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AUDITING
The PCAOB published a staff audit practice alert on auditing fair value measurements in financial statements.

“We were motivated to develop and issue this alert by the auditing challenges presented by the subprime credit situation and its effects on the markets and fair value measurements, and certain issues that might arise in the transition” to FASB Statement no. 157, Fair Value Measurements, Marty Baumann, director of the PCAOB Office of Research and Analysis, said in a news release.

The alert, Matters Related to Auditing Fair Value Measurements of Financial Instruments and the Use of Specialists, creates no new requirements. It highlights matters in four areas:

Auditing fair value measurements.

Classification of fair value measurements within the fair value hierarchy established by Statement no. 157.

The use of specialists in fair value measurements.

The use of pricing services in fair value measurements.

The alert is available at www.pcaobus.org/Standards/Staff_Questions_and_Answers/
2007/12-10_APA_2.pdf.

BANKING
The FDIC issued a proposed rule to improve the process of determining uninsured depositors at large institutions and enhance the regulator’s ability to make funds available promptly to insured customers if a large financial institution is closed.

Certain larger, or so-called “covered” institutions, would be required to adopt mechanisms that, in the event of a failure, would place provisional holds on large deposit accounts in a percentage specified by the FDIC; provide the FDIC with deposit account data in a standard format; and allow automatic removal of provisional holds once the FDIC has made an insurance determination. “Covered” institutions include banks with $2 billion in domestic deposits and either (1) more than 250,000 deposit accounts or (2) total assets of more than $20 billion. In December, there were 159 FDIC-insured institutions meeting these criteria.

Other proposed requirements that would apply to all FDIC-insured institutions govern the specific time and circumstances under which account balances are determined in the event of a failure. The FDIC is proposing the use of end-of-day ledger balances as normally calculated by the institution.

In a news release, the FDIC said it has usually been able to allow most depositors access to their deposits on the next business day after a closure, and that the proposed rules would better enable the FDIC to continue this practice.

The proposed rules are available at www.fdic.gov/news/board/07Dec19_NPRClaims.pdf. Comments will be accepted until April 14.

The Office of the Comptroller of the Currency revised the asset-size thresholds used to define “small bank” and “intermediate small bank” in regulations to the Community Reinvestment Act.

Beginning Jan. 1, 2008, banks that as of Dec. 31 of either of the prior two calendar years had assets of less than $1.061 billion are “small banks.” Small banks with assets of at least $265 million as of Dec. 31 of either of the prior two calendar years and less than $1.061 billion as of Dec. 31 of either of the two prior calendar years are “intermediate small banks.”

The rule was issued jointly with the Federal Reserve, the FDIC and the Office of Thrift Supervision. The full text is available at www.occ.treas.gov/fr/fedregister/72fr72571.pdf.

EMPLOYEE BENEFITS
The Treasury Department and the IRS issued proposed regulations on Pension Protection Act funding rules. REG-139236-07, Measurement of Assets and Liabilities for Pension Funding Purposes, will provide employers who sponsor single-employer defined benefit plans with guidance regarding the measurement of pension assets and liabilities under the new funding rules. Plan sponsors need to determine the contribution requirements that apply to their defined benefit plans for the first year that the new funding rules apply. The new funding rules are generally effective for plan years beginning on or after Jan. 1, 2008, with the regulations being proposed to be effective for plan years beginning on or after Jan. 1, 2009. Plan sponsors can rely on these proposed regulations for purposes of satisfying section 430 requirements for plan years beginning in 2008.

FINANCIAL REPORTING
FASB’s Emerging Issues Task Force issued a draft abstract intended to improve the comparability of earnings per unit calculations for master limited partnerships. The abstract addresses how current-period earnings of a master limited partnership should be allocated to general partners, limited partners, and, when applicable, incentive distribution rights, when applying EITF Issue no. 07-4, Application of the Two-Class Method Under FASB Statement No. 128, Earnings per Share, to Master Limited Partnerships.

Comments on the abstract were due Feb. 8 and are scheduled to be considered by the task force at its meeting March 12–13. The draft is available at www.fasb.org/eitf/
0704DA2.pdf.

