Accounting: 2012 Could Bring More Questions Than Answers

2012 looks to be a pivotal year on the accounting and auditing front. Several big questions loom that could change the face of accounting in the United States.

While only a handful of new standards are expected to take effect in the coming year, enormous change remains on the horizon. The big questions for public companies are: When, if ever, are we going to adopt International Financial Reporting Standards? What's going to happen to U.S. Generally Accepted Accounting Principles in the meantime? And what will be the role of the Financial Accounting Standards Board going forward?

To some, the accounting profession might not get the answers to these questions in the coming year. “It doesn't appear those will be resolved or any changes will be effective in 2012,” says Bob Dohrer, national director of assurance services for McGladrey & Pullen. “So in some ways that probably is good news for preparers. I'd characterize 2012 as a year that will be maybe friendlier to financial statement preparers than some of the years in the recent past.”

Yet some changes still take effect this year that companies need to prepare to implement in 2012, including changes to fair-value measurement and some new presentation requirements for comprehensive income. Other changes might not be finalized this year, but require companies to make preparations to implement them, including new approaches for recognizing revenue and accounting for leases.

First, companies should be sure they are prepared to implement new disclosure requirements for fair value measurements meant to make GAAP and IFRS accounting more comparable, says Lisa Filomia-Aktas, a partner with Ernst & Young. It will be important for companies to assure early in 2012 that they capture the data necessary to meet those requirements, which are focused mainly on illiquid or difficult-to-value items, she says. “Companies have to decide what level of information is going to be useful.”

Companies also need to take a close look at new rules on how to present other comprehensive income in financial statements, Filomia-Aktas says, and decide whether they will opt for a single statement of comprehensive income showing all net income and OCI on a single statement, or a separate statement for OCI immediately following the current income statement. Generally, companies in financial services are leaning toward separate statements, she says, while companies in other sectors that may have fewer items of OCI to present are more likely to present it immediately after net income.

FASB is also working on modifying the OCI presentation and is likely to approve a deferral to a specific requirement regarding how companies present reclassifications of OCI. Jim Dolinar, a partner at Crowe Horwath, says companies should keep an eye on FASB's decisions on the issue as they prepare to comply with the OCI standard.

Companies also should be sure they are current on recent changes to performing the annual goodwill impairment test, says Paul Kepple, chief accountant at PwC. FASB recently added an optional preliminary step to the quantitative, two-step test that clears the way for companies to make a qualitative assessment of whether goodwill is impaired before performing detailed calculations. It not only provides a potential simplification to the impairment testing, but it also hints at what's in store for testing indefinite-lived intangible assets as well. FASB is considering a similar approach for how companies would test impairment for those assets, which include brand names, trademarks, and other intangible assets.

Looking further ahead, Dolinar says companies should pay close attention to the changes coming for revenue recognition and leasing. FASB recently published a second draft of a proposed new standard for how all companies would recognize revenue and is expected in 2012 to publish a second draft of a proposal to bring all leases on to corporate balance sheets. “Both of those are going to have a pervasive impact on all companies,” he says. “They're not going to be effective this year, but once companies know where FASB is headed with them, they are both going to require a lot of work to prepare for.”

Chris Smith, a partner and audit and accounting practice leader at BDO USA, says FASB is far enough along in developing those standards that companies can get a good sense of what will be expected by reading the current draft versions. “Companies need to be participating in this process and commenting on these standards,” he says. “If you get your hands on this stuff as it gets issued, that's what's going to be coming down.”

“This is a good time for a company to think about how it is communicating its own performance and how it is communicating what is meaningful.”

—Dennis Whalen,

Executive Director,

KPMG's Audit Committee Institute

FASB is also working on a project to take a comprehensive look at all disclosures and see where changes might be in order. FASB isn't specifically looking for a way to curtail unnecessary or redundant disclosures, but the board expects that to be a likely result, says Dennis Whalen, executive director of KPMG's Audit Committee Institute. That gives companies a good opportunity to think more about where they can be more efficient or more effective with their own disclosures even in the context of current disclosure requirements. “This is a good time for a company to think about how it is communicating its own performance and how it is communicating what is meaningful,” he says.

On the audit side, the Public Company Accounting Oversight Board is mulling a number of major changes to auditing standards that would potentially shake up the present auditor-client relationship. The board is considering a measure to require mandatory rotation of audit firms among public company audits, a change in the content of the audit report, and requirements for auditors to disclose more about who performs the audit work, especially the engagement partner and any overseas affiliates.

It's not clear which, if any, will be adopted or when any new measures might take effect, says Andy Burczyk, a shareholder with audit firm Mayer Hoffman McCann. But it would be a good idea for companies to be aware of the changes that are being discussed, comment on them, and consider how they might affect their own interaction with their auditors, he says.

“Companies should understand that none of the proposed changes ill impact auditors and their clients in a way that is going to reduce the amount of audit effort that it's going to take to complete an audit,” he says. “If the effort is greater, the costs will be greater too.”