In this section, we provide brief updates on regulatory developments in auditing and accounting that may impact Japanese companies in the United States. Further discussion of the issues can be found in KPMG's Department of Professional Practice's Defining Issues.
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On August 7, 2013, the FASB proposed FASB ASU that would create a single definition of a public business entity to be used throughout U.S. GAAP, and would identify the types of entities that would be excluded from the scope of the Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies (the Guide) once the Guide is issued in final form. The definition in the proposed ASU would be used by the FASB, the Private Company Council, and the Emerging Issues Task Force when developing the scope of future accounting and reporting guidance. The proposal would be effective with the first ASU that uses the definition of public business entity.
On July 30, 2013, the SEC released the final amendments to its broker-dealer reporting rule aimed at strengthening independent audit requirements and enhancing oversight of broker-dealer custody practices. While the amendments will have a significant effect on broker-dealers that maintain custody of customers' assets, all broker-dealers will be affected to some extent.
Beginning with fiscal years ending on or after June 1, 2014, broker-dealers will be required to file one of two new reports – a Compliance Report or an Exemption Report – in addition to annual audited financial statements and supplemental schedules currently required by SEC rules. The supplemental report on internal control no longer will be required. Further, to facilitate the regulatory examination process, the final amendments require that a clearing and carrying broker-dealer give its consent for its independent accountant to give the SEC and its designated examining authority access to audit documentation supporting reports under Rule 17a-5 and to discuss related findings with its respective examination staffs. In this regard, broker-dealers must file an appointment letter of an independent registered public accounting firm by December 10, 2013, including representations about allowing access to the broker-dealer's independent accountant and the audit documentation. Finally, beginning with quarters ended on or after December 31, 2013, all clearing and carrying broker-dealers will be required to file a new form (Form Custody) that contains information about whether the broker-dealer maintains custody of customer and non-customer assets and, if so, how the assets are maintained.
The PCAOB proposed two new auditing standards that are intended to enhance the auditor's reporting model to make the auditor's report more relevant to investors. The proposed standards would require: (1) communication in the auditor's report of critical audit matters; (2) the addition of new elements to, and enhance some standardized language in, the auditor's report; and (3) performance of additional procedures related to other information outside the financial statements in annual reports (i.e., Form 10-K). The proposed effective date for the new standards and related amendments, subject to SEC approval, would be for audits of financial statements for fiscal years beginning on or after December 15, 2015.
On August 22, 2013, the FASB and Private Company Council (PCC) issued for public comment a proposal that would give private companies that issue U.S. GAAP financial statements the alternative to not apply variable interest entity (VIE) consolidation guidance to certain common control leasing arrangements. If approved, it would be easier for private company lessees to enter into off-balance-sheet leasing arrangements with affiliates.
As proposed, this guidance would apply to all entities except public business entities, not-for-profit entities, and employee benefit plans subject to specific plan accounting guidance.
In its September 13 meeting of the FASB's Emerging Issues Task Force (EITF), the Task Force discussed three issues and reached two Consensuses-for-Exposure about determining whether a performance target that can be met after the requisite service period is a performance condition or a condition that affects the grant-date fair value of the awards, and determining whether the host contract in a hybrid financial instrument is more akin to debt or to equity.
In their September 2013 joint meeting, the FASB reached tentative decisions about the proposed standard on financial instrument impairment and the FASB and IASB reached tentative decisions about the proposed standard on classification and measurement. Tentative decisions reached about impairment relate to the measurement of expected credit losses, the time value of money principle, and application guidance when assessing the future to develop forecasts. Tentative decisions about classification and measurement relate to the solely principal and interest condition, specifically, the meaning of principal, the meaning of interest, and prepayment and other contingent features.
The SEC issued for comment proposed rules that would require issuers to disclose (1) the median total annual compensation of all employees excluding the CEO, (2) the annual total compensation of the CEO, and (3) the ratio of the median of the annual total compensation of all employees to the CEO's annual total compensation.
As proposed, these rules would apply to all issuers, except for emerging growth companies, smaller reporting companies, and foreign private issuers, and would apply to filings that require disclosures about executive compensation (e.g., annual reports on Form 10-K and proxy statements).
The FASB reversed its previous decision made in May 2013 and tentatively decided to require repurchase-to-maturity agreements (repos-to-maturity) to be accounted for as secured borrowings. The FASB also reached tentative decisions about the meaning of substantially the same, repurchase financings, and new disclosures.
On August 28, 2013, the federal regulators re-proposed for comment risk retention rules for asset-backed securitizations (ABS). Generally, the revised proposal would require the sponsor of financial assets to retain an economic interest equal to at least 5% of the aggregate credit risk of the ABS issued unless certain exceptions are met.
The revised risk retention proposal addresses concerns that constituents raised about the proposed rule issued in 2011, including modifying: the definition of qualified residential mortgage, the measurement of credit risk retention, the risk retention options, and the expiration periods on risk transfer restrictions.