Fair Value Accounting: Affect On The Auditing Profession

During this period of global markets, multinational corporations are demanding financial accounting standards with enhanced uniformity. In an effort to achieve this objective, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working together on the Convergence Project, aiming to develop accounting standards that closely correlate with international financial reporting standards.  In September 2006 and February 2007, the FASB issued two key fair value accounting (FVA) standards which focused on providing guidelines for fair value measurement (through a classification hierarchy), expanding disclosure requirements, and also allowing business entities to increase FVA’s application.  However, the recent financial crisis has placed increased scrutiny on estimates derived under FVA.  Consequently, a spotlight has been placed on the auditing profession, as the effectiveness of an auditor’s ability to test estimates derived under FVA has been questioned due to numerous firms approaching collapse in the midst of the credit crisis.  Thus, the purpose of this paper is to present the challenges auditors face when auditing FV estimates, and to discuss the profession’s capability of adapting to FVA in the future.&nbsp

Fair Value Measurement: What’s New? Teaching Note

As the international economic landscape has become increasingly integrated, the argument for the development of uniform global accounting standards now exists. In an effort to achieve this objective, the Financial Accounting Standards Board, as part of the ongoing Convergence Project with the International Accounting Standards Board, released groundbreaking accounting standards, FAS157 & FAS159, in 2006 and 2007, respectively. Modeled after an international accounting standard, these standards pertain to the use of fair value accounting (FVA), and are the first of their kind as they provide a definition of FVA and an option to expand its use to certain financial instruments. While FVA has been argued to enhance financial reporting, there has also been significant controversy as to its application and ambiguity. The focus of this teaching note is to discuss FVA’s application to assets and liabilities, and to present the various effects that the election of the FV Option may have on an entity’s financial statements

Fair Value Accounting: Affect on the Auditing Profession

During this period of global markets, multinational corporations are demanding financial accounting standards with enhanced uniformity. In an effort to achieve this objective, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working together on the Convergence Project, aiming to develop accounting standards that closely correlate with international financial reporting standards. In September 2006 and February 2007, the FASB issued two key fair value accounting (FVA) standards which focused on providing guidelines for fair value measurement (through a classification hierarchy), expanding disclosure requirements, and also allowing business entities to increase FVA\u27s application. However, the recent financial crisis has placed increased scrutiny on estimates derived under FVA. Consequently, a spotlight has been placed on the auditing profession, as the effectiveness of an auditor\u27s ability to test estimates derived under FVA has been questioned due to numerous firms approaching collapse in the midst of the credit crisis. Thus, the purpose of this paper is to present the challenges auditors face when auditing FV estimates, and to discuss the profession\u27s capability of adapting to FVA in the future

Restatement VS Revision: A Case Study

There had been many recent cases of restatements of financial statements by US Corporations. Recently an article in the Wall Street Journal mentioned restatements by Bank of America, Nike and Alphabet among the 663 companies that filed financial revisions or restatements last year. Interestingly the frequency of these errors has more than doubled since 2002, when the Sarbanes-Oxley corporategovernance law was enacted, partly to increase managerial accountability. We will also examine what are the differences between restatements and revisions. We will examine what are the most common mistakes. Over half of last year’s corrections involved debt and equity, cash flows or taxes. Many of these issues are also major differences between US GAAP and IFRS, making comparison with international firms even more difficult. We will try to explain why a frim chooses a restatement or revision to announce the correction of errors

Interpreting Financial Results

The article discusses three accounting changes issued by the Financial Accounting Standards Board (FSAB). The Statement of Financial Accounting Standards (SFAS) No. 158 Employers\u27 Accounting for Defined Benefit Pension and Other Retirement Plans and the SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements are mentioned. Financial Interpretation 48 Accounting for Uncertainty in Income Taxes, an Interpretation of FSAB Statement No. 109 is mentioned. The takeaway? Financial analysts, investors, and creditors need to carefully interpret ratios and measures, including debt to equity, liabilities to equity, and return on equity. Financial ratios used in loan covenants should be clearly designed and defined, and, in some cases, equity may be more meaningfully defined as adjusted for certain changes in other comprehensive income

The Fair Market Value-Fair Value Dichotomy: Valuation Discounts in Recent Shareholder Dissent Cases

Many business owners offer some form of minority equity—real equity, not phantom arrangements (e.g., stock appreciation rights)—in their companies either in exchange for investment funding or as awards to key employees or important independent contractors

Wirecard and Potential U.S. Audit Issues

The German company Wirecard saga is yet to be fully written. Similar in scope to Enron and others in the early 2000’s, many lessons will be learned for company executives, regulators, and especially auditors worldwide. For U.S. companies and auditors, the PCAOB (Public Company Accounting Oversight Board) has promulgated comprehensive audit standards and procedures designed for public companies, but these standards also could have ancillary application to private companies for auditors when planning the audit engagement. The red flags and audit issues that manifested in the Wirecard events will provide the financial and academic communities with robust case studies as well as prudent warning signals that can potentially lead to material financial statement irregularities. The authors chronicle Wirecard’s financial story based upon public news reporting and identify and address certain PCAOB requirements and procedures when observable issues or “red flags” become readily apparent, assuming Wirecard was a U.S. company. This article does not address international audit requirements or the legal ramifications and remedies surrounding Wirecard’s legal case. However, the article should be of interest to financial executives and directors of public companies that have primary responsibility for company’s financial statements

Liberating Trapped Cash: A Case Study of Trapped Cash at Apple and Microsoft

The topic of trapped cash, or cash permanently reinvested overseas to avoid tax upon repatriation, has become a hot topic in accounting, finance and policy circles over the past two years. This case study analyzes the activities of two major technology firms, Microsoft and Apple, to liberate enormous holdings of trapped cash. The case prompts a discussion of the topic of trapped cash, stakeholder considerations and tools available to manage cash balances held outside the United States. The focus is to examine the strategies available and those selected by Microsoft and Apple to meet or at least appease stakeholder demands while freeing trapped cash

Restatement VS Revision: A Case Study

There had been many recent cases of restatements of financial statements by US Corporations. Recently an article in the Wall Street Journal mentioned restatements by Bank of America, Nike and Alphabet among the 663 companies that filed financial revisions or restatements last year. Interestingly the frequency of these errors has more than doubled since 2002, when the Sarbanes-Oxley corporate governance law was enacted, partly to increase managerial accountability. We will also examine what are the differences between restatements and revisions. We will examine what are the most common mistakes. Over half of last year\u27s corrections involved debt and equity, cash flows or taxes. Many of these issues are also major differences between US GAAP and IFRS, making comparison with international firms even more difficult. We will try to explain why a firm chooses a restatement or revision to announce the correction of errors

Court of Federal Claims Upholds Additional SUI Credit

The article discusses the decision in a tax court case that plaintiffs in consolidated tax refund cases were entitled to an additional state unemployment insurance (SUI) credit against their Federal Unemployment Tax Act (FUTA) tax liabilities for years 1991-1996. The dispute in the tax court case of E.P. Talent Services LP was addressed in a year 2004 Court of Federal Claims decision. It was ruled that the SUI credit is capped at over five percent of the taxpayer\u27s total FUTA wage base