Accounting Alert
Jan. 6, 2011
Accounting Alert offers accounting news you can use from Crowe Horwath LLP’s audit and assurance experts. In each issue of this electronic newsletter, you will find abstracts of recent accounting issues and regulatory developments.
From the Financial Accounting Standards Board (FASB)
Guidance for Pharmaceutical Manufacturers
Accounting Standards Update (ASU) No. 2010-27, “Other Expenses (Topic 720): Fees Paid to the Federal Government by Pharmaceutical Manufacturers,” was issued by the FASB on Dec. 16, 2010. The ASU provides guidance on how pharmaceutical manufacturers should recognize and classify fees mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act. The guidance specifies that the liability for the fees should be estimated and recorded in full upon the first qualifying sale with a corresponding deferred cost that is amortized to expense over the calendar year it is payable. The amendments are effective for calendar years beginning after Dec. 31, 2010, when the fees initially become effective. The ASU can be viewed on the FASB’s website (acceptance of terms required).
ASU on Goodwill Impairment Testing
On Dec. 17, 2010, the FASB issued ASU No. 2010-28, “Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The amendments in the ASU modify Step 1 of the goodwill impairment test (assessing whether the carrying value of the reporting unit exceeds its fair value) for reporting units with zero or negative carrying amounts. Some entities had concluded that Step 1 was passed because the fair value of the reporting unit was greater then zero, and as a result Step 2 (determining whether goodwill was impaired and calculating the amount of the impairment) of the test was not necessary. For those reporting units, an entity will be required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining that likelihood, an entity should consider whether there are any adverse qualitative factors indicating that a goodwill impairment exists. The qualitative factors are consistent with existing guidance and examples.
For public entities, the amendments in the ASU are effective for fiscal years, and interim periods within those years, beginning after Dec. 15, 2010. Early adoption is not permitted. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after Dec. 15, 2011. Nonpublic entities may adopt the amendments early using the effective dates for public entities. Any goodwill impairment resulting from adoption of the ASU should be reported by public and nonpublic entities as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. Goodwill impairments occurring after the initial adoption should be included in earnings as required by FASB Accounting Standards Codification Section 350-20-35.
The ASU can be viewed on the FASB’s website (acceptance of terms required).
Pro Forma Disclosure Requirements for Business Combinations
The FASB issued ASU No. 2010-29, “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations,” on Dec. 21, 2010. This ASU affects only public companies and is intended to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure for business combinations. It specifies that if a public entity presents comparative financial statements, those statements should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual periods only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.
The ASU is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after Dec. 15, 2010. Early adoption is permitted. The ASU can be viewed on the FASB’s website (acceptance of terms required).
Proposed ASUs
On Dec. 17, 2010, the FASB issued two proposed ASUs for public comment. The first proposed ASU, “Health Care Entities (Topic 954): Presentation and Disclosure of Net Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts,” would require a healthcare entity to change the presentation of its statement of operations by reclassifying the provision for bad debts from an operating expense to a reduction from revenue (net of contractual allowances and discounts). New disclosures about how the entity considers collectibility in determining the amount and timing of revenue and bad-debt expense, and a reconciliation of the activity in the allowance for doubtful accounts by major payor type would also be required. The exposure draft does not provide a proposed effective date for the amendments. Comments on the proposal are due Feb. 15, 2011.
The second proposed ASU, “Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers,” addresses how health insurers should recognize and classify fees mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act. The proposed guidance specifies that the liability for the fees should be estimated and recorded in full after the entity provides qualifying health insurance in the applicable calendar year in which the fees are payable. A corresponding deferred cost should be recorded and amortized to expense over the calendar year it is payable. The proposal also indicates the fees would not meet the definition of an “acquisition cost” as recently amended by ASU No. 2010-26, “Financial Services – Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.” The amendments would be effective for calendar years beginning after Dec. 31, 2013, when the fees initially become effective. Comments on the proposal are due April 18, 2011.
The exposure drafts can be viewed on the FASB’s website (acceptance of terms required).
