The Public Company Accounting Oversight Board has published a series of staff questions and answers on how to adjust prior-period financial statements that had been audited by a predecessor auditor.
Among other points, the Q&A notes that:
Several factors should be considered when determining whether a successor auditor is able to audit only the adjustment to prior-period financial statements or should re-audit the financial statements in their entirety. These factors include the extent of the adjustments, the reason for the adjustments, and cooperation of a predecessor auditor.
When a new auditor audits and reports on adjustments made to prior-period financial statements due to the correction of an error, the prior auditor may re-issue its report on the prior-period financial statements.
If the predecessor auditor does not re-issue its report on the prior-period financial statements, the successor auditor may re-audit and report on those financial statements as adjusted.
A successor auditor cannot audit and report on the adjustments made to the prior-period financial statements without first completing an audit of the current-period financial statements.
Kostoglian
Aram Kostoglian, a director at CBIZ Accounting, Tax & Advisory, says the Q&A “is actually just a restatement of existing practice. They’ve codified what was basically known to be the [PCAOB’s] practice but was never really published anywhere. There must have been some differentiation of practice out there and [the PCAOB] felt that was enough, that they should just get it out there.”
Kenneth Goldmann, a partner in the auditing practice at CPA firm J.H. Cohn, agrees that the bulletin largely restates prior positions but nevertheless calls it “a valuable resource that helps provide accountants and auditors the needed clarity that was previously lacking regarding adjustments to prior-period financial statements.”
Goldmann notes that before the bulletin was issued, his firm went through a restatement for a recently acquired client, and experienced the difficulty often associated with answering similar questions. Previously, he said, guidance on the issue was available in various pieces of accounting literature, “but the process was difficult to organize. With the issuance of these Q&As, the PCAOB has accomplished getting the information all in one centralized location.”
More importantly, he added, “it’s information that can be relied upon. It guides auditors in how to respond based on facts, and provides tangible examples and variations to the different circumstances associated with every individual client situation.”
FASB Staff Position On Equity Restructuring
The Financial Accounting Standards Board has issued a Proposed Staff Position addressing whether changes to equity compensation grants made in connection with an equity restructuring or a business combination should be considered a modification for purposes of applying Financial Accounting Standard No. 123(R)-1.
That earlier staff position, “Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R),” was issued in August 2005. It indefinitely delayed the effective date of some portions of FAS No. 123(R), and as a consequence required entities to apply the recognition and measurement provisions of FAS No.123(R) throughout the life of an instrument, unless the instrument is modified when the holder is no longer an employee.
Following the issuance of FSP FAS 123(R)-1, a question was raised on whether an entity that executes an equity restructuring must, in all cases, reassess whether the recognition and measurement of an instrument whose holder is no longer an employee become subject to other applicable Generally Accepted Accounting Principles. The same question was raised related to share-based payment awards modified or exchanged in a business combination.
The proposed new FASB Staff Position states that for instruments originally issued as employee compensation and then exchanged or modified, where the change is made only because of a business merger or equity restructuring that happens after the employee leaves the company, no change in the measurement or recognition of the instrument will result if:
Either there is no increase in value to the holders of the instrument or the exchange or change in the terms of the award is not made in contemplation of an equity restructuring or a business combination; and
All holders of the same class of instruments (say, stock options) are treated in a similar manner.
Thomas Welk, a partner with the law firm Cooley Godward, tells Compliance Week that the proposed staff position is “trying to get at when certain awards can change from being equity awards to liability awards, and whether they will continue to be treated under FAS 123(R) or some other accounting.”
Welk notes that the earlier staff position raised the question of how certain stock options or other instruments would be treated under FAS 123(R) when an entity goes through an equity restructuring. The question was whether any resulting modification negated the deferment provided by FAS 123(R)-1 and instead made it subject to other applicable GAAP.
“The FASB staff is saying, ‘Oh, good point,’ ” Welk says. “If you’re no longer an employee and a company does an equity restructuring, you’re still under FAS 123(R) if either there is no increase in the value to the holders of the instrument or the change is not made in contemplation of the equity restructuring, and if everybody is treated in a similar manner.”
If adopted, the staff position would be applied in the first reporting period that starts after the position is posted to the FASB Web site.
FASB, AICPA To Improve Private Co. Reporting
FASB and the American Institute of Certified Public Accountants issued a joint proposal this month intended to improve the financial reporting process for private companies.
The initiative seeks constituent feedback on proposed enhancements to the FASB’s standards-setting procedures, which would determine whether the Board should consider differences in accounting standards for private companies within U.S. GAAP.
Under the proposal, FASB would implement certain improvements to enhance the transparency of its standards-setting process for private companies and to consider input from its private company members. To that end, FASB and the AICPA would also sponsor a joint committee to serve as an additional resource to FASB, to further ensure that the views of private companies are incorporated into the standards-setting process.
The period for comment on the proposal runs until Aug. 15. FASB and the AICPA said in a press release that they “are encouraging everyone who plays a role in private company financial reporting—bank lenders, sureties/bonding companies, investors, owners and preparers, and practitioners—to review the proposal and comment on it.”
FASB Chairman Robert Herz said the joint proposal “represents just the latest step in our effort to explore ways to engage the participation of, and further improve the standards-setting process for, our private company constituents.”
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