At-A-Glance
In these
last few
years,
attention
has finally
been given
to the
development
of
practical,
cost-effective
financial
reporting
standards
for private
enterprises.
The highly
successful
IFRS for
SMEs
recently
reached its
third
anniversary.
Our opening
article
covers the
first formal
evaluation
of this
IFRS-based
achievement,
since its
launch in
2009. The
review found
the
standards to
have
weathered
the
introductory
period quite
well. Next,
we turn to
the ever
growing
importance
of the audit
committee’s
role,
especially
in public
companies,
with the
rapid pace
of change,
complexity
and risk
that
companies
and their
auditors
face. We
share some
insights
from the
AICPA’s
National
Audit
Committee
Forum,
moderated by
Integra’s
own Global
Board
member,
Steve
Austin.
Finally, our
quarterly
worldwide
update
returns,
with
highlights
of news from
major
international
accounting
organizations
and
regulators.
Editor Gerald E. Herter, CPA |
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In This Issue
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Fine Tuning of IFRS for SMES
The first comprehensive
review of IFRS for SMEs
IFRS for SMES was first
issued in 2009 to
provide a global set of
standards for small and
medium entities.
Starting with full IFRS,
the IASB, over a six
year period, reworked
the standards by
eliminating irrelevant
topics, selecting only
the easier of accounting
policy options,
simplifying principles
for recognition and
measurement, reducing
disclosures by 90 per
cent, and using clear,
easily translatable
language. The result
consisted of 230 pages,
and was considered
adequate to handle the
needs of 95 per cent of
all companies worldwide.
During the finalization
process, the IASB
determined that changes
would only be made after
three year intervals, at
which time the standards
would be reviewed, input
would be sought, and
implementation of issues
would be considered, for
possible amendment.
The results of the first
comprehensive review
were presented in an
Exposure Draft (ED) on
October 3. The ED
considered input from a
broad cross section of
financial statement
preparers, users,
professional and
regulatory bodies, and
other interested
parties. .
In the Press Release
announcing the Exposure
Draft, Hans Hoogervorst,
Chairman of the IASB
said:
“The IFRS for SMEs has
already been a
remarkable success,
having been adopted by
more than 80 countries
and used by millions of
companies worldwide. The
initial comprehensive
review is an important
step in our due process
as it provides a
mechanism to make sure
the IFRS for SMEs is
working as intended.
Responses to the Request
for Information
identified few
significant new issues.
However they highlighted
some areas where
targeted improvements to
the Standard could be
made.”
While the 57 proposed
amendments appear like a
considerable number, the
major thrust is to
better clarify and
explain the standards
for better
comprehension, as
opposed to modifying
them. Since IFRS for
SMEs is still relatively
new, a goal is to
minimize extensive
changes, so that SMEs
are not overwhelmed.
Thirteen amendments
relate to revisions and
additions that have been
made to full IFRS since
IFRS for SMEs was
issued. In most cases,
these are minor
clarifications,
simplifications, fixes
for problems or efforts
to address diversity in
practice. However, many
of the weightier IFRS
changes from the past
three years, such as
relating to business
combinations,
consolidations, fair
value measurement and
employee benefits, were
passed over as not
necessary for SMEs to
deal with.
Of the five amendments
that change
requirements, income tax
is one of the few areas
that will be
substantive. When IFRS
for SMEs was issued, the
IASB had a proposal in
the works to revise the
current IAS 12, Income
Taxes. That proposal was
incorporated in IFRS for
SMEs. The proposal arose
out of a joint project
with the FASB to reduce
the differences between
IFRS and US GAAP.
However, the proposal
was later dropped, so
the current amendment to
IFRS for SMEs restores
the IAS 12 recognition
and measurement
principles, while
retaining the simplified
presentation and
disclosure guidance in
the original IFRS for
SMEs. Both IFRS and US
GAAP use a balance sheet
approach in recognizing
deferred taxes resulting
from temporary
differences between book
value and tax bases of
assets and liabilities.
But differences in
application make them
incomparable.
Seven amendments
introduce new guidance
for handling
consolidation and
shareholder issues,
classifying financial
instruments, accounting
for extractive
activities, and several
new definitions.
