Thursday, May 17, 2012

A & A Alert - December 2011

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DECEMBER 2011

RubinBrown's Accounting & Auditing Alert is published monthly
to inform our clients and contacts about relevant technical
accounting and audit-related information.

FASB Looks To Amend The Definition Of An Investment Company

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Topic 946, Financial Services—Investment Companies, contains specialized accounting and disclosure requirements for investment companies.

The requirements to qualify as an investment company under Topic 946 were included originally in the AICPA’s Audit and Accounting Guide for investment companies.  The amendments in this proposed ASU would amend the guidance in Topic 946 for determining whether an entity is an investment company. 

The proposed ASU is a result of the efforts of the FASB and the IASB (collectively, the “Boards”) to develop a common, high-quality standard on consolidation policy. Investment companies carry all of their investments in operating entities at fair value, even if they hold a controlling financial interest in the investee. Therefore, the Boards agreed that, as part of the development of a consolidation standard, they would look to develop consistent criteria for determining whether an entity is an investment company.

The amendments in the proposed ASU would affect the scope, measurement, presentation, and disclosure requirements for investment companies in U.S. GAAP as follows:

  1. Amend the investment company definition in Topic 946 and provide comprehensive guidance for assessing whether an entity is an investment company.
  2. Require an investment company to consolidate another investment company or an investment property entity if it holds a controlling financial interest in the entity in a fund-of-funds structure. The investment company parent would retain the specialized guidance when consolidating another investment company or an investment property entity.
  3. Amend the financial statements and financial highlights presentation requirements for situations in which an investment company consolidates a less-than-wholly-owned investment company or a less-than-wholly-owned investment property entity.
  4. Prohibit an investment company that is able to exercise significant influence over another investment company or an investment property entity from accounting for its interest using the equity method of accounting. Rather, those investments would be measured at fair value.
  5. Require additional disclosures including changes in an entity’s status as an investment company, whether the investment company has provided support to any of its investees, and any significant restrictions on an investee’s ability to transfer funds to the investment company.

The effective date will be determined after the Boards consider the feedback on the amendments in this proposal. The proposed amendments would be effective for an entity’s interim and annual reporting periods in fiscal years that begin after the effective date. Earlier application would be prohibited.

Comments in response to this exposure draft are due January 5, 2012. 

The full text of the exposure draft is available by clicking here.
   

FASB Proposes To Defer Recently Required Presentation Of Other Comprehensive Income Reclassifications

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The FASB has issued a proposed ASU under Topic 220 (Comprehensive Income) that would defer the effective date for amendments to the presentation of reclassifications of items out of Accumulated Other Comprehensive Income in ASU No. 2011-05. 

Since 1998, accounting standards for non-governmental entities, excluding nonprofit organizations, have required the recognition and presentation of certain accounting events in an equity category referred to as Accumulated Other Comprehensive Income (AOCI) as well as supplementary income/expense reporting in a statement of Other Comprehensive Income (OCI), while skipping recognition in the Income Statement.  

A statement of OCI starts with net income and adds or subtracts changes in AOCI balances to arrive at a bottom line presentation of profit/loss that presents a more theoretically pure representation of an entity’s true results for the period.  For example, investment securities classified by an organization as “available for sale” (as opposed to “trading” or “held to maturity”) are marked to market value on the balance sheet at each reporting date with the resulting unrealized gain or loss recorded directly in equity via AOCI.  This income statement-averting unrealized investment gain or loss is reported in an OCI statement which is most commonly presented immediately following the income statement.

Continuing with our investment security example, once the security is subsequently sold and the sale-date gain or loss (difference between original cost basis and the previously marked to market carrying value) becomes realized and therefore reported in the income statement, it is necessary to reverse the cumulative sum of unrealized gains and losses for that security in order to report the total holding period gain or loss in the income statement. 

These previous unrealized gains and losses would reside in AOCI equity at the time of the security sale.  The presentation convention for this reclassification adjustment is the subject of the current FASB proposal.

ASU No. 2011-05, Presentation of Comprehensive Income, effective for years beginning after December 15, 2011 (public companies) and ending after December 15, 2012 (nonpublic companies), among other things, requires separate line item reporting of these reclassifications on the face of the income statement and the statement of OCI at their gross amounts as opposed to netting with other similar line items. 

Users of financial statements have expressed concern that the financial statements are not sufficiently transparent with respect to these reclassifications and therefore cannot readily determine the effect on current period profitability that results from prior period transactions.

The current exposure draft proposes to, at a minimum, defer the effective date of the presentation of OCI reclassification adjustments at gross amounts on the face of the financial statements over concern by stakeholders that ASU No. 2011-05 presentation requirements would be costly for preparers and may add unnecessary complexity to financial statements as a result of the addition of required separate line items on the face of the statements.  

The purpose of the proposed deferral is to provide the FASB with additional time to address these concerns.  The results of the additional consideration could be a postponed effective date or a change in the requirements of that portion of ASU No. 2011-05.

The full text of the exposure draft is available by clicking here.
   

FASB Issues Exposure Draft Related To Investment Property

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The Financial Accounting Standards Board (FASB) recently issued a new proposed Accounting Standards Update (ASU), Real Estate—Investment Property Entities (Topic 973), which would require entities that meet certain criteria to measure their investment properties at fair value, rather than to apply lease accounting to each individual lease. The proposed guidance also would involve additional presentation and disclosure requirements. 

