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October 2013 Essential Briefings The PCAOB Proposes Changes to the Auditor’s Report and Responsibilities for Other Information
regulatory reporting ____________________________________________________________ FASB Issues Updates on Disclosure Requirements for Nonpublic Employee Benefit Plans
financial reporting ____________________________________________________________ Revised Presentation Requirements for Unrecognized Tax Benefits
RISKS ____________________________________________________________ Measure Twice, Cut Once: Applicable to Selecting ERP and Accounting Software
Contents October 2013
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essential briefings 2 T he P C AOB P ropo se s C h a ng e s to t he Aud i tor’s R e por t a n d R e spo n s ibil i t ie s f or O t he r I n f or m at io n On August 13, 2013, the Public Company Accounting Oversight Board (“PCAOB” or the “Board”) issued Release 2013-005.
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regulatory reporting 4 FA SB Is sue s Up dat e s o n D is c l o sur e R e quir e me n t s f or No n p ubl ic E mp l oy e e Be n e f i t P l a n s In July 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-09 (“ASU 2013-09”) “Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04.”
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financial reporting 6 R e v ise d P r e se n tat io n R e quir e me n t s f or Un r e co g n i z e d Ta x Be n e f i t s ASU 2013-11: Income Taxes (Topic 740)—Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force).
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risks 6 Me a sur e T w ic e , C u t O n c e : A pp l icabl e to Se l ect i ng ER P a n d Accoun t i ng Sof t wa r e To some who have been through more than one ERP implementation in their careers, this premise may seem obvious. To most people, it isn’t. Role play time... here is a typical first call to us from a company executive that has invested big $$ in a failed implementation.
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October 2013
Ess e n t i a l B r i e f i n g s
The PCAOB Proposes Changes to the Auditor’s Report and Responsibilities for Other Information By ELBERTA NIZZOLI | partner
ENizzoli@SingerLewak.com | 310.477.3924
Summary: On August 13, 2013, the Public Company Accounting Oversight Board (“PCAOB” or the “Board”) issued Release 2013005, which proposes two new auditing standards on the auditor’s report on audited financial statements (the “proposed auditor reporting standard”) and the auditor’s responsibilities regarding other information in certain documents other than the audited financial statements and the auditor’s report (the “proposed other information standard”). The Board also proposes related amendments to PCAOB Standards. The Board’s proposed auditor reporting standard would retain the pass/fail model, referred to as such because the auditor opines on whether the financial statements are fairly presented or not, and would provide more information to investors and other financial statement users regarding the audit and auditor. The Board’s proposed other informa-
Purpose of the Propose d Change s :
tion standard would enhance the required auditor’s procedures by providing a specific basis for the auditor’s description in the auditor’s report of the auditor’s responsibilities for, and the results of, the auditor’s evaluation of the other information included in a company’s annual report that is filed with the SEC. Examples of other information in an annual report on Form 10-K would include Selected Financial Data, Management’s Discussion & Analysis, exhibits, and certain information incorporated by reference.
Investors have expressed that the current design of the auditor’s report does little to convey to investors and other financial statement users the substance of the information obtained and evaluated by the auditor. The proposed auditor report standard would provide investors and other financial statement users with additive potentially valuable information that investors have expressed interest in receiving but have not historically had access to in the past. The proposed other information standard would provide investors information regarding the auditor’s responsibilities for other information outside the financial statements. This refers to information that is contained in documents that include the auditor’s report and the audited financial statements. It is intended to improve the auditor’s procedures and enhance the auditor’s responsibilities with respect to other
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information. This acts to further protect the interests of investors. T he Si g n i f i c ant P rop o s e d C ha n ges: The significant proposed changes of the Board’s proposed auditor reporting standard include the following: • It would require the auditor to communicate in the auditor’s report critical audit matters that would be specific to each audit. The required communication would focus on those matters the auditor addressed during the audit of the financial statements that involved the most difficult, subjective, or complex auditor judgments or posed the most difficulty to the auditor in obtaining sufficient appropriate audit evidence or forming an opinion on the financial statements.
