by Richard Wortmann, CPA, DABFA
During the last year and a half, the FASB has been active in issuing new standards and revisions to existing standards that have broad impact to most industries. All practitioners should be aware that, in 2009, the FASB codified the standards and issues revisions to the codification as Accounting Standards Updates (ASU).
In 2009, seventeen ASUs were issued. Bear in mind that the codification became effective in July 2009. In other words, seventeen new standards were issued within six months. Granted, the first standard was to change the GAAP Hierarchy to recognize the Codification as “GAAP,” and the second and seventh standards contained technical corrections. More important to most practitioners:
- two of the remaining fourteen standards were related to fair value
- two were related to revenue recognition
- one was related to variable interest entities
In 2010, the FASB kept up its momentum and, to date, has issued twenty-five additional ASUs. These include several ASUs for technical corrections, but of particular interest are two more on revenue recognition, two on receivables, and a handful of standards specific to industries, such as defined contribution pension plans, oil and gas, entertainment and healthcare. There are also a large number of exposure drafts outstanding with unknown implementation dates, which are mostly as part of the convergence project with international standards.
Not to be left out, the AICPA has issued new standards over the past eighteen months as well. Many of these are part of the clarification project (making the audit standards more user-friendly). Nearly forty-five proposed auditing standards are in exposure draft as of the end of September, 2010. More immediate are the two significant changes in the SSARS. The first, which is already in effect, is the applicability of SSARS when performing an interim review. The second is a complete rewrite of SSARS as it relates to compilations and reviews effective for periods ending after December 15, 2010.
CONSOLIDATIONS, INCLUDING VARIABLE INTEREST ENTITIES
Consolidations
- 100% of the balance sheet and income statement of the subsidiary is consolidated into the parent.
- Non-controlling interest (formerly, minority interest) is “backed-out” of the income statement after net income from consolidated operations.
- Non-controlling interest is included in equity.
Variable-Interest Entities
- The primary beneficiary (PB) is no longer the entity that absorbs the majority of expected losses or receives a majority of the expected residual returns.
- The PB is the entity that has the power to direct the activities of an entity that most significantly impact the entity’s economic performance. (Note: The “parent” still must have an obligation to absorb losses or receive returns, but it does not have to be the “majority” any more.)
- Evaluations of whether or not the entity is a VIE that must be consolidated is an on-going requirement, not just when remeasurement events occur.
- Quantitative evaluations are eliminated.
- Rules on evaluating kick-out rights are clarified. (The general rule is that kick-out rights are ignored in evaluation.)
- Single-lease arrangements between related parties (e.g., the traditional “triangle,” including the same controlling owner, operating company and leasing company) generally must consolidate (lease between related parties has variability).
- The disclosure and presentation requirement is amended. Assets and liabilities of a VIE that consolidate and that are not available to creditors of the “parent” are separately presented on the balance sheet.
Business Combinations
- The purchase price cannot be adjusted for purchase-price contingencies longer than one year after the acquisition date.
- The assets and liabilities of the acquired entity must be measured at FV, and acquirers are no longer permitted to allocate purchase price to identifiable assets and liabilities with a plug to goodwill (e.g., notes receivable and payable may be reported on the balance sheet at other than amortized costs [face amount]).
- There are significant increases in disclosure requirements.
Receivables
- For public companies, changes go into effect as of FYE 12/31/10. For non-public companies, they will be delayed for one year.
- Note, trade, credit sales receivables are included.
- It now states that the inability to estimate losses for uncollectible receivables preclude accrual of the receivable and can push the sale to the installment method of cost recovery.
- There are increased disclosure requirements.
Fair Value
- The table presenting “Input Levels” must break down assets and liabilities into the entity’s risk model.
- Reconciliation is required for transfers in and out of each input level.
- It should be a tabular presentation.
- The net asset value (NAV) permitted for certain investments that calculate NAV as directed by the investment company A&A guide:
- should be level 2 if it can be settled in the near term
- should be level 3 if settlement is restricted (time-wise)
There is no guidance, however, when something goes from near-term to not near-term.
- There are increased disclosure requirements.
SSARS
- For interim reviews, when the prior year was audited, the subsequent is expected to be audited, and they were prepared under the same financial reporting framework (basis of accounting), SSARS does NOT apply, and auditing standards must be followed. The steps include:
- a risk assessment
- documentation of internal controls (including controls over interim reporting)
- an evaluation of whether controls are in place (walk-through)
- communication of internal control deficiencies
The results of the review can be used in relation to the year-end audit.
- The firm is required to document their understanding with the client (e.g., in an engagement letter).
- Each report must include additional language relating to management’s responsibility for internal controls.
- Expanded disclosure of cause-of-independence impairment on a compilation can be included in the accountant’s compilation report; however, the old disclaimer “We are not independent with respect to XYZ Company” can still be used.
- It introduces the concept of review evidence sufficient to support limited assurance.
- The accountant is required to gain sufficient understanding of the entity and industry in order to be able to assess where the risk of errors may be in the financial statements, and design the inquiries and analytics to address those risks.
- It suggests that “boilerplate” review procedures are not appropriate.
RICHARD WORTMANN, CPA, DABFA. Richard is an instructor for the AuditSense team, specializing in providing our GAAP Update classes. He is also the founding member of RW Group, LLC. Richard has over 25 years of experience meeting the accounting and auditing needs of public companies, employee benefit plans, nonprofit organizations, government agencies, health care organizations, private foundations, retail stores, construction companies, manufacturers, and professional services firms. His expertise includes financial and compliance audits, compilation, and reviews; consulting on internal controls and quality control; policies and procedures development; and strategic planning. Richard is a member of the Pennsylvania Institute of CPAs as well as the American Institute of CPAs, where he has served on numerous committees.
