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Issue 10 | December 2014
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At-A-Glance
In this issue, we spotlight three
recent major events in the accounting
world. First, Integra International
members celebrated 20 years as a
worldwide association in October. The
forward-looking vision of the founders
was clearly evident when members from
six continents joined together to report
the increasingly shared impact of
International Financial Reporting
Standards (IFRS) in their countries. See
our opening article for details.
At the same time, another joint
international effort by the Chartered
Institute of Management Accountants
(CIMA) and the American Institute of
Certified Public Accountants (AICPA)
produced the first comprehensive set of
Global Management Accounting Principles
(GMAP). For IFRS to be effective on a
global basis, the financial statements
prepared using the international
standards must have a consistently solid
foundation of accounting policies and
procedures at work in the companies
preparing them. The GMAP represents a
practical step forward toward that goal,
as explained in our second article.
Finally, we turn to financial
reporting on unaudited financial
statements in the United States. Our
third article summarizes the
long-awaited pronouncement that
clarifies when and how a practicing CPA
is associated with a company’s financial
statements. The new standard ends
several decades of confusion, with
guidance that is similar, but not fully
converged, with international standards.
Editor Gerald E. Herter, CPA |
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In This Issue
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Integra Highlights 20th Year Anniversary
Conference with Worldwide IFRS Roundup
Variations standout as countries adapt the
“universal” standards to local conditions
Showcasing the association’s far reaching
impact since its founding in 1994, Integra
International members from six continents
highlighted the changing role of International
Financial Reporting Standards (IFRS) in their
respective countries, at the worldwide
conference held recently in Vienna, Austria. A
wide range of IFRS use was noted, from
substantially full adoption all the way to
non-adoption. Even those countries that have
fully adopted IFRS have inserted differences to
adapt to local regulations or customs. Countries
reporting at the conference included Argentina,
Australia, France, India, Israel, Japan,
Nigeria, New Zealand, the United States of
America, and the United Kingdom.
When establishing Integra International near
the close of the twentieth century, the founders
recognized the growing importance of worldwide
collaboration. By 2001, when the International
Accounting Standards Board (IASB) was formed to
accelerate the move to global accounting
standards, the association was ready with a
structure in place that enabled members from all
parts of the world to work together on this
ambitious endeavor.
Just how successful IFRS have been depends on
your vantage point in the world. Speaking at a
United Nations Conference on Trade and
Development (UNCTAD) meeting in October, 2014,
Michael Prada, IASB Trustees Chairman, declared
that “We are now in a position in which IFRS is
undeniably the de facto global accounting
standard.” Prada has plenty of statistics to
back up his claim. In a global survey of
standard setters “representing around 96 per
cent of global GDP,” he reports that
“four-fifths of the world now mandates the use
of IFRS for all or most public companies. Of the
remaining one-fifth, almost all countries permit
the use of IFRS for some types of companies. The
research has also shown that the jurisdictions
surveyed have made very few modifications to
IFRS and, where they did, the modifications
affected only a few companies and were generally
regarded as temporary.”
Those in the United States tend to view IFRS
in a different light, as reported to the group
in Vienna by Integra Global Board member Steve
Austin. Austin shared a comment made by former
SEC Chairman, Christopher Cox at a June, 2014
conference: “Today, I come to bury IFRS, not to
praise them. The fact is, far too much time has
gone by with no meaningful progress. I think we
have to fairly conclude that the moment has
passed. Full-scale adoption of IFRS in the
United States might once have been possible, but
it is no longer. This is not a prognosis. It’s
just a statement of fact.”
While those on opposite sides of the Atlantic
may differ as to how well IFRS have been adopted
around the world, there is no question as to the
pervasive impact various elements of this
wide-ranging initiative have had. A prime
example, illustrated by Austin, is the sweeping
new standard,
Revenue from Contracts with Customers.
As covered in recent issues of this publication
(see the June, August and September, 2014
issues), the many countries already on board
with IFRS, as well as the United States, have
agreed to be bound by a single universal
standard for reporting revenue in financial
statements. Recognizing the tremendous challenge
of bringing the world into sync with this
standard, an international Transition Resource
Group is already in place to work out the kinks.
