Weekly Summary of Accounting, SEC and Auditing Developments: June 13-17, 2022
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ACCOUNTING AND SEC HEADLINES:
Government Grant Accounting – FASB Publishes Invitation to Comment on Government Grant Accounting
The FASB has published an Invitation to Comment (ITC), Accounting for Government Grants by Business Entities: Potential Incorporation of IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, into Generally Accepted Accounting Principles. The ITC gives stakeholders the opportunity to provide feedback on whether IAS 20 represents a workable solution for improving GAAP in the U.S. financial reporting environment for business entities as it relates to the accounting for government grants.
Stakeholders are encouraged to review and provide comment on the ITC by September 12, 2022.
In response to previous feedback, the FASB Chair Richard R. Jones added a project, “Accounting for Government Grants, Invitation to Comment,” to the research agenda last December. Published as part of that research project, the government grants ITC solicits additional feedback from stakeholders on relevant requirements in IAS 20 that should apply to US GAAP and includes specific questions for investors about the importance and utility of government grants information to their analysis of a company’s financial performance.
Securities Exchange Act – SEC Staff Updates Compliance and Disclosure Interpretation on Exchange Act Sections
The staff in the SEC’s Division of Corporation Finance (Corp Fin) has updated its Compliance and Disclosure Interpretation (C&D), Exchange Act Sections. This C&DI provides guidance from the SEC staff on the registration and reporting provisions of the Exchange Act — Sections 12, 13 and 15.
The SEC staff has revised Question 101.01 which provides guidance on whether the Corp Fin staff or the Division of Trading and Markets would consider a future or forward contract that permits cash or physical settlement to be “intended to be physically settled” and therefore excluded from the definitions of “swap” and “security-based swap” if, at the time the parties enter into the contract, the underlying securities cannot be legally transferred, or the transfer of the underlying securities is restricted by contract.
Investment Advisors – SEC Proposes Rules on Advisers Act Regulatory Status of Index Providers, Model Portfolio Providers, and Pricing Services
The SEC has published for public comment a Request for Comment on Certain Information Providers Acting as Investment Advisers. The SEC is “requesting information and public comment on matters related to the activities of certain “information providers,” including whether, under particular facts and circumstances, information providers are acting as “investment advisers” under the Investment Advisers Act of 1940 (“Advisers Act”). The Request specifically focuses on index providers, model portfolio providers, and pricing services.”
The SEC believes that the request for comment will facilitate consideration of whether regulatory action is necessary and appropriate to further the SEC’s mission. The public comment period will remain open for 60 days following publication on the SEC’s website or 30 days following publication in the Federal Register, whichever period is longer.
Auditor Independence – SEC Acting Chief Accountant Discusses Importance of the General Standard of Auditor Independence and an Ethical Culture
The SEC’s Acting Chief Accountant, Paul Munter, recently discussed the importance of the general standard of auditor independence and fostering an ethical culture. Munter indicates that high-quality audits are “critical to the process of providing decision-useful financial information for the benefit of investors, and auditors serve an important gatekeeping and investor protection function by helping to ensure that issues are promptly identified and addressed. The Commission has long-recognized that audits by professional, objective, and skilled accountants that are independent of their audit clients contribute to both investor protection and investor confidence in the financial statements.”
Specific topics discussed by Munter included:
The auditor independence framework of rule 2-01(b) of Regulation S-X;
The office of the chief accountant’s approach to auditor independence consultations;
Certain recurring issues in recent oca staff auditor independence consultations; and
The paramount importance that accounting firms foster an ethical culture with respect to auditor independence and fulfill their professional responsibilities.
AUDITING AND INTERNAL CONTROL HEADLINES:
Preparation, Compilation, and Review Engagements – 2022-2023 Edition of Knowledge-Based Preparation, Compilation, and Review Engagements Published
We have published the 2022-2023 edition of Knowledge-Based Preparation, Compilation, and Review Engagements. This publication examines the AICPA’s review, compilation, and preparation engagement standards and shows you how to conduct engagements in an efficient and effective manner.
This new edition is organized to enable those performing any one of the SSARS engagements to do so without referring to standards related to the other engagements conducted under SSARS. This publication incorporates the provisions of SSARS 25, Materiality in a Review of Financial Statements and Adverse Conclusions. SSARS 25 is effective for engagements performed in accordance with SSARSs for periods ending on or after December 15, 2021.
Checklist – New Edition of Summary Checklist of Recent Authoritative AICPA Professional Standards Published
We have published a new edition of the Summary Checklist of Recent Authoritative AICPA Professional Standards. This new edition reflects the issuance of the AICPA quality management standards and Statement on Auditing Standards (SAS) No. 147, Inquiries of the Predecessor Auditor Regarding Fraud and Noncompliance With Laws and Regulations. The quality management standards include:
Statement on Quality Management Standards (SQMS) No. 1, A Firm's System of Quality Management;
SQMS No. 2, Engagement Quality Reviews;
Statement on Auditing Standards (SAS) No. 146, Quality Management for an Engagement Conducted in Accordance with Generally Accepted Auditing Standards; and
Statement on Standards for Accounting and Review Services (SSARS) No. 26, Quality Management for an Engagement Conducted in Accordance with Statements on Standards for Accounting and Review Services.
Checklist – New Edition of Summary Checklist of GASB Standards Published
We have published a new edition of the Summary Checklist of Recent GASB Standards. This new edition reflects the release of GASB Statements 100, Accounting Changes and Error Corrections, and 101, Compensated Absences.
Error Corrections – GASB Issues Statement No. 100 on Accounting Standards and Error Corrections
The Governmental Accounting Standards Board (GASB) issued GASB Statement No. 100, Accounting Changes and Error Corrections, which is intended to improve the accounting and financial reporting requirements for accounting changes and error corrections.
The GASB believes that Statement No. 100 provides more straightforward guidance designed to lead to information that is easier to understand and more reliable, relevant, consistent, and comparable across governments for making decisions and assessing accountability.
The GASB’s previous standards on accounting changes and error corrections, in GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, were based on guidance established in the 1970s. The GASB’s pre-agenda research identified diversity in applying the existing standards in practice, including issues with selecting the appropriate category of accounting change or error correction.
Statement 100 defines the following categories:
Changes in accounting principles;
Changes in accounting estimates;
Changes to or within the financial reporting entity; and
Corrections of errors in previously issued financial statements.
Statement 100 prescribes accounting and financial reporting for (1) each category of accounting change and (2) error corrections. It requires that:
Changes in accounting principle and error corrections be reported retroactively by restating prior periods;
Changes in accounting estimate be reported prospectively by recognizing the change in the current period; and
Changes to and within the financial reporting entity be reported by adjusting beginning balances of the current period.
The Statement also addresses how accounting changes and error corrections should be displayed in financial statements, disclosed in notes, and presented in required supplementary information and supplementary information.
Statement 100 carries forward some of the requirements of Statement 62 but with clearer explanations. Regarding classification, a notable change relates to changes to or within the financial reporting entity, which previously did not encompass changes within the reporting entity, such as a change from discrete presentation of a component unit to blended presentation or vice versa. Regarding note disclosures, Statement 100 requires that governments disclose the effects of each accounting change and error correction on beginning balances in a tabular format.
“Governments and other stakeholders should find many of the requirements of Statement 100 familiar,” said GASB Chair Joel Black. “But they should find the understandability of the guidance greatly improved, and financial statement users should benefit from the new tabular disclosure.”
The requirements of Statement 100 are effective for accounting changes and error corrections made in fiscal years beginning after June 15, 2023, and all reporting periods thereafter. The GASB encourages earlier application.
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