value) after all acquired assets and liabilities
have been valued (if the acquisition cost is
less than fair values, there is an immediate
gain that is treated as part of continuing or
normal operations). Goodwill no longer is
amortized, and is subject to annual impairment tests for loss of value. If there is a forecast of lower growth, for example, and after
subjectively considering risk and long- versus
short-term projection periods for the unit,
the impairment estimate may be affected,
and adjustments can become volatile from
period to period. This may actually serve
managerial plans and earnings targets.
Critics suggest that reliability, because of
illiquid market information and subjective
cash-flow models, is in question, and the
impact on earnings may be serious enough
to require auditors to achieve some satisfaction through alternative means, such as using
market multiples and price-earnings ratios of
An acquiring company does not have to
determine fair value on the specific acquisition date. Temporary or provisional values
may be used, and adjusted to fair value during a measurement period, which generally
would not exceed one year from date of acquisition. Changes after the measurement
period would be reported as part of income.
Another intangible that may be created in
als. Thus, tested content rightfully lags behind cutting-edge practice, instead of leading
it. For example, the exam covers published
standards, instead of future standards that
might be published. However, we find in this
case that institute officials imprudently used
the exam as another lever in their campaign
to push adoption. In effect, this policy treats
today’s candidates as expendable pawns in a
much bigger game.
Furthermore, based on what we’ve learned,
this decision was foisted on state boards,
many of which are definitely uncomfortable
with and skeptical about the propriety and/or
usefulness of making IFRS part of the tested
knowledge when those standards are not now
in use and probably won’t be anytime soon,
if at all. Their current position is an uneasy
resignation to “wait and see” whether these
test items negatively impact exam success.
This situation is just plain wrong.
GUIDANCE, WHAT GUIDANCE?
In light of growing evidence that adoption is a
dead-end idea that isn’t going to happen any-
a business combination is the acquisition of
in-process research and development.
time soon (or later, for that matter), fairness
demands providing candidates with specific
guidance on what they need to know to succeed on the test.
Unfortunately, the AICPA is not sending
them helpful messages. To wit, the January
2011 Content Specification Outline offers
only this vague advice: “Candidates will be
expected to ... identify and understand the
differences between financial statements
prepared on the basis of accounting princi-
ples generally accepted in the United States
of America and International Financial Re-
porting Standards.” Elsewhere, candidates are
directed to a May 2010 newsletter that offers
these fuzzy and unhelpful words: “Questions
on international standards will begin to be
Summing up, the AICPA is essentially
warning candidates that anything about IFRS
is fair game for the exam, so they should learn
everything but expect only a few questions. In
other words, these innocent victims are sup-
posed to spend hours and hours mastering
material that will only slightly be tested.
That treatment is inexcusable. We fully
expect appeals and protests, and wonder
whether the institute and the state boards will
When buyer and seller cannot agree on a
price, they may agree on the issuance of stock
in the future by charging additional paid-in
capital and crediting common stock at par
value for the additional shares issued at that
later time; or they may agree to additional
payment in the future, contingent upon levels
of future earnings — called an earnout. This
contingency is not the same as pre-acquisi-
tion contingencies, described above.
AUDITING FAIR VALUE
Auditing is the process of gathering evidence
that enables the formation of an opinion on
the fairness of management’s representations. During fieldwork, through questionnaires and observations, the independent
auditor will assess the risk of material misstatement of financial statements.
Informational efficiency includes reliability of both developed data and relevant
market information. Physical inspections to
assess the condition of property may be rel-be open to litigation from those who fail the
test because they missed IFRS questions.
SO, WHY CONTINUE PUSHING IFRS?
According to all we know, the non-vergence
pipedream is still alive at the institute. For
example, we understand Council members
at the October 2010 meeting heard more of
the same line that adoption is inevitable and
good for accountants.
We’ve done our part by publishing a lot
about the futility of adoption and have personally administered reverse indoctrinations to many academic and professional
colleagues. We’re trying now to extend our
reach to others who haven’t yet seen through
the misleading messages.
But, more than that, we’re writing to confront those in the institute’s high offices with
the fact that they picked the wrong issue and
that it’s time to put it down and back away
from it quickly.
As a nail in the coffin, those attending the
SEC/PCAOB/AICPA conference in December
2010 heard SEC chair Mary Schapiro explain
that there is no easy road to adopting IFRS
and that the transition period would be “a
minimum of four years” after the commis-
evant to valuation — although auditors are
not appraisers of value. Any source of market
information should be timely and coincide
with the date of measurement. The choice
of interest rates also affects cash flow and
the measurement outcome. Any audit of fair
value must also consider if data is routine or
unusual in nature; if the company used out-
side service organizations that are qualified
and comply with stated objectives effectively;
if the technology used was efficient; and if
the computer science, math models, and un-
derlying accounting and finance theory all
produce a result in compliance with GAAP.
Auditors must remember that uncertainty
increases as the forecast period increases
and objective data decreases. Disclosures are
necessary to inform users of uncertainty. If
internal control is limited, risk increases and
fair value measurement becomes more complex. Be aware of management interference
with controls. Management’s written representations and assumptions must be reasonable and express intent of proper actions and
valuations that lead to financial statements
that are not materially misstated.
Auditors of fair value measurement in
fieldwork are not responsible for predicting
the future, but they must use a similar approach to auditing that would be used when
evaluating risk and auditing estimates in
sion’s decision to adopt, if that choice is ever
made. Of course, four years is a political lifetime to those in the federal government. The
institute’s managers need to realize adoption
isn’t going to occur for a long time, if at all.
WILL THEY QUIT?
Part of us hopes that reason and integrity will
win out. We urge AICPA management to publicly acknowledge its mistake and move on
to more worthy efforts, notably helping the
profession gain the position of higher trust
that Schapiro challenged us to achieve (that’s
another column coming soon). The most visible action would be to immediately rescind
the decision to put IFRS on the CPA Exam.
Failing that, the scope of the testing should
be drastically limited. Either move would take
innocent lambs off the sacrificial altar. They
didn’t deserve to be put there in the first place,
and there is no valid justification for leaving
them exposed to near-certain failure.
On the other hand, another part of us realizes that those in the high offices may not
want to publicly admit they made mistakes.
If that’s the case, pity the out-of-luck new accounting professionals that the AICPA management has thrown under the bus. AT