Following are a few important issues our accounting professionals wanted to briefly share with you. As always, should you desire more in-depth information please feel free to contact us.
PCAOB PROPOSES NEW AUDIT REPORTING STANDARDS
The Public Company Accounting Oversight Board (PCAOB) has proposed for public comment a new auditing standard that would increase the amount of information auditors would be required to include in audit reports.
The proposed standard would retain the pass/fail model in the existing auditor’s report, but would provide additional information to investors and other financial statement users about the audit and the auditor.
The proposed auditor reporting standard would require:
- the communication of critical audit matters as determined by the auditor;
- the addition of new elements to the auditor’s report related to auditor independence, auditor tenure, and the auditor’s responsibilities for, and the results of, the auditor’s evaluation of other information outside the financial statements; and
- enhancements to existing language in the auditor’s report related to the auditor’s responsibilities for fraud and notes to the financial statements.
Additionally, the PCAOB proposed a new related auditing standard on the auditor’s responsibilities for other information in an annual report. This proposed new standard describes the scope of “other information” and procedures the auditor is required to perform, including procedures when the auditor identifies a material inconsistency between the other information and the audited financial statements, a material misstatement of fact, or both.
The new proposals would create a significant change in the reporting model and the proposals are certain to generate much discussion within the profession.
The PCAOB will continue to seek public comment on the proposed standards and related amendments until December 11, 2013. If adopted, the new standards would be effective for audits of financial statements for fiscal years after December 15, 2015.
CHANGES TO LEASE ACCOUNTING RULES CONSIDERED
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) set accounting rules — the former for the United States, the latter for most of the rest of the world.
Last May, a revised Exposure Draft was jointly released by these two boards. With the public comment period now closed, a final rule could come in 2014 with effective implementation by 2017.
The existing accounting models for leases require lessees and lessors to classify their leases as either capital leases or operating leases and account for those leases differently. Those models have been criticized for failing to meet the needs of users of financial statements because they do not always provide a faithful representation of leasing transactions. In particular, they do not require lessees to recognize assets and liabilities arising from operating leases.
The proposed change would require a lessee to recognize assets and liabilities for leases with a maximum possible term of more than 12 months. A lessee would recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the leased asset (the underlying asset) for the lease term. Leases would be classified as Type A or B determining the method and term of reporting revenue and expense.
In addition, the Boards determined that retaining the existing lease accounting models for lessors would be inconsistent with the proposed approach to lessee accounting so several lessor accounting changes are also proposed in this Exposure Draft.
The proposed rules would change the way affected companies account for lease costs in calculating earnings, add debt to their balance sheets, and require some companies to revise their debt agreements with lenders. Although almost any entity that enters into a lease with a term over 12-months would be affected, most impacted would be lessees such as multi-location retailers and restaurant chains, and lessors such as real estate companies.
The vote to release this Exposure Draft barely made it through the FASB on a 4-3 vote. One of the proposal’s supporters, FASB Chairman Leslie Seidman, retired at the end of June. It is not clear if her replacement, Jim Kroeker, will support the proposal. In the meantime a coalition of over 30 industry associations has submitted a comment letter in opposition.
IRS TO INCREASE AUDITS OF PRIOR AND SUBSEQUENT – YEAR TAX RETURNS
According to a new government report from Treasury Inspector General for Tax Administration (TIGTA), the IRS needs to strengthen its correspondence audit selection process by auditing more of the prior and subsequent year tax returns of noncompliant income tax filers.
The report by TIGTA noted that the IRS relies heavily on the correspondence audit process, which is more economical than other types of audits. In fiscal year 2012, the IRS conducted 1.1 million correspondence audits and recommended approximately $9.2 billion in additional taxes.
For its report, TIGTA set out to determine the effectiveness of filing checks made during the correspondence audit process in the IRS’s Small Business/Self-Employed Division. Filing checks are used to determine whether the same pattern of noncompliance identified on an audited tax return is present on the prior and subsequent year tax returns.
Using a statistical sample of single year correspondence audits in which the taxpayers had agreed that they understated their tax liabilities by at least $4,000, TIGTA found that similar tax issues also existed on prior and or subsequent year tax returns in over 40% of the sampled taxpayers. Of those tax returns whose prior and subsequent returns were not audited, the avoided additional assessments ranged from $2,300 to almost $19,000.
TIGTA recommended that the IRS develop and implement procedures that instruct its auditors how they should use current-year correspondence audit results when deciding whether the prior or subsequent year tax returns also warrant an audit. They also recommended monitoring how well current year correspondence audit results are used in deciding to audit prior and/or subsequent-year tax returns.
The IRS agreed with TIGTA’s recommendation and plans to develop an Internal Revenue Manual section to address the case selection and delivery process, in addition to the duties and roles of IRS analysts and examiners with regards to the selection of prior and subsequent year audits.
ALL LEGAL SAME-SEX MARRIAGES WILL BE RECOGNIZED FOR FEDERAL TAX PURPOSES
The U.S. Department of the Treasury and the Internal Revenue Service (IRS) just ruled that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.
The ruling implements federal tax aspects of the June 26th Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act.
Under the ruling, same sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA, and claiming the earned income tax credit or child tax credit.
Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory, or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions, or similar formal relationships recognized under state law.
Individuals who were in same-sex marriages may, but are not required to, file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations.
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