At-A-Glance
Last month we reviewed the status of
accounting standards from a private
versus public, global versus local, and
large versus small perspective. Over the
coming months, we will look at some
specific standards that are being worked
out on an international basis as part of
the convergence movement. Lease
accounting is one of several such issues
challenging rule makers that we tackle
in this issue. Then we look north to see
how our Canadian neighbors are faring
with their move to IFRS. Finally, the
AICPA has taken notice of the rise and
broad impact that associations like
Integra International are having on
accounting firms as they address the
increasingly complex world we live in.
Read about what took place in New York
in February when two of our own members
joined representatives from the other
accounting associations for an AICPA
sponsored conference.
Editor Gerald E. Herter, CPA
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In This Issue
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Accounting For Leases
Changes are coming with convergence, but ever so
slowly
While anxiously waiting for the United States
to accept IFRS, as highlighted in our last
issue, the IASB and FASB have been jointly
forging ahead on several fronts. The radical
changes proposed to the look and feel of
financial statement presentation were detailed
by William Murphy, partner with Integra firm
Leaf, Saltzman, Manganelli, Pfeil & Tendler,
LLP, in the recently published Integra Global
Update. Now we turn to the specifics of one of
the rigorously contested accounting proposals:
Leases.
When I started in public accounting, the
Accounting Principles Board was in charge,
putting out 31 APB�s over 14 years, until its
replacement by the Financial Accounting
Standards Board in 1973. Much more prolific, the
FASB issued 168 pronouncements before
incorporating all the standards into the
topically oriented Codification in 2009.
Those who have been in the profession as long
as I have will remember the monumental FAS 13,
Accounting for Leases, the most comprehensive
individual pronouncement released up until that
point in 1976. FAS�s then were typically from
five to fifteen pages. FAS 13 weighed in at a
hefty 77 pages, and has been the holy grail of
rental arrangements ever since.
A comparison of current US GAAP for lease
accounting with IFRS reveals that while they are
generally similar, differences arise because of
the rules based approach of GAAP as contrasted
with the principles basis of IFRS. There are the
two categories of capital (�finance� in IFRS)
and operating leases in both sets of standards.
But whereas IFRS speaks in general terms, such
as �major part,� substantially all,� and
�immaterial� when considering whether a lease
should be capitalized by a lessee, GAAP has
specific rules, such as �75% of the life,� or
�90% of the fair value.� Similarly for lessors,
GAAP further separates capital lease
classification into sales, direct financing and
leveraged lease categories, while IFRS leaves
them together in one general category.
The IASB and FASB started working on a joint
standard back in 2006. Finally in August 2010,
the initial Exposure Draft was issued. Looking
to move away from the stigma of off balance
sheet financing, the proposal decreed that all
leases would be capitalized as �right of use
assets� with corresponding �lease obligation�
liabilities. The asset is recorded at the
discounted present value using the lessee�s
incremental borrowing rate, and is amortized on
a straight-line basis while interest on the
liability is amortized like a traditional loan.
The Exposure Draft provided that the lessor
would record the lease under a �performance
obligation approach� if risks and benefits were
retained. The right to receive lease payments
would be recorded as an asset along with a
deferred revenue liability, present valued the
same as in lessee accounting. The deferred
revenue would be transferred to revenue over the
term along with interest on the lease payments,
while the underlying asset is depreciated. If
exposure to risks and benefits were not
retained, a �de-recognition� approach would be
used whereby a portion of the underlying asset
is removed leaving a residual asset along with a
present valued lease payment receivable and
liability. Gain or loss is recorded on the
derecognized asset, while interest on the lease
payment asset is recognized over the term.
The comment period for the Exposure Draft,
ended December 2010, generated over 750
responses, indicating support for the overall
goal of a unified standard, but raising a
plethora of concerns about specific proposals.
Consequently, many further meetings and
deliberations were held. By March, 2011, a
number of new provisions were being considered.
Two of the significant ones were that short term
leases of twelve months or less would not need
to be capitalized, and that there would be two
types of capital leases rather than one: finance
lease (similar to a financing) and
other-than-finance lease (similar to a rental).
The finance lease would have expenses amortized
like a loan, which front loads expenses, while
the other-than-finance lease would have expenses
recorded straight-line. Lessor accounting
concerns proved to be more problematic, so
further consideration was deferred. The changes
responded to calls for less complexity and more
consistency with other projects, such as revenue
recognition.
