Pending Disclosure Rules on Government Incentives Don’t go Far Enough
FASB has gotten a lukewarm response from market watchers on pending new disclosure rules for government assistance businesses receive, some saying the package falls short by not tackling tax breaks. “We would also like to see the scope of the required disclosures expanded to include the most common form of government assistance—the receipt of property tax abatements from local and state governments in exchange for hiring minimum levels of workforce or otherwise meeting certain economic metrics,” Scott Ehrlich, President of Mind the GAAP, LLC, said on August 9. “As currently proposed, the forthcoming FASB update would not include this type of assistance as part of the required disclosures.” A major concern is that U.S. GAAP lacks recognition and measurement guidance for government assistance, a hole that became more evident during the COVID-19 pandemic when companies qualified and received government assistance. “As there was no recognition and measurement guidance for these programs, practitioners were forced to adopt an accounting policy. Many selected a policy based on IFRS guidance,” Ehrlich said. Government assistance refers to incentives that state and local governments offer, including cash grants, rebates, tax credits, to lure big businesses to relocate, expand, or remain in a specific area. The estimated annual value of fiscal incentives is around $90 billion, according to a 2019 report by McKinsey & Company. Analysts fear they “don’t know what they don’t know” about these types of figures. Other concerns are that the pending FASB disclosure package is “too little, too late,” as the rules would have been more useful if they had been issued prior to the COVID-19 pandemic and took effect before or during 2020
Standards Setters Ask If Cash Is Still King
An increase in non-cash transactions that are economically equivalent to cash but can bypass the statement of cash flows is causing accounting standards setters to question whether a wholesale review of the relevant guidance is needed, according to recent joint discussions between FASB and the IASB. Equity analysts have historically learnt to follow a company’s cash flows to understand the economics of a business, and over the past 30 years “free cash flows have become more of a focus for more and more investors,” IASB member Nick Anderson said. “And I noticed from [the FASB’s Invitation-to-Comment] that you’ve already had some calls to define free cash flows as a metric.” Transactions such as supply chain financing, lease exceptions, and international issues where debt is acquired through a business combination, are all economically equivalent to cash flow but have bypassed the cash flows statement. “I’m wondering whether we need a wholesale review of that statement. … can we really get back to that mantra—can we actually say ‘cash is king?’” said Anderson. Anderson’s remarks came during the boards’ July 23 discussions about their respective agenda consultation documents, issued this earlier year to solicit public comment about their five-year agendas.
ASB to Vote on Final Risk Assessment Standards
A year after issuing a proposal to revise audit standards on risk assessment, the AICPA’s Auditing Standards Board (ASB) is ready to finalize it. The board has scheduled a vote during a videoconference meeting on August 18. In August 2020, the board issued a proposed Statement of Auditing Standard (SAS), “Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment.” It would supersede SAS 122, Statements on Auditing Standards: Clarification and Recodification, as amended, and AU-C section 315, “Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment.” The proposal was revised to take into account issues identified in comment letters, and many of the issues were considered during previous meetings, according to a discussion paper prepared ahead of the meeting. The AICPA stated that the proposed standards enhance the requirements and guidance on identifying and assessing risks of material misstatement. In particular, the guidance addresses a company’s system of internal controls and information technology. The proposal revises the definition of significant risk so that auditors will focus on where the risks lie on a spectrum of inherent risk. It also includes new guidance aimed at enhancing the auditor’s professional skepticism.