This week’s GAAP Flash includes articles about Moody’s downgrade of China’s credit rating, a merger of equals business combination, speculation on impacts that technology will have on audit quality, and the FASB’s ASU on service concession arrangements.

Moody’s Cuts Its China Rating for the First Time Since 1989 (May 24, 2017) – Wall Street Journal (@WSJ)

Moody’s expects China’s debt to increase and their economy to slow in the coming years. Due to this expected deterioration in financial strength, Moody’s downgraded China’s sovereign credit rating from Aa3 to A1. This is the first downgrade of China by Moody’s since 1989. China’s ministry responded indicating that Moody’s “overestimated the difficulties in the Chinese economy”. The downgrade could present difficulties for Chinese companies in the global markets in the future when they need to raise new debt or repay existing loans.

How It’s Relevant:

While China’s debt rating has been downgraded, the A1 rating remains investment grade with a “strong payment capacity”. However, the downgrade may still impact Chinese companies as their ratings are often “linked” to China’s credit rating. For example, in the Chinese banking industry, the government owns and controls the banking system so the rating that is given to an individual bank is tied to the country’s rating. As such, Chinese companies may need to look at impairment of their assets – PP&E, goodwill, and financial instruments – as there could be a trickle-down impact stemming from China’s rating downgrade.

Huntsman-Clariant Deal Leads to Accounting Switching (May 22, 2017) – Wall Street Journal (@WSJ)

Huntsman Corporation and Clariant AG announced they have entered into an agreement to combine in a merger of equals through an all-stock transaction with the deal expected to close at the end of this year. Huntsman is a U.S.-based corporation and Clariant is a company in Switzerland. After the deal closes, the new entity, HuntsmanClariant, will file with U.S. Securities and Exchange Committee using IFRS.

How It’s Relevant:

First, remember that under business combination accounting under both ASC Topic 805 and IFRS 3, the companies involved must determine which company is the acquirer and which one is the acquiree. There is no merger accounting guidance. For more information on business combinations accounting under U.S. GAAP versus IFRS, take a look at our previous blog post on ASC 805 vs IFRS 3.

Additionally, transactions like this one highlight the importance for accountants to be “bilingual” in accounting – U.S. GAAP and IFRS. While the FASB and IFRS have worked to reduce differences, they do exist and switching from U.S. GAAP to IFRS will require education and work.

Scoping Out the Audit of the Future (May 22, 2017) – Accounting Today (@AccountingToday)

In this article, a roundtable of experts shared their thoughts on how technology might impact the future audit. Technology innovations such as robotics, blockchain technology, data analytic software, drones, and artificial intelligence, to name a few, are expected to have expanded roles in the future audit. The virtual panel included experts from Crowe Horwath, KPMG, the Center for Audit Quality, RSM, and MaloneBailey.

How It’s Relevant:

Technology has and continues to reshape the practice of accounting, including audit. Auditors need to stay abreast of changes in technology and incorporate technology advancement into the audit profession. I wholeheartedly agree with Frank Casal, vice chair of audit at KPMG, when he stated, “Technology has the potential to improve audit quality through increased precision and enhance the ability of audit professionals.”

FASB Issues Accounting Standards Update on Service Concession Arrangements (May 16, 2017) – Journal of Accountancy (@AICPA_JofA)

On May 16, the Financial Accounting Standards Board issued ASU 2017-10, Service Concession Arrangements. The main provisions of the Update are illustrated by an example - A public-sector entity grantor (government) enters into an arrangement with an operating entity under which the operating entity will provide operation services including general maintenance of a toll road that will be used by third-party users (drivers). The ASU clarifies that the grantor (government), rather than the third-party drivers, is the customer of the operation services in all cases for service concession

arrangements within the scope of Topic 853. Existing U.S. GAAP did not address how an operating entity should determine the customer of the operation services for transactions.

How It’s Relevant:

A service concession arrangement is an arrangement between a grantor and an

operating entity whereby the operating entity will operate the grantor’s infrastructure for a specified period of time. Examples include airports, roads, bridges, tunnels, prisons, and hospitals. The FASB issued ASU 2017-10 to address diversity in practice in how an operating entity determines the customer of the operation services for transactions within the scope of Topic 853, Service Concession Arrangements. 

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