose how management is addressing the exposures and the effects of any significant developments, including those after the reporting date.
The guidance follows a discussion of the topic by the SEC staff at the December 2011 AICPA National Conference on Current SEC and PCAOB Developments. Companies should consider this guidance as they prepare their annual reports (e.g., Form 10-K, Form 20-F).
Upcoming Thought center webcasts and podcasts
Repairs regulations - Do the new rules provide permanent improvements?
17 January 2012, 1:00 p.m. Eastern time
2011-12 Tax risk and controversy survey
A new era for global risk and uncertainty
9 February 2012, 10:00 a.m. Eastern time
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