GOVERNMENT
The Federal Accounting Standards Advisory Board (FASAB) issued Statement of Federal Financial Accounting Concepts 5 (SFFAC5), Definitions of Elements and Basic Recognition Criteria for Accrual-Basis Financial Statements. The document defines assets, liabilities, net position, revenues and expenses.

SFFAC5 is the fifth in a series of concepts statements intended to set forth a framework of objectives and fundamentals on which financial accounting and reporting standards will be based. The statements do not actually establish new financial accounting standards.

“This foundation will ensure that the accounting standards lead to financial statements that provide information that is comparable across agencies and programs,” FASAB Chairman Tom Allen said in a news release.

The document is available at www.fasab.gov/codifica.html.

A GAO study of accrual budgeting determined that it does not provide enough information about the nation’s long-term fiscal challenges. Instead, increased reporting on long-term budgetary implications of major tax and spending programs should be required, the GAO said. The Senate Budget Committee asked the GAO to update its 2000 study of other nations’ experiences with accrual budgeting in order to determine how they are increasing attention to long-term fiscal challenges.

The study reviewed the use of accrual budgeting in Australia, Canada, Iceland, the Netherlands, New Zealand and the U.K. While these countries have used accrual budgeting differently, in some cases to increase transparency and improve government performance, it has not been used to measure long-term fiscal challenges. Instead, many of the countries prepare fiscal sustainability reports to assess the overall sustainability of government finances.

The GAO recommends that accrual budgeting be explored for certain programs to ensure an informed incentive and budget decision-making process. Periodic reports on fiscal sustainability should also be required for the government as a whole, the GAO said. The report is available at www.gao.gov/new.items/d08206.pdf.

INTERNATIONAL
The International Auditing and Assurance Standards Board (IAASB), an independent standard-setting board under the auspices of the International Federation of Accountants (IFAC), proposed three new standards; two would focus on enhancing auditors’ consideration of controls at service organizations and a third would address communicating deficiencies in internal control to those charged with governance.

Following a risk-based approach, proposed International Standard on Auditing (ISA) 402 (Revised and Redrafted), Audit Considerations Relating to an Entity Using a Third Party Service Organization, deals with the auditor’s responsibilities to obtain audit evidence when an entity uses one or more service organizations. This may include obtaining reports prepared by the auditors of those organizations.

Proposed International Standard on Assurance Engagements (ISAE) 3402, Assurance Reports on Controls at a Third Party Service Organization, is the first subject matter-specific standard developed under the IAASB’s International Framework for Assurance Engagements. Reports prepared in accordance with proposed ISAE 3402 will be capable of providing appropriate audit evidence under proposed ISA 402 (Revised and Redrafted).

The IAASB also is seeking comments on proposed ISA 265, Communicating Deficiencies in Internal Control, which deals with the auditor’s responsibility to communicate to management and those charged with governance deficiencies in internal control that have been identified by the auditor. It distinguishes between significant and other deficiencies in order to establish requirements to communicate to the appropriate levels within the audited entity.

Comments on proposed ISA 402 (Revised and Redrafted) and proposed ISA 265 are due April 30. Comments on proposed ISAE 3402 are due May 31. The exposure drafts are available at www.ifac.org/EDs.

The International Accounting Education Standards Board, an independent standard-setting board of IFAC, released guidance to assist its member organizations and others in establishing effective practical experience programs. The new guidance is contained in International Education Practice Statement (IEPS) 3, Practical Experience Requirements—Initial Professional Development for Professional Accountants. IEPS 3 provides guidance on the period of practical experience, content of practical experience requirements, and the roles and responsibilities of IFAC members as well as mentors and employers.

The practice statement suggests how IFAC members and associates may meet the requirement for a period of practical experience for trainees to qualify as professional accountants. It also explains how workplace output can be used to assess competence developed by trainees during that period. The guidance can be downloaded for free from the IFAC online bookstore at www.ifac.org/store.

The trustees of the International Accounting Standards Committee (IASC) Foundation, the oversight body of the International Accounting Standards Board (IASB), published amendments to the IASC Foundation’s constitution that enlarge the International Financial Reporting Interpretations Committee (IFRIC) to 14 members from 12 members and amend the quorum and voting requirements accordingly. The changes are intended to give IFRIC membership greater diversity of practical experience, according to a press release. To view the amended constitution visit www.iasb.org/About+Us/About+the+Foundation/
Constitution.htm.

