How an accounting staff differentiates between equity and liabilities and treats goodwill are top of the agenda of the Federal Accounting Standards Board (FASB) this year.
For public companies, changes affecting audits could be coming as well.
Last year FASB proposed a standard to reduce confusion among accountants and investors over how to differentiate between equity and liabilities.
Current guidance is considered “overly complex, internally inconsistent, and the source of frequent financial statement restatements,” Russell Golden, FASB chair, said in a statement when the proposal was introduced.
Susan Cosper, a member of the FASB board, reiterated the point at a conference last year of the American Institute of CPAs. “We’re really just trying to reduce the cost and complexity for preparers and for investors because it’s an area that they struggle with,” she said.
One change FASB is proposing would apply to the way companies account for convertible instruments and contracts embedded in their own equity interests.
On the goodwill changes, the goal is to address complaints FASB has received on how intangible assets are amortized.
Goodwill is the value attributed to a company when it’s been acquired by another company for more than the sum of its assets.
Under current standards, companies test goodwill for impairment each year. Private companies and nonprofits are permitted to take a more predictable approach: amortize the goodwill over 10 years.
Public companies aren’t happy with the rules governing the impairment test and the amortization schedule they’re to follow. The changes FASB is considering include different ways to define the amortization term. Among them: a default period, a range with a cap and floor, a period set by the company with justification, or a period based on the useful lives (or a weighted average of the useful lives) of the assets.
It’s not clear how quickly FASB will undertake the changes, both to goodwill and the treatment of equity and liabilities, but both are priorities of Golden, whose term ends in July. Richard Jones, chief accountant at Ernst & Young, is slated to take over as chair.
Eased consulting restrictions
For public companies, another change that could be coming is an easing of restrictions on consulting services provided by audit firms.
Currently, firms can’t provide non-audit services to their clients or their clients’ affiliates, but the Securities and Exchange Commission is thinking about easing this for client affiliates by imposing that restriction only if the affiliate is considered a material contributor to the company.
If the auditor determines the affiliate isn’t a material contributor, the firm can provide it consulting services without that being considered a compromise of auditor independence.
It would be up to the auditor to decide if the affiliate is a material contributor or not.
The current treatment of non-audit work has been a problem for the Big Four audit firms as they’ve tried to expand into consulting.
Last year, PricewaterhouseCoopers had to pay the SEC $7.9 million to settle charges it compromised its independence by providing consulting services to more than a dozen affiliates of its audit clients.
“PwC repeatedly provided non-audit services without having effective quality controls in place for monitoring whether the services impaired its independence,” Anita Bandy, associate director of the SEC's Division of Enforcement, said in September when it announced the settlement.
Alignment on quality control
Another change affecting public companies is under consideration by the Public Company Accounting Oversight Board (PCAOB), the standards setter for companies whose shares are publicly traded.
The regulator is considering aligning its quality control rules with a proposal by its international counterpart, the International Auditing and Assurance Standards Board. Among the changes that could be coming: a company’s governance structure for the first time could be held accountable under the standards.
“The PCAOB has long considered firm governance and leadership to be a crucial aspect of firms’ [quality control] systems,” the regulator said.
That means PCAOB would look at whether the firm’s culture promotes a commitment to quality, has leadership that’s held accountable for its strategic decisions, and recognizes responsibility for ensuring the firm is serving the public interest.
Should all the changes go through — from FASB, the SEC, and PCAOB — staff and audit committees will be busy this year learning how to apply them.