SEC stresses importance of municipal bond integrity.

Arthur Levitt, chairman of the Securities and Exchange Commission, encouraged members of the Government Finance Officers Association, whom he called the custodians of public funds, to adopt internal procedures to safeguard against unanticipated risk and to control overall exposure.

Levitt told a Baltimore GFOA conference that a written and publicly available investment policy and independent oversight of performance were two important steps to help assure safe management of public funds. "Transparency would also help," Levitt said. "Ready access to trade and quote information would facilitate marking-to-market calculations and increase the accuracy of independent performance reviews." Levitt also urged city councils to review their lists of authorized investments regularly and monitor results closely. "Surprising investment gains should set off alarms as loudly as do surprising losses," he said.

Public trust

Levitt said the bankruptcy filing of Orange County, California, last December could break public trust of municipal bonds. "Some might believe a breach of promise to bondholders is inevitable." The chairman said that while corporate debt and equity markets have had to cope with broken contracts, municipal bonds have been obligated to "full faith and credit" of the issuer, even during the Depression, when all defaulted debt was repaid with interest. Levitt said a default would raise interest rates and increase the tax burden of the issuer's taxpayers. It also would threaten the confidence of individual investors who now hold 70% of outstanding municipal securities, a market worth close to $1.2 trillion.

Levitt said public trust in municipal bonds also was threatened by "pay-to-play" practices in the offering process, in which government officials believe they are entitled to special treatment by underwriters. Several jurisdictions and organizations have adopted resolutions to curb this problem, noted the chairman, but it still haunts the integrity of the municipal bond market. "It has been said trust is won with difficulty and is easily lost," said Levitt. "Municipal bonds enjoy a solid reputation today because of the valiant efforts of many in the past. My hope is that we will keep that legacy untarnished."

RELATED ARTICLE: Future Markets of the World

A survey of 195 multinational companies revealed that emerging markets are attracting substantial investment, and the trend is expected to accelerate.

[ILLUSTRATION OMITTED]

The same survey of 195 multinational companies actively investing or planning to invest in emerging markets revealed that Asia is the most popular emerging market.

[ILLUSTRATION OMITTED]

RELATED ARTICLE: Official Releases

FASB Statement No. 122, page 98...SOP 95-2, page 99...auditing

interpretation, page 102...ethics interpretations, page 102

Space considerations prevent publishing here the appendices to FASB Statement No. 122. Since the appendices often are important to understanding FASB statements, readers are advised to obtain complete copies. For additional copies of FASB statements and/or information on applicable prices and discount rates, contact the FASB order department, 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116. Telephone, main office [phone].

Statement of Financial Accounting Standards No. 122--Accounting for

Mortgage Servicing Rights

SUMMARY

This Statement amends FASB Statement No. 65, Accounting for Certain Mortgage Banking Activities, to require that a mortgage banking enterprise recognize as separate assets rights to service mortgage loans for others, however those servicing rights are acquired. A mortgage banking enterprise that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells or securitizes those loans with servicing rights retained should allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values if it is practicable to estimate those fair values. If it is not practicable to estimate the fair values of the mortgage servicing rights and the mortgage loans (without the mortgage servicing rights), the entire cost of purchasing or originating the loans should be allocated to the mortgage loans (without the mortgage servicing rights) and no cost should be allocated to the mortgage servicing rights.

This Statement requires that a mortgage banning enterprise assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights. A mortgage banking enterprise should stratify its mortgage servicing rights that are capitalized after the adoption of this Statement based on one or more of the predominant risk characteristics of the underlying loans. Impairment should be recognized through a valuation allowance for each impaired stratum.

This Statement applies prospectively in fiscal years beginning after December 15, 1995, to transactions in which a mortgage banking enterprise sells or securitizes mortgage loans with servicing rights retained and to impairment evaluations of all amounts capitalized as mortgage servicing rights, including those purchased before the adoption of this Statement. Earlier application is encouraged. Retroactive capitalization of mortgage servicing rights retained in transactions in which a mortgage banking enterprise originates mortgage loans and sells or securitizes those loans before the adoption of this Statement is prohibited.

