A Glimpse into Accounting Standards Updates for the Investment Industry– January 31, 2018

Posted by Keren Nass

Through the past months, standard-setting bodies have been busy creating new proposed standards and projects related to the investment industry, as well as finalizing standards that have completed their comment periods. Below is a brief look at what the FASB and PCAOB boards have been working on. 

FASB Accounting Updates

Disclosure Framework Project
The Disclosure Framework Project is in full swing to assess the materiality of disclosures. Overall, the updates are intended to continue to make disclosures more effective. The proposal is meant to focus primarily on two disclosure areas: 

  • Transfers. The changes would eliminate the disclosure requirements regarding a fund’s policy for recording transfers and explanations for transfers to/from level 1 and to/from level 2.
  • Level 3 Fair Value. The changes would eliminate the qualitative disclosure requirements regarding a fund’s policy and internal process for determining level 3 fair value measurements. However, the quantitative inputs included within the current disclosures would be subject to more requirements, specifically a range of inputs and/or weighted average of inputs. 

FASB is currently in the decision process and final stages of approving this project.
 
Receivables — Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities
Under ASU No. 2017-08, FASB has amended ASC 310-20 in which the amortization period for certain premium purchased callable debt securities is shortened to the earliest call date. The intention is to more closely align interest income recorded on bonds. The amendment does not apply to securities held at a discount.
 
Exceptions to this rule include instruments that contain prepayment features, call options that are contingent upon the occurrence of future events, or call options in which the timing or amount to be paid is not fixed. To account for an amortization change, a fund should book a one-time cumulative adjustment to retained earnings as of the beginning of the first reporting period as well as disclose the change in accounting policy in the initial year. For public business entities, the amendment will be effective for fiscal years and interim periods with fiscal years beginning after December 15, 2018. For all other entities, the amendment will be effective after December 15, 2019. 

PCAOB Accounting Updates 

The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion
An approved standard (AS 3101) seeks to enhance the form and content of the auditor’s report to make it more relevant and informative to investors and other financial statement users. The audit opinion itself still maintains the “pass/fail” opinion but creates the following additional items: 

  • Standardized form of the auditor's report, requiring the opinion to be the first section of the auditor's report and requiring section titles to guide the reader.
  • Clarifications of existing auditor responsibilities, enhancing certain standardized language in the auditor's report, including adding a statement about auditor independence.
  • Adding a statement in the auditor's report related to auditor tenure with the client.
  • Communication of critical audit matters (CAMs) to the audit committee related to either accounts or disclosures that are material to the financial statements. The requirement for CAMs varies for reporting entities. 

Except for CAM requirements, all additions are to take effect for fiscal years ending on or after December 15, 2017. CAMs are to take effect for fiscal years ending on or after June 30, 2019, for large accelerated filers; and for audits for fiscal years ending on or after December 15, 2020, for all other companies to which the requirements apply.
 
Auditing Accounting Estimates, Including Fair Value Measurements
A proposed standard (AS 2501) has been issued regarding auditing accounting estimates and fair value measurements. The purpose is to establish a single standard that sets forth a uniform, risk-based approach and enhance investor protection. The new standard is intended to: 

  • Prompt auditors to focus attention on potential management bias, having a higher level of professional skepticism.
  • Extend certain key requirements in the existing fair value standard to all accounting estimates in significant accounts and disclosures to reflect a more uniform approach to substantive testing.
  • Further integrate the risk assessment standards on estimates with greater risk of material misstatement.
  • Add requirements to address auditing fair values of financial instruments, including determining whether pricing information from third-party pricing is sufficient appropriate audit evidence. 

The proposed auditing standard and proposed amendments would be applicable to all audits conducted in accordance with PCAOB standards. The comment period closed at the end of August; final revisions and approval are pending.
 
Using the Work of an Auditor-Engaged Specialist
A proposed standard (AS 1210) has been issued to apply a risk-based approach to supervising and evaluating the work of specialists.
 
For use of the work of a company's specialist: 

  • Obtain an understanding of the work of the company’s specialists, including relationship to the company, and related company processes and controls.
  • Obtain an understanding of and assess the specialist’s knowledge, skill and ability.
  • Perform procedures to test and evaluate the work of a company’s specialist. 

For use of the work of an auditor's specialist:

  • Enhance the requirements for applying a risk-based approach to auditor-employed and auditor–engaged specialists.
  • Inform the auditor's specialist of the work to be performed and for reviewing and evaluating that specialist's work.
  • Amend requirements for assessing the knowledge, skill and ability of specialists. 

The proposed auditing standard and proposed amendments would be applicable to all audits conducted in accordance with PCAOB standards. The comment period closed at the end of August; final revisions and approval are pending.
  
Overall, both the FASB and PCAOB are providing additional guidance and insight for auditors to help limit broad interpretations to specific disclosures and responsibilities. Responses within the investment industry to these proposed and approved standards have varied, challenging the Boards to improve and streamline these standards even further with additional considerations and clarifications. However, in general, auditors in the industry view the new standards as necessary to help them fulfill their responsibilities to clients.

Please contact a member of your service team, or contact Keren Nass at knass@cohencpa.com or Peggy McCaffrey at pmccaffrey@cohencpa.com for further discussion.
 
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.