Category: Ethics

GAAP Matters – will debt classification change…will AICPA independence rules change?

Groups oppose the change proposed by the FASB, and…

New Lease GAAP accounting prompts a change in the AICPA’s auditor independence standard

Both the Private Company Council (PCC) and the Investor Advisor Committee (IAC) have recommended that the FASB reconsider and change its decision on a proposed GAAP standard dealing with debt classification (ASC Topic 470)

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The FASB has proposed and considered a change to GAAP that would affect the classification of debt. This proposal affects when debt can be classified as a non-current liability.  Classification as current vs non-current affects some key financial statement measures.

Generally, classification of debt as “long-term” is not available to instruments which will mature and become due within one year of the balance sheet date.  Under the proposal, debt “should” be classified as long-term (i.e. noncurrent) if “The entity has a contractual right to defer settlement of the liability for at least one year (or operating cycle, if longer) after the balance sheet date. If, before the balance sheet date, an arrangement is in place with a third party (for example, a line of credit) that would result in the entity avoiding the transfer of current assets within 12 months from the balance sheet date, the debt should be classified as noncurrent because the entity has a contractual right to defer settlement.”

The PCC requested that the FASB reconsider its prior decision to allow companies to classify debts due within 12 months as long-term debt if the company has unused long-term financing arrangements at the balance sheet date.  The PCC stated that the FASB decision to consider unused long-term financing arrangements adds complexity and is therefore not in line with its intent to simplify balance sheet classification of debt.

The IAC recommended the Board change its tentative decision to reclassify current debt as a non-current liability based sole on unused long-term financing arrangements – such as a line of credit.  The groups consider the analysis of whether the entity can use the line of credit to effectively extend the repayment of the debt to be somewhat complex as it could potentially include assessing the reasonableness that the line of credit will not be needed for other liquidity needs along with an assessment of terms and conditions of the credit line.

We have here an example where both the PCC and IAC, despite their varying  stakeholders and perspectives, have provided somewhat similar feedback to the FASB. According to the FASB website, the PCC is the primary advisory body to the FASB on private company matters. The PCC uses the Private Company Decision-Making Framework to advise the FASB on the appropriate accounting treatment for private companies for items under active consideration on the FASB’s technical agenda. According to the FASB’s website, the IAC is a standing committee that is expected to work closely with the FASB in an advisory capacity to ensure that investor perspectives are effectively communicated to the FASB on a timely basis in connection with the development of financial accounting and reporting standards.

And speaking of debt…AICPA Code of Conduct interpretation change is on the horizon for CPAs who have lease arrangements with clients

At its upcoming meeting the AICPA’s Professional Ethics Executive Committee (PEEC) will consider adopting a change to the independence interpretation that affects CPAs who have lease arrangements with their clients. This proposed revision was originally considered and exposed for comment by PEEC while I was a member of the PEEC.

The existing “Leases” independence interpretation provides that a lease between the CPA and the attest client does not impair independence if the lease is an operating lease – and – the lease terms are comparable with leases of a similar nature, and all amounts are paid in accordance with the lease terms and provisions. This existing interpretation also provides that a capital lease impairs independence because it is considered be a prohibited loan with the attest client.

The FASB has since adopted authoritative GAAP that when effective will significantly affect the operating versus capital lease interpretation which iscodified in ASC 842, Leases. Calendar year-end public business entities will adopt the new leases standard on January 1, 2019. Thus, PEEC determined it needed to consider how that GAAP change affects the Code of Professional Conduct.

The proposed revision to the Code of Conduct replaces the extant GAAP categorization approach with a conceptual framework approach, allowing for the consideration of factors that PEEC believes truly affect the CPA’s objectivity and professional skepticism. PEEC has stated that it does not believe that objectivity and professional skepticism are affected by whether a lease is an operating lease or a capital lease, per se, but believes that other factors related to the lease and the relationship should be considered in arriving at a conclusion on independence.

While the GAAP lease categorization requirements have been proposed to be eliminated from the revised interpretation, the other requirements remain in the proposed revised interpretation as minimum safeguards. Once these minimum safeguards are met (where applicable), the CPA is required to use a threats and safeguards approach, evaluating any other threats identified and applying safeguards when necessary.

