Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

Where could FRF-SMEs possibly have value? A galaxy far, far removed from the one that swirls around the SEC.

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There is another teeming galaxy beyond that of the publicly traded SEC-supervised companies and their PCAOB inspected auditors.

Professor Tom Selling discusses the bickering between the AICPA and NASBA over FRF-SMEs in his post, The AICPA’s Financial Reporting Framework: How Low Should a Profession Go?  He concluded:

NASBA, in so many words, is telling the AICPA that the FRF is beneath the dignity and responsibilities of the CPA.

I’ve been wanting to talk about the FRF-SME framework and some of the comments floating around.  The post above, and my brief comment there, is the springboard to this:

What is beyond the SEC galaxy?

I’m not talking about the galaxy of hyper-big audit firms that Francine McKenna and others describe where many of the independence and audit rules just don’t seem to always apply and even the SEC can’t quite always get their arms around bad accounting.

The distant galaxy I’m talking about consists of small businesses that may have 1 or 3 or a dozen owners (if you count spouse, the kids & siblings, and a few key employees who have a few shares).  They have a couple of leases and one lender, maybe two.

On the little planets in that galaxy, I don’t think lenders get worked up about 5 year lease disclosures, disclosing that capital lease amortization is combined with depreciation expense, splitting investments between levels 1, 2 & 3, defining levels 1, 2, and 3, disclosing the transfers between levels 1, 2, and 3, the amount of goodwill, the 5 year loan amortization, split-personality accounting for investment securities, number of open tax years, or disclosing reclassifications out of OCI separately from the additions to OCI (both net of tax, of course). 

All of those things are required by GAAP. Skip any of those issues and you will read about it in your peer review.

In the world of tiny companies, total revenues and total amount of the bank loan are probably just a rounding error in comparison to publicly traded financials.

In that place light-years removed from the SEC galaxy, GAAP adds to the borrowers costs without doing anything for the user of the financials. (Yes, user. As in singular.) In that world, GAAP, tax basis, modified cash basis, and FRF-SMEs all have value. Some have less cost.

In that other galaxy, there are no off-balance sheet financing risks or bifurcated or embedded derivatives. The derivatives there are the most-plain most-vanilla interest rate swap you’ve ever seen. The swap was probably purchased from the lender and pricing info is provided by the lender. The leases are very simple since those companies have insufficient economic power to engineer convoluted leases.

The lender doesn’t care how the buildings are depreciated because they got a recent appraisal to keep the regulators off their backs (and they won’t share the appraisal with their client). 

Regardless of the nifty, super-cool going concern exposure draft that finally places those evaluations in the proper book of professional literature, the company will be a completely viable going concern until an hour after the bank pulls the line of credit or the morning after they call the loan. Only the bank knows when that will happen – they will make the decision when the company fails.  Management and the auditor can only guess.

We do need to continue debating whether to put 767s and A310s on balance sheets. We really need to keep criticizing the idea of converging GAAP to a lower quality IFRS. (Wait a second…isn’t NASBA complaining of the horrors of using something less than the gold-standard of GAAP?)  We also need to keep ASU 2012-06 in the back of our mind while auditing. To refresh your memory, that deals with Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution.

We certainly need to debate and ponder those issues. As we do so, we need to remember there is another galaxy where leasing involves a dozen delivery trucks and two warehouses, not a hundred Boeing jets or 3,000 storefronts.

There’s a lot of distance between those two galaxies.

The company that has lots of faceless investors out there somewhere in the market? GAAP applies.

The small world of inside investors and one bank lender? That’s a different story.

Written by Jim Ulvog

July 16, 2013, 9:23 am at 9:23 am

Posted in Accounting, Pondering

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