THE ELITE QUARTERLY Accounting and Auditing

Transcription

1 THE ELITE QUARTERLY Accounting and Auditing Published by CPElite, Inc. The Leader in Continuing Professional Education Newsletters CPE for CPAs, Licensed Accountants, Enrolled Agents, and CFPs Fall 2011 Issue 2 Hours of CPE Credit (Accounting and Auditing) Phone and fax # , cpeliteinc@aol.com, web site We hope that you had a wonderful summer. If you have not renewed your newsletter subscription for 2011, you still may do so. Please see pages for more details, visit our web site, or call us at CPE. Thank you for being a customer -- we appreciate your business! Here are items in this newsletter. 1. AICPA and COSO (pages 1-3), including an AICPA and NASBA initiative to offer the CPA exam at international locations, and a COSO report announcing plans to update its original internal control framework. 2. PCAOB and SEC (pages 3-6), including a PCAOB report which considers requiring audit firm rotation, and the SEC s implementation of the whistleblower rules. 3. FASB, GASB, and Other (pages 6-8), including FASB s approval of a goodwill impairment standard, a study reporting on the of goodwill impairment charges, and GASB s issuance of two exposure drafts dealing with pension reporting. 4. Quiz Questions (pages 9-10). 5. Answer Sheet (page 11). 6. Newsletter and Subscription Information (page 12), providing three options for using our newsletter for CPE credit. 7. Course Information (pages 13-14). 8. Enrolled Agent and CFP Information (page 13). 9. CPA and Licensed Accountant Self-Study CPE Information (page 13). LEARNING OBJECTIVE AND CONTENT LEVEL The primary learning objective of this newsletter is to make accounting and auditing professionals aware of recent accounting and auditing developments. The content level of the material contained in this newsletter is an overview of these items. PREREQUISITES There are no prerequisites nor is advance preparation required for our newsletters. ========== AICPA and COSO ============= CPA EXAM OFFERED INTERNATIONALLY FOR THE FIRST TIME On August 1, 2011, the U.S. CPA exam started being offered for the first time in international locations by the AICPA and the National Association of State Boards of Accountancy (NASBA). The first international candidates took the CPA exam in Bahrain, Japan, Kuwait, Lebanon, and the United Arab Emirates. Over 1,000 candidates sat for over 2,000 CPA exam sections during the month of August. The AICPA studied the international examination delivery program for two years with the NASBA, state boards of accountancy, the Board of Examiners, and a variety of other major stakeholders. The resulting international testing program uses the existing examination and state board licensing process with the AICPA, NASBA, and Prometric, providing identical services to the domestic program. International candidates face the same licensing requirements as U.S. candidates, including passing the CPA exam and meeting education and experience requirements required by State Boards of Accountancy. The AICPA plans to have another month-long test window in November, 2011, and then provide monthlong testing opportunities again every three months thereafter. The new program offering the exam overseas to foreign nationals is driven by increasing international demand for the U.S. CPA license. The program also reflects the AICPA s goal to expand the CPA brand internationally to challenge other professional accounting licenses. Currently, 38 states, the District of Columbia, Guam, and Puerto Rico participate in the CPA exam international administration program. U.S. citizens who are living overseas can take the exam at any location. Citizens of Egypt, Jordan, Oman, Qatar and Saudi Arabia are allowed to take the exam in one of the Middle East locations. As in the past, state boards of accountancy in the U.S. continue to have legal authority to award the CPA license. According to the National Association of State Boards of Accountancy, international applicants must apply to take the CPA exam through U.S. state boards of accountancy offering eligibility for international candidates. The international exam is offered only in English and is identical to the exam offered in the United States. Over 10,000 international candidates traveled to the U.S. in 2010 to take the CPA exam, up 22 percent over the previous

2 year. Over 3,000 of these candidates came from Japan alone. Additional information about the new international CPA exam testing program is available at THE COSO PLANS TO UPDATE INTERNAL CONTROL FRAMEWORK The Committee of Sponsoring Organizations of the Treadway Commission (COSO) plans to issue an update of its original internal control framework. The COSO is a voluntary private-sector entity focused on improving company performance and governance through effective internal control, enterprise risk management and fraud deterrence. The five sponsoring organizations are the American Accounting Association (AAA), the American Institute of Certified Public Accountants (AICPA), Financial Executives International (FEI), the Institute of Management Accountants (IMA), and The Institute of Internal Auditors (IIA). The original COSO framework was introduced in the 1992 report, Internal Control Integrated Framework, and has served as a prominent internal control guide for companies and government agencies. The framework s five primary components of internal control are the following: (1) the control environment; (2) control activities; (3) information and communication; (4) monitoring, and; (5) risk assessment. Although the framework has no legal authority, it is used widely by public companies. Further, all federal government agencies use the framework as developed in the U.S. Comptroller General s guidance on internal controls for federal agencies. Many states have laws that require agencies to adopt internal control systems using guidance very similar to the COSO s framework. Although the COSO expects to maintain its five primary internal control components in the updated framework, a number of important improvements are planned. For example, the COSO plans to simplify and shorten lengthy discussion sections related to the framework components because they have become institutional knowledge. The COSO also is considering an increased focus on the use of information technology in