From the Securities and Exchange Commission (SEC)
Updated Financial Reporting Manual
On Dec. 6, 2010, the SEC posted a new version of its Financial Reporting Manual, updated Sept. 30, 2010. The manual is intended as an internal reference document for the SEC staff, but preparers and others might find it a useful reference source for financial reporting matters. The manual was most recently updated for issues related to significance testing of equity method investees, income averaging for significance testing, stock-based compensation in IPOs, internal control over financial reporting, selected financial data, and MD&A, as well as other changes.
Approval of PCAOB Risk Assessment Rules
The SEC on Dec. 23, 2010, issued “Public Company Accounting Oversight Board; Order Approving Proposed Rules on Auditing Standards Related to the Auditor’s Assessment of and Response to Risk and Related Amendments to PCAOB Standards.” This order formally approves the following eight PCAOB auditing standards (AS) relating to the auditor’s assessment of, and response to, risk in an audit.
- AS No. 8, “Audit Risk”
- AS No. 9, “Audit Planning”
- AS No. 10, “Supervision of the Audit Engagement”
- AS No. 11, “Consideration of Materiality in Planning and Performing an Audit”
- AS No. 12, “Identifying and Assessing Risks of Material Misstatement”
- AS No. 13, “The Auditor’s Responses to the Risks of Material Misstatement”
- AS No. 14, “Evaluating Audit Results”
- AS No. 15, “Audit Evidence”
These new auditing standards are effective for audits of fiscal years beginning on or after Dec. 15, 2010. The SEC order can be viewed here. PCAOB Release No. 2010-004, which announced the new standards, can be viewed here.
From the American Institute of Certified Public Accountants (AICPA)
Proposed Guidance on Statements Prepared Based on Another Country’s Reporting Framework
The Auditing Standards Board of the AICPA has issued an exposure draft of a proposed revised statement on auditing standards (SAS), “Financial Statements Prepared in Accordance With a Financial Reporting Framework Generally Accepted in Another Country.” The proposed guidance would supersede SAS No. 51, “Reporting on Financial Statements Prepared for Use in Other Countries,” and replaces a previous exposure draft issued during September 2009. When financial statements are prepared in accordance with a financial reporting framework generally accepted in another country, and such financial statements are intended for use in the other country, this revised proposal would require the inclusion of an emphasis-of-matter paragraph to highlight the foreign financial reporting framework in any report also intended for use in the United States, while permitting an unqualified opinion to be expressed on the financial statements. The proposed guidance would be effective for audits of financial statements for periods ending on or after Dec. 15, 2012.
The exposure draft can be viewed on AICPA website. Comments are due on Jan. 31, 2011.
Additional Clarity Standards Approved
The Auditing Standards Board of the AICPA recently finalized six additional standards as part of its Clarity Project, bringing the total number of completed clarified standards to 23. These clarified standards will be effective for audits of financial statements for periods ending on or after Dec. 15, 2012. The Clarity Project is intended to make existing U.S. generally accepted auditing standards (GAAS) easier to understand, apply, and move toward converging U.S. GAAS with International Standards on Auditing issued by the International Auditing and Assurance Standards Board. All of the final clarified statements on auditing standards can be viewed here.
From the International Accounting Standards Board (IASB)
Amendments to Two Existing Standards
On Dec. 20, 2010, the IASB issued amendments to two existing standards. The first amends International Accounting Standard (IAS) 12, “Income Taxes.” The amendments, described in the document “Deferred Tax: Recovery of Underlying Assets,” provide a practical approach for measuring deferred tax assets and liabilities when investment property is measured using the fair value model in IAS 40, “Investment Property.” The amendments introduce a presumption that recovery of the carrying amount normally will be through sale. The presumption can be rebutted if the investment property is held within a business model with the objective of consuming substantially all of the economic benefits from the investment property over time, rather than through sale. The amendments are effective for annual periods beginning on or after Jan. 1, 2012, with earlier application permitted. The IASB’s press release about the amendments to IAS 12 can be viewed here.
