The NYSSCPA recently released a pair of comment letters, one regarding the independence implications of hosting services, and the other on simplifying accounting for goodwill impairment. 

Be More Specific on What Hosting Services Means 

The first comment letter, authored by members of the Society's Professional Ethics Committee, was written in response to a proposed interpretation of AICPA ethics rules. The proposed interpretation takes the position that providing hosting services, that is having custody or control of data or records that the client uses to conduct its operations, creates unacceptable threats to independence that cannot be reduced to an acceptable level through the use of safeguards, therefore impairing independence. 

So, under this proposed interpretation, doing things like acting as the attest client's business continuity or disaster recovery provider, housing the production environment of the attest client's system on the member's firm's servers, or keeping attest client data or records in the member's firm's office for safekeeping, would be an unacceptable threat to independence. 

However, not all instances of hosting services would represent an independent threat. Retaining a copy of an attest client's data or records as documentation to support a service provided (like payroll data supporting a payroll tax return) would not be unacceptable. Neither would retaining a copy of a work product that the member was engaged to prepare, like a tax return, nor would licensing to an attest client to use software into which attest clients input their data and software provides the attest client with an output that they are responsible for maintaining. Also allowed would be electronically exchanging data or records with, or on behalf of, an attest client as long as the member hasn't been engaged to retain custody or control of those data or records on the client's behalf. 

The Society, in its comment letter, generally agreed with the proposed interpretation, but expressed concern that some of the terms might confuse members. For example, it said that people may confuse "hosting services" with solely providing a client with cloud services. 

"Accordingly, we suggest that the PEEC consider amending the name of the Proposed Interpretation to something along the lines of, 'Maintaining Custody and Control over Client Data and Records,'" said the Society.

Similarly, it felt that the terms "production environment" and "exchanging data" were not widely understood by members. It suggested clarifying the meaning of these phrases as they relate to the proposal. 

Finally, it said the effective date should be six months from the last day of the month in which is it published in the Journal of Accountancy, which is an AICPA publication. 

Overall, the Society pointed out that this is a wide-ranging proposal that can potentially affect many small and medium firms, and so it said there should be guidance on what to do in certain real world situations, such as: 

* Understanding the implications to the firm’s independence after the effective date of the interpretation, when a member’s firm has previously been providing data entry services and maintaining the client’s general ledger on their servers before the interpretation’s effective date. 

* Addressing the impact to a firm’s independence when it maintains its attest client’s books using the income tax basis of accounting, and maintains the client’s depreciation schedule on its server using the firm’s tax software to compute depreciation expense.   

* Describing the independence implications, if any, when a member’s firm establishes an affiliated entity to provide hosting services, as defined in the Proposed Interpretation, to the firm’s attest clients.  

* Understanding the implications to a firm’s independence, if any, when a firm provides cloud services to an attest client, where the client’s management has control over the data stored in the cloud.  

* Addressing the independence implications when a firm or member develops the software used by an attest client and then reviews the software to determine whether the client’s systems were properly processing transactions.

"We believe that each of the above situations results in an impairment of independence. However, we also recognize that firms may struggle with these questions and believe that the PEEC should address these issues upon final issuance of the Interpretation." 

Goodwill Accounting Simplification a Positive Step 

The second comment letter, authored by members of the Society's Financial Accounting Standards Committee, was written in response to the FASB's Proposed Accounting Standards Update—Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The proposal would provide a private company accounting alternative for measuring subsequent goodwill, in response to concerns voiced by private companies and their stakeholders about the cost and complexity of the current goodwill impairment test. 

The current test involves, among other measures, determining the implied fair value of goodwill and comparing it with the carrying amount of that goodwill. To do this calculation, an entity must perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in a purchase price allocation for an acquired business. 

The proposed alternative would let entities perform goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount. The entity generally would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, though this should not exceed the carrying amount of goodwill allocated to that reporting unit. The entity, though, would still have the option to perform the qualitative assessment for a reporting unit to determine whether the quantitative impairment test is even necessary. 

Further, under the proposal, there would be no requirement to perform a qualitative assessment for any reporting unit with zero or negative carrying amount and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. This means that the same impairment assessment would apply to all reporting units. In this case, an entity would be required to disclose the existence of any reporting units with zero or negative carrying amounts, and the amount of goodwill allocated to those reporting units. 

The Society generally agreed with this proposed simplification, as "the application of Step 2 requires the determination of 'implied fair value,' which is not consistent with the original measurement or the attributes of goodwill." Further, it noted that entities performing the current test often need to hire outside valuation specialists to determine fair values in reporting units where goodwill is material. 

It also agreed with the idea that the same impairment assessment be applied to all reporting units, including those with zero or negative carrying amounts. 

"Currently and under the proposal, the parent company would not have to recognize goodwill impairment of reporting units whose zero fair value exceeds its negative carrying value. This conclusion is counterintuitive because a reporting unit with minimal or zero fair value would not seem to have future economic benefits; hence, goodwill should be impaired. We recommend that the proposal present a rebuttable presumption that goodwill is fully impaired in instances when a reporting unit has both zero fair value and zero or negative carrying value. This presumption should be supported by verifiable facts and circumstances," said the Society. 

It did, however, express some concern that allowing entities to evaluate impairment at the entity level, versus the reporting unit level, might cause some confusion over exactly which entity level, such as the case of a parent and a subsidiary, is being used as the basis for evaluating that impairment. 

"Specifically, reporting companies evaluating goodwill impairment could interpret the entity level to be the ultimate parent organization. Theoretically, goodwill that is clearly impaired at the subsidiary/reporting unit level might not be deemed impaired at the reporting company (i.e., parent level)," said the Society. 

The Society suggested that the FASB clarify just how broadly the entity level should be extended in evaluating goodwill impairment.