This week’s GAAP Flash includes articles about income taxes, compilation and review, foreign corrupt practices act (FCPA) violations, and internal audit (IA) compensation.

FASB Issues Accounting Standards Update 2016-16—Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory(October 24, 2016) – FASB Latest News (@FAFNorwalk)

The ASU removes part of one of the exceptions to current and deferred tax recognition under ASC Topic 740. Remember, U.S. GAAP requires an entity to recognize current taxes and deferred taxes on all temporary differences unless a specific exception applies. The exception in question prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset is sold to a third party outside of the group.

This ASU essentially modifies the exception so that going forward it will only apply to inventory. Current and deferred taxes will now be recognized (once the ASU is effective) on all non-inventory intra-entity asset transfers. Effective date is for annual periods beginning after December 15, 2017 (public entities) and December 15, 2018 (all other entities). Early adoption is permitted as of the beginning of an annual reporting period for which financial statements have not been issued or made available for issuance.

How It’s Relevant:

This amendment eliminates an area with little authoritative guidance, thereby causing divergent interpretations to develop in practice and creating complexity in financial reporting. Stakeholders submitted this to the FASB as part of the “Simplification Initiative” which seeks to amend U.S. GAAP to eliminate areas that require undue cost or effort without providing significant useful information to the users of the financial statements. The FASB believes the most common assets that will be part of the scope of this ASU are intellectual property and property, plant and equipment. So, why didn’t the FASB extend the amendment to inventory? The FASB believes that requiring the recognition of current and deferred taxes on intra-entity inventory transfers might actually increase cost and complexity for some entities since the volume of transactions can be quite large and the items are usually sold outside of the group within relatively short timeframes.

SSARS 23 Expands Application of Preparation, Compilation Standards (October 25, 2016) – Journal of Accountancy (@AICPA_JofA)

SSARS 23, Omnibus Statement on Standards for Accounting and Review Services – 2016 extends the scope and applicability of the SSARS to engagements performed on certain areas other than the financial statements. Under the new guidance, AR-C Section 70, Preparation of Financial Statements will apply to prospective financial information. SSARS 23 also specifically clarifies when that section applies, when it may be applied, and when it does not apply. In addition, AR-C Section 80, Compilation Engagements will apply to compilations of prospective financial information, pro forma financial information, and other historical financial information.

How It’s Relevant:

SSARS 23 is short and sweet, but if you have engagements involving areas outside the financial statements, specifically prospective financial information, pro forma financial information, and other historical financial information, it will likely have an impact on you. In addition to the key changes mentioned, this new standard also makes a few other changes to AR-C Sections 60, 70, 80, and 90.

Embraer Paying $205 Million to Settle FCPA Charges Paying $205 Million to Settle FCPA Charges (October 24, 2016) – SEC Press Release (@SEC)

Aircraft manufacturer Embraer S.A. has to pay more than $205 million to settle alleged violations of the Foreign Corrupt Practices Act (FCPA). According to the allegations, Embraer made illicit payments to officials in the Dominican Republic ($3.52 million), Saudi Arabia ($1.65 million), and Mozambique ($800,000) to secure various contracts mostly related to the sale of military aircraft. In addition, approximately $5.76 million was paid to an agent in India related to the sale of specialized military aircraft for India’s air force. From these bribes, Embraer secured contracts and realized “significant” revenues. The bribes were paid through third parties in an attempt to mask the transactions. Part of the settlement is a penalty to the Justice Department, and part is disgorgement and interest to the SEC. In addition, Embraer is facing civil proceedings in Brazil.

How It’s Relevant:

Enforcement of the FCPA continues to be a high priority for the SEC. Enacted in 1977, the FCPA generally prohibits the payment of bribes to foreign officials to assist in obtaining or retaining business. The FCPA can apply to prohibited conduct anywhere in the world and extends to publicly traded companies and their officers, directors, employees, stockholders, and agents. Agents can include third party agents, consultants, distributors, joint-venture partners, and others.

The FCPA also requires issuers to maintain accurate books and records and have a system of internal controls sufficient to, among other things, provide reasonable assurances that transactions are executed and assets are accessed and accounted for in accordance with management's authorization. Want to test your knowledge of the FCPA? Check out our quick quiz, Shades of Gray with the FCPA.

Internal Audit Chiefs Gain in Clout, Compensation (October 24, 2016) – CFO Journal (@CFOJournal)

Let’s end this post on a good note, at least for the auditors out there. There has been increasing concern over cyberattacks, regulatory compliance, and personal liability of board members and executives. To combat these issues, the internal audit function, and particularly the head of internal audit, are seeing increasing authority, responsibility, and, thus, compensation. Even the reporting structure is changing, with more heads of internal audit reporting directly to the CEO and even the board of directors. Some companies have elevated the head of internal audit to a “C” role, such as the “Chief Audit Executive”. Pay packages for a CAE of a large company can now approach $1 million, which is up about 30% over the last decade!

How It’s Relevant:

The internal audit function has traditionally been an important, but not always widely recognized, aspect of a company’s control, risk management, and governance process. This vital role is finally seeing the spotlight, which is translating into higher compensation and greater authority within organizations.