CONTENTS

Introduction and Background/1--2

Standards of Financial Accounting and Reporting: Amendments to Existing Pronouncements/3--4

Effective Date and Transition/5--6

Appendix A: Basis for Conclusions/7--48

Appendix B: FASB Current Text, Mortgage Banking Activities/49

INTRODUCTION AND BACKGROUND

1. Prior to the issuance of this Statement, FASB Statement No. 65, Accounting for Certain Mortgage Banking Activities, required separate capitalization of the cost of the rights to service mortgage loans for others when those rights were acquired through a purchase transaction but prohibited separate capitalization when those rights were acquired through loan origination activities. As a result, mortgage banking enterprises and enterprises such as commercial banks and thrift institutions that conduct operations that are substantially similar to the primary operations of a mortgage banking enterprise (hereafter collectively referred to as a mortgage banking enterprise) often reported losses on the sale of mortgage loans with servicing rights retained that were acquired through loan origination activities. That was because, in determining the gain or loss on the sale, the cost deducted from the sales price included the cost associated with both the mortgage servicing rights and the loans themselves. However, if the same mortgage loans had been acquired in a purchase transaction, the cost of the mortgage servicing rights would have been capitalized separately as an asset and would not have been deducted from the sales price of the mortgage loans.

2. This Statement amends certain provisions of Statement 65 to eliminate the accounting distinction between rights to service mortgage loans for others that are acquired through loan origination activities and those acquired through purchase transactions. When a mortgage banking enterprise purchases or originates mortgage loans, the cost of acquiring those loans includes the cost of the related mortgage servicing rights. If the mortgage banking enterprise sells or securitizes the loans and retains the mortgage servicing rights, the enterprise should allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values if it is practicable to estimate those fair values. If it is not practicable to estimate the fair values of the mortgage servicing rights and the mortgage loans (without the mortgage servicing rights), the entire cost of acquiring the loans should be allocated to the mortgage loans (without the mortgage servicing rights) and no cost should be allocated to the mortgage servicing rights. Any cost allocated to mortgage servicing rights should be recognized as a separate asset. Mortgage servicing rights should be amortized in proportion to and over the period of estimated net servicing income and should be evaluated for impairment based on their fair value.

STANDARDS OF FINANCIAL ACCOUNTING AND REPORTING

Amendments to Existing Pronouncements

3. Statement 65 is amended as follows:

a. In the first sentence of paragraph 1, origination or acquisition is replaced by purchase or origination.

b. In the first sentence of paragraph 10, of existing is replaced by or origination of.

c. In paragraph 15, the referece to paragraph 18 is replaced by a reference to paragraph 19 and the following is added to the end of the paragraph:

The rate used to determine the present value shall be an appropriate long-term interest rate.

d. Paragraph 16 is replaced by the following: A mortgage banking enterprise may purchase mortgage servicing rights separately or it may acquire mortgage servicing rights by purchasing or originating mortgage loans and selling or securitizing those loans with servicing rights retained when a mortgage banking enterprise purchases or originates mortgage loans, the cost of acquiring those loans includes the cost of the related mortgage servicing rights. If the mortgage banking enterprise sells or securitizes the loans and retains the mortgage servicing rights, the enterprise shall allocate the total cost of the mortgage loans (the recorded investment in the mortgage loans including net deferred loan fees or costs and any purchase premium or discount) to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values if it is practicable to estimate those fair values (refer to paragraph 18) as follows:

a. A mortgage banking enterprise that purchases or originates mortgage loans with a definitive plan to sell or securitize those loans and retain the mortgage servicing rights shall allocate the cost of the mortgage loans based on the relative fair values at the date of purchase or origination.(5) The allocation shall be based on the assumption that a normal servicing fee will be received and that the rights to the remaining cash flows from the underlying mortgage loans will be sold or securitized. A definitive plan exists if (1) the mortgage banking enterprise has obtained, before the purchase or origination date, commitments from permanent investors to purchase the mortgage loans or related mortgage-backed securities, makes a commitment within a reasonable period (usually not more than 30 days after the purchase or origination date) to sell the mortgage loans or related mortgage-backed securities to a permanent investor or underwriter, or has made, before the purchase or origination date, commitments to deliver the mortgage loans for securitization and (2) estimates of the selling price have been made.