business, increasing coverage of the financial reporting objective to provide broader discussion of management reporting and external reporting. In the area of governance, the COSO is planning to add guidance that includes new detail about audit committee and compensation committee responsibilities. The update also will provide more detailed links between the internal control framework and the COSO s Enterprise Risk Management (ERM) framework published in the 2004 report, Enterprise Risk Management Integrated Framework, including increased discussion of risk assessment and fraud. Finally, the COSO is considering updates to consider substantive changes in business models, including increased use of outsourcing and supply chain management. The COSO expects the updated internal control framework to be published in the summer of AICPA RECOMMENDS THAT THE SEC PERMIT OPTIONAL IFRS ADOPTION On August 17, 2011, the AICPA recommended to the SEC that public companies in the U.S. be allowed the option of adopting International Financial Reporting Standards (IFRS). The AICPA recommendation letter came in response to a May 26, 2011, SEC staff paper, Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers Exploring a Possible Method of Incorporation. The SEC continues to seek comments on building IFRS into the U.S. financial reporting system as it considers IFRS implementation and a phased timeline for adoption. In a four-page letter to the SEC, AICPA Chairman Paul Stahlin and AICPA president and CEO Barry C. Melancon said they believe that U.S. issuers should be given the option to adopt IFRS as issued by the International Accounting Standards Board (IASB) regardless of whether the Commission decides to implement an endorsement or convergence approach for adopting IFRS in the U.S. financial reporting system. Stahlin and Melancon also highlighted that providing companies with an option to adopt would provide a new, improved level of consistency in the treatment of U.S. companies and foreign private issuers that report using IFRS. The letter provides strong AICPA support for the general goal of developing a single set of financial reporting standards for use by public companies around the world in pursuit of consistency, transparency, and comparability. Stahlin and Melancon suggested that financial statement preparers and users would benefit from having one common financial reporting language to facilitate comparison of companies residing in different countries. The letter also indicates pragmatic acceptance of the endorsement approach for incorporating IFRS and continuing support for the FASB in the critical role of facilitating IFRS incorporation into U.S. GAAP. An endorsement approach would provide the SEC and the FASB with an ability to modify or supplement IFRS after working through an established protocol. The letter emphasized that providing an adoption option would help achieve the goal of incorporating IFRS into the U.S. financial reporting system and facilitate comparison of U.S. companies that adopt IFRS with their international competitors that use IFRS. According to Stahlin and Melancon, anecdotal evidence suggests that the number of companies that would choose to adopt IFRS would not be large enough to jeopardize system-wide readiness. The letter also urged the Public Company Accounting Oversight Board to work to achieve greater harmonization of its auditing standards with International Standards on Auditing issued by the International Auditing and Assurance Standards Board. 2

3 True False Questions 1. International candidates taking the CPA exam outside the U.S. have different licensing requirements from U.S. candidates. Multiple Choice Questions 2. Which one of the following is not one of the COSO s planned changes in the update of its internal control framework? a. Provide more links between internal control and enterprise risk management. b. Change the number of primary components in the framework. c. Simplify discussion of the framework s components. 3. With regard to the AICPA recommendation that the SEC permit optional IFRS adoption, which one of the following statements is true? a. The AICPA supports the FASB as a primary player in the effort to incorporate IFRS into U.S. GAAP. b. The AICPA s support recommendation is conditional on SEC selection of the convergence approach for adopting IFRS. c. The AICPA letter argued that more evidence is needed to evaluate whether development of one common financial reporting language would be useful. Solutions 1. False is the correct response. International candidates taking the CPA exam outside the U.S. face exactly the same licensing requirements as U.S. candidates. True is the incorrect response. International candidates and U.S. candidates must meet the same examination, education, and experience requirements required by State Boards of Accountancy. International CPA Examination Program. 2. B is the correct response. The COSO does not plan to change the framework s five primary components.. A is an incorrect response. The update will provide more detailed links between the internal control framework and the COSO s Enterprise Risk Management (ERM) framework published in the 2004 report, Enterprise Risk Management Integrated Framework C is an incorrect response. The COSO plans to simplify and shorten lengthy discussion sections related to the framework components because they have become institutional knowledge. The COSO s Internal Control Framework Update. 