New Proposed ASU on Leases

Back in March 2009 the FASB and the IASB issued a discussion paper, Leases: Preliminary Views. After considering the responses to this discussion paper, the two Boards have issued a Proposed Accounting Standards Update Leases (Topic 840). This proposed ASU was issued August 17, 2010. The comment period ends December 15, 2010.

The main proposal in the proposed ASU is that lessees and lessors should apply a right-of-use model in accounting for all leases (including leases of right-of-use assets in a sublease) other than leases of biological and intangible assets, leases to explore for or use natural resources and leases of some investment properties. This means that:

(a) a lessee would recognize an asset representing its right to use the leased (‘underlying’) asset for the lease term (the ‘right-of-use’ asset) and a liability to make lease payments.

(b) a lessor would recognize an asset representing its right to receive lease payments and, depending on its exposure to risks or benefits associated with the underlying asset, would either recognize a lease liability while continuing to recognize the underlying asset (a performance obligation approach); or derecognize the rights in the underlying asset that it transfers to the lessee and continue to recognize a residual asset representing its rights to the underlying asset at the end of the lease term (a derecognition approach).

Assets and liabilities recognized by lessees and lessors would be measured on a basis that:

(a) assumes the longest possible lease term that is more likely than not to occur, taking into account the effect of any options to extend or terminate the lease.

(b) uses an expected outcome technique to reflect the lease payments, including contingent rentals and expected payments under term option penalties and residual value guarantees, specified by the lease.

(c) is updated when changes in facts or circumstances indicate that there would be a significant change in those assets or liabilities since the previous reporting period.

For contracts that combine service and lease components, the right to receive lease payments and the liability to make lease payments would exclude payments arising from distinct service components and for the draft IFRS, non-distinct service components for lessors that apply the derecognition approach.

For leases of 12 months or less, lessees and lessors would be able to apply simplified requirements.

The exposure draft also contains proposed disclosures based on stated objectives. This includes disclosures about the amounts recognized in the financial statements arising from leases and the amount, timing and uncertainty of cash flows arising from those contracts.

ASUs are available on the FASB website, www.fasb.org under Standards.,br/>
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Proposed ASU on Disclosure of Certain Loss Contingencies

The FASB issued Proposed Accounting Standards Update Contingencies (Topic 450) Disclosure of Certain Loss Contingencies on July 20, 2010. At that time the comment period was to have ended August 20, 2010. The FASB has extended the comment period to Sept. 20, 2010 as a result of feedback from early respondents. For public entities, the new guidance would be effective for fiscal years ending after December 15, 2010, and interim and annual periods in subsequent fiscal years. For nonpublic entities, the new guidance would be effective for the first annual period beginning after December 15, 2010, and for interim periods of fiscal years after the first annual period.

The FASB issued this proposed Update because investors and other users of financial reporting have expressed concerns that disclosures about loss contingencies under the existing guidance in Topic 450 do not provide adequate and timely information to assist them in assessing the likelihood, timing, and magnitude of future cash outflows associated with loss contingencies.

The amendments in this proposed Update would apply to all entities, both public and nonpublic, except that nonpublic entities would not be required to provide a tabular reconciliation of accrued loss contingencies.

Objective
This proposed Update would establish the following disclosure objective: An entity shall disclose qualitative and quantitative information about loss contingencies to enable financial statement users to understand (a) the nature of the loss contingencies (b) their potential magnitude and (c) their potential timing (if known).

To achieve this objective, an entity would consider the following principles in determining disclosures that are appropriate for its individual facts and circumstances for loss contingencies that meet the disclosure threshold:

a. During early stages of a loss contingency’s life cycle, an entity would disclose information that is available to enable users to understand the loss contingency’s nature, potential magnitude, and potential timing (if known). In early stages information may be limited and so disclosure may be limited. In subsequent reporting periods, disclosure would be more extensive as more information becomes available.
b. An entity may aggregate disclosures about similar contingencies (for example, by class or type) so that the disclosures are understandable and not too detailed.

Disclosures
The amendments in this proposed Update would require disclosure of certain remote loss contingencies. This expands the population of loss contingencies that are required to be disclosed to achieve more timely disclosure of remote loss contingencies with a potentially severe impact.

When assessing the materiality of loss contingencies to determine whether disclosure is required, an entity would not consider the possibility of recoveries from insurance or other indemnification arrangements.

The proposed amendments would retain the current qualitative disclosures. In addition to the quantitative disclosures required under GAAP, the amendments would require disclosure of publicly available quantitative information, other relevant nonprivileged information, and, in some cases, information about possible recoveries from insurance and other sources.

A public entity would be required to provide tabular reconciliations, by class, of recognized (accrued) loss contingencies that present the activity in the account during the reporting period.

Proposed ASUs are available on the FASB website, http://www.fasb.org/.

