EITF to Clarify Reporting Around When Convertible Debt is Issued to Raise Capital

FASB has added a project to its special task force unit’s agenda to address tricky accounting questions that have surfaced when companies issue convertible debt to raise capital. The board’s Emerging Issues Task Force (EITF) will clarify accounting rules related to convertible debt instruments that are settled in cash with terms that differ from the stated contractual conversion provisions, according to the discussions. “There were some improvements that the board made prior to my joining related to convertible debt and I think this is a carry-on improvement that we can make,” FASB Chair Richard Jones said. “I think the EITF brings to us people with deep technical knowledge and understanding of the details of transactions that are occurring. … I don’t know how many of us spend a lot of time on ‘instrument x’ or ‘instrument c’ but they can spend lots of time on it and tell us also the next versions that are coming and so I do think it’s an ideal issue for the EITF.” The work will clear up confusion around whether to use “induced conversion” or “extinguishment’ accounting to report convertible debt instruments settled partly or wholly in cash using terms that differ from the stated contractual conversion provisions.

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Some Private Companies Turn to Tax Basis to File Statements

Some privately held companies are fed up and “exhausted” over adopting big new accounting standards, especially leases, and now have their sights set on using tax basis formats to file financial statements as opposed to U.S. GAAP, according to Allison Henry, vice president of professional & technical standards at the Pennsylvania Institute of Certified Professional Accountants (PICPA). FASB issued Topic 842, Leases, in 2016 but it took effect on January 1, 2022, for private companies that are calendar year-end filers. But many privately held companies did not look at the standard until the end of last year and some are just getting to it now. “The implementation of ASC 842 is an enormous undertaking,” said Henry. “It looks so simple—frequently in training I hear ‘oh it’s just adding an asset and a liability and then you’re done, right?’ and I’ve said ‘wait no, let’s get through a good 50-minute session on this and then you can ask me the questions because it’s an enormous project management effort,’” she said on April 21. The PICPA is the second-oldest CPA organization in the United States with more than 20,000 members. The organization found that businesses have been challenged over the past two years since COVID with Paycheck Protection Program (PPP) loan implementation coupled with resource constraints, said Henry. “We even appealed to the FASB—we wanted another year just to get to a baseline—a little bit of relief because we’ve also seen high turnover in the accounting space and so you have less people to do all of this work.”


Staff Emphasizes Professional Skepticism Throughout Audit

The PCAOB has issued a staff guide that reminds CPAs to be very skeptical when performing audits. This is especially important when changes in economic conditions or other factors affect their publicly listed clients’ operations. “The application of professional skepticism—an attitude that includes a questioning mind—is critical to planning and performing high quality audits and ensuring investors are protected,” the staff stated in “Spotlight: Professional Competence and Skepticism Are Essential to Quality Audits.” The staff guide said that for an auditor to effectively apply professional skepticism, the auditor must have the necessary knowledge of the companies being audited as well as industry expertise. While a specialist can help an auditor in certain aspects of an audit, the auditor is still required to have sufficient knowledge of the subject matter being addressed to be able to properly supervise the audit engagement. “Without the necessary expertise, firms should not accept such engagements,” the staff guide stated. The six-page guide better explains several stages in an audit: client acceptance or continuance; audit planning; identifying and assessing risks of material misstatement; performing the work with due professional care; and evaluating the results of the audit.