A & A Alert - February 2012

The December 2011 edition of the Accounting & Auditing Alert presented the details of a proposed ASU to defer portions of ASU 2011-05, Presentation of Comprehensive Income (click here to view the December 2011 story)

On December 23, 2011, the FASB finalized this proposal through the issuance of ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.

ASU 2011-12 contains no significant modifications to the original proposal.  The FASB expects to complete its additional assessment on this topic by the end of 2012.  The amendments in ASU 2011-12 are effective at the same time as the amendments in ASU 2011-05 so that entities will not be required to comply with the presentation requirements in ASU 2011-05. 

These amendments are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011.  For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter.

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.  

ASU 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.

ASU 2011-12 defers 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 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 this deferral is to provide the FASB with additional time to address these concerns.

The full text of the ASU is available by clicking here.

The Public Company Accounting Oversight Board (PCAOB) has reproposed for comment an auditing standard on Communications with Audit Committees, and other amendments to PCAOB standards. The standard was initially proposed on March 29, 2010. 

Like the original proposal, the reproposed standard would establish requirements that enhance the relevance and quality of the communications between the auditor and the audit committee. The reproposed standard, in addition, would better align the communication requirements with performance requirements in other PCAOB standards, including the risk assessment standards (Auditing Standard Nos. 8-15).

Furthermore, on July 21, 2010, Congress gave the PCAOB oversight over the audits of SEC-registered brokers and dealers. Reproposing this standard provides an opportunity to comment on the standard in relation to the audits of brokers and dealers.

"Communication with audit committees is a fundamental responsibility of any auditor and has a direct and serious impact on the quality of that audit. This reproposal is intended to further enhance those communications," said James R. Doty, PCAOB Chairman.

The proposed auditing standard would supersede PCAOB interim standard AU sec. 380, Communication With Audit Committees, and AU sec. 310, Appointment of the Independent Auditor, and amend other PCAOB standards. Any new auditing standard and amendments to other PCAOB standards adopted by the PCAOB will be submitted to the Securities and Exchange Commission for approval.

Comments on the reproposed standard are due February 29, 2012.  The full text of the proposed auditing standard is available by clicking here.

1. The gross amounts of recognized financial assets and liabilities;
2. The amounts offset under current U.S. GAAP;
3. The net amounts presented in the balance sheet;
4. The amounts subject to an enforceable master netting arrangement or similar agreement that were not included in (b); and
5. The net amount (i.e., the difference between (c) and (d)).