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NYSSCPA Wants More Clarification from FASB

February 21, 2012

The New York State Society of CPAs has sent a trio of new comment letters to the Financial Accounting Standards Board asking for clarification on FASB’s proposed standards for investment company accounting, and supporting its new guidance on principal versus agent analysis and proposals for investment properties.

While the NYSSPA said it supported FASB’s Accounting Standards Updates on both investment companies and investment property entities, it expressed concern over the lack of clarity in the investment company guidelines, Financial Services—Investment Companies (Topic 946) Amendments to the Scope, Measurement, and Disclosure Requirements.

“On the whole we were in agreement with the board’s proposal,” said Craig Goodman, a member of the NYSSCPA’s Financial Accounting Standards Committee and one of the letter’s principal drafters. “We did feel that there were some certain aspects that needed additional clarification.”

The comment letter notes that there are portions of the proposal which could result in significant changes, possibly unanticipated, to current industry practice and require additional guidance or clarification should they be implemented without additional clarification.

One of the portions of the update the NYSSCPA would like more clarification on is the proposed amendments requiring an entity to meet six different criteria in order to qualify as an investment company. One of those criteria is that the entity can be, but does not need to be, a legal entity.

“If the reporting entity is not a legal entity and does not have a form of legally defined units or partnership interests, it becomes unclear how such unit ownership is determined and evidenced,” the response letter states.

The NYSSCPA asked the board to provide additional guidance on this and other matters, including having FASB provide a clear definition of what it means by “controlling financial interests” for consolidation purposes in a fund-of-funds structure.

The NYSSCPA does support many of the updated guidelines, including one that would require an entity to reassess whether it is an investment company, if there is a change in the purpose and design of the entity.

In regards to implementing the first set of proposed amendments, the NYSSCPA believes companies should be able to change agreements, obtain required financial statements, modify charts of accounts and put controls in place within one year to 18 months and that the implementation date should be at the beginning of a fiscal year.

The NYSSCPA said it agrees with FASB that early adoption of these amendments should be prohibited in order to allow for consistency of presentation and eliminate the possibility of confusion by an investor in more than one investment company if he or she receives statements on a different basis.

In a separate comment letter sent to the FASB on the proposed ASU, Real Estate—Investment Property Entities (Topic 973), the NYSSCPA also expressed its supports for the update, as it would clarify if an entity is a real estate investment entity.

“The [FASB] asserted that the accounting rules were not being consistently applied,” said NYSSCPA Financial Accounting Standards Committee chair J. Roger Donohue, one of the comment letter’s principal drafters. “The FASB is trying to provide guidance so everyone is on the same page.”

One of the main points the NYSSCPA supports is the requirement that an investment property entity have an “exit strategy” to dispose of its real estate property or properties to realize capital appreciation to maximize total return.

“When you have an investment, you buy it with the intent to sell it at some point down the line,” Donohue said.

The NYSSCPA agrees with the proposed ASU that only entities that meet the criteria of real estate investment property entities be required to measure their investments at fair value.

The NYSSCPA does not believe early adoption would have a negative effect on the implementation of these guidelines, but does feel both ASUs should be implemented at the same time along with the Principal versus Agent proposed amendments that are also currently being reviewed.

Members of the NYSSCPA’s Financial Accounting Standards Committee, Accounting & Auditing Oversight Committee and Investment Companies Committee jointly assessed the proposals. Their response was sent to the FASB on February 10. The open comment period for this proposal closed on February 15.

The NYSSCPA also said it supported the new guidance related to principal versus agent analysis in a Feb. 10 comment letter to FASB. The proposed amendments in the Accounting Standards Update Consolidation (Topic 810): Principal versus Agent Analysis, would affect all companies that are required to evaluate whether they should consolidate another entity and provides criteria for a reporting entity to evaluate whether a decision maker is using its power as a principal or as an agent.

The comment letter notes that all of the factors should be considered, including on a qualitative basis, to determine if the decision maker’s overall function is that of principal or agent.

“It is a qualitative approach to the items that you are looking at,” said Donohue. “You have to look at them all in the aggregate.”

The proposed accounting standards update drafted by the FASB notes the evaluation of a decision maker’s capacity would consider the following factors:

•    The rights held by other parties
•    The compensation to which the decision maker is entitled in accordance with its compensation agreement(s)
•    The decision maker’s exposure to variability of returns from other interests that it holds in the entity.

The NYSSCPA said it agrees with those proposed factors, doesn’t believe that any additional factors are necessary and supports the focus of the FASB to provide guidance for consolidation that would reflect substance over form.

The exposure draft prepared by FASB notes this proposed update would require judgment in determining how to weigh each factor in the overall principal versus agent analysis. The NYSSCPA feels the new proposed guidelines would result in consistent conclusions.

“Given the same facts, we believe that the same decision would be reached in the majority of cases. There is always a certain amount of subjective assessment, but following the guidance in the Update, we do not feel it would significantly affect the final assessment,” the letter stated.

The proposed update also would amend the evaluation of kick-out and participating rights held by non-controlling shareholders in a consolidation analysis. The NYSSCPA does not believe that kick-out rights held by multiple unrelated parties necessarily should be a determinative factor to conclude if the decision maker is functioning as a principal or agent.

The NYSSCPA stated that the effective date for these guidelines to be the annual financial statements of fiscal years beginning after December 15 of the year in which the ASU is issued. The NYSSCPA does not support early adoption in the case of these guidelines because of the far reaching effects of the ASU with respect to the entities involved. The NYSSCPA suggested it would seem more practical to have all the organizations adopt this at the same time.

The open comment period for the exposure draft closed on February 15.

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