3. A is the correct response. The AICPA letter provides continuing support for the FASB in the critical role of facilitating IFRS incorporation into U.S. GAAP. B is an incorrect response. The AICPA letter states that U.S. issuers should have the choice to adopt IFRS regardless of whether the SEC decides to implement an endorsement or convergence approach for adopting IFRS. C is an incorrect response. The AICPA letter argued that financial statement preparers and users would benefit from having one common financial reporting language to facilitate comparison of companies residing in different countries. AICPA Recommendation for Optional IFRS Adoption. ============PCAOB and SEC============== PCAOB CONSIDERS REQUIRING AUDIT FIRM ROTATION On August 16, 2011, the PCAOB met and voted to issue a new concept release, Concept Release on Auditor Independence and Audit Firm Rotation, to evaluate the prospect of limiting audit firm tenure with public companies. The PCAOB has decided to seek comments from the public on ways to improve the independence, objectivity and professional skepticism of auditors and audit firms. The primary proposal under consideration is the possibility of requiring mandatory audit firm rotation. The release contains a series of questions for public consideration, including questions about the optimal term length, the advantages and disadvantages of audit terms of 10 or more years, and whether possible auditor term limits should only apply to the largest public companies. PCAOB Chairman James Doty stated that he does not have a strong opinion about whether the PCAOB should adopt term limits, but that it is time to examine and debate the issue carefully after gathering a strong body of evidence in the area. Doty also highlighted that the central question of the release is whether auditor term limits set at some appropriate length will reduce client-based pressure on auditors to develop and protect long-term client relationships to the detriment of investors and our capital markets. PCAOB member Jay Hanson, former chairman of the AICPA s Financial Reporting Executive Committee, also recognized the concept release s focus on mandatory auditor rotation and urged great caution before moving forward. He specifically called for careful cost/benefit analysis and consideration of possible unintended consequences of forced rotation, including further analysis of PCAOB inspection reports and other information to evaluate the link between audit deficiencies and problems with auditor objectivity and 3

4 skepticism. The PCAOB recognized the 2003 GAO report, Public Accounting Firms: Required Study on the Potential Effects of Mandatory Audit Firm Rotation, which concluded mandatory audit firm rotation may not be the best way to improve auditor independence and audit quality. From a cost perspective, the GAO report found that large firms estimated that first-year audit costs in a new mandatory firm rotation system would increase by 20 percent because of increased start-up costs associated with auditing a new client. PCAOB member Daniel Goelzer recognized that the time is right to consider new ways to promote auditor independence, but ultimately expressed strong doubt that mandatory audit firm rotation is a practical or cost-effective way of strengthening independence. Goelzer suggested two different ways to handle the rotation issue: (1) allowing the SEC or the PCAOB to require audit firm rotation when an inspection report reveals that long tenure or auditor independence problems lead to audit failure, and (2) establishing new requirements for audit committees to justify audit firm retention after an extended period of time (e.g., 10 or 15 years). The PCAOB plans to collect comments until December 14, 2011, and then hold a public forum on the issue in March, PCAOB CONSIDERS CHANGES TO AUDITOR S REPORT On June 21, 2011, the PCAOB issued a concept release, Concept Release on Possible Revisions to PCAOB Standards Related to Reports on Audited Financial Statements, describing possible changes to the auditor s reporting model. The release proposes a number of change alternatives to the auditor s report and seeks comments with the goal of improving the transparency of the report and the audit process for investors and other users. The prospective changes also would provide additional information about companies financial and non-financial information. For example, the PCAOB first suggested an alternative where auditors would supplement the traditional audit report with a narrative report providing their views on significant matters related to the client. This new auditor discussion and analysis section could include auditor comments about significant audit risks identified during the engagement, specific auditor procedures and results, auditor independence, management s judgments and estimates, accounting policies and practices, and conflict issues encountered during the engagement. Second, the PCAOB suggested the alternative of requiring and expanding the use of emphasis paragraphs in the auditor s report to highlight the most significant financial statement issues and identify where they are disclosed in the financial statements. Emphasis paragraphs are currently optional in auditor s reports, but the PCAOB recognized that such sections can provide important information needed by users to better understand critical financial reporting issues. Third, the PCAOB is considering an alternative that would require auditors to provide assurance in the report on information outside the financial statements, such as management s discussion and analysis, non-gaap information, and earnings releases. Finally, the PCAOB suggests that the current standard auditor s report could be improved by clarifying the descriptions of auditor responsibilities and the purpose of an audit. The focus of clarification work could involve specific terms and concepts like reasonable assurance, auditor fraud detection responsibility, auditor responsibility for financial statement disclosures, management s responsibility for the preparation of the financial statements, auditor s responsibility for information outside of the financial statements, and auditor independence. In highlighting these alternatives, the PCAOB stressed that they are not mutually exclusive, but rather examples of possible revisions to the auditor s report that could occur individually or in combination. The PCAOB also stated that the proposed changes are not intended to change the auditor s responsibility to obtain sufficient appropriate audit evidence to support the audit opinion. If implemented, the potential changes would likely require new standards and rules from the PCAOB and the SEC. SEC IMPLEMENTS FINAL WHISTLEBLOWER AWARD RULES On August 12, 2011, the SEC made effective new rules to pay whistleblowers for their information about securities violations that either have occurred, are ongoing, or are about to occur. The Dodd-Frank Act of 2010 added Section 21F to the Securities Exchange Act of 1934, Securities Whistleblower Incentives and Protection, which directs the SEC to pay whistleblowers who voluntarily provide original information about a securities law violation to the SEC. The SEC approved the new