Public Hearing on
SSARS no. 1

T he controversial issue of so-called plain-paper financial statements— "plain" because CPAs do not have to put their names on them—is being reconsidered at a public hearing. The American Institute of CPAs accounting and review services committee will hold a public hearing titled "The Applicability of Statements on Standards for Accounting and Review Services (SSARS) and Plain-Paper Financial Statements." The hearing will address questions such as the following:

• Can the applicability section of SSARS no. 1, Compilation and Review of Financial Statements , be clarified to help CPAs figure out when they have to compile financial statements?

• Should SSARS no. 1 be revised to exempt CPAs from having to compile financial statements in certain types of situations?

• Should CPAs be permitted to issue plain-paper financial statements?

The hearing is related to the proposed modification of SSARS no. 1, titled Assembly of Financial Statements for Internal Use Only . Judith M. Sherinsky, technical manager, American Institute of CPAs audit and attest standards, told the Journal the assembly exposure draft raised a number of practice problems indicating that SSARS no. 1 may need to be clarified or amended. (For more information on the assembly ED, see "Internal-Use Only Questionnaire Examined," JofA, Sept.96)

The public hearing will be held August 27-28 at the Rosemont Convention Center in Rosemont, Illinois, a mile and a half from Chicagos OHare airport. Those wishing to speak at the hearing should submit an outline of their remarks by August 8 to Judith Sherinsky, AICPA, Audit and Attest Standards, 1211 Avenue of the Americas, New York, New York 10036-8775. Outlines also can be e-mailed to jsherinsky@aicpa.org . Participants will have 10 minutes each to present their views. A paper describing the issues to be addressed at the hearing can be requested from Sherinsky or by calling 201-938-3787 (the AICPA faxback system) and selecting document no. 1991.

Those interested in attending also will find another reason to make the trip: The Illinois CPA Society will be the host of the Midwest Accounting and Business Show at the Rosemont Convention Center August 26-28. The theme this year is Business and Technology Solutions. Call the Illinois CPA Society at 312-993-0407 for details, or visit the society on the Web at http://www.icpas.org .

IASC Says Its on Time

T he International Accounting Standards Committee said it will meet a March 1998 deadline to complete a core set of international accounting standards (IASs). Sir Bryan Carsberg, IASC secretary-general, said there were a few instances in 1996 when publication dates of documents were slightly delayed but that "none of these delays had caused the target date for completion to be revised."

Nonetheless, Peter Clark, IASC senior research manager, told the Journal that if a conflict arose between meeting the deadline and jeopardizing the quality of a standard, the IASC would put quality before the timetable.

The IASC has been working to complete a core set of accounting standards for international stock offerings. In 1995, the International Organization of Securities Commissions (IOSCO) agreed to seek endorsements of individual securities regulatory bodies, such as the U.S. Securities and Exchange Commission, if the IASC drew up rules of sufficient quality.

Two proposals await comments
The IASC issued two exposure drafts on impaired assets and lease accounting that, if approved, will be part of the core set of standards. E55, Impairment of Assets , specifies testing its nonfinancial assets, including

• How a company should assess whether it will recover the book value of its assets.
• When a company should account for and measure an impairment loss.

The IASC requests that comments on the exposure drafts include views on the relative merits of measuring impaired assets by fair value.

The IASC proposed revisions to IAS no. 17, Accounting for Leases , that focus on the issues IOSCO considers essential in a lease accounting standard. "Since IAS no. 17 was approved in 1982, IASC and many national standard setters have become aware of deficiencies in current requirements," said Carsberg.

The ED proposes enhancing disclosures by lessees and lessors, eliminating the net cash investment method of allocating a lessors finance income and requiring lessors to use the net investment method.

Comments for both E55 and E56 are due no later than July 31. Copies of the proposals can be obtained for $16 each by calling the IASC in London at 44-171-353-0565 or by e-mail at iasc@iasc.org.uk . The Web site of the IASC is http://www.iasc.org.uk .

Copies of the ED are available online at http://www.IFAC.org or by calling the IFAC in New York at 212-302-5952.

