Survival of the Fittest...CPA Firms!

Remember the old joke about the two ostriches? As they walked down the beach, one stuck his head in the sand and said "Where did that other fellow go?" This ostrich was blinded by his own actions. This is sometimes true for many of us. We may get so caught up in our day-to-day work responsibilities, putting out client fires and trying to live life that we don't see the signs of the times.

A recent news article in the WebCPA Daily reported that about half the small and medium-size CPA firms surveyed believe economic recovery is on the horizon in the fourth quarter of this year. I hope they are correct but I doubt it. In fact, I believe the signs I see on the horizon are growing darker. Increasing unemployment, new tax increases everyday and runaway government spending aren't the combination of events most CPAs and business persons see as recovery!

Like the economic recession of the 1980s, CPA firms that survive and grow in the years ahead won't be those with their heads in the sand! Survival of the fittest CPA firms depends on more than becoming "mean and lean" by cutting operating costs and terminating employees. Successful firms will be those that take the time NOW to rethink their objectives, types of services, staff development and target client profiles.

Many CPAs and business persons rely on the cycles of history as their basis for decision making. Because of the worldwide causes of the current recession, and because of the influential supporters of worldwide solutions to our problems, it is safe to say "We have not gone this way before!" CPA firms, particularly smaller ones, must get ready for the events of the next few years.

Over the next few months we'll be providing many detailed articles and updates for the Update Subscribers on our website, www.cpafirmsupport.com . At CPA Firm Support Services, LLC, our objective is to help smaller CPA firms succeed in the months and years ahead. Please visit our site and join us as we get ready for the future together!

SFAS No. 167, Amendments to FASB Interpretaion No. 46(R)

The FASB issued Statement No. 167, Amendments to FASB Interpretation No. 46(R) in June 2009 to improve financial reporting by enterprises involved with variable interest entities. One of the reasons for this Statement is that the issuance of SFAS No. 166, Accounting for Transfers of Financial Assets eliminated the qualifying special-purpose entity concept which effected certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities. A second reason is that constituent are concerned about the application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity.

It is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited.

It retains the scope of Interpretation 46(R) and adds entities previously considered qualifying special-purpose entities, as the concept of these entities was eliminated in Statement 166.

This Statement amends Interpretation 46(R)

· To require an enterprise to perform an analysis to determine if the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity.
· To require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity.
· By replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with a qualitative approach which focuses on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. This approach will be more effective for identifying which enterprise has a controlling financial interest in a variable interest entity.
· To require enhanced disclosures for any enterprise that holds a variable interest in a variable interest entity.
· To add an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance. A troubled debt restructuring is such an event.

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What Smaller CPA Firms Can Do About Standards Overload

CPA firms are beginning to rethink their policies regarding the application of accounting standards. Here are a few ways some firms are coping with standards overload:

1. When complex standards like FIN 45, FIN 46 and FIN 48 and others are required in GAAP basis financial statements, some CPAs are recommending noncompliance. Many users of small entities’ financial statements don’t care about application of such standards. Managements’ disclosures of departures from GAAP appear in footnotes and the auditor’s and accountant’s reports contain departure paragraphs describing the noncompliance.
   
   
2. Evaluating the effects of complying with some accounting standards often reveals immaterial affects on financial statements. In such circumstances, applicable standards do not have to be applied or disclosed in financial statements.
   
   
3. Interpretive Rule 203-1 of the AICPA Code of Professional Conduct states “This rule therefore recognizes that upon occasion there may be unusual circumstances where the literal application of pronouncements on accounting principles would have the effect of rendering financial statements misleading.” In such cases, departures from GAAP may be justified and disclosed by managements and accountants.
   
   
4. Using an OCBOA, such as income tax basis or modified cash basis, greatly limits the application and disclosure of many accounting standards. Required disclosures for OCBOA presentations primarily include the significant differences from GAAP and other disclosures necessary to prevent the financial statements from being misleading.
   
   
5. Standard-setters are required to issue exposure drafts of new standards for public comment prior to finalization. Frequently visiting the exposure drafts sections of standard-setters’ websites will provide smaller CPA firms the opportunity to have a voice in their future.

Engagement Planning for Going Concern Issues

Here are some practical questions accountants and auditors may wish to incorporate in the planning documentation of every audit and review engagement for the foreseeable future.