The FASB said that this exposure draft is a result of its efforts to align the scope of entities that would apply the proposed lessor accounting model under U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) and also to address the diversity in practice about the accounting by real estate entities.

Earlier, as part of joint efforts between the FASB and the International Accounting Standards Board (IASB), the IASB decided that a lessor of an investment property would not be required to apply the proposed lessor accounting requirements in the IASB’s August 2010 exposure draft, Leases, if the lessor measures its investment properties at fair value.

Unlike IFRS, the FASB said that U.S. GAAP does not contain specific accounting requirements for investment properties. As a result, an entity that invests in real estate properties but is not an investment company is required to measure its real estate properties at cost under Topic 360, Property, Plant, and Equipment, and account for the leases separately. In response to consistent investor input, the FASB said that it decided to prescribe the circumstances when fair value would be required, rather than introduce an optional accounting practice into U.S. GAAP.

The FASB stated that the effective date for the proposed guidance will be determined after the Board considers feedback.  Early adoption would be prohibited.

Comments in response to this exposure draft are due January 5, 2012. 

The full text of the exposure draft is available by clicking here.

 

   

Amendments Proposed To The Consolidation Analysis For Variable Interest Entities and Limited Partnerships

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The FASB has issued a proposed ASU under Topic 810 Consolidation titled Principal versus Agent Analysis, that would require an evaluation of whether an entity's decision maker is using its power over an entity in the capacity of a principal or an agent in determining if the entity is a variable interest entity and whether it should be consolidated with the reporting entity. 

In addition, the proposed ASU would require a general partner to perform a similar evaluation in determining whether it has control over a limited partnership. 

In June 2009, the FASB issued Statement No. 167, which amended FIN 46(R).  Statement No. 167 was subsequently incorporated into Topic 810 of the FASB Codification, by ASU No. 2009-17. As a result of ASU No. 2009-17, an enterprise is required to conduct a qualitative analysis for the purpose of determining whether, based on its variable interests, it also has a controlling interest in a variable interest entity (VIE). 

Originally, the effective date of ASU No. 2009-17 was to be as of the start of the first annual reporting period beginning after November 15, 2009.  In February 2010, ASU No. 2010-10, indefinitely deferred the effective date for an investment manager's interests in certain entities having attributes of an investment company.

This proposed ASU would:

  1. Rescind the indefinite effective date deferral for certain entities
  2. Require an evaluation of whether an entity's decision maker is using its power as a principal or as an agent, which, in turn, would affect the determination of whether the entity is a VIE and whether it should be consolidated with the reporting entity
  3. Resolve the current inconsistencies regarding the impact of so-called kick-out or participating rights on the analysis of whether a general partner must consolidate a limited partnership or whether the holder of a majority voting interest must consolidate an investee. 

Thus, the consolidation analysis for voting interest entities and partnerships would be more closely aligned with those being proposed for VIEs.

The proposed guidance is similar to, but not fully converged with IFRS 10, Consolidated Financial Statements, which becomes effective January 1, 2013.  A specific effective date has not been proposed.

Comments in response to this exposure draft are due January 17, 2012. 

The full text of the exposure draft is available by clicking here.

   

PCAOB Proposes Disclosure In The Audit Report Of Engagement Partner And Certain Other Participants

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The Public Company Accounting Oversight Board (PCAOB) issued for public comment a proposal that would require registered accounting firms to disclose in the audit report the name of the engagement partner and the names of other accounting firms and other persons not employed by the auditor that took part in the audit. 
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"This proposal would increase transparency of public company audits by providing investors with information about certain key participants in the audit," said James R. Doty, Chairman of the PCAOB. "This would bring disclosures about U.S. audit engagement partners more in line with those provided for many engagement partners abroad."

The proposal to require disclosure of the name of the engagement partner follows and builds upon a related Concept Release which considered requiring the engagement partner to sign his or her name on the audit report. After careful consideration, the PCAOB did not include in this proposal a requirement to sign the engagement partner's name on the audit report.

Instead, the proposal would require that the engagement partner's name be disclosed in the audit report, which would make the engagement partner's name readily available to the users of the audit report while mitigating concerns about minimizing the firm's role in the audit.

In addition, the proposal would require the auditor to disclose in the audit report other accounting firms and other persons not employed by the auditor that took part in the audit. The proposed disclosure would enable investors to evaluate the other participants in the audit in the same manner that they evaluate the auditor.

For example, knowing the name of a disclosed accounting firm that took part in the audit would enable investors to determine whether the firm is registered with the PCAOB and has been subject to PCAOB inspection, or is located in a country that does not allow PCAOB inspections. Investors would also be able to verify whether a disclosed firm or person has had any publicly available disciplinary history with the PCAOB or other regulators.

Comments on the proposal are due January 9, 2012.  The full text of the proposal is available by clicking here.
   
Fred Kostecki, CPA - St. Louis
Partner-in-Charge
Assurance Services Group
314.290.3398
fred.kostecki@rubinbrown.com		 Todd Pleimann, CPA - Kansas City
Managing Partner - Kansas City Office
Assurance Services Group
913.499.4411
todd.pleimann@rubinbrown.com		 Bert Bondi, CPA - Denver
Partner & Denver Practice Leader
Assurance Services Group
303.799.6826
bert.bondi@rubinbrown.com
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