Accounting Alert

July 8, 2010

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)

Proposed ASU on Revenue Recognition
On June 24, 2010, the FASB issued an exposure draft of a proposed Accounting Standards Update (ASU), “Revenue Recognition (Topic 605) – Revenue from Contracts with Customers.” The proposed guidance, developed jointly with the International Accounting Standards Board (IASB), would establish principles that an entity would apply when reporting information about the amount, timing, and uncertainty of revenue and cash flows arising from its contracts to provide goods or services to its customers. The proposed ASU would supersede most of the existing guidance – consisting of broad revenue recognition concepts and numerous requirements for particular industries or transactions – on revenue recognition contained in U.S. generally accepted accounting principles (GAAP).

Under the proposal, an entity would recognize revenue in an amount reflecting the consideration it receives, or expects to receive, in exchange for the goods or services transferred to customers. To apply the principles, an entity would:

  • Identify the contract(s) with a customer;
  • Identify the separate performance obligations in the contract;
  • Determine the transaction price;
  • Allocate the transaction price to the separate performance obligations; and
  • Recognize revenue when each performance obligation has been satisfied.

The exposure draft can be viewed on the FASB’s website. Comments on the proposal are due Oct. 22, 2010.

Proposed ASU on Fair Value Measurements and Disclosures
On June 29, 2010, the FASB issued an exposure draft of a proposed ASU, “Fair Value Measurements and Disclosures (Topic 820) – Amendments for Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” The result of another joint project with the IASB, this proposed ASU is intended to ensure that fair value will have the same meaning in U.S. GAAP and in the International Financial Reporting Standards (IFRS), and that their respective fair value measurement and disclosure requirements will be the same except for minor differences in wording and style. The proposed amendments would change the wording used to describe many of the principles and requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. It would also clarify the FASB’s intent about the application of some existing fair value measurement guidance and require some additional disclosures about fair value measurements. Many of the ASU’s requirements are not intended to result in a change in the application of the guidance currently contained in FASB ASC Topic 820, but some of the proposed requirements would change a particular principle or requirement for measuring fair value such as:

  • Clarifying that the concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets;
  • Providing guidance for measuring the fair value of an interest classified in shareholders’ equity;
  • Permitting an exception to the requirements in Topic 820 for measuring fair value when a reporting entity manages its net exposure, rather than its gross exposure, for financial instruments that are managed within a portfolio; and
  • Providing additional guidance on the application of blockage factors and other premiums and discounts in a fair value measurement.

The exposure draft can be viewed on the FASB’s website. Comments on the proposal are due Sept. 7, 2010.

Delay in Standards Convergence Project Announced
The FASB and the IASB issued a joint statement on June 2, 2010, regarding their timeline for convergence of U.S. GAAP and IFRS. The boards had set a target date for completion of the convergence projects by June 2011, but now say a few projects may be extended into the second half of 2011. The delay is in response to constituents’ concerns about their ability to provide high-quality input on the large number of exposure drafts originally planned for publication by June 30, 2010. The FASB and the IASB have modified their plans to prioritize the major projects and to limit the number of significant or complex exposure drafts to no more than four issued in any one quarter. The revised strategy and timeline is not expected to negatively impact the Securities and Exchange Commission’s work plan to consider whether and how to incorporate IFRS into the U.S. financial reporting system.

From the U.S. Supreme Court

Ruling Issued on PCAOB
On June 28, 2010, the U.S. Supreme Court (the Court) issued its decision in the lawsuit challenging the constitutionality of the Public Company Accounting Oversight Board (PCAOB). The Court ruled that provisions of the Sarbanes-Oxley Act that allow for the removal of PCAOB board members by the commissioners of the Securities and Exchange Commission (SEC) only for good cause contradict the Constitution’s separation of powers provisions. However, the decision notes the PCAOB may continue to function as it previously has if the board members are made subject to removal at the will of the SEC commissioners. No other aspects of the PCAOB or its programs are affected by the Court’s decision. Therefore, registration, inspection, enforcement, and standard-setting activities of the PCAOB will continue unchanged.

The Court’s decision can be viewed here.