Five amendments
introduce new exemptions
that arise from
standards that would
cause “undue cost or
effort,” such as fair
value measurement of
equity investments in
financial instruments,
separate recognition of
intangible assets in
business combinations,
and offsetting of income
tax assets and
liabilities.
Three amendments add
guidance, clarifying
IFRS for SMEs usage in
separate parent
financials, applying the
“undue cost or effort”
exemption, and
clarifying foreign
exchange differences in
subsidiary disposals.
The three disclosure simplification amendments provide relief from
disclosing termination
benefit policy, and
prior year information
relating to biological
assets and share
capital.
Lastly, twenty one amendments are considered minor clarifications of
wording, unclear
sentences, scope of
sections, and removal of
inconsistencies.
In IFRS for SMEs, the
IASB has produced a
practical, simplified
set of standards that is
based on full IFRS, and
therefore retains a
fundamental relationship
with the standards used
by large companies in
many countries. In
contrast, the FASB has
taken a piecemeal
approach with the
Private Company Council,
which eventually may
arrive at a similar
point, but will take
time. The AICPA,
addressing the desire by
American SMEs for a more
timely, comprehensive
solution, has moved
ahead by issuing the
Financial Reporting
Framework for SMEs.
For further information, see
IFRS for SMEs
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The Key Role of the Audit Committee
The AICPA’s National Audit Committee
Forum
One of the ways Integra
International benefits the
accounting profession and its
members is by taking a leadership
role. Last month we covered
interactions of Integra Board
Members with the International
Accounting Standards Board. This
month we cover the AICPA’s National
Audit Committee Forum in New York,
at which Integra Global Board
Member, Steve Austin, served as
moderator. At this Forum, Steve was
joined by a PCAOB Board Member, the
Institute of Internal Auditors
President, and a Delaware Supreme
Court Justice, among other
authorities and professionals, in
covering the latest issues impacting
audit committees.
Jay Hanson, one of five PCAOB Board
Members, emphasized the PCAOB’s
“goal to enhance the PCAOB’s
transparency and communications with
our stakeholders, including, in
particular, investors and audit
committees.” That goal was
elaborated in the six priorities the
PCAOB has adopted for attainment in
the next few years:
- Improving the timeliness,
content and readability of the
reports we issue on firm
inspections;
- Improving the timeliness
of determinations we make about
whether a firm has addressed quality
control deficiencies to our
satisfaction and providing
additional information on the
Board’s remediation evaluation
process;
- Initiating a project to identify
and report on audit quality
indicators;
- Enhancing our processes
and systems to improve analysis and
usefulness of inspection findings in
order to better understand audit
quality and better inform
standard-setting and other
regulatory activities;
- Enhancing the framework
for our standard-setting efforts in
order to improve the effectiveness
of the process and the project
tracking information provided to the
investing public; and
- Enhancing the Board’s
outreach to and interaction with
audit committees.
Criticism has been made for how long
the PCAOB takes to issue inspection
reports, and for the negative tone
in the reports. Hanson pointed out
that the PCAOB is required to report
on deficiencies. While some would
like to see positive comments as
well, the PCAOB is not set up to
evaluate “best practices” on a
comprehensive basis. However, he
feels that the current project to
develop “audit quality indicators”
(AQI) may be helpful in this regard.
AQI’s, for example, could be 1)
output-based, such as reporting on
the number of frauds or restatements
occurring during an audit firm’s
tenure, 2) input-based, such as
relating to auditor processes and
procedures, and staff experience
levels, or 3) results based, such as
gauging the veracity of auditor
reports, disclosures and assurances.
Hanson also felt, based on feedback, that the proposal for mandatory
auditor rotation would not move
forward. Nevertheless, he called on
audit committees to be vigilant in
insisting on strict auditor
independence from the client. The
auditor is not to talk of being the
“client’s business partner,” and
auditor client social interactions
should be evaluated for
inappropriate activities or
benefits. In the UK, actions have
been taken on similar issues. As
mentioned in last month’s Audit &
Accounting Alert, Britain’s
Financial Reporting Council (FRC)
has codified in its standards the
vital role of the audit committee by
requiring that audit committees,
boards of directors, and auditors
report on their interactions. Also,
Britain’s Competition Commission
recently issued its final report
that calls for auditors to compete
for public company audits every ten
years, by requiring companies to
issue mandatory tenders for the
work, though actual auditor rotation
is not mandatory.
