The Financial Accounting Standard Board and its international counterpart have lurched forward yet again in their quest to converge rules for calculating earnings per share.
FASB has issued a revised exposure draft of a standard it first proposed in 2005 to converge EPS accounting rules. The International Accounting Standards Board, meanwhile, has published a parallel proposal to revise international rules for EPS.
The latest exposure draft would amend Financial Accounting Standard No. 128, Earnings Per Share, to simplify how the all-important EPS figure is calculated and to make it more consistent with EPS calculations under International Financial Reporting Standards. Taken together, IASB and FASB proposals seek convergence by providing a clear principle to determine which instruments should be included in the calculation of EPS, a clear EPS calculation for particular instruments, and a simplified calculation for instruments that are accounted for at fair value through profit and loss.
For U.S. Generally Accepted Accounting Principles, the amended exposure draft establishes an EPS calculation where the denominator (the bottom number in the fraction used to calculate EPS) would be the same as the denominator used to compute EPS under international rules, with certain exceptions.
FASB Project Manager Sheri Wyatt says the diluted EPS figure receives the biggest change in the revised exposure draft. (Diluted EPS measures the quality of a company’s EPS if all convertible securities are exercised.)
“The Board started thinking more about instruments companies report at fair value and how those should be reflected in diluted EPS,” Wyatt says. “During redeliberation the Board changed its view and said convertible instruments would not be included in basic EPS unless they meet the definition of participating securities.”
For example, Wyatt says, an employee stock option would no longer be subject to the treasury stock method (a computation method that adds to the total number of shares in the EPS equation therefore lowering EPS) because changes in fair value are already reflected in diluted EPS.
Despite FASB’s and IASB’s work on converging EPS rules, the boards are also working on longer-range plans to eliminate the whole notion of net income altogether—which would bring an end to EPS too as a consequence.
Wyatt says, “there’s still a lot of time” until those long-range plans are complete. “In the interim, there is some good simplification that could be made to EPS to get closer to what IASB is doing,” she says.
There is no targeted effective date for the new EPS standard. Wyatt says FASB wants to make that decision later, pending further progress on the longer-range standards and further developments on the convergence of U.S. and international accounting standards.
Trade Groups Team Up on Fraud
Three professional groups have teamed up to offer a compilation of the latest thinking on how best to prevent and detect corporate fraud.
The American Institute of Certified Public Accountants, the Institute of Internal Auditors, and the Association of Certified Fraud Examiners recently published a guide that outlines principles for establishing effective fraud risk management, regardless of the type or size of an entity.
The guide doesn’t necessarily break any new ground in how best to combat fraud, AICPA Director Steve Winters says, but serves as a streamlined resource for fraud risk management.
“The purpose of the paper was to consolidate and gather best practices from a variety of organizations,” he says. “We recognized there wasn’t a single place to find a comprehensive set of guidelines people could use to help detect and prevent fraud. This provides one place where everything is consolidated.”
The guidance establishes the connection between fraud prevention and governance, noting that the board of directors must be engaged, because most major frauds are perpetrated by senior management in collusion with other employees. The guidance also stresses that personnel at all levels have a duty to understand and respond to fraud risks.
A team of more than 20 fraud management experts from the private and public sectors, as well as academia, worked to compile the guidelines over a two-year period, the sponsoring groups say. It has been endorsed by an additional batch of professional groups including the Institute of Management Accountants, the Association of Chartered Certified Accountants, and the Canadian Institute of Chartered Accountants.
Companies are under more pressure than ever to uncover corporate fraud based on a number of high-profile scandals in recent years, Winters says. Separate reports from the ACFE indicate that seven percent of a company’s revenue is lost to fraud and that smaller companies are especially vulnerable. ACFE’s research has established that antifraud controls seem to have a measurable effect on an organization’s risk for being victimized.
Richards
“The publicity around those events has placed an emphasis for responsibility for dealing with fraud higher up in organizations,” he says. “Now board directors are being held accountable. There’s heightened attention on the people at the very top of the organization and their role in establishing an atmosphere of intolerance toward fraud.”
Dave Richards, president of the Institute of Internal Auditors, says people just don’t like to discuss fraud. “Unfortunately in many businesses the subject of fraud is a dirty word,” he says. “Most people will look to their code of conduct and say that’s my fraud policy, but it really isn’t.”
GAO Finds Tax Gap for Foreign, U.S. Companies
Foreign-controlled companies in the United States paid consistently less tax than U.S. companies from 1998 to 2001, according to a recent study by the Government Accountability Office.
The GAO studied compared tax liabilities for a variety of foreign- and U.S.-owned companies operating in the United States as concerns emerged that foreign companies were abusing transfer pricing (or pricing on inter-company transactions) to escape related tax liabilities. The GAO found a greater percentage of large foreign companies reported no tax liability in a given year from 1998 to 2005, and large foreign companies were more likely to report no tax liability over multiple years than U.S.-owned companies.
While the mismatch appears by most measures in the years from 1998 to 2001, the GAO said, it disappears in 2002 implying that differences in tax liabilities are not statistically significant in 2002 through 2005.
Levin
The GAO said its research could not establish a reason for the imbalance in tax liability, whether because of transfer-pricing abuses or because of other factors such as the size or age of a given company or the industry sector in which it operates. It also could not establish a cause for the mismatch in earlier years, then a statistically insignificant difference between U.S. and foreign-owned companies in latter years.
The GAO delivered its findings to Sen. Carl Levin, chairman of a Senate sub-committee on investigations. The GAO acknowledges Levin’s “long-standing concerns” about abuses in transfer pricing.
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