On the Horizon -- First meeting of TRG for credit losses

Contents FASB      TRG for credit losses holds first public meeting

     ASB clarifies the attestation standards
     Guidance on auditor reporting issued
     Audit and accounting guides updated
     Not-for-profit audit alert released

     Report on audit committee communications published
     Board requests comments on engagement quality review standard

addresses issues raised during pension guidance implementation
issues publication on audit committees
publishes report on cybersecurity in securities market

FASB TRG for credit losses holds first public meeting The Transition Resource Group (TRG) for the FASB’s upcoming standard on credit losses held its first public meeting on April 1. The proposed standard will impact how a broad range of entities estimates the allowance for bad debts. Financial assets within the scope of the proposal include trade receivables, lessor net investments in leases, and such financing receivables as loans, debt securities, and reinsurance receivables.

The FASB initially released the proposed ASU, Financial Instruments – Credit Losses, in December 2012 and is expected to release a final standard in the second quarter of 2016. The TRG reviewed a revised draft of the proposed ASU, and addressed whether the expected credit loss model in the proposed standard is clear in the following areas:

  • Method(s) of estimating credit losses
  • Period(s) over which the forecasted condition of a financial asset is made
  • Ability to revert to historical loss information in lieu of reasonable and supportable forecasts
  • Use of an entity’s own information when it is accessible without undue cost or effort and is more relevant than external information

The TRG generally agreed the standard was clear in those areas, but suggested clarifying certain aspects of the guidance, such as
  • The estimation of expected losses for periods beyond an entity’s ability to make reasonable and supportable estimates of future macroeconomic conditions
  • How to treat premiums and discounts on financial assets within the scope of the proposed guidance
  • Some of the proposed illustrative examples

TRG members noted that one example, which addresses how a loss rate–based approach can be used to estimate expected credit losses for a pool of loans, could be clarified as to how historical loss rates are measured. TRG members noted this example would be of particular interest to community banks.

The FASB indicated that it will consider these comments and may direct the staff to make incremental changes to the proposed standard to address the TRG’s comments.

Finally, the FASB noted that an allowance for credit losses should not be established for undrawn commitments to extend credit when the lender can unilaterally cancel the undrawn portion, which is typically the case for undrawn portions of credit cards. The Board further clarified that it would not be appropriate to establish a liability pursuant to ASC 450, Contingencies, for such undrawn commitments.

The meeting materials and archived footage of the meeting are currently available on the FASB’s website. Future meetings will be announced on the FASB’s website.

AICPA ASB clarifies the attestation standards The Auditing Standards Board (ASB) issued Statement on Standards for Attestation Engagements (SSAE) 18, Attestation Standards: Clarification and Recodification, which reorganizes the attestation standards along the lines of the type of engagement, depending on the subject matter and type of service.
SSAE 18 supersedes SSAEs 10 through 17, except for

  • SSAE 15, An Examination of an Entity’s Internal Control Over Financial Reporting That Is Integrated With an Audit of Its Financial Statements, and related Attestation Interpretation 1, “Reporting Under Section 112 of the Federal Deposit Insurance Corporation Improvement Act” (AT Sections 501 and 9501). This content was clarified and moved to the auditing standards with the issuance of Statement on Auditing Standard 130, An Audit of Internal Control Over Financial Reporting That Is Integrated With an Audit of Financial Statements.
  • Chapter 7, “Management’s Discussion and Analysis,” of SSAE 10, Attestation Standards: Revision and Recodification (AT Section 701). AT 701 is being retained in its current unclarified format as AT-C Section 395.

SSAE 18 also provides a level of convergence with the International Standard on Assurance Engagements 3000 (Revised), Assurance Engagements Other than Audits and Reviews of Historical Financial Statements.

SSAE 18 is effective for practitioner reports dated on or after May 1, 2017, with early adoption permitted.

Guidance on auditor reporting issued The ASB also issued Interpretation 3, “Reporting on Audits Conducted in Accordance With Auditing Standards Generally Accepted in the United States of America and International Standards on Auditing,” of AU-C Section 700, Forming an Opinion and Reporting on Financial Statements.

The interpretation includes an example AICPA audit opinion incorporating the required minimum elements of International Standard on Auditing 700 (Revised), Forming an Opinion and Reporting on Financial Statements.

Audit and accounting guides updated
The AICPA issued the following Audit and Accounting Guides:
  • Employee Benefit Plans (updated January 1, 2016)
  • Not-for-Profit Entities (updated March 1, 2016)

Not-for-profit audit alert released
The AICPA issued Audit Risk Alert, Not-for-Profit Entities Industry Development – 2016. This alert provides information on recent industry, technical, regulatory, or professional developments, as well as guidance, practice aids, and illustrative examples addressing common audit and accounting issues.

PCAOB Report on audit committee communications published The PCAOB published a report, “Inspection Observations Related to PCAOB Rules and Auditing Standards on Communications with Audit Committees,” discussing its inspection observations of registered firms’ initial implementation of, and compliance with, PCAOB Auditing Standard 16, Communications with Audit Committees.

