Nemec, Marilyn J.

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eGrove (Univ. of Mississippi)

Woman C.P.A. Volume 37 Issue 3 Article 11 7-1975 Theory & Practice: Pronouncements and Other Developments Marilyn J. Nemec Follow this and additional works at: https://egrove.olemiss.edu/wcpa  Part of the Accounting Commons, and the Women's Studies Commons Recommended Citation Nemec, Marilyn J. (1975) "Theory & Practice: Pronouncements and Other Developments," Woman C.P.A.: Vol. 37 : Iss. 3 , Article 11. Available at: https://egrove.olemiss.edu/wcpa/vol37/iss3/11 This Article is brought to you for free and open access by the Archival Digital Accounting Collection at eGrove. It has been accepted for inclusion in Woman C.P.A. by an authorized editor of eGrove. For more information, please contact egrove@olemiss.edu. Theory& PracticePronouncements and Other DevelopmentsMarilyn J. Nemec, CPAPartner, Alexander Grant & CompanyChicago, IllinoisFINANCIAL ACCOUNTING STANDARDS BOARDThe FASB issued two more Statements of Financial Accounting Standards and three interpretations of its statement on Accounting for Research and Develop­ment Costs. These are, of course, in addi­tion to several exposure drafts of pro­posed statements and a discussion memorandum on Criteria for Determin­ing Materiality which will be summarized in the future as these projects are finalized.Statement No. 4Statement No. 4, entitled Reporting Gains and Losses from Extinguishment of Debt (an amendment of APB Opinion No. 30), provides that if such gains and losses in the aggregate are material, they shall be classified as an extraordinary item, net of related income tax effect.This treatment shall be accorded debt extinguishment whether it is early, at the scheduled maturity date, or after the scheduled due date. However, gains or losses from cash purchases of debt in­struments made to satisfy current or fu­ture sinking fund requirements are not to be treated as extraordinary items. Some obligations to acquire debt have the characteristics of sinking fund require­ments. For example, if an enterprise is required to purchase each year a certain percentage of its outstanding bonds be­fore their scheduled maturity, the gain or loss from such purchase is not required to be classified as an extraordinary item. On the other hand, debt maturing serially does not have the characteristics of sink­ing fund requirements, and gain or losses from extinguishment shall be classified as an extraordinary item.Adequate description of the transac­tions resulting in the gains or losses from extinguishment of debt shall be shown on the face of the earnings statement or in a note to the financial statements to enable users of the financial statements to evaluate the significance of the gains or losses. The sources of any funds used to extinguish debt if identifiable, the in­come tax effect in the period of extin­guishment, and the per share amount of the aggregate gain or loss net of related income tax effect shall be disclosed.Retroactive application of the provi­sions of this Statement are not required. It is effective for extinguishments occurring after March 31, 1975; however, the follow­ing should be noted:• It need not be applied to extin­guishments occurring on or after April 1, 1975 pursuant to the terms of an offer or other commitment made prior to that date.• Application to all extinguish­ments occurring during a fiscal year in which April 1, 1975 falls is en­couraged.• Retroactive application to extin­guishments occurring in prior fiscal years is encouraged but not re­quired.Further, retroactive application is not intended to change the accounting for amounts deferred on refundings of debt that occurred prior to the effective date of APB Opinion No. 26 (January 1, 1973) or the classification of the amortization of these amounts in the statement of earn­ings.Accounting for Contingencies, FASB Statement No. 5, defines a contingency as an existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. All uncertainties in the accounting pro­cess do not give rise to contingencies as the term is used in this Statement. For example, estimating the life of a depreci­able fixed asset or the liability for services rendered but not billed involves a degree of uncertainty, but no uncertainty exists as to the fact that the asset's life (useful­ness to the business) will end or that a liability has been incurred.Criteria for accruing an estimated loss by a charge to earnings are two, both of which must be met:• Information available prior to is­suance of the financial statements indicate that it is probable that an asset had been impaired or a liabil­ity had been incurred at the date of the financial statement (the end of the most recent accounting period for which financial statements are being presented). It is implicit in this condition that it must be prob­able that one or more future events will occur confirming the fact of the loss.26 / The Woman CPA• The amount of loss can be reason­ably estimated.Disclosure requirements are given for los­ses accrued, contingencies not accruable because both criteria are not met, and events giving rise to losses occurring after the date of the financial statements but before the date of the auditors' report.Catastrophe and self-insurance re­serves, as well as reserves for general con­tingencies, are eliminated, since under the criteria losses are accruable only after the event giving rise to the loss has taken place.An appropriation of retained earnings is not prohibited providing it is shown within the stockholders' equity section of the balance sheet and is clearly identified as an appropriation of retained earnings. Losses shall not be charged to an appro­priation of retained earnings, and no part of the appropriation shall be transferred to earnings.This Statement is effective for fiscal years beginning on or after July 1, 1975. Earlier application is encouraged. Any changes in accounting principle resulting from its application are to be made by a cumulative