This week marked a busy week for the Public Company Accounting Oversight Board, with the comment deadline closing on one proposal on April 20, Engagement Quality Review, and issuance of new guidance for auditors on fair value on April 21.
The PCAOB has received and posted 30 comment letters on EQR as of this afternoon, including this comment letter sent by FEI’s Committee on Corporate Reporting (CCR). The letter, signed by CCR chair Arnold Hanish, supports the PCAOB’s efforts to adopt a comprehensive standard on EQR, and commends the PCAOB for proposing a revised standard which “we believe … is better articulated, in a less prescriptive tone, than the Board’s original proposed standard.”
However, the FEI CCR letter also provides two suggestions for the PCAOB to consider in its deliberations toward issuing a final standard: (1) although CCR supports the change from ‘knows or should know’ to ‘due professional care’ in the revised proposal, the intent of that change, says FEI CCR, could be contradicted by wording on p. 24 of the Release; and (2) the documentation requirements in paragraph 19c of the proposal “are too prescriptive and would drive an excessive amount of documentation that is not necessary to further the objective of well-performed EQRs in quality audits.” Read FEI’s comment letter for further details.
Separately, on April 21, PCAOB released Staff Audit Practice Alert No. 4, Auditor Considerations Regarding Fair Value Measurements, Disclosures, and Other-Than-Temporary Impairments. As noted in the related PCAOB press release, “This alert is intended to remind auditors of their responsibilities in conducting reviews of interim financial information and annual audits in light of the new FSPs [FASB Staff Positions No. 157-4, 115-2, and 107-1] related to fair value measurements and other-than-temporary impairments.”
BNA Reports: FASB Developing New Fair Value Disclosure Guidance
In related news on the fair value front, Steve Burkholder reported earlier today, in his article FASB Eyes Third-Quarter Release On Enhanced Disclosures of Fair Value in BNA's Daily Report for Executives that "[FASB] is contemplating a third-quarter release of beefed-up disclosures intended to provide investors and other financial statement users with information on how companies arrive at fair values." The fair value disclosure project was added to FASB's agenda in February, as noted in this press release.
BNA's Burkholder, reporting on the discussion that took place at FASB's educational session earlier this week (FASB holds weekly educational or 'Ed sessions' which are open to the public - but not webcast - at which the board and staff discuss - but do not vote on - certain issues as it works toward developing proposed or final guidance), notes, "A main aim of the disclosures would be shedding light on how firms use what FASB in Statement No. 157 [Fair Value Measurement] labels 'inputs to valuation techniques,' or information factored into measurements of fair value, and the significant, 'reasonably possible' assumptions that underlie such gaugings."
He adds, "In a staff-written update on the disclosure improvements project, the board said that it may consider added footnote reporting requirements. Those might include sensitivity analysis, or 'the sensitivity of fair value measurements to changes in assumptions'... [which] might encompass a range of discount rates keyed to forecast credit losses or losses in loan portfolio values, for example, and perhaps a range that is narrower than a 'best-case, worst-case scenario... Similarly, the disclosures might show how much adjustment was made to observable data in carrying out fair valuations, one participant in the April 22 meeting suggested. On a related note, FASB Chairman Robert Herz spoke about 'a range of adjustments that would have been reasonable.'”
Burkholder reports there was also some discussion at the Ed session about what some constituents view as the 'taint' associated with 'Level 3' inputs, and some apparent frustration among some members of the board and staff (my take on what Burkholder reported) with what some members of the public say (or believe) about 'Level 3.' According to Burkholder:
- FASB Technical Director Russell Golden said at the Ed session: “People view ‘unobservable’ as ‘made-up,' which isn't true.”
- FASB Board Member Tom Linsemeier "cited his concern on seeing the Center for Audit Quality issuing a view that 'any observable price is better than Level 3,' adding, “I don't think that's the case.”
- In response to Linsmeier's comment, FASB Board Member Larry Smith said, "I agree.”
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