March 10, 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)
Hedge Accounting Issues
The FASB published a discussion paper on Feb. 9, 2011, “Selected Issues about Hedge Accounting,” to solicit input on how to improve, simplify, and converge the financial reporting requirements for hedging activities. In December 2010, the International Accounting Standards Board (IASB) issued an exposure draft, “Hedge Accounting,” that proposed revisions to International Financial Reporting Standards (IFRS) relating to hedging activities. The IASB’s proposed revisions would result in more differences between IFRS and the proposed hedge accounting guidance in the FASB’s May 2010 exposure draft, “Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities – Financial Instruments (Topic 825) and Derivatives and Hedging (Topic 815).”
The FASB’s discussion paper includes the IASB exposure draft and asks stakeholders whether the IASB’s proposals are a better starting point for any changes to U.S. accounting principles as the proposals relate to derivatives and hedging activities. The IASB believes its proposal more closely aligns hedge accounting with risk management activities, establishes a more objective-based approach to hedge accounting, and addresses inconsistencies and weaknesses in the existing hedge accounting model.
The FASB’s discussion paper and the May 2010 exposure draft can be viewed on the FASB’s website (acceptance of terms required). Comments on the discussion paper are due April 25, 2011.
FASB Project Update – Leases
The FASB issued its proposed accounting standards update, “Leases (Topic 840),” in August 2010. In its February 2011 meetings, the FASB, along with the IASB, began deliberating issues identified in response to the exposure draft request for comments and during public roundtable meetings. The boards have reached tentative decisions changing several significant aspects of the proposal, including:
- Lease types. The boards decided to identify a principle for identifying two types of leases for both lessees and lessors, with different profit and loss effects: a finance lease with a profit and loss recognition pattern consistent with the proposals in the exposure draft, and an other-than-finance lease with a profit and loss recognition pattern consistent with an operating lease under existing standards.
- Lease term. For both lessees and lessors, the lease term should be defined as the noncancellable lease term, together with any options to extend or terminate the lease when there is significant economic incentive for an entity to exercise an option to extend the lease or not to exercise an option to terminate the lease.
- Lease definition. The boards discussed how to clarify the guidance to help users assess whether a contract contains a lease.
- Variable lease payments. The boards reconsidered which variable lease payments should be included in the lessee’s liability to make lease payments and the lessor’s right to receive lease payments.
A summary of the project and its tentative decisions is available here on the FASB’s website.
From the American Institute of Certified Public Accountants (AICPA)
Further Guidance on Interim Financial Information
Statement on Auditing Standards (SAS) No. 121, “Revised Applicability of Statement on Auditing Standards No. 100, Interim Financial Information,” was issued in February 2011. This SAS addresses the independent accountant’s professional responsibilities when engaged to review interim financial information. SAS No. 121 amends the guidance codified in AU sec. 722 to indicate that guidance is applicable when the accountant audits the entity’s latest annual financial statements, and that the appointment of another accountant to audit the current-year financial statements is not effective prior to the beginning of the period covered by the review. SAS No. 121 is effective for reviews of interim information for periods beginning after Dec. 15, 2011. Early application is permitted. A summary of SAS No. 121 can be viewed here on the AICPA’s website.
The AICPA also issued Statement on Standards for Accounting and Review Services (SSARS) No. 20, “Revised Applicability of Statements on Standards for Accounting and Review Services,” to indicate that SSARS do not apply when the provisions of SAS 100, as amended, apply. SSARS No. 20 is effective for reviews of financial statements for periods beginning after Dec. 15, 2011. Early application is permitted.
From the Securities and Exchange Commission (SEC)
Updated Interpretations From SEC Staff
The SEC’s Division of Corporation Finance staff has updated its Compliance and Disclosure Interpretations (C&DIs) related to certain SEC rules on registration and reporting under the Securities Exchange Act of 1934 (new questions 169.01 – 169.06, available here) and Regulation S-K (new question 128B.01, available here). The CD&Is have been updated to provide guidance related to the SEC’s final rule, “Shareholder Approval of Executive Compensation and Golden Parachute Compensation” (available here). This final rule was issued Jan. 25, 2011, and includes requirements on shareholder approval of executive compensation and golden parachute compensation arrangements.
