Accountants corner: Update on financial statement standards and developments in the accounting profession

Secured Lender, The, Nov/Dec 2000 by Grusd, Neville

Since the last report which covered pronouncements through FASB 133 (The Secured Lender - March/ April 1999), there have been relatively few new ones particularly any which may be of interest to asset-based lenders. However, the advent of e-commerce will definitely affect accounting rules in the future.

The latest e-commerce topics under review deal mainly with costs incurred in developing Web sites, establishment of data bases, etc. While most asset-based lenders do not consider these items to be collateral, there is the issue of how nonamortized costs should be viewed in relation to evaluating the net worth of the client.

The new pronouncements issued by the Financial Accounting Standards Board (FASB) were:

FASB 134: Accounting for Mortgage-Backed Securities held for sale by a Mortgage-Banking Enterprise.

FASB 135: Recision of FASB 75, Accounting Requirements for Pension Plans of Various State and Local Government Units.

FASB 136: Transfers of Assets to a Not-for-Profit organization.

FASB 137: and 138: Accounting for Derivative Instruments and Hedging Activities (deferral of effective date and amendment of FASB 133).

FASB 139: Financial Reporting by Producers and Distributors of Motion Pictures (amending various prior FASBs on this subject).

Other topics currently in the FASB pipeline include:

Accounting for Obligations Associated with the Retirement of Long-Lived Assets.

Reporting Financial Instruments and Certain Related Assets and Liabilities at Fair Value.

Business Combinations and Intangible Assets.

Accounting for Transfers of Financial Assets (amendment to FASB No. 125).

In addition, the American Institute of CPAs is considering an amendment of existing audit and accounting guides on Accounting by Certain Financial Institutions and Entities that Lend to or Finance the Activities of Others.

The FASB's Emerging Issues Task Force also reviews various topics which may later lead to full pronouncements. Items which may be of interest to lenders include: Issue 98-9: Accounting for Contingent Rent for Retailers, which may be based on future specified sales targets. This would affect both lessors and lessees.

Issue 99-5: Accounting Pre-Production Costs Related to Long-term Supply Arrangements. Costs may be incurred far in advance of actual production, but only after the contract has been received. The issue is whether these costs should be treated as "capitalizable costs," "start-up costs" or "R&D costs" and subject to the accounting rules applicable to those types of costs.

Issue 99-17: Accounting for Advertising Barter Transactions. It is becoming increasingly popular for Internet companies to enter into transactions in which they exchange rights to place advertisements on each other's Web sites. While direct barter transactions have no effect on net income, by raising revenues in these cases a company may artificially inflate its market capitalization, where revenues are the basis for this valuation.

Issue 00-2: Accounting for Web Site Development Costs and Services offered to visitors. The issue is whether these costs should be written off immediately or amortized over a period.

Issue 00-10: Accounting for Shipping and Handling Fees and Costs. Some companies reflect the income as revenues and costs as either cost of goods sold or selling expenses, while others net them out. A consistent approach to the reporting of these items is under consideration.

Issue 00-14: Accounting for Coupons, Rebates and Discounts. The Issue will address the classification of these items, including the accounting for free or heavily discounted products.

Issue 00-20: Accounting for Costs Incurred to Acquire or Originate Information for Database Content and Other Collections of Information. The issue is whether the costs involved in these activities should be capitalized and amortized or expensed as incurred.

Non-CPA ownership

This trend has continued, but at a slower pace than in 1998 and 1999.

H&R Block, which has made no acquisitions this year, is now consolidating the regional firms it acquired previously. The nonattest functions are being merged into RSM McGladrey, while the attest portion of the firms are expected to merge into McGladrey & Pullen. This will make the combined company the seventh largest national firm.

Century Business Services, a public company and a major consolidator of CPA firms, recently reported a steep drop in income for the quarter ended June 30, 2000. Revenues were up 12 percent but earnings per share dropped from 15 cents per share to 2 cents per share. Of this decrease, 4 cents is attributed to a change in the period amortizing goodwill from 40 to 15 years. Maybe the latter period was more realistic from the start.

Non-CPA ownership of CPA firms is now an accepted fact. As the new relationships mature it will be interesting to observe whether they will achieve their objectives for all parties concerned.

Securities & Exchange Commission (SEC) activin.

The SEC has been very aggressive in its efforts to regulate the accounting profession (or is it "industry" today?). Of course its interest is public companies and protection of investors. The AICPA has also been very active in its opposition to SEC proposals. Besides objecting to the SEC's approach to various matters it is also concerned that their "rules" may be applied later to nonpublic entities, and by other bodies that legislate accounting matters.