Within a couple months, the Boards could not
agree on technical measures for implementing the
two lease model, so it was dropped for a return
to the original Exposure Draft single lease
model. Also, disenchantment over lessor
accounting continued as the IASB preferred a
single model using a derecognition approach,
while the FASB held out for a model closer to
current standards.
So where do things stand now with the
proposed new lease standard? Along with the
items mentioned, a variety of other issues have
been debated. So much so, that the Boards plan
to �re-expose� the Exposure Draft in the second
quarter of 2012, incorporating the new thinking.
While some agreement has been reached on lessor
accounting, challenges still lie ahead.
Further frustration was expressed by FASB
members at a late February 2012 meeting of the
Boards. IASB members introduced an apparently
new model for all leases where expenses would be
based on consumption, which FASB members felt
would distort expenses for certain leases where
a straight-line model would be more appropriate.
The frustration was as much for the fact that a
new concept was being introduced so late in the
game, on an area that had been thought to be
resolved already. Still there is hope that the
final joint standard will be issued by the end
of the year.
For further information, see
Leases - Joint Project of the FASB and the IASB
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Canada Adopts IFRS
IFRS reaches North America with Canada in 2011 and
Mexico in 2012
Though IFRS has already been embraced by over 120
countries, until the United States comes on board, the
global set of standards will lack some level of
credibility. While the SEC appears to be in the final
stages of resistance before accepting the inevitable
(?), Canada has moved ahead, requiring public companies
to adopt IFRS for fiscal years beginning in 2011, and
Mexico will follow in 2012.
Consequently, the first Canadian IFRS-based financial
statements are starting to emerge. How is the conversion
going?
According to Tim Kiladze, reporter for Toronto based
The Globe and Mail, in a February 13, 2012 article
titled Canadian bank IFRS transition was easy sailing,
�After all the fanfare and hoopla around Canadian banks�
transition to International Financial Reporting
Standards, it turns out the change has come and gone
quite smoothly.� His point was that annual earnings were
not that much different from the GAAP numbers, which
were also reported. He did note, however, that book
values had dropped an average of 8%, mainly from
cumulative effects of recognizing pension losses and
reversing securitization gains.
While the reporter has one perspective, the Ontario
Securities Commission (OSC) looked at the new financial
reporting landscape differently. The Office of the Chief
Accountant (OCA) issued a Staff Notice (52-720) in
February spelling out �levels of compliance with certain
features of these standards that are �new� to our
capital markets.� The Notice was based on selected
interim financial reports that the staff had
scrutinized. The goal was to provide early guidance that
companies could use to improve compliance in 2012.
The OCA focused on ��application of accounting
standards that contain different recognition,
measurement and disclosure requirements under IFRS��
Topics covered included 1) business combinations, 2)
common control business combination transactions, 3)
impairment, 4) critical judgments and sources of
estimation uncertainty, and 5) going concern. Notable
concerns were raised over adequacy of disclosures, areas
not covered by a specific IFRS standard, and
distinguishing between significant and immaterial
judgments.
New disclosures required to provide readers a clear
and complete picture were often not sufficiently
present. In areas without a specific IFRS standard, more
care should have been taken when applying the
generalized IFRS accounting policies guidance, since
different interpretations are more likely. For
estimations and judgments, attention needed to be given
to assure both that the most important assessments were
covered, but that immaterial reasoning did not �clutter
up� the financial statements. While full disclosure is
important, the presence of excessive, obscure technical
detail can distract the reader from critical matters
deserving their consideration.
Though beating the US to IFRS, Canada was still late
in the game compared to Europe. On the plus side, the
experiences observed in Europe provided a �heads up� to
the Canadians in forging ahead. The Canadian approach
like Europe before it has been labeled the �big bang,�
converting all at once, while the US is contemplating a
�staggered� approach of gradual convergence or
�condorsement.� While the gradual approach is considered
less costly and less prone to mistakes in the short
term, confusion may result from the longer period of a
hybrid set of standards. Also, �big bang II� is on the
way, as dozens of IFRS projects are looming in the near
future, many prompted by the 2008 financial crisis.