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• It would add new elements to the auditor’s report related to auditor independence, audit tenure, and the auditor’s responsibility for other information in annual reports containing the audited financial statements and the auditor’s report. • It would enhance certain standardized language in the auditor’s report, including the addition of the phrase “whether due to error or fraud” when describing the auditor’s responsibility under PCAOB standards to obtain reasonable assurance about whether the financial statements are free of material misstatements, whether due to error or fraud. The required procedures under the Board’s proposed other information standard include the following:
October 2013
• It would apply the auditor’s responsibility for other information specifically to a company’s annual report filed with the SEC that contain that company’s audited financial statements and auditor’s report. • It would enhance the auditor’s responsibility regarding other information by adding procedures for the auditor to perform in evaluating the other information based on relevant audit evidence obtained and conclusions reached during the audit. • It would require the auditor to evaluate the other information for material misstatements of fact as well as for material inconsistencies with amounts or information, or the manner of their presentation, in the audited financial statements. • It would require communication in the auditor’s report
regarding the auditor’s responsibilities for, and the results of, the auditor’s evaluation of the other information. O t he r C o n s i derati ons On July 30, 2013, the SEC amended Rule 17a-5 under the Exchange Act to require that audits of brokers’ and dealers’ financial statements be performed in accordance with the standards of the PCAOB for fiscal years ending on or after June 1, 2014. The Board is seeking comments on issues specific to brokers and dealers and on whether the proposed standards and amendments are appropriate for audits of brokers and dealers. The Board is also seeking responses to questions on applying the proposed standards to audits of emerging growth companies (“EGC”). In accordance with Section 104 of the Jumpstart
Our Business Startups Act, any rules adopted by the Board after April 5, 2012 do not apply to audits of EGCs unless the SEC determines that the application of these additional requirements is necessary or appropriate in the public interest, after considering the protection of investors, and whether the action will promote efficiency, competition, and capital formation.
believes that the proposed approach represents a cost-sensitive approach that would be scalable to less complex companies based on the nature and extent of the information outside the financial statements for these companies as compared to companies with more extensive operations.
The Board anticipates that the proposed auditor reporting standard will have cost implications for the auditor, the companies, and their audit committees and is requesting comments regarding the nature and extent of these costs.
The proposed standards and amendments would be effective for audits of financial statements for fiscal years beginning on or after December 15, 2015, depending on the timing of approval by the PCAOB and the SEC of any final standard and related amendments.
The Board also considered the additional effort and cost of implementing changes in the auditor’s responsibilities regarding other information and
W he n It Would Be Effe ctiv e :
ELBERTA nizzoli can be reached at enizzoli@singerlewak.com or 310.477.3924
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r e g u l ato ry r e po r ti n g
FASB Issues Updates on Disclosure Requirements for Nonpublic Employee Benefit Plans BY STEPHANIE KOAI | MANAGER
SKoai@SingerLewak.com | 310.477.3924
Summary: In July 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-09 (“ASU 2013-09”) “Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04.” ASU 2013-09 defers the effective date of disclosures regarding significant unobservable inputs used in Level 3 fair value measurements for investments of Nonpublic Employee Benefit Plans. P ur p o s e o f ASU 2013- 09 a n d Who I t Af f ects: Stakeholders raised concerns that certain disclosure requirements in FASB Accounting Standards Codification (“ASC” or the “Codification”) 820-10-50-2, which was effective for nonpublic entities for annual periods beginning after December 15, 2011, potentially provide proprietary information about nonpublic entities through the dissemination of their employee benefit plans’ financial statements on the 5 | SingerLewak
ments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The Main Prov isions :
regulator’s website. The amendments in this ASU address those concerns. The amendments in this ASU apply to certain quantitative disclosure requirements for an employee benefit plan, other than those plans that are subject to the Securities and Exchange Commission’s (“SEC”) filing requirements (“nonpublic employee benefit plan”), that holds investments in its plan sponsor’s own nonpublic entity equity securities, including equity securities of its plan sponsor’s nonpublic affiliated entities and that are within the scope of the disclosure requirements contained in FASB ASU 2011-04, Fair Value Measurement (Topic 820): Amend-
October 2013
The amendments in this ASU defer indefinitely the effective date of certain required disclosures in ASU 2011-04 (Topic 820) of quantitative information about the significant unobservable inputs used in Level 3 fair value measurements for investments held by a nonpublic employee benefit plan in its plan sponsor’s own nonpublic entity equity securities, including equity securities of its plan sponsor’s nonpublic affiliated entities. The amendments in this ASU do not defer the effective date for those certain quantitative disclosures for other nonpublic entity equity securities held in the nonpublic employee benefit plan or any qualitative disclosures.
R e v i s i o n s a nd B a si s f or Revisions:
plans in the amendments to the Codification relating to this deferral without using the term nonpublic employee benefit plan. The description of such employee benefit plans is included in ASC 820-10-65-9.
not reveal a plan sponsor’s or a plan sponsor’s affiliated entities proprietary information.
The Board limited the indefinite deferral to quantitative information about the significant unobservable inputs used in Level 3 fair value measurement. The quantitative information represents proprietary information about key assumptions used by a nonpublic plan sponsor and the plan sponsor’s nonpublic affiliated entities to value its stock.
The Board revised the description of the nonpublic employee benefit plan to an employee benefit plan other than those plans that are subject to the SEC’s filing requirements. The revision was made to be less specific in nature as some plans file Form 10-K/A, while others file Form 11-K with the SEC.