PEEC is set to take up the final adoption of its proposal in the summer of 2018…I will follow its progress and provide additional analysis as information becomes available.

Ethically speaking – International Code of Conduct – Global Principles for Professional Accountants

A new Code of Ethics has been released by the International Ethics Standards Board for Accountants.  It is reorganized to be easier to apply in practice.

Andrew Mintzer, CPA

The Code of Ethics(Code) is designed to present rich guidance about how accountants should deal with, and consider, ethics and independence issues.

Although the fundamental principles of ethics remain the same in the new code, the unifying conceptual framework has been revised. Accountants should use this framework to identify, evaluate, and address threats to compliance with the fundamental principles.

What does the new Code cover?

The Code has guidance for all professional accountants as well as specific additional guidance for both professional accountants in public practice, as well as professional accountants in business.

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The new code contains:

  • Revised “safeguards” provisions designed to be better aligned to threats to compliance with the fundamental principles.
  • Independence provisions regarding long association of personnel with audit clients.
  • New and revised sections dedicated to professional accountants in business relating to preparing and presenting information, and relating to pressure to breach the fundamental principles.
  • Guidance for professional accountants in business.
  • Guidance to emphasizing the importance of understanding facts and circumstances when exercising professional judgment.
  • New guidance to explain how compliance with the fundamental principles supports the exercise of professional skepticism in an audit or other assurance engagements.

Professional Accountants in Business

The IESBA Code Part 2 has specific requirements for “professional accountants in business”.  As explained, this Part of the Code sets out requirements and application material for professional accountants in business when applying the conceptual framework. The conceptual framework does not describe every possible circumstance, including professional activities, interests and relationships, that could be encountered by professional accountants in business, which create or might create threats to compliance with the fundamental principles, the Code, thereforerequires professional accountants in business to be alert for such facts and circumstances.

Investors, creditors, employing organizations and other segments of business, as well as governments and the public, might rely on the work of professional accountants in business. Professional accountants in business might be solely or jointly responsible for the preparation and reporting of financial and other information, on which both others might rely. They might also be responsible for providing effective financial management and competent advice on a variety of business-related matters. The Code, therefore, sets out requirements for professional accountants in business in several key areas where they might encounter pressure to breach the fundamental principles.

One such pressure area faced by professional accountants in business is to breach the fundamental principles of ethical conduct.

Accountants in business should not let the pressures they face breach their compliance with the Code.

A professional accountant shall not:

  1. Allow pressure from others to result in a breach of compliance with the fundamental principles; or
  2. Place pressure on others that the accountant knows, or has reason to believe, would result in the other individuals breaching the fundamental principles.

Pressure might be explicit or implicit and might come from:

  • Within the employing organization, for example, from a colleague or superior.
  • An external individual or organization such as a vendor, customer or lender.
  • Internal or external targets and expectations.

Examples of pressure that might result in threats to compliance with the fundamental principles include:

  • Pressure related to conflicts of interest, such as pressure from a family member bidding to act as a vendor to the professional accountant’s employing organization to select the family member over another prospective vendor.
  • Pressure to influence preparation or presentation of information such aspressure to report misleading financial results to meet investor, analyst or lender expectations…or to please superiors.
  • Pressure to act without sufficient expertise or due care such aspressure from superiors to perform a task without sufficient skills or training or within unrealistic deadlines.

Boss to professional accountant – just do it!

  • Pressure related to inducements:

oPressure from others, either internal or external to the employing organization, to offer inducements to influence inappropriately the judgment or decision making process of an individual or organization.

oPressure from colleagues to accept a bribe or other inducement, for example to accept inappropriate gifts or entertainment from potential vendors in a bidding process.

  • Pressure related to non-compliance with laws and regulations, such as pressure to structure a transaction to evade or postpone tax.

I will cover other section of the Code of Ethicsin future articles.

 

 

Andrew M. Mintzer, CPAis a forensic accounting with the Los Angeles office of Hemming Morse, LLP.  He is a past chair of the California Society of Certified Public Accountants.