Proposal Could Simplify Accounting for Acquired Loans
FASB has voted to issue a proposal that will provide a single accounting model for all acquired loans, a response to concerns that the current rules are complex and do not result in useful information for investors. The potential changes will result in consistent accounting for all acquired financial assets and reduce costs for companies, according to the discussions. “This responds to some of the most significant criticism we heard from investors of CECL during the outreach process, but I think it’s also important that now that we have reached this stage that we get broader input,” FASB Chair Richard Jones said. The proposal will be issued this summer with a 60-day comment period. The board will propose changing aspects of the current expected credit losses (CECL) standard, which requires two different models for acquired assets depending on a borrower’s creditworthiness. Specifically, the purchased financial assets with credit deterioration (PCD) model would be expanded to include high-quality loans, resulting in all loans being treated under a new term “purchased financial assets” (PFA) and accounted for the same way. The non-PCD model, which has been deemed to be unintuitive and cause banks to double count losses, would be eliminated. Board members said they are eager for the change, revealing the board had been chastised over the non-PCD model.
Board Votes to Issue New Accounting Rules for Joint Venture Formations
A new accounting standard will be issued this year on how to recognize and measure contributions made to a joint venture upon its formation, all seven members of the FASB agreed on April 5, 2023. The board affirmed its October 2022 proposal to require a joint venture to apply a new basis of accounting upon formation, recognizing and initially measuring its assets at fair value consistent with rules for business combinations, including measurement exceptions. “I think the fair value route that we’re taking makes a lot of sense; it provides users with better, more useful information than the cost basis,” FASB member Gary Buesser said. “I think the formation date that we’ve come up with is a viable solution.” The standard will fill a hole in U.S. GAAP, which had sparked reporting differences in how joint ventures accounted for contributions received upon formation. Some initially measured their net assets at fair value at the formation date, while others accounted for their net assets at the venturers’ carrying amounts. The provisions will bring big benefits to users of financial statements, reducing reporting differences across entities and improving the usefulness and relevancy of information that is needed when making investment decisions, according to the board’s discussions. It will also eliminate or reduce the basis differences of a joint venture’s financial statements when compared to the reported investment by the venturers.
Audit Profession Asks for More Flexible Confirmation Standards
In comment letters, auditors said that they support the PCAOB’s overall objective of updating its standard on audit confirmation, but the auditing profession asked the board to make some targeted changes to certain prescriptive requirements in the board’s proposal, including the new rule for the auditor to confirm cash and cash equivalents. The Center for Audit Quality (CAQ) believes that prescriptive requirements are inflexible because they limit the auditor’s judgment in performing audit procedures that address the assessed risks of material misstatement. Among other things, the CAQ is concerned about the new requirement for the auditor to confirm cash without the ability to overcome the presumption to confirm cash. “We believe a high-quality audit is not a predefined set of steps that are applied to every audit engagement, but instead includes a customized set of procedures designed to be responsive to the risks identified,” wrote CAQ Senior Director for Professional Practice Vanessa Teitelbaum. The CAQ, an affiliate of the AICPA that represents firms that audit public company financial statements, wrote its comment letter in response to the PCAOB Release 2022-009, Proposed Auditing Standard–The Auditor’s Use of Confirmation, and Other Proposed Amendments to PCAOB Standards, issued on Dec. 20, 2022. The proposal would better reflect today’s business environment and the increasing use of sophisticated technology that was not available when the current standard was written three decades ago. The standard would also strengthen confirmation procedures to better help prevent fraud.