• Does the accountant’s or auditor’s understanding of the client’s business and industry reveal any information contrary to the going-concern assumption? Such information may include current and expected recurring operating losses, cash flow problems, defaults on debt obligations, inability to obtain financing or renewals of existing credit lines, an industry significantly affected by the recession, customers and vendors with going-concern problems, decreasing assets valuations, statutory noncompliance, and external matters such as lawsuits, loss of franchise, dealership or licenses, etc.
• Does management have any concerns about the entity’s ability to continue in business for at least a year or possibly longer?
• What are management’s plans to mitigate any revealed threat to continued existence?
• Are management’s plans realistic and are they capable of carrying them out?
• What procedures will be necessary for the engagement team to evaluate management’s plans to overcome going-concern problems?
• What effects are the going-concern issues likely to have on the basis of preparation of the entity’s financial statements?
• What effects are the going-concern issues likely to have on the accountant’s or auditor’s report?
  
  

The FASB is still deliberating on its proposed statement, Going Concern, which was issued 10/9/08. The planning suggestions above will facilitate compliance with the final SFAS and with existing SAS No. 59. You can download a copy of the proposed statement from the Exposure Drafts section of www.fasb.org .

Exposure Drafts for Compilations and Reviews

The Accounting and Review Services Committee of the AICPA has published exposure drafts of three proposed Statements on Accounting and Review Services:

• Framework and Objectives for Performing and Reporting on Compilation and Review Engagements
• Compilation of Financial Statements
• Review of Financial Statements
  
  

Here are the significant proposed changes:

1. Practitioners will be able to express review assurance when independence has been impaired due to performing non-attest services designed to assist entities in preparing better financial statements (internal control services).
2. Accountants will have the option to disclose the reasons why they are not independent in performing compilation services.
3. Engagement letters will be required for both compilation and review services.
4. Terminology will change; limited assurance will change to moderate assurance, review risk will be added and defined and review evidence will be explained.
5. New documentation requirements for reviews will include managements’ responses to inquiries regarding analytical procedures fluctuations and other significant matters.
6. New compilation documentation requirements will include any fraud communications to management and significant findings or issues coming to the accountant’s attention, as well as questions about how they were resolved.
   
   

Exposure drafts of these proposed pronouncements can be downloaded from www.AICPA.org. by clicking on Professional Resources, Accounting and Auditing, Audit and Attest Standards and Exposure Drafts of Proposed Statements. Responses may be sent to mglynn@aicpa.org no later than July 31, 2009.

Codification Launches July 1, 2009

The FASB voted on June 3, 2009 to approve the FASB Accounting Standards Codification™ as the single source of authoritative nongovernmental U.S. Generally Accepted Accounting Principles (GAAP). It will launch July 1, 2009.

The Codification will be effective for interim and annual periods ending after September 15, 2009. This means that preparers must begin to use the Codification for periods that begin on or about July 1, 2009.

Calendar year-end companies would initially apply the Codification to their third-quarter interim financial statements.

All existing accounting standard documents are superseded. With the launch of the Codification all other accounting literature not included in the Codification will be considered nonauthoritative.

The FASB's website is www.fasb.org.

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Not-for-Profit Entities: Mergers and Acquisitions

Effective for reporting periods ending after December 15, 2009 SFAS No. 164 establishes principles and requirements for how a non-profit entity:

• Distinguishes between a merger and an acquisition
• Applies the carryover method when accounting for a merger
• Applies the acquisition method for acquisitions
• Determines required disclosures
  
  

SFAS No. 142, Goodwill and Other Intangibles, and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements are made applicable to nonprofit organizations in this pronouncement.

SFAS No. 164 recognizes the unique features of nonprofit organizations, such as the lack of ownership interests. Nonprofit organizations' mergers and acquisitions, therefore, focus primarily on carrying out the mission, governance and programs of the organization rather than providing returns to shareholders. Many nonprofit organizations do not involve the transfer of consideration but are nonreciprocal transfers; an acquiree's assets are contributed to the acquirer and recorded as an inherent contribution.

This statement requires the "carryover method" for mergers of nonprofit organizations. This method is similar to the old pooling of interests method in ARB 51 and APB 16. The merged organizations form a new entity with a new governing body. An acquisition is accounted for using the acquisition method.

Since information about goodwill may be of limited use to potential contributors, this statement requires an acquirer that expects the operations of the acquiree as part of the combined entity to be predominantly supported by contributions and returns on investments to recognize goodwill as a separate charge in its statement of activities.

Since there are these and other differences in accounting for mergers and acquisitions of nonprofit organizations, accountants and auditors should become familiar with the details of this pronouncement. A complete copy of SFAS No. 164 can be downloaded from www.fasb.org. The components of the statement will also be presented in FASB's Accounting Standards Codification.

Individuals subscribing to our update service on www.cpafirmsupport.com can access practical summaries of this and other proposed and new pronouncements on our Subscription Plan page.