whistleblower award program by a 3 to 2 vote, with the SEC s two Republican commissioners voting against the rule. The program will reward eligible individuals with an amount of 10% to 30% of the monetary penalty when a successful SEC enforcement action from information provided results in sanctions that exceed $1 million. The new rule greatly enhances the SEC s ability to reward whistleblowers. Prior to the Dodd-Frank Act, the SEC could only reward whistleblowers for information related to insider-trading cases. The SEC has considerable discretion in determining the percentage award given and can consider factors such as the significance and timing of the information, the amount of assistance provided, the whistleblower s culpability in the area, and whether the whistleblower interfered with a company s internal compliance and reporting systems. The rule specifies certain qualitative aspects of information needed for award eligibility. For example, whistleblower information must be considered original by the SEC, coming from the whistleblower's independent knowledge (facts known by the whistleblower that are not pulled from public sources) or independent analysis (whether conducted by the whistleblower alone or in conjunction with others). The information cannot already be known by the SEC or exclusively derived from an allegation made in a judicial or administrative hearing, governmental report, hearing, audit, investigation, or news report. Finally, the SEC must receive the information for the first time after July 21, 4

5 2010, which is the Dodd-Frank Act s enactment date. The SEC describes specific situations where whistleblower information would not be considered new or independent: (1) information gained through privileged communications with an attorney typically is ineligible; (2) information provided by attorneys, officers, directors, trustees, partners, internal auditors, external auditors, and fraud investigators also will typically be ineligible for awards; and, (3) information obtained in an illegal way will be ineligible. The antiretaliation provisions state that employers are prohibited from taking an adverse action against individuals who whistleblow. Anti-retaliation protection applies regardless of whether a whistleblower actually qualifies for an award if the whistleblower reasonably believed that an actual violation occurred. The SEC decided not to require whistleblowers to report wrongdoing through the company s internal compliance procedures. SEC involvement in whistleblowing awards has generated considerable controversy among groups concerned that such a program would undermine companies internal compliance processes. RESEARCH PROVIDES EVIDENCE CHALLENGING SOX BAN ON PROVIDING INTERNAL AUDIT SERVICES TO EXTERNAL AUDIT CLIENTS Professors Doug Prawitt (Brigham Young University), Nathan Sharp (Texas A&M University), and David Wood (Brigham Young University) conducted a study that provides evidence that companies who have external auditors that also provide outsourced internal audit services have a lower risk of misleading or fraudulent financial reporting. Their paper, Internal Audit Outsourcing and the Risk of Misleading or Fraudulent Financial Reporting: Did Sarbanes-Oxley Get it Wrong?, is motivated by the Sarbanes-Oxley Act (SOX) ban on companies outsourcing internal audit work to their external audit provider. This banning of such bundled audit services by one audit firm is based on concerns about problems resulting from the auditorclient economic bonding that undermines auditor independence, objectivity, and reliability in a way that diminishes financial statement reliability. However, the authors highlight a competing knowledge spillover argument that suggests that external auditors who also provide outsourced internal audit services for clients have opportunities for deeper understanding of a client that leads to improved overall audit quality. The researchers used proprietary data from The Institute of Internal Auditors and Audit Integrity, LLP to test whether the economic bonding or the knowledge spillover argument provides the better explanation of how outsourced internal audit services impact external audit services and financial reporting reliability. The study s sample included 334 firm-year observations involving 159 publicly-traded companies during the period. The study s results provide strong evidence in support of the knowledge spillover argument. The researchers found that pre-sox outsourced internal audit work by the external auditor was associated with lower accounting risk when compared with in-house internal audit functions or outsourced internal audit to a third party who was not also the external auditor. This finding suggests that the SOX goal of improving financial reporting quality by banning concurrent provision of external audit and outsourced internal audit services may not be successful. The researchers argue that examining this issue is important for evaluating the effects of this specific SOX prohibition and for helping policymakers in future deliberations related to non-audit services that can be provided by external auditors. The authors highlight that policymakers should carefully evaluate the possible unintended consequences of reducing coordination among governance mechanisms such as external auditors and management. Multiple Choice Questions 4. Which one of the following is true related to the PCAOB s new concept release, Concept Release on Auditor Independence and Audit Firm Rotation? a. PCAOB leadership indicated a strong preference for mandatory audit firm rotation. b. The PCAOB release is based on the 2003 GAO report finding that mandatory audit firm rotation was the best way to improve audit quality. c. The concept release seeks public comments about the advantages and disadvantages of long auditor tenures with clients. 5. Which one of the following statements best describes the purpose of the PCAOB s concept release on possible changes to the auditor s report? a. Increase auditor responsibility for fraud detection. b. Raise the audit evidence standard to increase audit quality and consistency. c. Improve audit report and audit process transparency for users. 6. Which one of the following is false related to the SEC s new whistleblower award rules? a. The new program will reward eligible whistleblowers with up to 30% of the monetary penalty imposed. b. The SEC Commissioners approved the new whistleblower award program with a unanimous vote. c. The new program was mandated by federal law. 7. Which one of the following is not one of the competing theories tested in a recent study on the SOX ban on providing external audit clients with internal audit services? 5