From the American Institute of Certified Public Accountants (AICPA)

Auditing Standards Board Delays Clarity Project
The Auditing Standards Board (ASB) has voted to change the effective date of clarity standards that have been completed but not yet issued as authoritative. The new effective date is for reporting periods ending on or after Dec. 15, 2012. The ASB had previously indicated the revised standards would be effective no earlier than for years beginning after Dec. 15, 2010, but extended that date to allow more time for finalization of the standards and to allow practitioners more time for training and updating of audit methodologies. The ASB’s clarity project is intended to make U.S. generally accepted auditing standards (GAAS) easier to read, understand, and apply, while converging U.S. GAAS with the International Standards on Auditing. All sections of currently effective Statements on Auditing Standards (SASs) in AICPA “Professional Standards” are being rewritten to conform with clarity drafting conventions. More information about the ASB’s clarity project can be found here.

The ASB recently issued an exposure draft of its latest standard – redrafted in accordance with the clarity drafting conventions – “Filings With the U.S. Securities and Exchange Commission Under the Securities Act of 1933.” The proposed SAS does not change or expand the guidance in SAS No. 37, “Filings Under Federal Securities Statutes.” The exposure draft can be viewed here. Comments are due Aug. 2, 2010.

Proposed SSAE on Compiled Prospective Financial Statements
The Accounting and Review Services Committee of the AICPA has issued a proposed Statement on Standards for Attestation Engagements (SSAE), “Reporting on Compiled Prospective Financial Statements When the Practitioner’s Independence Is Impaired.” The proposal would permit, but not require, the accountant to disclose the reason for an independence impairment in the accountant’s report on compiled prospective financial information. If adopted, the proposal would align the reporting guidance for prospective and historical financial statements. Disclosure of the reason for an independence impairment is currently permitted when reporting on historical compiled financial statements (Statement on Standards for Accounting and Review Services No. 19, “Compilation and Review Engagements”). The guidance in the proposed SSAE would be effective for compilations of prospective financial statements for periods ending on or after Dec. 15, 2010, with early implementation permitted.

The exposure draft can be viewed here. Comments on the proposal are due Sept. 10, 2010.

New name for the Accounting Standards Executive Committee
The AICPA has changed the name of the Accounting Standards Executive Committee (AcSEC) to the Financial Reporting Executive Committee (FinREC). FinREC is the AICPA’s senior technical committee for financial reporting matters. It is responsible for determining the AICPA’s technical policies regarding financial reporting standards and is the AICPA’s spokesbody on those matters. FinREC also provides nonauthoritative guidance on financial reporting matters.

From the Federal Trade Commission (FTC)

Red Flags Rules Delayed AgainOn May 28, 2010, the FTC announced a further extension of the compliance enforcement deadline of the Red Flags Rules through Dec. 31, 2010. The Red Flags Rules – officially “Identity Theft Red Flags and Address Discrepancies Under the Fair and Accurate Credit Transaction Act of 2003” – require covered entities to implement programs to identify, detect, and respond to signs of possible identify theft. The extension gives temporary relief to covered entities, which include financial institutions, automobile dealers, and certain other businesses that extend consumer credit. The FTC will begin enforcing the Red Flags Rules after the U.S. Congress passes legislation that more precisely identifies the entities covered by the rules.

The news release announcing the enforcement delay can be viewed on the FTC’s website.

From the Committee of Sponsoring Organizations (COSO)

Study on Fraudulent Financial Reporting Released
The Committee of Sponsoring Organizations of the Treadway Commission has released a study entitled, “Fraudulent Financial Reporting: 1998-2007, An Analysis of U.S. Public Companies.” The study is an in-depth analysis of the nature, extent, and characteristics of 347 alleged fraudulent financial reporting cases investigated by the SEC. Key findings are compared to those of COSO’s previous study released in 1999. COSO believes the results of the study will be useful to investors, regulators, boards of directors, external auditors, and other stakeholders as they seek to prevent, deter, and detect fraudulent financial reporting.

Some of the significant findings of the study include:

  • The magnitude of individual fraud cases and the size of companies perpetrating fraud increased significantly compared to the prior study;
  • The CEO and/or CFO was cited for some level of involvement in 89 percent of the fraud cases; and
  • Improper revenue recognition was the most common type of fraud observed, followed by asset overstatements and understatements of expenses or liabilities.