Steve Austin led a session on the
new COSO internal control guidance
that audit committees need to be
familiar with in their oversight
capacity. Some have wondered why the
widely accepted framework, first
issued in 1992, should be tampered
with. But when considering the
monumental changes that have taken
place in the past twenty years, the
need for the update becomes obvious.
Technology applications alone look
radically different from the systems
in place in the nineties.
Requirements of governance and the
demands on accountability have also
been ratcheted up significantly, in
no small part due to financial
crises and failures in recent years.
Organizational structures and
relationships have become more
complex and interdependent, as well.
The new COSO Framework addresses the
changes, codifies the principles,
and increases the focus on
operations, compliance and
non-financial reporting objectives.
Other topics covered at the Forum included recent accounting
pronouncements, SEC activities,
relationships with senior management
and the board of directors, working
with the internal auditors, IT
issues, and audit committee best
practices illustrated through the
presentation of a mock audit
committee meeting. Barbara Berlin,
Director of the
PriceWaterhouseCoopers Center for
Board Governance, discussed audit
committee member concerns, including
increasing time commitments,
challenges keeping up with
technology complexities, compliance
obligations, and overall heightened
risks.
For further information, see
PCAOB Board Member
Addresses National Audit Committee
Forum and
Updated COSO Framework will Help
Audit Committees
Worldwide Update
Quarterly roundup of recent and
upcoming actions and activities by
audit and accounting organizations
International
IASB –
International Accounting Standards
Board (www.ifrs.org)
- IFRS Foundation – IOSCO
Protocol – A Statement of
Protocols was announced on September
18 between the IFRS Foundation and
the International Organization of
Securities Commissions for further
cooperation on International
Financial Reporting Standards. The
IOSCO, whose membership includes
securities regulators overseeing 95%
of the world’s securities markets,
and the IFRS Foundation, will add to
their current interactions involving
the development and implementation
of IFRS, by exchanging information
about the progression of IFRS usage
around the world, identifying
implementation aspects of mutual
interest, organizing annual IFRS
enforcers’ gatherings around issues
and standards, and agreeing to
promptly address urgent
implementation issues.
- The IFRS Foundation
Education Initiative – A
set of Framework-based IFRS teaching
materials was announced on October
7, available free for download. The
materials are compiled in three
stages to correspond with the
typical CA/CPA training progression.
Separately, a set of 35 stand-alone
training modules, one for each
section, is available for IFRS for
SMEs
- IFRS for SMEs
Comprehensive Review –
Exposure Draft issued on October 3.
See article above.
- Revenue
Recognition and Lease Proposal
Status – The proposed joint
IASB-FASB standard, Revenue from
Contracts with Customers, is in
final drafting and deliberation
stages, with hoped for fourth
quarter 2013 release. The comment
period for the proposed joint
IASB-FASB standard, Leases, has
ended, and the proposal is being
redeliberated in light of the
comments. There has been substantial
resistance to the proposal, which
would require most leases to be
reported on the financial statements
as assets with corresponding
liabilities, and then generally have
equipment and vehicle lease costs
divided each period between
liability interest expense and asset
amortization, while real estate
lease costs are simply amortized on
a straight-line basis. Consequently,
the timing for finalization of the
proposal is currently unclear.
IFAC –
International Federation of
Accountants (www.ifac.org)
- Enhancing
Organizational Reporting –
IFAC Policy Position 8 was, issued
on October 11, to emphasize the
importance and usefulness of
reporting broad-based information
beyond that which is provided in
traditional financial reporting.
Such reporting promotes transparency
and accountability, assists decision
making by management and governance,
provides a more complete view of
organizational performance and
sustainability, and provides
shareholders with key information,
such as the perceived value of human
resources, intellectual capital, and
other intangibles. IFAC supports the
Integrated Reporting Framework
(<IR>), the development of IAASB
assurance standards, global
consistency and the role of the
accountancy profession.