6 a. Agency theory. b. Economic bonding theory. c. Knowledge spillover theory. Solutions 4. C is the correct response. The concept release specifically seeks public comments on the advantages and disadvantages of audit terms of 10 or more years, A is an incorrect response. PCAOB Chairman James Doty stated that he does not have a strong opinion about whether the PCAOB should adopt term limits. B is an incorrect response. The 2003 GAO report concluded that mandatory audit firm rotation may not be the best way to improve auditor independence and audit quality. PCAOB Concept Release on Mandatory Audit Firm Rotation. 5. C is the correct response. The PCAOB s stated goal with the release is to improve the transparency of the auditor s report and the audit process for investors and other users. A is an incorrect response. The PCAOB does not seek to increase auditor responsibility for fraud detection. B is an incorrect response. The proposed report changes are not intended to change the auditor s responsibility to obtain sufficient appropriate audit evidence to support the audit opinion. PCAOB Concept Release on Possible Revisions to PCAOB Standards Related to Reports on Audited Financial Statements. 6. B is the correct response. The SEC approved the new whistleblower award program by a 3 to 2 vote, with the SEC s two Republican commissioners voting against the program. A is an incorrect response. The SEC program will reward eligible individuals with an amount of 10% to 30% of the monetary penalty for information when a successful SEC enforcement action results in sanctions that exceed $1 million. C is an incorrect response. The Dodd-Frank Act of 2010 added Section 21F to the Securities Exchange Act of 1934, Securities Whistleblower Incentives and Protection, which directs the SEC to pay whistleblowers who voluntarily provide the SEC with original information about a securities law violation. SEC Approval of Final Whistleblower Award Rules. 7. A is the correct response. Agency theory was not one of the two primary competing theories tested in the study. B is an incorrect response. The study tested the economic bonding theory that was the foundation of the SOX ban on companies outsourcing internal audit work to their external audit provider. C is an incorrect response. The study also evaluated a knowledge spillover theory that suggests external auditors providing outsourced internal audit services have opportunities for deeper understanding of a client that leads to improved overall audit quality. Internal Audit Outsourcing and the Risk of Misleading or Fraudulent Financial Reporting: Did Sarbanes-Oxley Get it Wrong? =========FASB, GASB, AND OTHER========= FASB APPROVES REVISED GOODWILL IMPAIRMENT TEST STANDARD On August 10, 2011, the FASB approved a revision to simplify goodwill impairment testing for companies. The revision to the Accounting Standards Update to Accounting Standards Codification (ASC) 350, Intangibles Goodwill and Other: Testing Goodwill for Impairment has come as a direct result of feedback from private companies that had communicated strong concern about the cost and complexity of goodwill impairment tests. Prior to the revision, ASC 350 required entities to assess goodwill for impairment at least annually by comparing reporting unit fair value to its carrying amount. Under the revised rule, companies will have the option to first assess qualitative factors to determine whether performing the current two-step impairment test is necessary. The updated guidance no longer requires companies to make a reporting unit fair value calculation unless the qualitative assessment indicates that it is more likely than not (more than 50 percent) that its fair value is less than its carrying amount. Examples of qualitative factors include macroeconomic conditions (e.g., deteriorating economy, limited access to capital), industry and market considerations (e.g., competition, regulation), cost factors, company financial performance (e.g., declining cash flows and revenues), and other entity-specific events (e.g., changes in management, litigation, expectation of reporting unit sale). Entities have the option of skipping the qualitative assessment and proceeding directly to step one of the goodwill impairment test. Additional testing to measure impairment amount is now only necessary when a company decides that it is more-likely-than-not that a reporting unit's fair value is less than its carrying amount. Reporting units with zero or negative carrying amounts currently are required to perform a qualitative assessment in place of step one. If a company s qualitative assessment suggests that it is more likely than not that goodwill is impaired, then step two measurement of impairment is required. The changes 6

7 will become effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, although early adoption is allowed. The revised standard will not converge U.S. GAAP and IFRS in the area. IFRS provides that the annual goodwill impairment test is a one-step process with impairment measured as the difference between the fair value and the carrying amount of a cash-generating unit or group of cash-generating units. KPMG STUDY FINDS SHARP DECLINE IN GOODWILL IMPAIRMENT CHARGES In June, 2011, KPMG released the results of a study of goodwill trends in a report entitled, Evaluating Impairment Risk: Goodwill Impairment Continues Its Downward Trend in KPMG states that the purpose of the study is to help financial executives evaluate trends in goodwill impairment. The overall results for 2010 suggest a continuing trend of decline in goodwill impairment charges across many industries. Goodwill impairment charges in 2010 dropped to approximately $39 billion, down almost 60 percent from $92 billion in The number of companies that booked impairment charges fell 41 percent from 217 to 129. Only seven percent of companies in the 2010 study recorded a goodwill impairment compared to 12 percent in 2009 and almost 16 percent in In addition, the