Integra International has also been quick to
respond. At the Vienna conference, a new Audit &
Accounting group was formed under the leadership
of Integra member Marzena Richter, from the
accounting firm of Staniszewski & Richter,
headquartered in Warsaw, Poland. The group will
coordinate efforts by Integra members across the
world as they work to effectively implement the
new Revenue standard, as well as other issues
that develop. Consequently, Integra
International members will be well positioned to
assist clients as they navigate the new
accounting pronouncements.
For further information, see
Integra International
Celebrates its 20th Anniversary and
Integra International Appoints New
Accounting & Audit Group Leader.
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Global Management Accounting Principles Issued
The quest for “universal” management accounting
principles resembles the IFRS movement to
worldwide financial reporting standards
The credibility of IFRS based
financial reports will depend to a great extent
on the presence of a solid undergirding of sound
global management accounting principles (GMAP).
Yet until now there has not been a push toward a
single set of universal management accounting
principles comparable to the campaign for IFRS.
Recognizing this missing element, the Chartered
Institute of Management Accountants (CIMA) and
the American Institute of Public Accountants
(AICPA) in 2010 jointly embarked on a mission to
develop those principles.
Analogous to the IFRS-based relationship
between the American-based Financial Accounting
Standards Board (FASB) and the
international-based International Accounting
Standards Board (IASB), the GMAP cause brought
together the American-based AICPA and the
international-based CIMA. Out of their initial
research came the Consultation Paper (CP) issued
in February, 2014 that was covered in our March
2014 Audit & Accounting Alert. The wide-ranging
responses to the CP from a diverse set of
stakeholders around the world confirmed and
strengthened the principles as they were
finalized.
The formal GMAP, published on October 22,
2014, received instant praise from a group of
corporate executives, who stated in a letter to
the Financial Times:
“The rise in both the
amount of data and the pace at which businesses
now operate have not been matched with the
systems and mechanisms required to make the
right decisions at the right time…Successful
businesses recognise the need to professionalise
the decision-making process through a framework
that factors in external and non-financial
information covering the present and the future.
That is why we support the new set of Global
Management Accounting Principles developed by
CIMA and the American Institute of Certified
Public Accountants. At a time when economic
growth and recovery have never been so critical,
we encourage government and business leaders
globally to consider how these Principles can
help drive sustainable success in their
organisations.”
Management accounting is defined as “the
sourcing, analysis, communication and use of
decision-relevant financial and non-financial
information to generate and preserve value for
organisations.” With that definition in mind,
the GMAP are focused around four overriding
principles, as described in the document:
- Communication provides insight
that is
influential. Good management
accounting begins and ends with
conversations, allowing management to cut
across silos and create a path to integrated
thinking.
- Information is
relevant.
One of management accounting’s central roles
is providing decision-makers the right
information on a timely basis. If the needs
of the decision-maker are understood, then
identification, collection, validation,
preparation, and storage of timely
information can be carried out.
- Impact on
value is
analysed. This principle requires a thorough
understanding of the business model and the
macroeconomic environment. Strong management
accounting functions are able to turn
information into insight by assessing the
impact of scenarios being considered.
- Stewardship builds
trust. The
principles require active management of
relationships and resources “so that the
financial and non-financial assets,
reputation, and value of the organisation
are protected.”
These principles are further delineated
through the 14 identified practice areas:
- Cost transformation and management
- External reporting
- Financial strategy
- Internal controls
- Investment appraisal
- Management and budgetary control
- Price, discount and product
decisions
- Project management
- Regulatory adherence and
compliance
- Resource management
- Risk management
- Strategic tax management
- Treasury and cash management
- Internal audit
A diagnostic checklist can be downloaded that
provides a practical approach for applying the
principles to a specific company. Best practice
questions are offered throughout.
First, the importance of qualified personnel
is explored by spelling out the necessary
competencies, organized by questions designed to
assess technical, business, people, and
leadership skills.
Next, the adequacy and effectiveness in the
company of the four overriding principles are
analyzed with questions that focus on strategy,
planning, execution and review.
For each of the fourteen practice areas, a
definition is given, the value to the
organization is described, and then questions
serve to probe how well the company’s management
accounting function is addressing the practice
area.