GASB Gets Two New Members

T he Financial Accounting Foundation named two new members to serve on the Governmental Accounting Standards Board. Cynthia B. Green, Ph.D., vice-president for state studies of New Yorks Citizens Budget Commission, and Edward J. Mazur, CPA, vice-president for administration and finance of Virginia State University, were appointed for four- and five-year terms, respectively, beginning July 1.

The FAF had voted last October to increase the number of the GASB members to seven from five. An FAF subcommittee also recommended the positions be filled by a financial statement user and a state-level preparer (see box ).

How they voted

The trustees considered whether the expanded GASB should use a supermajority vote to approve projects and standards or should retain its present policy of simple majority voting.

"There were valid arguments both for and against supermajority voting in the standard-setting process," said FAF chairman J. Michael Cook. He told the Journal that in comments on the proposal the FAF trustees received directly from constituent groups as well as in discussions with the GASB, there was virtually no opposition to the proposal to continue simple majority voting for the GASB. "As part of our oversight responsibility, we intend to monitor the effectiveness of the voting process and its impact on GASB standards to determine whether the present voting requirements should be reconsidered," said Cook.

A broader board

Cook said Green and Mazur would "bring a broader perspective to GASB deliberations," and their experience would "enhance the standards boards process and the quality of its work on the important matters it will address in the future."

In 1983, Green joined the Citizens Budget Commission—a 65-year-old watchdog organization devoted to change in the governments of New York State and New York City—where she analyzed New York States finances and communicated her analyses to citizens, the media and government officials. She is a member of the GASBs advisory council, the Governmental Research Association and the Public Works Forum.

Mazur served two years as the first federal government controller under the Chief Financial Officers Act of 1990. Before that, he had been the state comptroller of the Commonwealth of Virginia for 11 years. He is a member of the American Institute of CPAs, the Virginia Society of CPAs and the Association of Government Accountants.

Similar to the new reporting model proposal for government agencies (see "GASB Issues Reporting Model Proposal," JofA, Apr.97), the new model would have public colleges and universities use a dual-perspective presentation. The first—the entitywide perspective—would be prepared on the accrual basis of accounting and would show in one place all of the schools operations. Tom L. Allen, GASB chairman, said the entitywide perspective was intended to provide "a more comprehensive picture of their operations, financial position and cash flows than would be possible if the information was reported only by fund group, as it is now."

The second—the fund group perspective—would present traditional measurements found in the current fund-type-based model. "Schools would have to do very little that is different from traditional accounting to comply with the fund perspective," said John H. Engstrom, a member of the American Institute of CPAs government accounting and auditing committee and a professor at Northern Illinois University.

A split decision

The GASB could not reach a unanimous consensus when voting to approve this proposal. Chairman Allen presented the GASB with an alternative view that would not use the dual-perspective model. "Allen suggested that colleges and universities present entitywide statements as the basic financial statements with the fund group information as required supplementary information," said Engstrom.

One copy of the proposal is available without charge from the GASB order department by calling 203-847-0700, ext. 555.

The ISB:
A New Board to Monitor Auditor Independence

T he Securities and Exchange Commission and the American Institute of CPAs jointly announced the formation within the AICPA of a new, private-sector body that will create, codify, amend and preserve independence standards for auditors of public companies. The composition of the eight-member Independence Standards Board (ISB) will be divided equally between public members and CPAs in public practice. It will be a part of the SEC practice section (SECPS) of the AICPA division for CPA firms.

The issue of securing auditor independence is not new: Members of the SEC, including Chairman Arthur Levitt, Jr., and SEC senior staff have warned repeatedly that auditing firms could be pursuing consulting services at the expense of the audit function. Levitt told members at the AICPA National Conference on SEC Developments last December it was imperative that audit firms "continue to ensure that audit quality was not compromised and that auditor performance continue to meet public expectations." Last September, the General Accounting Office recommended the SEC consider new forms of auditor oversight.

The ISB—a response to those recommendations—is expected to provide solutions to challenges facing auditing firms that pursue new service areas and form new, complex business and professional relationships. It also will be expected to update SEC independence rules.

"Current SEC regulations do not address appropriately the potential for bias in the audit function," said SEC Commissioner Steven M. H. Wallman. He told the Journal the ISB may have to develop a new set of more flexible SEC rules that both safeguard independence and allow auditors to engage in new services that enhance the audit function. "An independent group that is given the time to study independence issues can create a rational body of regulations that are finely tuned to the needs of todays public companies," said Wallman.