median goodwill impairment charge dropped 72 percent in 2010 to $27 million from $97 million in The study s sample included 1,879 public companies in the U.S. with minimum revenues and market capitalization of $500 million and minimum assets of $300 million. The study evaluated annual goodwill impairments during the period and included companies representing 24 industries. The results indicate that the diversified financials industry had the highest actual impairment charges of almost $14 billion in 2010, representing 36 percent of the $39 billion in total goodwill impairment charges within the sample. The telecommunication services industry and energy industry had the second and third highest impairment charges, respectively. In the 2009 study, the technology hardware and equipment industry had the highest goodwill impairment charges, although the industry represented less than one percent of impairment charges in the 2010 study. KPMG also found that goodwill impairment charges for the materials industry, capital goods industry, and energy industry also dropped substantially from 2009 to The 24 companies analyzed in the automobiles and components industry recorded no goodwill impairment charges in The consumer durables industry had the highest percentage of sample companies with goodwill impairment charges at 16 percent. KPMG concluded that the 2010 decrease in goodwill impairment charges represents a continuing trend that reflects higher market valuations and better operating performance in an improving economy. GASB PROPOSES STANDARDS FOR IMPROVING PENSION REPORTING On July 8, 2011, the GASB announced the issuance of two exposure drafts intended to improve state and local government financial reporting related to pensions. The purpose of the proposed standards is to amend existing pension standards to improve how the costs and obligations associated with government-provided pensions are calculated and reported. GASB Chairman Robert H. Attmore recognized that users of state and local government financial reports have complained that current standards provide inadequate information to understand the cost and the liability for benefits promised to active and retired employees. The proposed changes are designed to increase reporting transparency, accuracy, and consistency, although they are not intended to change the speed with which public pension plans must pay off their unfunded pension obligations. The first exposure draft, Accounting and Financial Reporting for Pensions, focuses on reporting by governments that provide their employees with pensions. This draft proposes a requirement for governments to report in the statement of financial position a net pension liability balance that represents the difference between the total pension liability and the net assets put away in a qualified trust to pay benefits to current employees, retirees, and their beneficiaries. The Exposure Draft also proposes substantial modifications to how governments calculate their total pension liability and pension expense. For example, the GASB proposes that governments be required to immediately recognize more pension expense components, including the effect on the pension liability of changes in benefit terms, instead of current deferral and amortization for up to 30 years currently used in practice. The draft also proposes continued use of the long-term expected rate of return to discount the value of projected benefit payments when plan assets are expected to cover projected benefit payments. However, if plan assets are expected to be insufficient for paying benefits, the draft proposes that governments would have to use a discount rate that applies the interest rate on a tax-exempt, 30-year municipal bond index rated AA or higher to reflect that future payments are not expected to be made from longterm investments. The GASB highlights that most municipal bond rates have lower interest rates than the rates currently used by states, so the change would result in a larger net pension liability. In the area of cost methods, the draft proposes a change from the current menu of six actuarial cost methods to a single required actuarial cost allocation method, referred to as entry age normal. Finally, the GASB proposed requiring government presentation of more extensive note disclosures and supplemental information. The second exposure draft, Financial Reporting for Pension Plans, addresses financial reporting by pension plans that are administered through qualified trusts. The draft describes a framework for separate financial reports of defined benefit plans and proposed note disclosure requirements for defined contribution plans. True False Questions 8. The FASB s revised goodwill impairment test standard no longer requires all companies to perform the traditional two-step impairment test. 7

8 Multiple Choice Questions 9. Which one of the following statements is true related to KPMG s study of goodwill impairment charges? a. The study found that the number of companies that booked goodwill impairment charges increased significantly in b. The study indicated that goodwill impairment charges dropped significantly in c. The study found that the median goodwill impairment charge increased significantly in Which one of the following statements is false related to the GASB s proposed standards related to pension reporting? a. The proposals would require governments to immediately recognize more pension expense components. b. The proposals would substantially modify how governments calculate their total pension liability and pension expense. c. The proposals would apply only to local government financial reporting. Solutions 8. True is the correct response. The FASB s revised goodwill impairment test standard provides companies with the option to first assess qualitative factors to determine whether performing the current two-step impairment test is necessary. False is the incorrect response. The revised standard no longer requires companies to make a fair value calculation unless initial assessment of qualitative factors indicates that it is more likely than not that a reporting unit s fair value is less than its carrying amount. Revised ASC 350, Intangibles Goodwill and Other: Testing Goodwill for Impairment. 