b. A mortgage banking enterprise that does not have a definitive plan at the purchase or origination date and later sells or securitizes the mortgage loans and retains the mortgage servicing rights shall allocate the amortized cost of the mortgage loans as described in paragraph 16(a) based on the relative fair values at the date of sale or securitization.

If it is not practicable to estimate the fair values of the mortgage servicing rights and the mortgage loans (without the mortgage servicing rights), the entire cost of purchasing or originating the mortgage loans shall be allocated to the mortgage loans (without the mortgage servicing rights) and no cost shall be allocated to the mortgage servicing rights.

e. Paragraph 17 (as amended by FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities) and footnote 6 are replaced by the following three paragraphs and related footnote:

For the purpose of evaluating and measuring impairment of capitalized mortgage servicing rights, a mortgage banking enterprise shall stratify those rights based on one or more of the predominant risk characteristics of the underlying loans. Those characteristics may include loan type,(6) size, note rate, date of origination, term, and geographic location.

Impairment shall be recognized through a valuation allowance for an individual stratum. The amount of impairment recognized shall be the amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value (refer to paragraph 18). The fair value of mortgage servicing rights that have not been capitalized shall not be used in the evaluation of impairment.

Subsequent to the initial measurement of impairment, the mortgage banking enterprise shall adjust the valuation allowance to reflect changes in the measurement of impairment. Fair value in excess of the amount capitalized as mortgage servicing rights (net of amortization), however, shall not be recognized. This Statement does not address when a mortgage banking enterprise should record a direct write-down of capitalized mortgage servicing rights.

f. Paragraph 18 is replaced by the following:

The fair value of an asset is the amount at which the asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Quoted market prices in active markets are the best evidence of fair value and shall be used as the basis for the measurement, if available. If quoted market prices are not available, the estimate of fair value shall be based on the best information available in the circumstances. The estimate of fair value shall consider prices for similar assets and the results of valuation techniques to the extent available in the circumstances. Examples of valuation techniques include the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved, option-pricing models, matrix pricing, option-adjusted spread models, and fundamental analysis. Valuation techniques for measuring mortgage servicing rights should be consistent with the objective of measuring fair value and should incorporate assumptions that market participants would use in their estimates of future servicing income and expense, including assumptions about prepayment, default, and interest rates.

g. In paragraph 19, (net of any valuation allowances) is added after the right to service mortgage loans. The following is added to the end of the paragraph:

For this purpose, estimates of future servicing revenue shall include expected late charges and other ancillary revenue. Estimates of expected future servicing costs shall include direct costs associated with performing the servicing function and appropriate allocations of other costs. Estimated future servicing costs may be determined on an incremental cost basis.

h. In paragraph 30, acquiring is replaced by purchasing or originating.

i. The following three paragraphs are added after paragraph 30:

The fair value of capitalized mortgage servicing rights and the methods and significant assumptions used to estimate that fair value shall be disclosed. If no cost is allocated to certain mortgage servicing rights in accordance with the last sentence of paragraph 16 of this Statement, the mortgage banking enterprise shall describe those mortgage servicing rights and shall disclose the reasons why it is not practicable to estimate the fair values of the mortgage servicing rights and the mortgage loans (without the mortgage servicing rights).

The risk characteristics of the underlying loans used to stratify capitalized mortgage servicing rights for purposes of measuring impairment shall be disclosed.