A workable solution

Both the AICPA and the SEC have expressed their support for the new board. Barry Melancon, AICPA president, said he considered the formation of the ISB a very "positive" development. "It is a major breakthrough for the SEC to effectively transfer its existing independence authority to the ISB, and it is an indication of the SECs confidence that self-regulation is working," said Melancon.

He emphasized that the ISBs authority applies only to auditors of publicly owned companies and that the independence and other ethics standards for auditors of other entities will remain the responsibility of the AICPA professional ethics executive committee. Furthermore, he said, the new arrangement "does not alter the authority of the state boards of accountancy."

Robert Mednick, chairman of the AICPA board of directors and managing partner of Andersen Worldwide, said he was pleased the new structure of independence oversight placed all independence standard setting within the AICPA. "The new board will assume primary responsibility for public company independence standards from the SEC, which has not had the people or resources in recent years to do much more than respond to requests for no-action letters and commence enforcement proceedings against individual companies," said Mednick. He said he also expects the ISB to reconcile existing differences between standards for private and public company audits.

Levitt also underscored the need for new oversight. He said a balanced board consisting of both practicing public accountants and distinguished public members would ensure auditor independence. "With the ISB taking the initiative, the news board will harness the resources and expertise of the private sector to address a difficult challenge without new regulation or legislation," said Levitt.

Setting up

Chancellor William Allen of the Delaware Court of Chancery has agreed to serve as the ISBs first chairman. The remaining members of the board had not been named at Journal press time. The AICPA will provide the funding for the new board, its executive director and staff. The ISB will be supported by an independence issues committee (IIC) within the SECPS made up of nine CPAs from firms that audit SEC registrants and will deal with emerging issues on a timely basis.

The SEC will oversee the board and its regulations. Due process procedures will be similar to those of the Financial Accounting Standards Board—meetings will be open to the public and proposed standards will be exposed for comment before they are issued.

More information on the ISB, including the announcements of its members, is available on the AICPA Web site at http://www.aicpa.org .

Investors' Knowledge—
or Lack of It

Small Business Tax Solutions

Q. To ensure that a corporate merger will be treated as a tax-free reorganization by the Internal Revenue Service, how should the continuity of interest requirement be measured under the new regulations that have been proposed by the Treasury Department?

A. To qualify as a tax-free reorganization, a merger transaction must meet various statutory and regulatory requirements. One, under Treasury regulations section 1.368-1(b), is known as the continuity of interest requirement. The current regulations require that the acquired companys shareholders have a continuing and substantial proprietary interest as shareholders in the acquiring company. Historically, two primary tests have been applied to determine whether the continuity of interest rules are satisfied.

PASSING THE TWO TESTS
The first test looks at how much of the consideration the acquired companys shareholders receive is in the form of stock; the IRS position is that at least 50% must be stock (revenue procedure 77-31, 1977-2 CB 568). The courts, however, have allowed lessgoing as low as 38%to find continuity of interest. In John A. Nelson Co. v. Helvering (296 U.S. 374 [1935]), the court said 38% nonparticipating preferred stock was adequate to establish continuity.

Once a company is acquired, a second test is how long its shareholders have held the stock they received in the reorganization. The IRS position historically has been that continuity of interest can be thwarted by post-transaction sales if there is a preconceived plan or arrangement to dispose of the acquiring companys stock (revenue ruling 66-23, 1966-1 CB 67). The courts have adopted this view when a shareholder intends to dispose of his or her stock as soon as possible after the reorganization (see McDonalds Restaurants of Ill., Inc. v. Commr , 688 F.2d 520 [7th Cir. 1982] and Robert A. Penrod , 88 TC 1415 [1987]).

This second test has resulted in significant litigation and uncertainty in structuring reorganization transactions. In an effort to simplify transaction structuring, the IRS has proposed new regulations that would all but do away with continuity of interest problems.

WHAT THE IRS PROPOSES
The basic premise of the proposed regulations is that continuity of interest would be measured almost solely by reference to the consideration furnished by the acquiring company. As long as the portion of consideration composed of stock is substantial (50% or more, according to the IRS), post-transaction sales would be disregardedsubject to a few exceptions. The proposed regulations appear to eliminate the need to analyze post-transaction dispositions under the so-called step transaction doctrine.

