Examination of Complex Liabilities/Equity Accounting to Begin
In early 2019, FASB plans to take its first official steps on a significant project to improve the accounting for instruments with the characteristics of both liabilities and equity. The board and its research staff gave a preview of potential paths forward when it met with members of its main advisory panel, the Financial Accounting Standards Advisory Council (FASAC), in late December. Members of the FASAC said that the board needs to simplify the guidance around accounting for convertible instruments with embedded conversion features. “Simplicity is key,” said FASAC member Zachary Gast, global head of research at CFRA. “We look across hundreds of companies and their non-GAAP disclosures, and every single company with convertible debt that is forced to report interest expense in their income statement backs that out—every single one. And that should tell you something.”
Post-Implementation Review Finds Engagement Quality Review Standard Works Well
The PCAOB’s standard on engagement quality review has worked well, according to the staff’s post-implementation review of the standard. “The evidence indicates that engagement quality reviewers have greater involvement earlier in the audit process, and that audit firms have reassessed their engagement quality review assignment practices,” the PCAOB said in a report published on December 19, 2018. “The staff’s review also provides some evidence of improvements in audit quality after the effective date of AS 1220.” The review also found that the standard did not have significant unintended consequences. “In terms of direct costs, although engagement quality reviewers, on average, spend more time performing their reviews in the post–AS 1220 period, increases in reviewer hours are overall very small relative to average total audit hours and the average total cost of an audit,” the PCAOB said. To conduct the post-implementation review, the PCAOB said the staff analyzed information collected through inspection and enforcement programs, third-party data, and a public request for comment.
Proposed Implementation Guide Addresses Questions on Fiduciary Activities Standard
On January 3, GASB released a proposed implementation guide (Project 3-13) offering answers to questions about its Statement 84, Fiduciary Activities, issued in January 2017. The standard sets guidance for state and local governments managing funds such as pensions, trusts, and custodial funds. It establishes criteria for identifying a fiduciary activity, focusing on the government’s control of the assets involved and the beneficiaries of the managed funds. Comments on the proposal are due February 28. If GASB finalizes the proposed implementation guide, it will become effective for reporting periods beginning after December 15, 2018, with the exception of two pieces of guidance that are also covered in a separate proposed GASB implementation guide, (Project 24-16d, Implementation Guidance Update—2019), which GASB released in November. Comments on that guide are due January 31.