This week’s issue features potential changes to step 2 of the goodwill impairment test under ASC 350, Brexit and hedging under ASC 815, the unconstitutionality of the Consumer Financial Protection Bureau, and earnings management under both IFRS and U.S. GAAP.

Consumer Financial Protection Bureau Structure Ruled Unconstitutional (October 11, 2016) – USA Today (@USATODAY)

The Dodd-Frank Wall Street Reform and Consumer Protection Act (The Dodd-Frank Act) introduces a total of 398 total rule-makings aimed at protecting the U.S. Financial System and preventing another collapse like the one we saw in 2008. One of those rules created the Consumer Financial Protection Bureau (CFPB). According to the CFPB’s website, the organization aims to “make consumer financial markets work for consumers, responsible providers, and the economy as a whole. It protects consumers from unfair, deceptive, or abusive practices and takes action against companies that break the law. It arms people with the information, steps, and tools that they need to make smart financial decisions.”

This sounds like a great organization, right? Well, not so fast! There is one small problem. On Tuesday, a federal appeals court found the CFPB to be unconstitutional. Why? Because, the agency is led by a single director who is appointed by the president and is only removable for good cause. According to the court, this violates historical and constitutional precedents for federal regulators.

How It’s Relevant:

The CFPB, although a new organization, has a large role to play in the U.S. financial system. It has the power to enforce federal consumer financial laws and hold financial service providers accountable for their actions. It can do this in a variety of ways – warning letters, enforcement actions, fines and penalties, or even by actually shutting the business down! This is a lot of power for a presidential appointment (who cannot be removed without good cause) to hold.

While it sounds like the court’s finding marks a major setback for one of the most pervasive legislative overhauls to hit the financial markets, don’t get too upset (or too excited). It’s not all bad news for the CFPB. While the courts did find the CFPB to be unconstitutional in its structure, the courts did not dismantle the CFPB. Instead, they ruled to require an amendment to the statute that created the CFPB to specify that the president should have the power to remove the director at will.

Earnings Management Just as Bad under IFRS as U.S. GAAP (October 6, 2016) – Accounting Today (@AccountingToday)

This article discusses an academic study, originally released in September 2015, that studied public and private, large and small entities across the United States, Europe, and Asia. It found that earnings management is used to approximately the same degree across all companies – large or small, public or private, IFRS or U.S. GAAP.

How It’s Relevant:

We’ve published plenty of posts in the past regarding the recent rise in non-GAAP measures and the scrutiny that the SEC has placed on these measures. You can check out this post where we talked about a report that found that U.S. companies used non-GAAP measures to overstate their income by more than $164 billion! While U.S. companies certainly have the flashy “non-GAAP” term to throw around, it’s important to remember that U.S. GAAP is not the only Generally Accepted Accounting Principle (or GAAP). IFRS is also a form of GAAP and it allows for a lot more judgment and discretion. The regulatory environment is also a bit more relaxed than that of the U.S. So, while IFRS preparers may not be getting all the press and attention of their U.S. GAAP counterparts, it’s important to remember that using accounting as a tool for earnings management is a pervasive issue!

FASB Drops “Step 2” of Goodwill Impairment Testing (October 12, 2016) – Compliance Week (@complianceweek)

At its May 2016 meeting, the Financial Accounting Standards Board (FASB) decided to eliminate the second step of the goodwill impairment test. Step 2 of the goodwill impairment test has always been a complex process involving determining the fair value of the reporting unit as if it were acquired in a hypothetical business combination. Also, this was a difference between IFRS and U.S. GAAP as this step does not exist within IAS 36. Finally, the FASB recently did away with this step for private companies as part of its Private Company Council initiative.

How It’s Relevant:

Companies everywhere can rejoice…once this update is finalized, anyway. U.S. GAAP has a stringent, multi-step process in place when it comes to testing goodwill for impairment. First of all, entities have the option to perform a qualitative assessment to determine whether or not goodwill is more-likely-than-not impaired. If an entity elects not to perform the qualitative assessment, or fails the qualitative assessment, the entity continues to step one. Step one of the impairment test has the entity compare the carrying value of the reporting unit to its fair value. This is the only step of the IFRS impairment test. If the entity fails step one, then the company must measure the amount of impairment for goodwill by performing a full-on fair valuation of the reporting unit as if it were acquired in a business combination, including recognizing internally generated intangibles, etc. This also means that the impairment amounts computed under IFRS and U.S. GAAP will likely differ. If the FASB goes through with eliminating step 2, not only will it save companies a lot of time and money, it will also align U.S. GAAP more closely with IFRS!

Pound’s Tumble both Helps and Hurts Multinationals (October 10, 2016) – The Wall Street Journal (@wsj)

According to this article, while many believe that the falling British Pound since the Brexit vote has been benefitting the UK economy, it’s not that simple. While the impact of the weaker currency has been balanced out by fluctuations in other currencies, many companies are having to rethink their hedging strategies. For instance, Sports Direct International PLC recently announced that it has entered into a U.S. dollar/pound hedging strategy that would cut its 2017 results by $18.3 million.

How It’s Relevant:

At first, the impact of Brexit seemed uncertain, but the fallout is starting to make itself evident. Multinational companies need to remain aware of the impact of Brexit on the global economy, especially as it relates to foreign exchange rates. Many companies, like Sports Direct International PLC, hedge their foreign currency risk. With the turmoil in the foreign currency markets, are those hedged relationships still effective? Are companies still following the strict rules to be able to apply hedge accounting? If not, the impact on their P&L can be severe!

Another impact of tumultuous exchange rates? Impacts on foreign currency translation and transaction accounting. Want a reminder of accounting for foreign currency transaction and translation? Check out our blog posts here and here.