The report, covering 2014 and preliminary 2015 inspection results, noted that no compliance failures were identified in 93 percent of the audits inspected in 2014 to which the standard was applied. Preliminary results from the 2015 inspections show similar results. The report also notes that most of the firms inspected in 2014 had incorporated the requirement of AS 1301, Communications with Audit Committees (formerly AS 16), into their audit methodologies; introduced relevant practice aids; or provided training to partners and staff.

Results of inspection staff interviews with audit committee chairs indicate that there has been effective two-way communication with auditors and improvements in the robustness and formality of the communications, including more in-depth discussions about audit progress, significant risk areas, and audit findings.

Board requests comments on engagement quality review standard The PCAOB Center for Economic Analysis issued “Request for Comment – Post-Implementation Review of Auditing Standard (AS) 7, Engagement Quality Review,” soliciting input from stakeholders. This feedback will provide the center with information to evaluate AS 7 and launches the PCAOB’s first post-implementation review program of the overall effect of previously adopted PCAOB rules and standards.

The goal of the program is to evaluate whether adopted rules and standards are accomplishing their intended purposes, identify any unintended consequences, and gauge the overall effects of the rules or standards. The Request for Comment on AS 7 includes several questions related to the past effectiveness and recommendations for future improvements.

Comments are due by July 5.

GASB addresses issues raised during pension guidance implementation The Governmental Accounting Standards Board (GASB) issued Statement 82, Pension Issues, an amendment of GASB Statements No. 67, No. 68 and No. 73, which addresses practice issues raised during implementation of the Board’s pension accounting and financial reporting standards for state and local governments. The new guidance amends the GASB’s previously issued accounting and reporting guidance for pensions provided to employees of state or local government employers, and supersedes certain questions in Implementation Guide 2015-1.

Specifically, the new guidance addresses implementation and consistency in practice issues related to

  • Presentation of payroll-related measures in supplementary information: The guidance amends the payroll-related measure, and the ratios that use that measure, to require presentation of the payroll on which contributions are based, instead of the payroll of employees that are provided with pensions through the plan.
  • Selection of assumptions and deviations from the Actuarial Standard of Practice for financial reporting purposes: The guidance clarifies that a “deviation,” as defined, from the Actuarial Standards Board’s Actuarial Standard of Practice is not acceptable for the selection of assumptions used in determining the total pension liability and related measures.
  • Classification of employer-paid contributions: The guidance clarifies that payments made by an employer to satisfy contribution requirements under the terms of the pension plan should be classified as member contributions by the plan and as employee contributions by the state or local government employer. In addition, an employer’s expense and expenditures for those amounts should be (1) recognized in the period for which the contribution is assessed, and (2) classified in the same manner as similar compensation other than for pensions.

The requirements of the new guidance are effective for reporting periods beginning after June 15, 2016. However, when an employer’s pension liability is measured as of a date other than the employer’s most recent fiscal year-end, guidance related to the selection of assumptions is effective in the first reporting period in which the measurement date of the pension liability is on or after June 15, 2017. Earlier application is encouraged.

The new classification guidance should be applied retroactively by restating all prior-year financial statements. If restatement is not practicable, the cumulative effect, if any, of applying the new guidance should be reported as a restatement of beginning net position for the earliest period presented. Information required by the new guidance that is presented in 10-year schedules of required supplementary information should also be restated for all prior years presented, if practicable.  

The new guidance related to the selection of assumptions should be applied on a prospective basis.

CAQ issues publication on audit committees The Center for Audit Quality (CAQ) issued a publication, “The Evolving Role of Audit Committee Challenges and the Way Forward,” summarizing several of the challenges discussed at a series of panels co-hosted by the CAQ and the International Corporate Governance Network from March 2013 to September 2015.

The publication includes the steps the panelists identified to address the challenges, including

  • Enhancing transparency
  • Effecting evolutionary (not revolutionary) change
  • Embracing assertive audit committees
  • Striving for diversity
  • Engaging on policy

IOSCO publishes report on cybersecurity in securities market The International Organization of Securities Commissions (IOSCO) published a report, “Cyber Security in Securities Markets – An International Perspective: Report on IOSCO’s Cyber Risk Coordination Efforts,” discussing insights from IOSCO’s various committees on the topic of cyber resilience.

The report notes that cyber risk is a growing and significant risk to the integrity, efficiency, and soundness of financial markets worldwide. The report reviews the different regulatory approaches related to cybersecurity and the potential tools regulators can use to respond to the risks. The report also describes some of the practices adopted by market participants.

The report highlights the regulatory issues, challenges, and approaches to cybersecurity facing the following securities market segments:

  • Reporting issues
  • Trading venues
  • Market intermediaries
  • Asset managers and financial market infrastructures

© 2016 Grant Thornton LLP, U.S. member firm of Grant Thornton International Ltd. All rights reserved. This Grant Thornton LLP On the Horizon provides information and comments on current accounting and SEC reporting issues and developments. It is not a comprehensive analysis of the subject matter covered and is not intended to provide accounting or other advice or guidance with respect to the matters addressed in this publication. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this publication. For additional information on topics covered in this publication, contact a Grant Thornton client-service partner.