New Audit and Reporting Standards Issued
Dennis Gardiner, Managing Partner
Our team members stay busy throughout the year completing the audit work and reports for you. Along with staying on task, we have had a few new audit (AICPA) and reporting (FASB) standards to learn about and interpret as we ready ourselves for the upcoming audit season. Here are the changes for this season:
New Audit Standards – effective with December 31, 2023 audits
SAS No. 143 Auditing Accounting Estimates and Related Disclosure outlines the responsibilities of auditors regarding accounting estimates and the associated disclosures during a financial statement audit. This standard helps auditors handle the challenges posed by the growing complexity of scenarios arising from new accounting standards that involve estimates. SAS No. 143 is part of a broader initiative to enhance audit quality and helps auditors adapt to new accounting standards while focusing on factors influencing estimation uncertainty and potential bias.
SAS No. 144 offers guidance on utilizing pricing information from pricing services while assessing management's estimates concerning the fair value of financial instruments. Additionally, enhancements have been made to the guidance when utilizing an auditor's specialist's work.
SAS No. 145 New Risk Assessment Standard, was issued to address global deficiencies in auditor risk assessment procedures. Key changes include enhanced requirements and guidance on understanding the entity's internal control system, assessing control risk, and considering economic, technological, and regulatory factors. The standard introduces revised and new requirements, such as redefining significant risk, evaluating specific controls, separate assessments of inherent and control risk, and a "stand-back" requirement for completeness in identifying significant transactions, balances, and disclosures. These modifications aim to bolster the auditor's risk assessment approach and improve the overall audit process.
New Reporting Standards
FASB ASU 2023-09 is to enhance the transparency and utility of income tax disclosures to better comprehend an entity's operations, associated tax risks, and tax planning impact on its tax rate and future cash flow prospects. Effective for December 31, 2026 audits, early adoption permitted.
FASB ASU 2023-05 focuses on improving the accounting treatment of contributions made to a joint venture at its formation, particularly in the joint venture's separate financial statements. The main goals are to offer decision-useful information to investors and capital allocators and to reduce diversity in accounting practices. Currently, GAAP lacks specific guidance on recognizing and initially measuring assets contributed and liabilities assumed during a joint venture's formation. This has resulted in varied practices. To address this diversity and enhance investor information, a new accounting basis has been mandated for joint ventures. Under this basis, joint ventures will recognize and initially measure assets and liabilities at fair value, aligning with business combinations guidance to ensure consistency in reporting across joint ventures. Effective for joint ventures formed on or after January 1, 2025, early adoption permitted.
FASB ASU 2023-01 requires entities toassess whether a related party arrangement among entities under common control, known as a common control arrangement, qualifies as a lease. If confirmed, the entity must classify and account for the lease as it would for an arrangement with an unrelated party, based on legally enforceable terms and conditions. This marks a departure from Topic 840, where entities considered the economic substance of an arrangement influenced by related party nature. The shift in Topic 842 emphasizes a consistent treatment for leases, irrespective of related party involvement, prioritizing legally enforceable terms and conditions over economic substance. Effective for December 31, 2024 audits, early adoption permitted.
You are likely to sense additional inquiries from our team members as they work through the necessary documentation for the audit standards. The reporting standards will kick in as the year(s) passes. Much like your businesses, there are changes all around what we do.