9. B is the correct response. The KPMG results indicate that 2010 goodwill impairment charges dropped almost 60 percent from A is an incorrect response. The study results indicate that the number of companies that booked 2010 goodwill impairment charges fell 41 percent. C is an incorrect response. The study results indicate that the median goodwill impairment charge dropped 72 percent in Evaluating Impairment Risk: Goodwill Impairment Continues Its Downward Trend in C is the correct response. The GASB proposals are intended to improve pension reporting in state and local governments. A is an incorrect response. The GASB proposes that governments be required to immediately recognize more pension expense components, including the effect on the pension liability of changes in benefit terms, instead of current deferral and amortization for up to 30 years currently used in practice. B is an incorrect response. For example, if plan assets are expected to be insufficient for paying benefits, the GASB proposes that governments have to use a discount rate that applies the interest rate on a tax-exempt, 30-year municipal bond index rated AA or higher to reflect that future payments are not expected to be made from long-term investments. Two GASB Exposure Drafts to Improve Pension Reporting All rights reserved. The reproduction or translation of these materials is prohibited without the written permission of CPElite. The material contained in CPElite's courses and newsletters qualifies for CPE credit designed to enhance the professional knowledge of the individual. The material is sold with the understanding that CPElite is not engaged in rendering legal, accounting, tax, or other professional services in a consulting capacity "We have entered into an agreement with the Office of Director of Practice, Internal Revenue Service, to meet the requirements of 31 Code of Federal Regulations, Section 10(g), covering maintenance of attendance records, retention of program outlines, qualifications of instructors and length of class hours. This agreement does not constitute an endorsement by the Director of Practice as to the quality of the program or its contribution to the professional competence of the enrolled individual." CPElite, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Suite 700, Nashville, TN, Web site:

9 ***** QUIZ QUESTIONS ***** Place your answers to the following 2 True-False Questions and 8 Multiple Choice Questions on the enclosed answer sheet (page 11). ON-LINE TESTERS GO TO CPELITE.COM AND CLICK ON-LINE TESTING. TRUE-FALSE QUESTIONS 1. The COSO s plan to update its internal control framework does not include changes to the primary components of internal control. 2. In its 2010 report on goodwill impairment, KPMG found that the 2010 increase in goodwill impairment charges reflects a continuously declining economy. MULTIPLE CHOICE QUESTIONS 3. Which one of the following statements is true related to the new international CPA exam program? a. The AICPA plans to provide testing opportunities for international candidates every three months. b. Currently, only 48 states in the U.S. participate in the CPA exam international administration program. c. The international CPA exam is offered in four different languages, including English, Spanish, French, and Japanese. 4. With regard to the AICPA recommendation that the SEC permit optional IFRS adoption by U.S. companies, which one of the following statements is false? a. The AICPA letter to the SEC suggested that system capacity should not impair the SEC s ability to deal with companies that voluntarily choose to adopt IFRS. b. The AICPA letter recommends IFRS adoption choice for U.S. issuers regardless of the SEC s final implementation approach. c. The AICPA letter focused only on accounting standards and did not comment on harmonization of auditing standards. 5. PCAOB member Daniel Goelzer expressed strong doubt that prospective PCAOB limits on audit firm tenure with public companies would be a practical or cost effective way to strengthen auditor independence. Which one of the following is not a specific alternative to mandatory auditor rotation suggested by Goelzer? a. Require audit firm rotation when an inspection report reveals that long tenure or auditor independence problems lead to audit failure. b. Encourage audit firms to consider implementing policies requiring resignation of engagements once they exceed 10 years. c. Establish new requirements for audit committee to justify audit firm retention after an extended period of time. 6. Which one of the following is not a specific change to the auditor s report proposed in the PCAOB s Concept Release on Possible Revisions to PCAOB Standards Related to Reports on Audited Financial Statements? a. Adding a new audit opinion specifically related to the aggressiveness of accounting at the client. b. Developing a new auditor discussion and analysis section that could include comments about audit and client management issues. c. Expanding the use of emphasis paragraphs in the auditor s report to highlight the most significant financial statement issues. 7. Which one of the following best describes the potential awards to eligible individuals under the new SEC whistleblower award program? a. The award equals 10% of the monetary penalty for information that results in a successful SEC enforcement action. b. The award equals 30% of the monetary penalty for information that results in a successful SEC enforcement action. c. The award equals an amount between 10% and 30% of the monetary penalty for information that results in a successful SEC enforcement action. 8. Which one of the following statements best describes the results in Internal Audit Outsourcing and the Risk of Misleading or Fraudulent Financial Reporting: Did Sarbanes-Oxley Get it Wrong?? a. The results provide support for the economic bonding concerns that lead to the SOX ban on outsourced internal audit work by the external auditor. b. The results provide support for the knowledge spillover argument and suggest that the SOX ban on outsourced internal audit work may not be successful in improving audit quality. c. The results suggest that support for economic bonding theory or knowledge spillover theory depends on whether public or private companies are considered. 9