The International Accounting Standards Board (IASB) published an exposure draft of proposed amendments to International Financial Reporting Standard (IFRS) 2, Share-Based Payment, and International Financial Reporting Interpretations Committee (IFRIC) 11 IFRS 2, Group and Treasury Share Transactions. The proposals respond to requests for guidance on how a group entity that receives goods or services from its suppliers (including employees) should account for the following arrangements:

Arrangement 1. The entity’s suppliers will receive cash payments that are linked to the price of the equity instruments of the entity.

Arrangement 2. The entity’s suppliers will receive cash payments that are linked to the price of the equity instruments of the entity’s parent.

Under either arrangement, the entity’s parent has an obligation to make the required cash payments to the entity’s suppliers. The entity itself has no obligation to make such payments. The proposed amendment to IFRS 2 clarifies that IFRS 2 applies to arrangements such as those described above even if the entity that receives goods or services from its suppliers has no obligation to make the required share-based cash payments. The proposed amendment to IFRIC 11 specifies that the entity should measure the goods or services in accordance with the requirements for cash-settled share-based payment transactions. To download the ED, visit www.iasb.org/Open+to+Comment.htm. Comments are due by March 17.

INVESTING
The SEC launched an online tool that enables investors to instantly compare what 500 of the largest American companies are paying their top executives. The database highlights the power of interactive data to transform financial disclosure. The Executive Compensation Reader is available at www.sec.gov/xbrl. It uses XBRL technology and includes direct links to companies’ proxy statements, including footnotes and the companies’ explanations of their compensation decisions.

The SEC posted on its Web site a report titled Investor and Industry Perspectives on Investment Advisers and Broker-Dealers. In a news release, the SEC said changes in the financial services market have contributed to a lack of boundaries between investment advisers and broker-dealers, causing the SEC to want a clear understanding of the industry’s complexities for future regulatory reform. The agency commissioned the RAND Corp. to study the state of the investment advisory and brokerage industries to determine:

The current business practices of broker-dealers and investment advisers

If investors understand the differences between and relationships among broker-dealers and investment advisers

The study found that although investors fail to distinguish between broker-dealers and investment advisers according to federal regulation definitions, they still express a high level of satisfaction with the services received from their financial service providers. The study does not evaluate the legal or regulatory environment and does not make policy recommendations. Rather, “the report will assist the Commission’s efforts to update our regulations to improve investor protections in today’s new marketplace,” SEC Chairman Christopher Cox said in the release.

The entire report is available at www.sec.gov/news/press/2008/2008-1_randiabdreport.pdf.

SECURITIES
The number of companies sued in securities class action litigation rose 43% between 2006 and 2007, to 166 from 116, according to a report by the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research. Litigation activity for 2007 was 14% below the 10-year historical average (1997–2006) of 194 companies sued per year, but the report noted that activity jumped in the second half of 2007 as the subprime mortgage crisis unfolded and stock market price volatility increased.

One hundred companies were sued in the second half of the year, a litigation rate that reversed a trend of eight consecutive quarters with below average litigation activity. Of the filings in the second half of the year, 23 were related to subprime issues.

This year’s report for the first time tracked the outcome of cases filed in previous years. Of cases filed between 1996 and 2001, 35% were dismissed and 64% were settled. The median time from filing to settlement was 33 months. The report is available at http://securities.stanford.edu/clearinghouse_research/2007_YIR/20080103-01.pdf.

FYI
The National Association of Black Accountants’ board of directors named Gregory Johnson, CPA, the organization’s executive director. Before joining the NABA staff, Johnson served as director of quality control for Grant Thornton International. He created methods to monitor GTI member firms’ audit practices on a global basis and administered its audit review program. He also was responsible for communication and research initiatives related to quality control. Before joining GTI, Johnson held several key positions at the AICPA, including manager of minority initiatives, director of CPA examination external relations, and director of CPA examination strategy. Johnson began his career at PricewaterhouseCoopers.