Example . Anderson owns all of the stock of Orbit. Primo, Inc., acquires Orbit by merger. The merger agreement says Anderson will receive 50% Primo stock and 50% cash for her interest in Orbit. Immediately after the mergerunder the terms of a plan that existed before the mergerAnderson sells her Primo stock to Barton, who is unrelated to Primo. This transaction satisfies the continuity of interest requirement under the proposed regulations (proposed Treasury regulations section 1.368-1(c)(3), example 1).

Under the proposed regulations, the exception is for transactions in which the acquirer or its affiliates have a plan or intention to reacquire for cash some or all of the stock given in the merger. The subsequent reacquisition would be combined with the reorganization and the determination of whether continuity is satisfied would be made after taking into account the post-transaction redemption.

Example . Anderson owns all of the stock of Orbit. Primo acquires Orbit by a merger in which Anderson receives 50% Primo stock and 50% cash for her interest. Under a binding agreement, Anderson agrees to sell the Primo stock back to Primo for cash. Under these circumstances, continuity of interest is not satisfied and the merger would not be tax-free. The same result would occur if Anderson sold her stock to an affiliate of Primo.

The proposed regulations would apply only to transactions occurring after the regulations are final; they would not apply to transactions closing after the regulations are final under an agreement entered into before the regulations were final. It is curious that such a pro-taxpayer regulation would apply only prospectively. If the IRS is going to make such a fundamental change to its position, it should do so for all transactions that are still potentially subject to challenge, regardless of when they close.

EXCHANGE OF OPTIONS AND WARRANTS
It is worth noting that the IRS also proposed changes to its rules on the treatment of the exchange of options and warrants in a reorganization. The regulations currently provide that exchanging options and warrants is not tax-free under Internal Revenue Code section 354 (although, based on the facts, the exchange may not be taxable under IRC section 1001). The proposed regulations would treat options and warrants just like stock. This change also is prospective, effective only after the date the regulations are published in final form.

BRYAN E. BLOOM is a tax attorney with WRH Partners in Morristown, New Jersey, and an adjunct professor at Fairleigh Dickinson University. He is an author in the AICPA tax CEA series.

New Government Securities Sales Rules

T hree federal authorities now require depository institution government securities broker—dealers to comply with rules that are substantively identical to the National Association of Securities Dealers (NASD) business conduct and suitability rules. The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation adopted the NASD rules jointly to provide consistent treatment for government securities customers. The new rules went into effect on July 1.

According to the new rules, banks dealing in government securities must observe "high standards of commercial honor and just and equitable principles" and have reasonable ground for believing that investment recommendations are suitable for a customer based on his or her holdings and financial situations and needs. The new suitability rules apply only when a bank makes a recommendation to its customer.

For more information, contact the OCC Securities and Corporate Practices Division at 202-874-5210; the Federal Reserve Board Legal Division at 202-452-3513; or the FDIC Division of Supervision at 202-898-3618.

Survey Reveals Worry, Confusion—and Opportunities

I n January 1997, 1,000 people, aged 30 to 59, were interviewed by phone on a variety of financial planning concerns. Some of the results presented here are compared with earlier surveys. Barton Francis, CPA, PFS, a partner of Ernst & Young and chairman of the recent American Institute of CPAs personal financial planning conference, commented on what these trends reveal about financial planning attitudes. He also discussed opportunities for CPA financial planners. (Francis, the AICPA, and the firm were not involved in collecting data or organizing this survey, however.)

Francis advised CPAs to look over these results and consider how they reflect their clients situations. "Qualified CPAs would be doing a great service to their clients by bringing up these issues and helping clients develop solutions to their problems."