- The Role and
Expectations of a CFO: A Global
Debate on Preparing Accountants for
Finance Leadership – IFAC
Discussion Paper, issued on October
10, focusing on implications from
changes that now find that “In
addition to being the financial
gatekeeper, CFOs are now expected to
participate in driving an
organization toward achieving its
objectives. As part of the
leadership of the organization, CFOs
are expected to increase their
support of strategic and operational
decision making in a “business
partnering” capacity in addition to
fulfilling traditional stewardship
responsibilities relating to
governance, compliance and control,
and business ethics.”
- Professional
Accountancy Organization Global
Development Report – issued
on October 2 by MOSAIC, the
Memorandum of Understanding to
Strengthen Accountancy and Improve
Collaboration, of which IFAC is a
signatory. The report was created to
provide an assessment of
professional accountancy
organization (PAO) development at
the global, regional, and national
levels. The report’s key findings
include the importance of
undertaking PAO development
comprehensively at the national
level; strengthening legal and
regulatory foundations; furthering
implementation of international
standards; and supporting internal
strengthening of PAOs.
AAA – Americas, Australia &
Asia
FASB
– Financial Accounting
Standards Board (www.fasb.org)
- Two PCC Proposals
sent to FASB for Approval –
On October 1, the Private Company
Council voted to request FASB
approval of private company GAAP
alternatives for the accounting for
interest rate swaps and goodwill.
The simplified hedge accounting
approach would be allowed for
interest rate swaps that convert
variable rate interest payments to
fixed rate payments. Also, fair
value disclosures would not be
required of these swaps. Goodwill
acquired in a business combination
could be amortized over ten years or
less, and a simplified test for
impairment would be allowed.
- FASAC Survey
Results – The Financial
Accounting Standards Advisory
Council in September issued
stakeholder survey results regarding
the FASB’s future agenda that listed
the following top projects needing
completion in the next 3-5 years:
disclosure framework, accounting for
financial instruments: hedging,
conceptual framework, financial
instruments with characteristics of
equity, pensions, and financial
statement presentation.
- Revenue
Recognition and Lease Proposal
Status – See IASB above.
- Disclosure
Framework Project – In
October, a Q & A fact sheet was
issued. The framework is designed to
lead to disclosures that clearly
communicate the information that is
most important to the users of
financial statements. It is intended
to promote consistent decisions by
the FASB about disclosure
requirements and guide reporting
organizations when making disclosure
decisions. The IASB has also
instituted a Disclosure Initiative.
- Insurance
Contracts – Public
roundtables are scheduled for
December to hear feedback on the
Exposure Draft that was issued on
June 27, 2013, for which the comment
period has just ended.
AICPA – American
Institute of Certified Public
Accountants (www.aicpa.org)
- Accounting and
Review Services Committee (ARSC)
– Exposure Drafts are to be issued
titled Preparation of Financial
Statements, Compilation Engagements,
and Association With Financial
Statements. A compilation report
would be required when the
accountant is engaged to perform a
compilation. When the accountant
prepares financial statements, but
does not perform a compilation,
review or audit, a legend would be
required on each page stating that
no assurance is provided, but no
report is required. When an
accountant agrees to permit use of
his or her name in a document that
includes financials for which the
accountant did not issue a
compilation, review or audit report,
the financials need to indicate that
no CPA provides any assurance.
- Assurance Services
Executive Committee –
published Assurance Services: A
White Paper for Providers and Users
of Business Information in September
promoting how independent,
third-party assurance services
provide value and confidence, and
describing factors to consider in
selecting an assurance provider.
- ASEC XBRL
Assurance Task Force –
published SOP 13-2, Performing
Agreed-Upon Procedures Engagements
That Address the Completeness,
Mapping, Consistency, or Structure
of XBRL-Formatted Information in
September to assist accountants that
submit XBRL files to the SEC.