For each period for which results of operations are presented, the activity in the valuation allowances for capitalized mortgage servicing rights, including the aggregate balance of the allowances at the beginning and end of each period, aggregate additions charged and reductions credited to operations, and aggregate direct write-downs charged against the allowances shall be disclosed.

4. Paragraph 9 of FASB Technical Bulletin No. 87-3, Accounting for Mortgage Servicing Fees and Rights, is replaced by the following:

An enterprise may acquire mortgage servicing rights by purchasing or originating mortgage loans and selling those loans with servicing rights retained or by purchasing the servicing rights separately. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income.

Effective Date and Transition

5. The provisions of this Statement shall be applied prospectively in fiscal years beginning after December 15, 1995, to transactions in which a mortgage banking enterprise sells or securitizes mortgage loans with servicing rights retained and to impairment evaluations of all amounts capitalized as mortgage servicing rights, including those purchased before the adoption of this Statement. Earlier application is encouraged in fiscal years or interim periods for which financial statements or information has not been issued. Retroactive capitalization of mortgage servicing rights retained in transactions in which a mortgage banking enterprise originates mortgage loans and sells or securitizes those loans before the adoption of this Statement is prohibited.

6. Paragraph 17 of Statement 65, as amended by this Statement, applies to impairment evaluations of all capitalized mortgage servicing rights. However, a mortgage banking enterprise may continue to apply its previous accounting policies for stratifying mortgage servicing rights to those mortgage servicing rights that were capitalized prior to the adoption of this Statement.

This Statement was adopted by the unanimous vote of the seven members of the Financial Accounting Standards Board.

DENNIS R. BERESFORD, Chairman

JOSEPH V. ANANIA

ANTHONY T. COPE

JOHN M. FOSTER

JAMES J. LEISENRING

ROBERT H. NORTHCUTT

ROBERT J. SWIERINGA

Statement of Position 95-2--Financial Reporting by Nonpublic Investment

Partnerships

NOTE

Statements of position of the Accounting Standards Division present the conclusions of at least two-thirds of the Accounting Standards Executive Committee, which is the senior technical body of the Institute authorized to speak for the Institute in the areas of financial accounting and reporting. Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles in the Independent Auditor's Report, identifies AICPA statements of position as sources of established accounting principles that an AICPA member should consider if the accounting treatment of a transaction or event is not specified by a pronouncement covered by rule 203 of the AICPA Code of Professional Conduct. In such circumstances, the accounting treatment specified by this statement of position should be used, or the member should be prepared to justify a conclusion that another treatment better presents the substance of the transaction in the circumstances.

Space considerations prevent publishing here the appendices to SOP 95-2. Since the appendices often are important to understanding SOPs, readers are advised to obtain complete copies. To obtain a copy of SOP 95-2 (product no. 014808JA), contact the AICPA order department at [phone].

CONTENTS

Summary

Introduction

Scope

Background

Conclusions

Effective Date

Basis for Conclusions

Appendix A--Condensed Schedule of Investments

Appendix B--Discussion of Comments Received on the Exposure Draft

SUMMARY

This statement of position (SOP) applies to financial statements of investment partnerships that are exempt from SEC registration under the Investment Company Act of 1940 (with certain exceptions) prepared in accordance with generally accepted accounting principles (GAAP). It provides guidance on financial statement presentation and disclosure of investments, income, and partners' capital. It requires--

* That financial statements include a condensed schedule of investments in securities.

* Presenting a statement of operations in conformity with the requirements for statements of operations of management investment companies in the Audit and Accounting Guide Audits of Investment Companies.

* Presenting in the financial statements management fees and disclosing how they are computed.

This SOP is effective for financial statements issued for fiscal years beginning after December 15, 1994. Earlier application is encouraged.

INTRODUCTION

1. Investment partnerships are identified as a type of investment company in the AICPA's Audit and Accounting Guide Audits of Investment Companies (the Guide). The Guide uses the term investment company to mean "generally...an entity that pools shareholders' funds to provide the shareholders with professional investment management (paragraph 1.01)" [emphasis added]. The Guide states that it uses the term to refer to an entity with the attributes described in chapter 1 rather than to conform with the legal definition of an investment company in the federal securities laws.