"The increasing number of people who cite making ends meet as their greatest financial concern shows that many are adjusting to the possibility of unexpected layoffs. With respect to retirement and investment planning, companies are shifting responsibility for retirement savings from traditional plans to 401(k)s, and I think the 7-percentage point rise is a good sign. It shows the population has a higher level of interest, which should lead to increased knowledge."	"Will employees be more responsible now that they have more choices? You have to hope that increased interest and concern convert into knowledge and action. Employee education and advising on 401(k) options are two of the greatest opportunities for CPAs to provide value-added services."	"Since all professionals are lumped together, I think the reduced reliance on professionals may show a distrust of commission-based advisers. Opportunities exist for independent, objective advisers who are not out to sell products. I think people turn to friends and relatives because theyre just overwhelmed with information. An objective, qualified CPA can be of great help here."
"The baby boomers have moved from the free-spending 1980s to the asset-accumulating 1990s. Theyre aging."	"This big jump occurred as people recognized the high cost of long-term care and other needs of the elderly."	"Compare this with the 82% who claim they expect to have enough in retirement. This shows a lot of mixed feelings and confusion. There is clearly a need for counseling and education."
"This is confusing. They expect to have money but fear they wont. CPAs should help clients focus on managing the long-term risk of not having enough money, and prevent clients from focusing on what the markets are doing today. The goal is not how much you make today; its having enough at the end of the game."	"This is scary. One in four thinks he or she will have to cut back during retirement? Again, planning is essential."	"This is interesting. Older workers may find it necessary to continue working. The boomers havent been that great at saving and Social Security is becoming weaker; working may be essential to their financial well-being. Also, employers may realize that workers in their 60s and 70s are an underused resource and hire them in greater numbers than previously."
"Thats a big spread! Compare it with the mere 17% who said paying for a college education was a top financial concern. The respondents may not seem terribly concerned about education, but they should be."	Source: Prepared for Phoenix Home Life Mutual Insurance Co., Hartford, Connecticut, by Yankelovich Partners. More information is available on Phoenixs Web site at http://www.phl.com .

Overpayments, Underpayments and Interest Netting

S ince 1986, the Internal Revenue Service has provided separate tax rates for overpayments and underpayments—with higher rates for underpayments. To reduce interest expenses, most companies want over- and underpayments "netted" when they overlap during the same period. The IRS will allow annual netting for companies that have both during the same year; also, an overpayment for one year can be offset against an underpayment for another year if both are outstanding at the time of the offset.

On April 18, 1997, the Treasury Department issued Netting of Interest on Tax Overpayments and Underpayments, recommending a legislative solution to implementing "global" interest netting, such as netting an underpayment against an overpayment that already had been paid by the IRS. Meanwhile, President Clintons recently unveiled tax simplification package includes a global interest netting proposal calling for a zero rate of interest during a period of mutual indebtedness for an overlap. Both the Treasury report and President Clintons package recommend that global netting be limited to income taxes, applied only to tax years not barred by statute and performed only at the companys request, with the company bearing the burden of establishing whether it is entitled to the interest netting.

Observation: The Treasury report emphasizes that the most problematic issue with global interest netting is collecting and maintaining the data needed for an accurate calculation. However, because interest computations are extremely difficult and complex, the report points out that companies should not be forced to pay extra interest simply because they had difficulties when computing the correct amount.

The report should serve as a reminder that companies need to perform their own interest computations to make sure that computational errors and/or data deficiencies do not result in overpayments. Moreover, companies will want to make sure they take advantage of whatever netting and offsetting are available.

—Tracy Hollingsworth, Esq., staff director of tax councils at Manufacturers Alliance, Arlington, Virginia.

B efore 1997, individuals could deduct the cost of health insurance only if they itemized and their total medical expenses exceeded 7 ^1/4 % of adjusted gross income. In addition, self-employed individuals were allowed to deduct only 30% of the cost of their health insurance premiums for themselves and their immediate family members right off the top as a deduction for adjusted gross income. The remaining premiums were subject to the same 7 ^1/4 % limitation.

Now, under a pilot program that began on January 1, 1997, certain self-employed individuals and employees of small businesses who are covered by "high-deductible" health plans are eligible to establish medical savings accounts (MSAs). Subject to limitations, amounts contributed to an MSA are deductible directly from gross income. Employer contributions to an MSA on behalf of an employee are excluded from the employees income, and the earnings generated by an MSA and distributions received from an MSA to pay for the taxpayers or the taxpayers familys unreimbursed medical expenses are not subject to tax.