PCAOB – Public
Company Accounting Oversight Board (www.pcaob.org)
- New Broker-Dealer
Attestation and Auditing Standards
– In response to the
Dodd-Frank Act, the PCAOB on October
10 adopted two new attestation
standards: Examination Engagements
Regarding Compliance Reports of
Brokers and Dealers and Review
Engagements Regarding Exemption
Reports of Brokers and Dealers.
These standards, subject to SEC
approval, will bring broker-dealers
under closer PCAOB purview for
engagements with year ends after May
31, 2014. Also, a new auditing
standard: Auditing Supplemental
Information Accompanying Audited
Financial Statements delineates the
auditor’s responsibilities with
regard to supplemental information.
- Proposed Auditor
Reporting Standards – On
August 13, the PCAOB issued two
proposals: The Auditor's Report on
an Audit of Financial Statements
When the Auditor Expresses an
Unqualified Opinion, and The
Auditor's Responsibilities Regarding
Other Information in Certain
Documents Containing Audited
Financial Statements and the Related
Auditor's Report. The comment period
ends on December 11, 2013. See the
October Audit & Accounting Alert for
a discussion of these proposals.
CSA
- Canadian Securities
Administrators (www.osc.gov.on.ca)
- Auditor Oversight
Proposals – On October 17,
the CSA issued proposals requiring
accountants to report to the
regulator any significant remedial
actions imposed by the Canadian
Public Accountability Board, and to
notify clients if the accountant is
not in compliance with the remedial
actions.
Europe,
Middle East, India & Africa
EFRAG
– European Financial Reporting
Advisory Group (www.efrag.org)
- Conceptual
Framework – In a draft
comment letter and three draft
bulletins, EFRAG supports the
practical approach employed by the
IASB, but is not in complete
agreement and calls for a more
conceptual approach to some issues.
The bulletins cover complexity,
measurement and the distinction
between equity and liabilities.
- Leases –
A final comment letter expresses
concerns with complexity and
disagrees with the introduction of a
dual measurement model and believes
the conditions of transfer of
control of the right of use must be
revisited to capture only
in-substance purchases.
FRC
– Financial Reporting Council of the
UK (www.frc.org.uk)
- Exposure Draft:
Guidance on the Strategic Report
– The ED, issued on August 15,
addresses the narrative reporting
requirement. The Strategic Report
replaces the Operating and Financial
Review in the annual report, and is
designed to provide information
relevant to shareholders. The
guidance covers, placement of
information, materiality, means of
communication, and added disclosures
regarding the business model,
strategy, human rights issues, and
gender diversity.
- Conceptual
Framework – published two
bulletins in September, one
questioning the omission of
stewardship/accountability as a
specific objective of financial
reporting, and the other questioning
the asset/liability approach which
defines assets and liabilities
first, such that equity, income and
expense rely on those definitions.
- Corporate
Reporting Review Annual Report
– The 2013 report found that
although reporting by larger
companies remains at a good level,
reporting by some smaller listed
companies suffers from a lack of
sufficient or appropriate resource,
and therefore FRC will consider
actions to strengthen reporting
going forward.
- The Independent
Auditor’s Report on Financial
Statements – revisions to
ISA 700 (UK and Ireland) issued on
June 4, 2013, requiring auditors to
explain more about their work to
investors.
EP
– European Parliament (http://www.europarl.europa.eu/)
- Committee on
Economic and Monetary Affairs (ECON)
– On October 1, ECON proposed a
regulation that would tie the
funding arrangements for the IASB
and EFRAG to their showing that they
comply with European laws. Also,
funding would be subject to an
annual assessment of whether these
criteria are fulfilled, rather than
the current six year arrangements.
The IASB and EFRAG are protesting
this proposal as a challenge to
their independence.
Additional A&A News
The following links provide a selection of current articles
devoted to highlighting other A&A topics currently making
news.
-
Anti-Fraud Collaboration Report:
Expectation Gaps Exist within
Financial Reportings
-
Could accountants deflate the
'carbon bubble'?
-
Audits Differ by Engagement
Partner, Research Say
-
Good
and bad news in reporting season
-
UK Competition Commission
finalizes measures to open up
audit market
-
Big
data? Great - so long as you get
the analysis right
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