The complete study can be viewed here.

From the Governmental Accounting Standards Board (GASB)

GASB Issues Omnibus Statement
On June 24, 2010, the GASB issued Statement No. 59, “Financial Instruments Omnibus.” The statement updates and improves existing financial reporting and disclosure requirements of certain financial instruments and external investment pools. Issues addressed in the statement include:

  • Improving the consistency of investment measurements reported by pension and post-employment-benefit plans by applying the reporting provisions of GASB Statement No. 31, “Accounting and Financial Reporting for Certain Investments and for External Investment Pools,” for interest-earning investment contracts to unallocated insurance contracts;
  • Clarifying GASB Statement No. 31 to indicate that a SEC Rule 2a7-like pool is an external investment pool that operates in conformity with SEC Rule 2a7 as described in the Investment Company Act of 1940, as amended;
  • Limiting interest rate risk disclosures for investments by amending GASB Statement No. 40, “Deposit and Investment Risk Disclosures” to require such information be disclosed only for debt investment pools that do not meet the requirements to be reported as a 2a7-like pool; and
  • Amending GASB Statement No. 53, “Accounting and Financial Reporting for Derivative Instruments,” to clarify which financial instruments are within the scope of that pronouncement.

The statement is effective for reporting periods beginning after June 15, 2010, with earlier application encouraged. The GASB’s news release announcing the issuance of the new standard can be viewed here.

Exposure Draft on Service Concession Arrangements
A revised exposure draft of a proposed Statement of Governmental Accounting Standards, “Accounting and Financial Reporting for Service Concession Arrangements,” was issued on June 17, 2010. The revised proposal reflects changes made as a result of comments received on a previous exposure draft published in June 2009.

The proposed statement would establish accounting and reporting requirements for service concession arrangements (SCAs). SCAs are arrangements between a transferor (a government) and an operator (governmental or nongovernmental) in which: 1) the transferor conveys to an operator the right and related obligation to provide services through the use of a facility; and 2) the operator collects and is compensated with fees from third parties. The guidance would apply only to arrangements in which specific criteria determining whether a transferor has control over the facility are met. A transferor would report a facility that is subject to an SCA as its capital asset, following existing guidance. New facilities constructed or acquired by the operator would be reported by the transferor at fair value when the facility is placed into operation. A corresponding deferred inflow of resources would be recorded and subsequently reduced in a systematic manner over the term of the arrangement. The proposed statement also provides guidance for governments that are operators in an SCA. Required disclosures about SCAs would include a general description of the arrangement, along with information about the associated assets and liabilities, rights granted and retained, and guarantees and commitments.

The requirements of the proposed statement would be effective for reporting periods beginning after Dec. 15, 2011. The provisions generally would be required to be applied retroactively for all periods presented.

The exposure draft can be downloaded from the GASB’s website. Comments on the proposal are due Aug. 17, 2010.

Preliminary Views Document on Pension Standards
On June 16, 2010, the GASB issued a Preliminary Views document, “Pension Accounting and Financial Reporting by Employers,” which outlines the board's current views about how to improve pension accounting and financial reporting by government employers. The GASB is seeking input about the proposed document from constituents before developing more-detailed proposals for changes to existing standards. The proposed changes in the Preliminary Views document would move government pension accounting and reporting away from the funding orientation that now exists and instead would introduce recognition and measurement standards that based on the GASB’s conceptual framework. Recognition of the effects of pertinent transactions and other events in the net pension expense of the employer would be required in the period they occur rather than in the period they are funded. The GASB believes that, by improving the measurement of pension expense, the proposed changes would provide information that would better assist financial report users in assessing the relationship between current-year revenues and the cost of the services provided by the government during that year.

The Preliminary Views document, along with a plain-language supplement, can be downloaded from the GASB’s website. Comments on the proposal are due Sept. 17, 2010.

Contact Information
For more information, please contact Ed Grossman at 863.603.4814 or

Under U.S. Treasury rules issued in 2005, we must inform you that any advice in this communication to you was not intended or written to be used, and cannot be used, to avoid any government penalties that may be imposed on a taxpayer. 

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