2011 GAAP Taxonomy
The SEC has accepted the 2011 U.S. GAAP Financial Reporting Taxonomy effective Feb. 28, 2011. The taxonomy is a list of computer-readable tags in eXtensible Business Reporting Language (XBRL) that allows companies to tag financial data included in financial statements and related footnote disclosures. A listing of all taxonomies available for use in SEC filings, including the 2011 U.S. GAAP Taxonomy, is available here on the SEC’s website.
From the International Accounting Standards Board (IASB)
Guidance on IFRS for SMEs
On Feb. 24, 2011, the SME Implementation Group published for public comment its first draft guidance, “IFRS for SMEs; Section 1, Issue 1: Use of IFRS for SMEs in Parent’s Separate Financial Statements,” on the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs). The SME Implementation Group is responsible for assisting the IASB on matters related to the implementation of IFRS for SMEs and to make recommendations to the IASB regarding amendments to those standards. The proposed guidance, in the form of a question-and-answer document, addresses whether a parent entity that does not have public accountability may present its separate financial statements in accordance with IFRS for SMEs if it is part of a group that is required (or elects) to present consolidated financial statements in accordance with full IFRS.
The draft guidance can be viewed on the IASB’s website. Comments are due April 4, 2011.
From the Governmental Accounting Standards Board (GASB)
Proposed Guidance on Hedge Transactions
On Feb. 14, 2011, the GASB issued for public comment an exposure draft, “Derivative Instruments: Application of Hedge Accounting Termination Provisions – an amendment of GASB Statement No. 53.” Hedge accounting, under GASB Statement No. 53, permits reporting fair value changes of a hedging derivative as either deferred inflows or deferred outflows of resources rather than recognizing those changes in investment income. When a hedging derivative is terminated, hedge accounting must cease and all accumulated deferred amounts must be reported in investment income.
The exposure draft addresses situations in which a government has entered into a hedging interest rate swap or a hedging commodity swap transaction and the credit support provider for the swap counterparty (or counterparties) commits or experiences either an act of default or a termination event. The board concluded that the government’s economic position remains unchanged when the credit support provider is replaced through an assignment or an in-substance assignment. In short, the exposure draft proposes that when certain conditions are met, the use of hedge accounting should not be terminated.
The provisions in the exposure draft would be effective for financial statements for periods beginning after June 15, 2011, with earlier application encouraged. The exposure draft can be viewed on the GASB’s website. Comments are due April 15, 2011.
Midyear Guide Supplement
The GASB has published a supplement to the 2010 – 2011 “Comprehensive Implementation Guide.” The guide and supplement were developed to clarify, explain, or elaborate on underlying GASB standards. The guidance is intended to assist financial statement preparers and auditors in the implementation and application of a number of GASB pronouncements. The supplement presents, in a Q&A format, guidance regarding credit risk disclosures, derivative instruments (including additional illustrations), and life insurance reported as investments.
The supplement is available here on the GASB’s website.
Reminder: GASB 54 Effective Date
Governments need to be preparing for changes in how they report their fund balances. GASB Statement No. 54, “Fund Balance Reporting and Governmental Fund Type Definitions” (GASB 54), is effective for financial statement periods beginning after June 15, 2010. This standard establishes a hierarchy of fund balance classifications based primarily on the extent a government is bound to observe spending constraints imposed on how resources reported in governmental funds may be used. Beginning with the most binding constraints, fund balance amounts will be reported in the following classifications:
- Nonspendable – amounts that are not in a spendable form (for example, inventory) or required to be maintained intact;
- Restricted – amounts constrained by external parties, constitutional provision, or enabling legislation;
- Committed – amounts constrained by a government using its highest level of decision-making authority;
- Assigned – amounts a government intends to use for a particular purpose; and
- Unassigned – amounts that are not constrained will be reported in the general fund.
GASB’s plain-language article, published when GASB 54 was issued in March 2009, is available here on the GASB’s website.
For more information, please contact Ed Grossman at 863.603.4814 or firstname.lastname@example.org.
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.