The second amends International Financial Reporting Standard (IFRS) 1, “First-time Adoption of International Financial Reporting Standards.” The amendments, described in “Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters,” provide relief for first-time adopters of IFRS from having to reconstruct certain transactions that occurred before their date of transition to IFRS. The guidance replaces references to a fixed date of “January 1, 2004” in IFRS 1 with “the date of transition to IFRSs.” In addition, the amendments provide guidance on how an entity should resume presenting financial statements in accordance with IFRSs after a period when the entity was unable to comply with IFRSs because its functional currency was subject to severe hyperinflation. The amendments are effective for annual periods beginning on or after July 1, 2011, with earlier application permitted. The IASB’s press release about the amendments to IFRS 1 can be viewed here.
Hedge Accounting Proposal
The IASB published an exposure draft, “Hedge Accounting,” on Dec. 9, 2010. The proposal’s requirements are intended to enable an entity to better reflect its risk management activities in the financial statements, thereby helping investors to understand the effect of those activities on future cash flows. The proposal addresses what instruments qualify for designation as hedging instruments and what items qualify for designation as hedged items, provides an objective-based hedge effectiveness assessment, and discusses enhanced presentation and disclosure requirements for hedging activities. The proposal is the third and final phase of the IASB’s project to replace IAS 39, “Financial Instruments: Recognition and Measurement.”
Comments are due to the IASB March 9, 2011. The IASB’s press release, with links to the exposure draft and additional materials, can be viewed here.
Guidance Issued on Management Commentary
On Dec. 8, 2010, the IASB issued an IFRS practice statement, “Management Commentary – A framework for presentation.” The practice statement is a broad, nonbinding framework for the presentation of narrative reporting to accompany financial statements prepared in accordance with IFRSs. Management commentary provides financial statement users with a historical and prospective commentary on the entity’s financial position, financial performance, and cash flows (similar to the MD&A used in filings with the SEC). The IASB’s press release with a link to the practice statement can be viewed here.
From the Governmental Accounting Standards Board (GASB)
GASB Statement No. 62 Issued
On Dec. 30, 2010, the GASB issued Statement No. 62, “Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements” (GASB 62). This new guidance is intended to enhance the usefulness of the Codification of Governmental Accounting and Financial Reporting Standards by incorporating guidance that previously could be found only in certain Financial Accounting Standards Board and American Institute of Certified Public Accountants pronouncements. By incorporating this guidance into a single source, the GASB hopes to reduce the complexity of locating and using the authoritative literature needed to prepare state and local government financial reports, thereby resulting in a more consistent application of the relevant guidance. GASB 62 is effective for financial statements for periods beginning after Dec. 15, 2011, with earlier application encouraged. The GASB’s news release announcing the statement can be viewed here.
Two Projects Added to Current Technical Agenda
During December 2010, two projects were added to the GASB’s current technical agenda. Projects on the current agenda are those the GASB expects to deliberate actively during the coming year. The first project, “Government Combinations,” addresses government combinations and will consider the financial reporting requirements that apply when one government annexes another, when there is a consolidation of governments or government functions, when an acquisition takes place, when shared services agreements between governments exist, and in certain other circumstances. The project will also consider spinoff issues. The GASB anticipates issuing an exposure draft by mid-2012.
The second project, “Deferred Inflows of Resources and Deferred Outflows of Resources: Omnibus,” is a narrow-scope practice issue. Because the GASB Concepts Statement specifies that recognition of deferred inflows and deferred outflows should be limited to those instances identified in GASB authoritative pronouncements, a standard is needed to determine which, if any, additional balances not specifically identified, but that appear to meet the definitions of deferred inflows and outflows in GASB Concepts Statement No. 4, “Elements of Financial Statements,” should be reported as deferred outflows or inflows rather than as assets or liabilities. Currently only GASB Statements No. 53, “Accounting and Financial Reporting for Derivative Instruments,” and No. 60, “Accounting and Financial Reporting for Service Concession Arrangements,” require recognition of deferred inflows and outflows of resources in specific situations. If the GASB determines that certain other balances should be reported as deferred inflows or deferred outflows, then reclassification guidance for those balances would be necessary. The GASB plans to issue an exposure draft in summer 2011. The GASB currently has an exposure draft, “Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position” (available here), that will provide statement presentation guidance for these elements.
The GASB’s current project agenda with links to information about the projects can be viewed here.
Contact Information
For more information, please contact Ed Grossman at 863.603.4814 or ed.grossman@crowehorwath.com.
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