Fair-Value, Tax Services Update; More

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udit regulators have delayed until next spring the starting date for an independence rule designed to create greater separation between audit and tax work—and may be rethinking certain aspects of the rule entirely.

Last week, on the eve of the rule’s effective date, the Public Company Accounting Oversight Board adjusted the implementation schedule for Rule 3523, which it adopted in July 2005 and the Securities and Exchange Commission approved in April 2006.

The rule says accounting firms cannot provide tax services to officers in a public company who have roles in the oversight of financial reporting if the same firm also serves as the company’s auditor. The intent is to assure that the auditor remains fully independent from the company and its officers as it inspects the company’s books (see box at right for details).

As written, the rule prohibits an audit firm from providing tax services to officers during both the engagement period (which begins when the firm is hired) and the period for which the company’s financial statements are being audited. Now the PCAOB is indicating that it may reconsider whether the separation of audit and tax services should apply to both of those periods or only to one of them.

“The Board intends to revisit the application of Rule 3523 to tax services provided during the period before a registered public accounting firm becomes auditor of record for an audit client,” the PCAOB wrote in its release last week delaying the effective date. “Accordingly, the Board has decided to adjust the implementation schedule for Rule 3523 as it applies to tax services provided during the audit period while it revisits this aspect of the rule.”

The PCAOB said it will not apply the rule to tax services provided on or before April 30, 2007, when the services are provided during the audit period—or the financial reporting period that is being audited—and are completed before the professional engagement period begins.

Bahnson

In effect, the rule change makes it easier for a public company to change audit firms without bumping into periods of time when its officers might be having their tax work done by the same firm.

Paul Bahnson, a professor of accounting at Boise State University and a former member of the Financial Accounting Standards Board, says the PCAOB may be rethinking how to roll in the moratorium period.

“It seems reasonable to me that this issue may be worth a second look,” he says. “While it is pretty easy to see that providing these services is inappropriate, I can see where there may be some issues in determining when the moratorium period should begin when a company changes auditors.”

Turner

Lynn Turner, managing director of research at Glass, Lewis & Co. and former chief accountant for the SEC, is not as sympathetic. “This move by the PCAOB to permit auditors to continue to provide tax services to the executives whose work they are auditing is akin to spitting in the eyes of investors, especially when the service does not have to be disclosed,” he says. “This is not an issue of limited choice, as there are literally thousands of highly qualified local and regional accounting firms who can do as good as, if not better, tax services than the Big 4 accounting firms.”

Fistful Of Guidance From FASB

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he Financial Accounting Standards Board is flyspecking a number of recent pronouncements with final and proposed staff positions that make a variety of technical corrections, including some transitional guidance for companies as they implement the requirements of the recently finished Financial Accounting Standard 157, Fair Value Measurements.

Final staff positions include FSP FAS 123(R)-6, a technical correction to share-based payment rules that clarifies the disclosure rules as they apply to nonpublic entities. Another final staff position, FSP FAS 126-1, clarifies the definition of a “public entity” for purposes of reporting requirements surrounding public debt, such as municipal bonds or industrial revenue bonds.

In addition to the two final staff positions, FASB also issued four proposed staff positions for which the Board welcomes public comment.

The staff is amending some existing rules and offering some transition guidance in proposed staff position No. FAS 141-b, 142-e, and 144-b: Fair Value Measurements in Business Combinations and Impairment Tests, to address the Board’s discovery while finishing FAS 157 that companies followed different practices in measuring nonfinancial assets for purposes of mergers and acquisitions and for depreciation.

The staff says certain language in Statements 141, 142, and 144 may have resulted in different interpretations of requirements, leading some entities to use entity-specific assumptions rather than assumptions the market might make in establishing fair values. The staff position amends those statements to clarify how FASB wants the measurements to be done.

In PFSP FAS 144-c, the staff addresses how to classify and whether to depreciate a long-lived asset when an entity plans to account for its direct or indirect interest in the asset as an equity-method investment after the asset is sold. FASB says it has heard inquiries and seen different practices, so it’s advising companies that they should classify the entire long-lived asset as held-for-sale and stop depreciating the asset once it meets the held-for-sale criteria.

Two additional proposed staff positions originate with the Board’s Emerging Issues Task force. In FPS EITF 00-19-b, the staff addresses an issuer’s accounting for registration payment arrangements, specifying that a contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement should be recognized separately and measured as specified in FAS 5, Accounting for Contingencies.

In PFSP EITF 03-6-a, the staff addresses whether instruments granted in share-based payment transactions should be regarded as participating securities prior to vesting and therefore included in the earnings allocation for purposes of calculating the earnings per share. The staff says rights to dividends or dividend equivalents (whether paid or unpaid) on unvested awards constitute participation rights and therefore should be included in the EPS calculation.

FASB, IASB Invite Comment On Measurements

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ASB and its overseas counterpart, the International Accounting Standards Board, have scheduled a series of roundtables for anyone interested in discussing measurement issues as they relate to the two boards’ joint project to write a common conceptual framework for future standards-setting.

In the United States, FASB will open its doors on Feb. 1. Additional roundtables will be held in London on Jan. 29 and in Hong Kong on Jan. 16-17. The objective will be to hear views from a representative sample of constituents on measurement issues early on, as the two boards prepare to tackle the subject in the context of their work to write a conceptual framework.

The boards will not issue written positions in advance of the roundtables. Anyone interested in participating is invited to register, and the boards will select participants from among registrants to assure a broad, representative group. The deadline for registering is Nov. 17.