The principles and the checklist will prove
useful to management and CPA advisors alike in
strengthening the underpinnings of the
management and financial reporting accounting
systems.
For further information, see
Global Management Accounting Principles
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Reporting on Unaudited Financial Statements gets
a Major Overhaul in the United States
AICPA issues new Compilation and Review Standard
The late 1970’s brought two major changes to
public accounting in the United States that are
still with us today. First, in 1977, peer review
was introduced to strengthen the quality of
assurance services. Then in 1978, just after I
joined my current firm to bolster their
accounting and audit practice, reporting on
financial statements was turned upside down. For
many years prior to 1978, there had been two
primary financial statement reports: audited and
unaudited.
Then along came SSARS 1. No, I am not talking
about the deadly virus that originated in China
(SARS). The first Statement on Standards for
Accounting and Review Services was issued in
December 1978, casting a whole new light on
financial statement reporting. The terms
“compilation” and “review” took on new meaning
for CPAs. Audits had become costly for small
companies and were not always practical for
their needs. Nevertheless, users wanted some
assurance of the credibility of the financials
that an unaudited report did not provide.
Now, some 36 years later comes the most
significant change in reporting since the
introduction of compilation and review: SSARS
21, Statements on Standards for Accounting and
Review Services: Clarification and
Recodification. Consider that in 1978
accountants did not even have personal computers
on their desks. Today, smart phones have much
more power than the early personal computers, to
say nothing of computing in the cloud. With the
technological advances that have taken place,
the need for a new look in reporting standards
was long overdue.
Decades of confusion stemmed from the SSARS 1
requirement that all financial statements
“submitted” by a CPA to a client or third party
include, at least, a compilation report.
Unfortunately, the pronouncement did not define
“submission.” After years of creative attempts
by practitioners to get around the requirement,
SSARS 7, issued in 1992, added a definition
stating that “financial statements have been
submitted if the accountant has: (1) generated
either manually or through a computer a
financial statement or (2) materially changed
account classifications, amounts or disclosures
directly on client prepared financial
statements.” That definition caused more years
of confusion, so in the year 2000, SSARS 8
changed the submission definition to "presenting
to a client or third parties financial
statements that the accountant has prepared
either manually or through the use of a computer
software." Alas, that definition did not solve
the problem. As technology has progressed,
determining when a CPA has crossed the line from
advising to preparing has become increasingly
difficult.
Finally, in October, 2014, the issuance of
SSARS 21 eliminated the guesswork, stating that
a report is required only when a CPA is
“engaged” to compile, review or audit financial
statements. When engaged to perform a
compilation, the existing rules generally
continue to apply, and are listed here in the
form that the new standard states them:
- A compilation report is required,
- The report is streamlined to
differentiate the non-assurance compilation
report from assurance (review and audit)
reports so that the standard report contains
only one paragraph with no headings,
- The compilation report must be
modified whenever the accountant’s
independence is impaired,
- An engagement letter must be
signed by both the accountant and the
client’s management, and
- The financial statements may or
may not have disclosures.
If the CPA is engaged to prepare the
financial statements, but is not engaged to
perform an audit, review or compilation, then
the standard states:
- No report is required,
- A legend is required on each page
of the financial statements stating that no
assurance is being provided, and
- An engagement letter must be
signed by both the accountant and the
client’s management.
The requirements for a “review” engagement
are redrafted into the new “clarity” format, but
with minimal changes otherwise.
According to the AICPA, international
compilation and review standards were considered
when producing SSARS 21, but there is not full
convergence between them.
SSARS 21 is effective for financial statement
engagements for periods ending on or after
December 15, 2015, with early implementation
permitted.
For further information, see
Summary of SSARS No.
21
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Audit & Accounting Alert
is a publication of Integra International intended
to highlight emerging issues in the profession.
The goal is to give Integra members an awareness
of developments impacting the practice of Audit &
Accounting, enabling them to stay on the forefront
of industry trends.
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Editor Gerald E. Herter •
HMWC CPAs & Business Advisors, 17501 E. 17th
Street, Suite 100, Tustin, CA 92780-7924
• Tel: 1 714 505-9000 • Fax: 1 714 505-9200 •
Email:
[email protected]
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