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May/June 2012
Some reporting entities must be ready by Jan. 1, 2013, to comply with new disclosure requirements intended to clarify offsetting assets and liabilities for financial statement users. Under new guidance issued by the Financial Accounting Standards Board, users would have available improved information about financial and derivative instruments subject to offsetting, or “netting,” in statements of financial position.
Have you ever wondered what your auditor is talking about? Rest assured you're not alone. While most auditors are diligent in their quest for clarity, the lingo trap can sometimes rear its ugly head. Here's a bit of a primer on that crazy audit - and accounting - language.
Because of the economic woes seen during the past few years, many businesses have seen decreased profits. Some companies that were barely getting by and didn't adjust during these tough times have gone out of business. A review of the statement of cash flows could have revealed that operations had been using - not providing - cash and that the company had been relying greatly on bank financing to stay afloat. An analysis of the accounts receivable may have alerted business owners and managers that a majority of their receivables were not current and collection issues might arise in the future.
In an audit, effective and timely two-way communication is essential to ensure that the auditor and the client's board of directors have a common understanding of significant audit issues and a constructive working relationship to address those issues. Because of the importance of effective two-way communication, auditing standards require auditors to formally communicate certain audit-related matters to those charged with governance. Learn the three primary purposes of the auditor's communications.
If segregating duties is one of the primary methods to prevent employee fraud – why don't all businesses use it? Many companies have only one to three people in their accounting department or their entire administrative staff. During annual audit engagements, they usually hear about a lack of segregation of duties – allowing one employee to collect customer payments, write and record checks, prepare bank reconciliations and then ultimately record all of these transactions. Audit clients typically respond: "My business is too small to hire additional employees to get a true segregation of duties." Before dismissing the auditors' comments, business owners should keep in mind that a large percentage of employee theft and embezzlement occurs in small businesses with fewer than 10 employees.
The Financial Accounting Standards Board intends for new guidance to enhance disclosures employers include in their financial statements when they participate in multiemployer plans. To properly address disclosures required by the update, it is important to assess which multiemployer pension plans are considered individually significant. Some of the disclosure requirements relate only to those plans. As such, all relevant facts and circumstances associated with individual plans – for example, expected future contribution requirements, number of employees participating in the plans, potential withdrawal liabilities, etc. – need to be considered to determine whether the individually significant threshold is met.
When Standard & Poor’s cut the rating of U.S. sovereign debt from AAA to a AA+ rating, the announcement was accompanied with a negative outlook in S&P’s long-term assessment of that debt. In several instances, the requirements of U.S. GAAP (generally accepted accounting principles) incorporate the need to consider risk-free rates of return. As such, questions have bubbled up about whether returns on U.S. sovereign debt still would be considered the appropriate rates in following U.S. GAAP requirements.
Companies try to make informed decisions to deal with whatever challenge or opportunity may be around the corner. But they don’t have a crystal ball. To plan for the future, company management uses prospective financial information. If concerned with estimating future operating results based on an existing situation only, management can use a forecast to present that information. If management would like to consider different scenarios, projections based on hypothetical assumptions may be more useful.
If you have been in the service industry for a while and have a basic understanding of internal control audits, you probably have heard of a Statement of Auditing Standards No. 70 report.
SAS 70 has been a success because clients have demanded a detailed understanding of their service provider’s process and internal controls. One of the most common areas outside the traditional SAS 70 framework is a service provider’s IT operations (e.g., data security). The service provider’s management and various external parties constantly demand assurance in this area. Facing this dilemma, the American Institute of CPAs replaced SAS 70 with the new Service Organization Controls reporting package, which includes three reports. SOC 2 is the dedicated reporting mechanism for an in-depth review of the service providers’ IT internal controls.
Reporting “other comprehensive income” is attracting more attention. Intending to increase the prominence of other comprehensive income in financial statements, the Financial Accounting Standards Board issued amended guidance and requirements in June 2011. The guidance is in Accounting Standards Update (ASU) 2011-05, Presentation of Comprehensive Income.
With a tangle of standards and requirements, it has been a challenge to measure and disclose fair value clearly and consistently. To add some clarity to the issue, the U.S. and international accounting standards boards recently released their converged fair value measurement and disclosure requirements.
Risk is part of life – and part of business. When companies think about risk, it’s usually in areas such as competition, safety, expansion, new lines of business, price increases or staffing.
When auditors think about risk, it is always about the company’s financial statements. The auditors’ work comes down to one result: their opinion on the financial statements. To quote the auditors’ report, it is the auditors’ responsibility to “obtain reasonable assurance that the financial statements are free of material misstatement.” For auditors, the risk is that they perform an audit and either don’t choose the right procedures or don’t appropriately interpret the results of those procedures in forming their opinion on the financial statements.
These days, practitioners often find themselves preparing financial statements and then doubting that the statements will actually give users what they need to manage their businesses or comply with the requirements of lenders and other outside parties.
The concerns become apparent by the questions users raise. And in most cases, our old friend the "expectation gap" gets in the way of harmonious communication among the client, other users and the accountant. Recently, a number of new GAAP requirements include provisions that are particularly complex and have caused users to seek alternative reporting methodologies.
The recurring cost and complexity of performing the first step of the two-step goodwill impairment test methodology are the driving forces behind planned new guidance. In April 2011, the Financial Accounting Standards Board (FASB) issued the proposed Accounting Standards Update (ASU), Testing Goodwill for Impairment. This update was in response to the feedback the FASB received from private company constituents during October and November 2010 roundtable discussions.
The dreaded Internal Revenue Service audit is one of the universal concerns for companies everywhere. While there is no guaranteed method to avoid an audit, a variety of situations may increase the chance for examination. IRS officials are naturally reluctant to share details of the audit selection process. But it makes sense to direct attention to the areas where the Service has focused attention with "Market Segmentation Specialization Program" (MSSP) efforts.
With the recent economic downturn still currently in focus, the Financial Accounting Standards Board has noted that creditors have significantly increased the volume of debt they are restructuring or modifying.
Several public companies have recently announced plans to change accounting policies related to how they account for returns on plan assets and how they will reflect actuarial gains and losses in determining the net period pension cost.
Employers may provide benefits to employees whose employment has been terminated. How do employers account for these benefits?
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