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Blue Ribbon Panel Asking for Feedback

As you are no doubt aware, the Blue Ribbon Panel, a joint effort by the AICPA; the Financial Accounting Foundation (FAF) FASB’s parent organization; and the National Association of State Boards of Accountancy (NASB) has been discussing alternate models for private company financial reporting. The panel considered seven alternative models at its July meeting. They eliminated models that were based on IFRS and a model that effectively would have maintained the status quo. The three models that remain would result in differences in GAAP for private companies, where warranted, compared with GAAP for public companies. The three are:

• U.S. GAAP with Exclusions for Private Companies—with enhancements
• U.S. GAAP—Baseline GAAP with Public Company Add-Ons
• Separate, Stand-Alone GAAP Based on Current U.S. GAAP

Another recommendation to come out of the panel’s discussion is consideration of a separate board for private companies under the FAF. FASB would still set public company standards and the new board would be made up of individuals that are focused on private companies. This “private companies board” would decide whether, what and how GAAP should apply to private companies starting with the FASB standards.

Now the panel is asking for your feedback. They are asking users of private company financial statements, preparers and practitioners to respond to a series of questions. The questions will help the panel in (1) discussing how accounting standards can best meet the needs of U.S. users of private company financial statements and (2) making recommendations. The questions are on fasb.org and must be submitted by Sept. 15. A summary of the responses will be distributed to panel members and participating observers. The summary will be included as part of the observer notes (a publicly available meeting handout) for the panel’s next meeting, Oct. 8 at the AICPA’s New York City office.

Take advantage of this opportunity to tell the panel what you think about private company accounting standards. And while you’re at it, tell us what you think about a separate accounting standards board for private companies by leaving a comment.

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Commission Studying the Future of Accounting Education

Now's your chance to tell a new commission what you think needs to be taught to future accountants. The American Accounting Association (AAA) and the AICPA have formed a new commission to study possible future paths of higher education for students who plan on becoming accountants. The "Pathways Commission" will ask for input from all areas the accounting community. This includes individuals and representatives from organizations that impact the various current accounting education pathways.

According to Bruce Behn, University of Tennessee professor and chair of the commission, the commission's goal is to facilitate an open, transparent discussion to be supported by both technolgy and public discussions.

The commission recognizes the difficulty of sustaining the momentum for change in the dynamic environment of accounting practice and education. For this reason the commission's efforts are structured to continue into the future.

The commission was formed to study accounting pathways because a number of forces are affecting accounting education including:

• Shortages of qualified teachers with accounting doctorates,
• The need to revise the accounting curricula regularly in light of fast-paced business changes,
• University budget constraints that threaten to make the cost of education prohibitive, and
• The need for training in specialized areas to meet the profession's demands.

The commission will hold its first meeting Oct. 15-17 in Washington, D.C.

More information on the commission may be found at http://www.pathwayscommission.org/.

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ASU No. 2010

The FASB issued ASU No. 2010–20, Receivables (Topic 310) Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses in July 2010.

The objective of this ASU is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. It is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. Currently, a high threshold for recognition of credit impairments impedes timely recognition of losses.

Amendments in this Update:

• Apply to all entities, both public and nonpublic. Affect all entities with financing receivables, excluding short-term trade accounts receivable or receivables measured at fair value or lower of cost or fair value.
• The extent of the effect depends on the relative significance of financing receivables to an entity’s operations and financial position.

Disclosures

This Update requires an entity to provide disclosures that facilitate financial statement users’ evaluation of the following:

• The nature of credit risk inherent in the entity’s portfolio of financing receivables
• How that risk is analyzed and assessed in arriving at the allowance for credit losses
  The changes and reasons for those changes in the allowance for credit losses.

To achieve the above objective, an entity should provide disclosures on a disaggregated basis. The amendments in this Update define two levels of disaggregation—portfolio segment and class of financing receivable.

Effective date

For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Therefore, for calendar year issuers, the year end information will be presented for 2010, but activity for the year will not be presented until 1st quarter 2011.

For nonpublic entities the disclosures are effective for annual reporting periods ending on or after December 15, 2011.

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PCAOB Proposed AS Related to Confiramtions and Related Amendments

If you or your firm audit public companies then you'll be interested in the PCAOB's latest proposed Auditing Standard. The PCAOB released Proposed Auditing Standard Related to Confirmation and Related Amendments to PCAOB Standards on July 13, 2010. The comment period ends September 13, 2010.

The proposed auditing standard, Confirmation,

• Supersedes the Board's standard, AU section 330, The Confirmation Process, and related amendments to the Board's auditing standards.
• Is applicable to all registered firms conducting audits in accordance with PCAOB standards.

The new standard:

• Requires confirmation procedures for specific accounts.
• Incorporates procedures in response to risk of material misstatement.
• Updates the standard to reflect significant advances in technology.
• Defines a confirmation response to include electronic or other medium.
• Enhances requirements when confirmation responses include disclaimers and restrictive language.

In drafting the proposed standard the Board considered International Standard on Auditing (ISA) 505, External Confirmations, issued by the International Auditing and Assurance Standards Board (IAASB) and the Proposed Statement on Auditing Standards, External Confirmations (the ASB's proposed SAS), of the ASB of the AICPA.

The proposed auditing standard may be downloaded from the PCAOB’s website, www.pcaob.com.

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