Accounting Alert
May 11, 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)
ASU on Repurchase Agreements
On April 29, 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-03, “Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements.” This ASU addresses financial reporting for repurchase agreements (“repos”) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before maturity. Topic 860 provides guidance on when an entity may or may not recognize a sale of the transferred financial asset. That determination is based, in part, on whether the entity has maintained effective control over the transferred asset. Under previous guidance, one relevant consideration was the transferor’s ability to repurchase or redeem financial assets transferred before maturity (the transferor’s ability criterion). To make that determination, an entity had to consider whether the collateral obtained was sufficient to reasonably assure completion of the arrangement, even if the transferee defaulted. Under the new guidance, an exchange of collateral is not a determining factor in assessing effective control. The amendments remove the transferor’s ability criterion from the consideration of effective control. Implementation guidance related to the transferor’s ability criterion is also removed from Topic 860.
All other criteria applicable to the assessment of effective control are still in place. The transferor is deemed to have maintained effective control over the financial assets transferred, and must account for the transaction as secured borrowing, for agreements that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity if all of the following conditions are met:
- The financial assets to be repurchased or redeemed are the same or substantially the same as those transferred;
- The agreement is to repurchase or redeem them before maturity, at a fixed or determinable price; and
- The agreement is entered into contemporaneously with, or in contemplation, of the transfer.
The new guidance in the ASU is effective for the first interim or annual period beginning on or after Dec. 15, 2011, and should be applied prospectively to transactions that occur on or after the effective date. Early adoption is not permitted. The ASU can be viewed here on the FASB’s website (acceptance of terms required).
Proposed Guidance on Testing Goodwill
The FASB published on April 22, 2011, an exposure draft intended to simplify how an entity is required to test goodwill for impairment. The proposed ASU, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment,” would allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under the proposed amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying value. The proposed ASU includes examples of events and circumstances an entity should consider in performing the qualitative assessment. An entity would have the option to bypass the qualitative assessment for any reporting unit for any period and proceed directly to the current two-step goodwill impairment test. The proposed amendments would not change how an entity measures a goodwill impairment loss.
If approved, the proposed ASU would be effective for interim and annual goodwill impairment tests performed for fiscal years beginning after Dec. 15, 2011. Early adoption would be permitted. The exposure draft can be viewed here on the FASB’s website (acceptance of terms required). Comments are due June 6, 2011. To make it easier for constituents to provide comments on this exposure draft, the FASB is piloting a new electronic constituent feedback form (available here).
Progress Report on ConvergenceOn April 21, 2011, the FASB and the International Accounting Standards Board published a fourth progress report on their joint work to improve accounting standards and achieve convergence. The boards reported significant progress, with a number of projects completed or to be issued in the next few weeks (the FASB expects to soon issue final ASUs on fair value measurements and the presentation of other comprehensive income). Priority will now be given to completing the three remaining major projects identified in the Memorandum of Understanding (revenue recognition, leases, and accounting for financial instruments). The boards have agreed to extend the timetable for completion of these projects beyond the June 2011 target date to permit further work and consultation with stakeholders. Completion is expected in the second half of 2011. The complete progress report can be viewed here.
From the American Institute of Certified Public Accountants (AICPA)
Proposed Audit and Accounting Guides
The Financial Reporting Executive Committee of the AICPA has issued working drafts of the accounting content of two proposed audit and accounting guides. The guides, “Health Care Entities” (available here) and “Employee Benefit Plans” (available here), address new accounting issues that have emerged since the guides were last updated. Comments on the accounting content of the proposed guides are due June 6, 2011, and June 10, 2011, respectively.
From the Securities and Exchange Commission (SEC)
Study and Recommendations on Internal Control Reporting
On April 22, 2011, the Office of the Chief Accountant of the SEC published “Study and Recommendations on Section 404(b) of the Sarbanes-Oxley Act of 2002 For Issuers With Public Float Between $75 and $250 Million” (available here). The study was required by the Dodd-Frank Wall Street Reform and Consumer Protection Act to identify ways the SEC could reduce the burden of compliance with Section 404(b) while maintaining investor protections. Section 404(b) requires a registrant to provide an attestation report by the external auditor on management’s assessment of internal control over financial reporting (ICFR).
The SEC staff found that:
- The costs of Section 404(b) compliance have declined since the requirements were first implemented;
- Investors generally view the auditor’s attestation on ICFR as beneficial;
- Financial reporting is more reliable when the auditor is involved with ICFR assessments; and
- There is no conclusive evidence linking the requirements of Section 404(b) to listing decisions of entities with public float between $75 and $250 million.
The study included two recommendations:
- Maintain existing investor protections for accelerated filers to comply with the auditor attestation provisions of Section 404(b). The staff notes that Dodd-Frank already exempts approximately 60 percent of reporting issuers from Section 404(b) and does not recommend further extending the exemptions.
- Encourage activities that have potential to further improve both the effectiveness and the efficiency of Section 404(b) implementation. The report recommends that the Public Company Accounting Oversight Board monitor its inspection results and consider publishing observations to assist auditors in performing top-down, risk-based audits of ICFR.
Small Entity Compensation GuideThe SEC has published “Shareholder Approval of Executive Compensation and Golden Parachute Compensation – A Small Entity Compliance Guide” (available here). The guide summarizes amendments adopted by the SEC to its disclosure rules and forms as part of implementing Section 951 of Dodd-Frank. The guide includes a summary of the new rules, effective dates of the new requirements, and other resources for additional information.
Roundtable on IFRS
The SEC will sponsor a roundtable on July 7, 2011, to discuss the benefits and challenges of potentially incorporating International Financial Reporting Standards (IFRS) into the financial reporting system for U.S. issuers. The roundtable will feature three panels representing investors, smaller public companies, and regulators and focus on topics such as investor understanding of IFRS and the impact of the potential adoption on smaller public companies and the regulatory environment. The roundtable, which will be held in the SEC’s Washington headquarters, will be open to the public and available via webcast. The SEC’s press release announcing the roundtable is available here.
From the International Accounting Standards Board (IASB)
Draft Q&As on IFRS for SMEs
Three draft question and answer (Q&A) documents were published on April 14, 2011, by the SME Implementation Group (SMEIG). The SMEIG is responsible for assisting the IASB on matters related to the implementation of International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SMEs). The Q&As are intended to be nonmandatory guidance that will help those using IFRS for SMEs. The new draft Q&As address the following topics:
- Captive insurance subsidiaries;
- Interpretation of “traded in a public market”; and
- Investment funds with only a few participants.
The draft Q&As can be viewed here on the IASB’s website. Comments are due June 15, 2011.
Contact Information
For more information, please contact Ed Grossman at 863.603.4814 or ed.grossman@crowehorwath.com.
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.