10 9. Which one of the following statements is true related to when additional goodwill impairment testing is needed in the FASB s approved revision to Accounting Standards Codification (ASC) 350, Intangibles Goodwill and Other: Testing Goodwill for Impairment? a. Formal impairment testing is needed when a company decides that it is more likely than not that a reporting unit s fair value is less than its carrying amount. 10. Which one of the following is not a specific objective of the GASB s proposed standards related to pension reporting? a. Increased pension reporting transparency. b. Increased speed of paying off unfunded pension liabilities. c. Increased pension reporting accuracy. b. Formal impairment testing is needed when the company decides that it is reasonably possible that a reporting unit s fair value is less than its carrying amount. c. Formal impairment testing is needed when a company decides that it is highly probable that a reporting unit s fair value is less than its carrying amount. 10

11 CPElite Inc. ON-LINE TESTERS: GO TO CPELITE.COM AND CLICK ON-LINE TESTING QUIZ INSTRUCTIONS AND ANSWER SHEET FALL 2001, ACCOUNTING & AUDITING Latest Recommended Completion Date: Within one year of purchase) There are 10 quiz questions. The quiz questions are on pages 9-10 of the newsletter. Choose the best answer based on the limited facts of each question, and record your answer below. Indicate your responses in the newsletter for your personal records and complete the Newsletter Evaluation below. You must score 70% to receive continuing professional education credit for the newsletter. After you successfully complete the quiz, your quiz results, a complete set of solutions, and a certificate of completion will be mailed to you within 10 working days of our receipt of your answer sheet. The completion date that you specify on your answer sheet below will be the date placed on your certificate. We appreciate your business and hope that you are satisfied with the newsletter ANSWER SHEET 2 HOURS OF CPE: ACCOUNTING & AUDITING DELIVERY METHOD - SELF STUDY Please record your answers below to the quiz questions. Customers should mail to the address below which coincides with the zip code indicated below. FOR NONSUBSCRIBERS, please be sure to include your check for $20 or supply the credit card information below. CUSTOMERS CUSTOMERS WITH ZIP CODES BELOW WITH ZIP CODES ABOVE CPElite CPElite P.O. Box 721 P.O. Box 1059 White Rock, SC Clemson, SC COMPLETE FOR NEWSLETTER CREDIT NAME (Circle Mr./Ms.) [PLEASE PRINT] ADDRESS ADDRESS PHONE NUMBER (Note: We do not share or sell addresses) SIGNATURE COMPLETION DATE PURPOSE OF CPE (Indicate whether credit is for enrolled agent, CPA, CFP, or other purpose. For CPAs and licensed accountants, please indicate the state where you are licensed. For CFPs, please provide either the last four digits of your social security number or your certificant/cfp Board ID number). Please Check Applicable Box New Customer Previous Customer Please complete the credit card information below for VISA [ ] Mastercard [ ] Discover [ ] (check one) Credit Card # Expiration Date NEWSLETTER EVALUATION 1. The stated learning objective was met (Circle Yes or No). 2. The materials were accurate (Circle Yes or No). 3. The materials were relevant and contributed to the achievement of the learning objective (Circle Yes or No). 4. The time allotted to the learning activity was appropriate. (Circle Yes or No). 5. Additional Comments 11

12 CPElite, Inc. In a Class By Yourself ORDER BLANK (Or go to and click Order Now!) The Elite Quarterly Newsletter Ordering Options (On-Line Testers Order at Option Unlimited CPE Option Access for CPE credit to all of our 2011 newsletters and courses: up to 74 hours of CPE credit for a total cost of $160. All 2011 materials must be completed by December 31, 2011, under this option. Option annual subscription to The Elite Quarterly Accounting and Auditing Covers four quarterly 2- hour issues of The Elite Quarterly Accounting and Auditing (also entitles you to a free 2-hour ethics issue for enrolled agents) 10 hrs of CPE (Taxation) for only $70. See page 12 for other newsletter formats. Option 3 Purchase just this newsletter for 2 hours of CPE credit (A&A) for $20. Course Ordering Options (see pages 19-20) - No cost under Option 1 (enter N/C in Amount column below), $10 per hour under Option 2 or 3. We currently offer eight 6-hour courses. Please read the description of our courses on page 20. Indicate the courses you are ordering by entering N/C (Option 1), or $60 (Option 2 or 3) on the appropriate line below. The CPE hours listed are based on 50 minutes of completion time per CPE hour. For questions, call us at , or us at cpeliteinc@aol.com ways to order By mail, by phone or by fax , or by Google at Course Number / Title CPE Hours Cost Per Course Enter Amount [1] INCOME ITEMS/PROPERTY TRANSACTIONS 6 N/C for Option 1, otherwise $60 [2] ABOVE-THE-LINE DEDUCTIONS 6 N/C for Option 1, otherwise $60 [3] ITEMIZED DEDUCTIONS 6 N/C for Option 1, otherwise $60 [4] RATES/CREDITS/SPECIAL ISSUES 6 N/C for Option 1, otherwise $60 [5] PARTNERSHIP TAXATION PART I 6 N/C for Option 1, otherwise $60 [6] PARTNERSHIP TAXATION PART II 6 N/C for Option 1, otherwise $60 [7] S CORPORATION TAXATION PART I 6 N/C for Option 1, otherwise $60 [8] S CORPORATION TAXATION PART II 6 N/C for Option 1, otherwise $60 Delivery Method (please check applicable box) Download Mail TOTAL COST OF COURSES (Sum of the costs on the eight lines above) 2 NEWSLETTER OPTIONS -- Described Above and on Next Page Option 1 Unlimited CPE (Up to74 hours of 2011 CPE): Enter $160 Option 2 Year 2011 subscription Accounting and Auditing (10 hours of CPE): Enter $70 Option 3 Quarterly Newsletter submitted (A&A) as single issue (2 hrs of CPE): Enter $20 3 AMOUNT DUE: Lines (Payable by Check to CPElite Inc. or VISA, MC, Discover below) $ Please Check Applicable Box New Customer Previous Customer Please complete the credit card information below for VISA [ ] Mastercard [ ] Discover [ ] (check one) Credit Card # Expiration Date Name Signature Phone Address To order by mail - CPElite, Inc.. Customers with Zip Codes below Address to P.O. Box 721, White Rock, SC Customers with Zip Codes above Address to P.O. Box 1059, Clemson, SC To order by phone or fax using your Discover, Mastercard, or VISA, call or fax: CPE. Please have your credit card information available. To order on the internet visit our web site at We appreciate your business!