Issue 2 |March 2018 Audit & Accounting Alert

While tax accountants have a year before their clients need to report on most of the changes brought about by the American Tax Cuts and Jobs Act (TCJA), those preparing financial statements do not have that luxury. With the Act signed into law on December 22, 2017, companies with calendar 2017 year-ends need to consider potential impacts on the 2017 financial statements. Making things more difficult, the Act, considered by some as the most comprehensive in the past fifty years, contains issues that may take months, if not years, to clarify.

Fortunately, the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC), quickly recognized the concerns and have jumped in with guidance on how to proceed. Though only public companies are required to take direction from the SEC, the current situation is one of the few where private companies and non-profits are not only allowed but given the green light by the FASB to follow along.

The various forms of guidance include an SEC Staff Accounting Bulletin, several FASB Staff Q & A’s and an FASB Accounting Standards Update regarding SEC disclosure and accounting requirements.

From time to time the SEC staff issue a Staff Accounting Bulletin (SAB) to give their interpretations of how to apply SEC disclosure requirements to accounting pronouncements that may not be clear or are not readily determinable at the time for submitting a required filing. SAB 118 was issued to address disclosures arising from the TCJA that are generally required for the 2017 financial reporting filings. The guidance is designed for items arising from the TCJA where “the accounting for certain income tax effects of the Act will be incomplete by the time financial statements are issued for the reporting period,” and “where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting.”

The SAB separates items into three components: (1) those for which the accounting is completed, (2) those for which the accounting is incomplete but for which a reasonable estimate can be made, and (3) those for which the accounting is incomplete and for which a reasonable estimate cannot be determined. For category (1) full recording should be made, for category (2) the reasonable estimate should be recorded as a provisional amount, subject to subsequent adjustment, and for category (3) no amount should be recorded. For both categories (2) and (3), full recording should be completed when information is available, which should be no later than a year following enactment of the law. The period from enactment until full accounting is completed is known as the measurement period. Also, provisional amounts recorded during the measurement period are to be reflected in income from continuing operations.

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The November 2017 issue of the Audit & Accounting Alert showcased the then newly released Enterprise Risk Management—Integrating with Strategy and Performance (ERMISP). Developed by the American private sector group, Committee on Sponsoring Organizations of the Treadway Commission (COSO), the ERFISP was the latest update of the internal control and risk management framework COSO has been promoting for the past 25 years to help organizations reduce fraud and operate more efficiently.

Recognizing the growing challenges presented by environmental, social and governmental risks, COSO has now produced supplemental guidance to the framework that was issued for review and discussion on February 7, 2018. Titled Enterprise Risk Management – Applying enterprise risk management to environmental, social and governance-related risks (ESG Guide), the 151-page draft was developed in collaboration with the World Business Council for Sustainable Development (WBCSD) as an “engaging, innovative process focused on organizational integration to create shared value. All organizations set strategy and periodically adjust it, staying aware and ahead of both ever-changing opportunities for creating value and the challenges that occur in pursuit of that value.”

The ESG Guide opens with a comparison of the risk landscape from ten years ago to today, as described by the World Economic Forum’s Global Risk Report. The top five global risks in terms of likelihood are:

The top five global risks in terms of impact are:

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IASB – International Accounting Standards Board (www.ifrs.org)

1. Plan Amendment, Curtailment or Settlement (Amendments to IAS 19 Employee 5Benefits), issued February 7, 2018, “specifies how companies determine pension expenses when changes to a defined benefit pension plan occur...When a change to a plan—an amendment, curtailment or settlement—takes place, IAS 19 requires a company to re-measure its net defined benefit liability or asset. The amendments require a company to use the updated assumptions from this re-measurement to determine current service cost and net interest for the remainder of the reporting period after the change to the plan.” Effective on or after January 1, 2019.

IFAC – International Federation of Accountants (www.ifac.org)

1. International Public Sector Accounting Standards Board (IPASB) - Exposure Draft 64, Leases, released January 31, 2018, “proposes a single right-of-use model for lease accounting that will replace the risks and rewards incidental to ownership model in IPSAS 13, Leases. For lessees, ED 64 proposes accounting requirements that are converged with IFRS 16, Leases issued by the International Accounting Standards Board. For lessors, ED 64 proposes a right-of-use model specifically designed for public sector financial reporting. ED 64 also proposes new public sector specific accounting requirements for leases at below market terms (also known as "concessionary leases") for both lessors and lessees.” The comment period ends June 30, 2018.
2. International Auditing and Assurance Standards Board (IAASB) - Feedback Statement – Exploring the Growing Use of Technology in the Audit, With a Focus on Data Analytics, released January 8, 2018, reported that respondents affirmed the applicability of current audit standards, while seeking practical guidance on the use of data analytics technology, and recognizing that professional skepticism needs to be applied when using data analytics.

Africa, Europe, India, and the Middle East (AEIME)

FRC – Financial Reporting Council of the UK (www.frc.org.uk)

1. Accounting and reporting framework for the construction and business support services sectors, guidance issued January 29, 2018, “reminds Boards of companies in the construction and business support services sectors of their reporting obligations. This guidance will also be relevant to other companies.” The guidance was issued as a result of the collapse of Carillion.

Americas, Asia, Australia and New Zealand (AAANZ)

FASB – Financial Accounting Standards Board (www.fasb.org)

1. Exposure Draft, Derivatives and Hedging: Inclusion of the Overnight Index Swap (OIS) Rate Based on the Secured Overnight Financing Rate (SOFR) as a Benchmark Interest Rate for Hedge Accounting Purposes, issued February 20, 2018, “would expand the list of U.S. benchmark interest rates permitted in the application of hedge accounting.” The comment period ends March 30, 2018.

2. Leases - Land Easement Practical Expedient for Transition to Topic 842 – ASU 2018-01, issued January 25. 2018, reduces the cost of adopting the new leases standard by “providing an optional transition practical expedient that, if elected, would not require an organization to reconsider their accounting for existing land easements that are not currently accounted for under the old leases standard and clarifying that new or modified land easements should be evaluated under the new leases standard, once an entity has adopted the new standard.” Effective generally when the new lease standard is adopted.
3. Income Statement—Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, ASU 2018-02, issued February 14, 2018, provides an option to “financial statement preparers to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 (or portion thereof) is recorded. The amount of the reclassification would be the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate. Effective generally in 2019. See the first article in this issue for more details.
4. Staff Q & A Documents related to implementation of the Tax Cuts and Jobs Act, issued January 11 and 22, 2018. See the first article in this issue for details.
5. Exposure Draft, Leases: Targeted Improvements, issued January 5, 2018, proposes to “simplify transition requirements and, for lessors, provide a practical expedient for the separation of non-lease components from lease components. Specifically, the amendments would: add an option for transition to ASU No. 2016-02, Leases (Topic 842), that would permit an organization to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in its financial statements; add a practical expedient that would permit lessors to not separate non-lease components from the associated lease components if certain conditions are met. This practical expedient could be elected by class of underlying assets; if elected, certain disclosures would be required.” The comment period ends February 5, 2018.

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