effect adjustment in accor­dance with APB Opinion No. 20 and not by restatement and prior period adjust­ment, as proposed in the exposure draft of this Statement. Reclassification of an ap­propriation of retained earnings to com­ply with the requirement that such ap­propriation must be within the equity section of the balance sheet shall be made in any financial statements for periods be­fore the effective date of this Statement that are presented after the effective date of this Statement.Although possible gain was included in the FASB definition of contingency, the provisions of paragraphs 3 and 5 of Ac­counting Research Bulletin No. 50 were not reconsidered by the FASB. Those paragraphs of ARB No. 50 which, there­fore, continue in effect provide generally that contingencies that might result in gains usually are not reflected in the fi­nancial statements and, while disclosure of such contingencies may be made, care is required to avoid misleading implica­tions as to the likelihood of realization.Insurance companies strongly opposed elimination of the castastrophe reserve. The “income smoothing" effect of such a reserve had been discussed previously by the AICPA and the Accounting Principles Board. In January, 1973, the SEC issued ASR No. 134 which, while not taking a position opposing such a reserve, re­quired specific disclosure of the impact of following this accounting practice on the balance sheet and statement of earnings.Statement No. 2FASB Statement No. 2, Accounting for Research and Development Costs, con­cluded that all research and development costs encompassed by the Statement shall be charged to expense when incurred. Costs of research and development con­ducted for others under contractual ar­rangements and those specifically reim­bursable under the terms of a contract, as well as costs related to exploration and mineral development in the extractive in­dustries are excluded.The Statement is effective for fiscal years beginning on or after January 1, 1975.The required expensing of Research and Development Costs is to be applied retroactively by prior period adjustment. This also means that when a statement of earnings includes one or more prior periods in addition to the current period:• Companies changing to a policy of expensing Research and De­velopment Costs as incurred in ac­cordance with the Statement are to restate all prior periods presented to reflect as expense the Research and Development Costs incurred in each of these prior periods.• Companies who during any of the prior periods presented changed from a policy of deferring and amor­tizing Research and Development Costs to one of expensing as incur­red in accordance with APB Opin­ion No. 20 are to eliminate the cumulative effect amount and re­state the periods prior to the change to reflect Research and Develop­ment Costs as incurred in each prior period.• Companies who during one or more of the prior periods presented completed the amortization of pre­viously deferred Research and De­velopment Costs are to restate these prior periods to reflect Research and Development Costs incurred in each period.Of course, in all of these restatements elimination of the amortization previ­ously taken and adjustment of the provi­sion for income tax are also required.The Statement also requires that disclo­sure be made in the financial statements of the total Research and Development Costs charged to expense in each period for which an income statement is pre­sented. Companies who have not previ­ously capitalized Research and Develop­ment Costs, as well as those who have, should revise their accounting systems to the extent necessary to accumulate their Research and Development Costs as de­fined in the Statement to comply with this disclosure requirement.Three interpretations of the Statement have been issued. They are generally ef­fective on or after March 31, 1975. As usual earlier application is encouraged; however, none of these interpretations are to be applied prior to initial applica­tion of the provisions of FASB Statement No. 2.Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method (FASB interpre­tation No. 4) applies the “alternative fu­ture use" tests to assets that are acquired in a purchase business combination for use in the Research and Development ac­tivities of the combined enterprise. Ac­cordingly, amounts assigned to pur­chased tangible or intangible assets would be charged to expense when the combination is consummated unless the asset has an alternative future use. Appli­cation of this Interpretation to Business Combinations accounted for by the purchase method (a) is required for busi­ness combinations initiated after March 31, 1975, (b) is encouraged for combina­tions initiated prior to April 1, 1975 and consummated after March 31, 1975 (appli­cation may be applied selectively to those combinations) and (c) may be applied to combinations initiated and consum­mated prior to April 1, 1975; however, if a company chooses to apply this Interpreta­tion to those combinations it must be applied retroactively to all business com­binations accounted for by the purchase method that were consummated prior to April 1, 1975.Applicability of FASB Statement No. 2 to Development Stage Enterprises (FASB Interpretation No. 5) requires that Re­search and Development Costs be charged to expense as incurred if a de­velopment stage enterprise prepares con­ventional financial statements (as op­posed to those special financial state­ments commonly referred to as Article 5A statements) or if its financial statements are included, either by consolidation or by the equity method, in conventional financial statements. Further, when a de­velopment stage enterprise commences operations and begins issuing financial statements in the conventional format, the provisions of FASB Statement No. 2 shall be applied retroactively by prior period adjustment. It should be noted that FASB Statement No. 2 is applicable to Research and Development Costs but not to other similar costs such as pre­operating and start-up. This Interpreta­tion is effective on March 31, 1975, for July 1975 / 27fiscal years beginning on or after January 1, 1975.Applicability of FASB Statement No. 2 to Computer Software (FASB Interpreta­tion No. 6) provides that:• Costs incurred to acquire or de­velop computer software that is to be used in an enterprise's selling and administrative activities are not Research and Development Costs.