The Board excluded the qualitative disclosures in paragraph 820-10-50-2(bbb)(1) and (f) from the indefinite deferral because the qualitative disclosures will be relevant to the primary users of the financial statements but will
The Board did not include this proposed definition in the Master Glossary of the Codification to clarify that it does not apply to all Topics in the Codification. Instead, the Board simply described these employee benefit
W he n It Would Be Effe ctiv e : The deferral in this amendment is effective upon issuance for financial statements that have not been issued. STEPHANIE KOAI can be reached at SKOAI@singerlewak.com or 310.477.3924
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financial reporting
Revised Presentation Requirements for Unrecognized Tax Benefits By AARON SULLIVAN | manager
ASullivan@SingerLewak.com | 310.477.3924
ASU 2013-11: Income Taxes (Topic 740)—Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force). The Financial Accounting Standards Board (“FASB”) recently issued guidance on the presentation of unrecognized tax benefits in cases when companies have net operating losses or tax credits carried forward. The amendment was issued to address the fact that there is currently diversity in practice among companies in this position. This diversity resulted from a lack of explicit guidance in the FASB’s original pronouncement Topic 740, Income Taxes. Certain companies present unrecognized tax benefits as a liability, unless the benefit is directly associated with a position taken in a year that results in the recognition of the net operating loss or tax credit carry forward for that year and the carryforward has not been used.
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from the disallowance of a tax position under tax law
Other companies present the unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss or credit carryforward. Prese ntation re quire d In order to promote comparability across financial statements, the FASB will now require companies to present an unrecognized tax benefit, or portion thereof, for a net operating loss or tax credit carryforward as a reduction of a deferred tax asset. As with most guidance, there are exceptions. In either of the following instances the unrecognized tax benefit should be presented as a liability instead of reducing a deferred tax asset: The net operating loss or tax credit carry forward is not available at the reporting date to settle additional taxes that would result
October 2013
Tax law does not require the company to use the net operating loss or credit carried forward to settled additional taxes resulting from the disallowance of the tax position and the company does not intend to use the loss or credit thus. Effe ctiv e date For public filers this update is effective for fiscal years, and interim periods within those years beginning after December 15, 2013. The update is effective a year later for private companies for periods beginning after December 15, 2014. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date and retrospective application is permitted. Inte rnational Financ ia l Re porting Standards ( IFRS) comparison IFRS does not include comparative guidance regarding the presentation of unrecognized tax benefits.
r i sks
Measure Twice, Cut Once: Applicable to Selecting ERP and Accounting Software By bob green | partner
BGreen@SingerLewak.com | 818.999.3924
P r e m i s e : Measuring twice and Cutting Once can better ensure a successful ERP or Accounting Software implementation To some who have been through more than one ERP implementation in their careers, this premise may seem obvious. To most people, it isn’t. Role play time…. here is a typical first call to us from a company executive that has invested big $$ in a failed implementation: Prospect: “we bought XYZ product because of a recommendation from (golf buddy, cousin, industry peer, ill-prepared business advisor, etc.) But, now that we bought and installed it, we’re even more dysfunctional because (reasons S, T, U, V) – and I’m out over $350,000 with no positive returns.” Our team: “That’s a shame, but you’re in good company… Before you met with the software sales team, did your management team document your business’ requirements from a software implementation? And, did you determine how you would mea-
sure success when the implementation was completed?”
outcomes. You’ll be so glad you did this.
Prospect: “Nope. Actually we just had a meeting with their sales team at our office, watched some fancy PowerPoint slides, saw a short software demonstration – and it seemed to work fine – and it looked a lot like our Outlook inboxes so people were ready to go with it, right away.”
When you shop for software with a clear understanding of what success “looks like”, you increase your likelihood of choosing a successful product and implementer
I could go on. You get it. Cut the Risk of bad software experiences - a bit of advice from experienced professionals: MEASURE TWICE – CUT ONCE. We implore you: take the time with your management team to determine the processing and reporting that matter most to your business, and study where you will gain the most efficiencies from better automation – before you talk to ANY software reseller about buying software. Don’t even start one of your team on (truly blind) “research” on the web (ouch – it happens) to find the software that’s right for you until you at least work through your requirements and desired
Clearly, you get the picture that we’re here to help you with the process. But even if you don’t hire us to help, do yourselves a favor by making sure that the fun part follows the hard work – meaning, hold off on fancy software demo’s until you’ve really determined what you want from the process, and what you will measure when it is all done. Just a reminder about our team: we’re here to help objectively, independently, and without bias. We do NOT sell ERP/accounting software – but we work in this area every day by helping our clients evaluate, upgrade, procure, manage and – optimize it. Call or email me below. Our team is at the ready. And, good luck with your measurement!
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