The Financial Accounting Standards Board has issued a proposed guidance that aims to clarify the “shortcut method” of hedge accounting.
Hedge accounting is governed primarily by Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities, which in 1999 generally established that companies must report derivative instruments as assets or liabilities at fair value.
Derivatives are securities or contracts based on underlying assets, such as stocks or bonds. The value of the derivative is set to fluctuate in correlation with the underlying asset, to offset the risk of adverse changes in value. The goal is to minimize swings in asset values that create volatility in the balance sheet.
Under certain circumstances, companies can use a “shortcut” to assure a hedge qualifies for lower-maintenance hedge accounting treatment.
The proposed guidance addresses a number of issues that have caused implementation difficulties. “Currently, there is diversity in the way the shortcut method is applied by preparers of financial statements,” FASB financial services industry fellow, Louis Fanzini said in a prepared statement. “That diversity has resulted in differences in financial statement information for similar transactions. This proposal seeks to reduce that diversity.”
Fanzini added that the proposal “is designed to reduce complexity in a way that makes it easier for preparers to understand the application of the shortcut method, resulting in clearer financial statements for the investor.”
The Board is seeking written comments on the proposal. Comments are due by Sept. 21, 2007. Details can be found on FASB’s Web site (link, above right).
PCAOB Issues Ethics And Independence Rule
The Public Company Accounting Oversight Board is seeking comment on a proposed new ethics and independence rule concerning communications with audit committees.
The rule, unveiled July 24, would require auditors to inform an audit committee of any past or present relationships with the company or its financial reporting executives that might bear on the firm’s independence. The communications would be required both before the firm accepts a new engagement, as well as annually for continuing engagements.
Goelzer
Currently, while auditors are required to inform audit committees annually about matters that might bear on independence, “nothing in those rules says that such a communication should take place before the audit committee hires the auditor,” PCAOB member Daniel Goelzer said last week in an address to the Board. “This common-sense requirement would make sure that audit committees have the relevant independence information in front of them when they select the auditor, not after they have already made the decision and the work has been performed.”
The PCAOB is also seeking comment on a proposed amendment that addresses whether an accounting firm that has assisted company executives with their taxes may work with that same company later in that same year.
“The Board already prohibits accountants from simultaneously auditing a company’s financial statements and providing personal tax services to the executives responsible for its financial reporting,” Goelzer said. “But, in its current form, Rule 3523 would also prevent a firm from accepting the audit assignment, even if the executive tax work occurred during the early part of the fiscal year and ended before the firm became the financial statement auditor.”
The proposed amendment is based on comments the PCAOB sought in April, about whether a firm’s independence would be affected by providing services to an executive during the portion of the audit period that precedes the start of the professional engagement period. Most commented that independence would not be affected.
Olson
During the meeting, PCAOB Chairman Mark Olson also expressed his support of both the new rule and the amendment. He added that the rest of Rule 3523 would not be changed. “[The amendment] would maintain auditor independence by preventing a firm from continuing to provide tax services to persons covered by Rule 3523 once the professional engagement has commenced.”
Comments on both rules are due by Sept. 7, 2007.
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