Update on Selected Accounting and Auditing Standards  
By Robert Bondy
Community Bank Advisor, 2008 Winter

FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48)

In January 2008, the FASB announced an expanded scope of the one-year implementation deferral of FIN 48 for nonpublic companies, which was first announced in November 2007. When announced, the deferral was effective for nonpublic companies who had not issued interim financial statements. Many banks initially thought they would be eligible for this deferral, however, upon closer examination, they did not qualify because of their quarterly regulatory filings.

This recent update clarifies the scope of the deferral by indicating that nonpublic companies that have not yet issued a full set of annual financial statements to third parties are eligible. For those eligible nonpublic companies, FIN 48 will now be effective for the annual financial reporting period which begins after December 15, 2007. Early adoption is still permitted.

Companies that have not yet implemented FIN 48 should assess and document their tax positions to be ready to adopt this pronouncement for 2008.

FASB Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160)

This statement was issued in December 2007 and establishes consistent reporting standards for reporting minority interests in consolidated financial statements. The new standard addresses accounting, presentation and disclosure issues.

Previously, minority interest was reported on the balance sheet as either a liability, or in the mezzanine section between liabilities and equity. This new standard requires minority interest to be reported as a separate component of equity. This statement also changes the income statement presentation, as previously, income attributable to the minority interest was classified as an expense in the consolidated financial statements. Under SFAS 160, consolidated net income will include all of the income of the subsidiary, with the net income attributable to the minority interest being disclosed separately after net income.

SFAS 160 requires that any changes to the parent’s ownership interest of the subsidiary that do not result in deconsolidation be accounted for as equity transactions. Previously such transactions could either be treated as equity transactions or components of the current year income or loss. If an ownership change results in deconsolidation of the subsidiary, the parent will recognize a gain or loss on the transaction. Any remaining non-controlling equity investment in the entity will need to be valued at fair value as of the transaction date.

This statement is effective for fiscal years beginning after December 15, 2008, and early adoption is not allowed. The statement will be applied prospectively, with the exception of the presentation and disclosure requirements, which will be applied retrospectively for all periods presented.

New Auditing Standards Effective for 2007 Audits

In 2006, the American Institute of Certified Public Accountants (AICPA) issued eight new Statements on Auditing Standards (SASs No. 104-111) which address the auditor’s risk assessment process. The new standards represent significant changes to previously existing audit practices for all entities. These standards were effective for the December 31, 2007 calendar year-end audits.

The new standards include:

• More thorough examination and evaluation of accounting processes and controls, including the overall control environment, key controls over significant transactions, and the quality of internal oversight of the financial reporting process
• Enhanced assessment and documentation of systems and processes that create risks of material misstatement in financial statements, and performance of additional testing in response to these risks
• Better linkage between the assessed risks and the audit procedures performed in response to those risks

In December 2006, the AICPA issued SAS No. 114 — Auditor Communication with Those Charged with Governance. This new standard also became effective for the 2007 calendar year-end audits and focuses on the communications that should take place between an auditor and those charged with governance, including boards of directors or audit committees. This statement replaces SAS No. 61 and retains many of the same required communications, such as discussions regarding:

• The auditors responsibility under U.S. General Accepted Auditing Standards
• Qualitative aspects of accounting practices:
  • Significant accounting estimates
  • Changes in accounting policies and adoption of new pronouncements
  • Significant account policies in controversial or emerging areas
  • Significant risks, exposures, and uncertainties
• Any difficulties encountered in performing the audit
• Corrected and uncorrected misstatements discovered during the audit
• Disagreements with management
• Consultations with other independent accountants

The communication required by SAS 114 is encouraged to be two-way. Those charged with governance should communicate their assessment of risk and any concerns with the auditors.