To receive these MSA benefits, Internal Revenue Code section 220(c) (2)(A) requires that a taxpayer invest in a high-deductible health plan with an annual deductible of at least $1,500 and not more than $2,250 for individual coverage and at least $3,000 and not more than $4,500 for family coverage.

Throughout 1997, the insurance industry has been selling MSAs that have "double deductibles." That is, benefits are currently being paid to individual family members on the earlier of the following two dates: (1) when an individual taxpayers personal medical expenses exceed $1,500 (regardless of the familys total medical costs) or (2) when the familys combined medical costs exceed $3,000.

In revenue ruling 97-20 (1997-19 IRB), the IRS ruled that family plans with double deductibles are ineligible MSAs. According to the ruling, to qualify as an MSA high-deductible family health plan, benefits cannot be paid to any family member until the entire familys annual medical expenses exceed $3,000. That is, in a family plan there no longer is an individual deductible.

Observation: The IRS is providing relief to taxpayers who purchase health plans before November 1, 1997, that provide family coverage before that date. These plans will be treated as high-deductible MSAs even though they include double deductibles. This relief will apply until the first renewal date on or after December 31, 1997, or for the term of the health plan; however, it will not extend beyond December 31, 1998.

—Michael Lynch, CPA, Esq., associate professor of accounting at Bryant College, Smithfield, Rhode Island.

Salary Guide for Accountants in Business and Industry

Pay increases this year for financial officers are hardly
keeping up with inflation—with the highest raises
going to the lowest paid employees in each category.   Chief Financial Officers and Treasurers*

¹ Bonuses and incentives reflect an increasingly large part of overall pay at this level.
² Add 10% for CMA (certified management accountant) designation.
³ Add 10% for CPA designation.
Source: Robert Half International, Inc., Menlo Park, California.

FASB to Address Pooling of Interests

T he United States stands alone as perhaps the last country in the world to still permit pooling-of-interests accounting. Other countries either do not allow it at all or allow it only under certain narrow circumstances. "Were out of step with the world,"

G. Michael Crooch, chairman of the American Institute of CPAs accounting standards executive committee, told the Journal . Crooch is a partner of Arthur Andersen, where he advises clients on mergers.

The Financial Accounting Standards Board has agreed to look at these rules and possibly make some changes in the next few years. "I think there will be a strong push for the United States to harmonize its accounting with the rest of the world," said Crooch. He pointed out that Securities and Exchange Commission Chief Accountant Michael Sutton also is concerned about the current rules; Sutton told the Wall Street Journal that over 40% of his staffs time is spent figuring out which mergers qualify for pooling. Still, Crooch said any changes would be accompanied by a lot of debate because pooling is a popular method for merging entities.

Companies favored method
"Merging companies like this treatment, as opposed to purchase accounting, because they dont write up assets or add goodwill to their balance sheets. Without pooling, goodwill has to be amortized against future earnings, and if companies record goodwill on the books, they end up with lower future earnings—certainly an undesirable result for management." In fact, any changes in the pooling-of-interests treatment will have to be accompanied by changes in accounting for goodwill, according to Crooch, who noted that if the FASB drastically restricts pooling rules, the major opportunity to avoid goodwill amortization will disappear.

"The use of pooling of interests is very important in some mergers," said Crooch, "and I have even had clients tell me, If we cant account for this merger as a pooling of interests, were not going to do it at all."

The FASB is still discussing the issue; draft rules might not be issued for two years.

Less Risk for Volunteers

T he Senate approved a bill intended to limit the liability of volunteers of "nonprofit organizations." The Volunteer Protection Act (S 543), passed just two weeks after President Clinton held a national volunteerism campaign in Philadelphia, is intended to protect volunteers from frivolous lawsuits. A similar bill (HR 1167) has been introduced in the House.

Potential threats of legal liability have discouraged many Americans from performing volunteer activities, such as serving on boards and committees, according to the American Society of Association Executives. This bill would limit the liability of volunteers that are

1. Acting in good faith within the scope of their duties.
2. Properly licensed or certified when necessary.
3. Not willfully or wantonly engaged in misconduct.

Two other bills introduced in the Senate and House (S 514 and HR 911) encourage the states to enact uniform volunteer protection laws rather than make volunteer liability protection a federal law.