For further information, see
IFRS
in Canada
Second AICPA/Firm Association Annual Meeting
Annual confab lays groundwork for future
collaboration
Building on initial efforts in 2011, the AICPA
recently brought representatives from accounting firm
associations together to explore ways to enhance mutual
opportunities for supporting each other. Integra
International AAA Executive Committee Members, Don
DeGrazia and Doug White attended the meeting in New
York. Top AICPA executives and president, Barry
Melancon, provided profession-related, legislative and
international updates, as well as conducting roundtable
discussions and presenting the Horizons 2025 report.
While all aspects of the accounting industry were
covered comprehensively, we�ll cover some of the
highlights affecting audit and accounting.
In the legislative arena, several new laws and bills
working their way through Congress warrant discussion.
The Dodd-Frank Act of 2009, passed in the aftermath of
the financial industry meltdown, among other things
brought in the requirement for non-public broker dealer
audits, gave shareholders a say on executive
compensation, as well as setting the audit requirement
of SOX 404(b) internal control reports to public
companies with $75 million or more market
capitalization. While this last rule had been in place
for all companies from Sarbanes-Oxley, the SEC had
delayed enforcement for smaller companies.
THE JOBS Act (Jumpstart Our Business Startups)
working its way through Congress portends to drastically
modify Dodd-Frank in an effort to stimulate the private
sector. With broad congressional support, the Bill
combines six previous proposals into one comprehensive
action. The Act creates an �IPO On-Ramp� for �emerging
growth companies.� Companies with less than $1 billion
in revenue could go public without complying with SOX
404(b), and with delayed compliance with new or revised
FASB standards until they reach $1 billion in revenue or
five years after going public. Barry Melancon, AICPA
President, SEC Chairman, Mary Shapiro, and Financial
Accounting Foundation President, Teresa Polley, all
vigorously oppose the legislation as inviting serious
harm to investor protections.
The role and actions of the PCAOB have been the
subject of debate, as discussed in the February Audit &
Accounting Alert. Another area of proposed legislation
addresses PCAOB disciplinary procedures. While the SEC
and other governmental agencies conduct all disciplinary
proceedings in public, the Sarbanes Oxley law requires
that proceedings against accounting firms be conducted
privately until some formal action is taken, if any. The
proposed law, originally brought forth by the PCAOB
chairman, would open up the PCAOB inquiries in the same
manner as the other agencies.
In the international arena, the expanding
opportunities for reporting on areas such as
sustainability, internal control, risk management,
service organization controls, XBRL and the cloud were
emphasized. In this regard, the license mobility
provided by MRA�s, Mutual Recognition Agreements, will
facilitate practicing in these areas around the world. A
Mutual Recognition Agreement between two countries works
like the reciprocity agreements that allow CPA�s to
practice across state lines. The United States currently
has MRA�s with Canada, Mexico, Australia, New Zealand,
Hong Kong and Ireland, with more in the works.
Profession-wise, Barry Melancon covered a broad
spectrum of topics. A couple of those are the IIRC and
the GCMA. The International Integrated Reporting Council
(IIRC) is composed of governmental, private sector,
academic and community leaders from across the world. As
stated on the organization�s website, �Integrated
Reporting is a new approach to corporate reporting that
demonstrates the linkages between an organization�s
strategy, governance and financial performance and the
social, environmental and economic context within which
it operates. By reinforcing these connections,
Integrated Reporting can help business to take more
sustainable decisions and enable investors and other
stakeholders to understand how an organization is really
performing.� The Council is in the process of developing
a framework for moving forward toward this improved
reporting model for the future.
The Chartered Global Management Accountant (CGMA),
the new standardized designation for management
accountants worldwide, was a joint effort by the AICPA
and CIMA, Chartered Institute of Management Accounts.
�The CGMA mission is to promote the science of
management accounting on the global stage. The
designation champions management accountants and the
value they add to an organization,� according to
Institute�s website.
While much more was covered in the AICPA/Firm
Association meeting, this get together was
considered a great success, and is expected to further
enhance the abilities of all participating groups to
help each other in addressing the myriad of
opportunities and challenges facing their members.
Additional A&A News
The following links provide a selection of current articles
devoted to highlighting other A&A topics currently making
news.
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Ex-CIMA president slams institute's strategy for
CGMA
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Investor group & AICPA affiliate challenge SOX
rollback
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Private company reporting decision in May?
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CFOs Shout Down Idea of Mandatory Auditor Rotation
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Big Win for Accounting Profession in New Jersey
Supreme Court
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IASB meets European accounting standard setters
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