• Costs incurred to purchase or lease computer software developed by others are not Research and De­velopment Costs unless the software is for use in research and development activities, in which case such costs are to be charged to expense as incurred subject to the "alternative future use" tests.• All costs incurred for the internal development of software for use in research and development ac­tivities are to be charged to expense as incurred.• If computer software is developed internally as part of a new process (for example, software to accom­pany a computerized typesetting machine), or if software developed internally is itself a marketable product or process (for example, software to be used by a service UNIVERSITY OF MASSACHUSETTS AMHERSTTEACHING OPPORTUNITIESThe University of Massachusetts at Amherst is seeking new faculty mem­bers in accounting. Faculty appointments are normally made at the Assistant Professor level and require a Ph.D. in hand or in progress; CPA desirable but not necessary. Appointments for visiting and adjunct professors are also made. Salaries and fringe benefits are competitive.Amherst is a delightful New England town with a large student population. It offers an active and varied cultural life and is within easy driving distance of Boston and New York City.Massachusetts offers the usual set of degree programs: B.S.B.A., M.S. with concentration in various functional areas, M.B.A. and the Ph.D. Research support is available through the Center for Business and Economic Research. The School also coordinates the ABLE program, a federally funded consor­tium of six universities, providing educational opportunities to minorities at the masters level in business.Accounting faculty will be attending the AAA meetings in Tucson to meet interested candidates or contact:Professor Anthony T. Krzystofik, ChairmanDepartment of AccountingSchool of Business AdministrationUniversity of MassachusettsAmherst, Mass. 01002An equal opportunity/affirmative action employer.bureau), costs incurred for concep­tual formulation or the translation of knowledge into a design are Re­search and Development Costs. Programming and testing costs in connection with these purposes are also Research and Development Costs when incurred in the search for or evaluation of product or pro­cess alternatives or in the design of pre-production models.• Costs incurred for programming and testing are not Research and Development Costs when they are incurred for routine or other ongo­ing efforts to improve or adopt an existing product to a particular need.• Costs of developing software for others under a contractual ar­rangement is beyond the scope of FASB Statement No. 2.This interpretation is effective for fiscal years beginning on or after April 1, 1975. Retroactive application of this Interpreta­tion, and therefore, restatement of prior fiscal years, is encouraged but not re­quired.Accounting and Reporting by De­velopment Stage Companies, the second exposure draft of a proposed Statement resulting from the discussion memoran­dum and subsequent public hearings on research and development and similar costs, is presently being accorded "sec­ond level" priority by the FASB.FORECASTS AND PROJECTIONSThe AICPA has been dealing with the problems of financial forecasts in three parts. Guidelines for preparing financial forecasts and developing forecasting sys­tems have been published by the Man­agement Advisory Services Division. The Accounting Standards Division has dis­tributed an exposure draft of a statement of position containing guidelines for pre­sentation and disclosure of financial fore­casts. Comments on this exposure draft are currently being considered. Guidelines for reviewing and reporting upon financial forecasts are being drafted by the Auditing Standards Executive Committee.The Securities and Exchange Commis­sion has now issued its proposed economic projection rules. These pro­posed rules generally follow the conclu­sions set forth in a release issued by the SEC after its public hearings to gather in­formation for a reassessment of its policy of prohibiting projections, except that the proposed rules include disclosure and re­porting standards for a "reviewer's re­port" . The SEC had previously concluded that a statement of verification of a projec­tion by a third party should not be permit­ted.Differences between the AICPA's ap­proach and that of the SEC will have to be resolved, but it is possible that forecasts or projections will be seen in annual re­ports and in SEC registration and report­ing forms in the not too distant future.ACCOUNTING STANDARDSDIVISIONFrom time to time the AICPA's Account­ing Standards Division issues Statements of Position relating to accounting for specific items or to accounting in certain industries. The portions of these state­ments which relate to auditing proce­dures and the auditors' report are "au­thoritative;" however, the portions which relate to accounting principles and financial reporting are considered rec­ommendations to the FASB.The latest of these statements were Ac­counting Practices in the Mortgage Bank­ing Industry and Revenue Recognition When Right of Return Exists. In addition to the guidelines for presentation and dis­closure of financial forecasts, a proposed statement on accounting practices of real estate investment trusts is being pre­pared.28 / The Woman CPA

Theory & Practice: Pronouncements and Other Developments

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Theory & Practice: Pronouncements and Other Developments

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