2. The Guide refers to investment partnerships in chapter 1 (paragraph 1.03):

Several types of investment companies exist: management investment companies, unit investment trusts,...investment partnerships....

3. The Guide also states:

The accounting principles and auditing procedures discussed in this guide generally apply to all investment companies, though the guide has been written primarily for auditors of mutual funds and closed-end companies registered with the Securities and Exchange Commission (SEC) under the 1940 Act (paragraph 1.04) [emphasis added].

To comply with SEC rules and regulations, registered investment companies must make certain disclosures in addition to those required by generally accepted accounting principles. Those additional requirements are not presented in illustrative financial statements because they are not otherwise required by generally accepted accounting principles (paragraph 5.46).

4. The illustrative financial statements of management investment companies in the Guide contain a detailed schedule of investments.

SCOPE

5. This SOP applies to investment partnerships that are exempt from SEC registration under the Investment Company Act of 1940 and defined as investment companies in paragraph 1.01 of the Guide, except for the following:

a. Investment partnerships that are brokers and dealers in securities subject to regulation under the Securities Exchange Act of 1934 (registered broker-dealers) and that manage funds only for those who are officers, directors, or employees of the general partner

b. Investment partnerships that are commodity pools subject to regulation under the Commodity Exchange Act of 1974

Investment partnerships identified above as being exempt from the scope of this SOP should comply with the financial reporting requirements in the AICPA audit and accounting guides applicable to such entities.(1) Investment partnerships that are SEC registrants must comply with the financial statement reporting requirements as set forth in the Guide and as required by Articles 6 and 12 of the SEC's Regulation S-X.

BACKGROUND

6. There has been diversity in practice in the application of certain provisions of the Guide--specifically, the requirement for a schedule of investments, the format of the statement of operations, and the reporting of management fees.

7. Schedule of Investments. The Guide requires investment companies to list all of their individual securities in the statement of net assets or in an accompanying schedule of investments. Many nonpublic investment partnerships do not present such a list in their financial statements.

8. Statement of Operations. Investment companies present their results of operations in a statement of operations as specified in the Guide. The Guide requires separate disclosure of dividends and interest income and of realized and unrealized gains (losses) on securities. Some investment partnerships combine these items and present them as one income-statement caption with no separate disclosure.

9. Management Fees and Allocations. Investment companies normally enter into an investment advisory agreement under which they receive investment management. The fee for that service is usually based on a specified percentage of average assets being managed. Some agreements may provide for a performance fee or allocation, which includes the normal fee plus a bonus (or less a penalty) if the company's performance exceeds (or fails to exceed) a preestablished benchmark. Many investment companies reflect such fees, including the bonus portion, as an expense in the statement of operations. If an investment company is organized as a limited partnership, however, the payment may take the form of an allocation of earnings based on a predetermined formula specified in the partnership agreement. In such cases, some investment partnerships reflect this allocation of partnership income through a reallocation of partners' net income from the limited partners to the general partner within the equity section of the statement of assets and liabilities rather than as an expense.

CONCLUSIONS

10. Schedule of Investments. The financial statements of an investment partnership, when prepared in conformity with GAAP, should, at a minimum, include a condensed schedule of investments in securities owned by the partnership at the close of the most recent period. Such a schedule should do the following.

a. Categorize investments by the following:

(1) Type (such as common stocks, preferred stocks, convertible securities, fixed-income securities, government securities, options purchased, options written, warrants, futures, loan participations, short sales, other investment companies, and so forth)

(2) Country or geographic region

(3) Industry

Report (i) the percent of net assets that each such category represents and (ii) the total value and cost for each category in (1) and (2).

b. Disclose the name, shares or principal amount, value, and type of the following:

(1) Each investment (including short sales) constituting more than 5 percent of net assets

(2) All investments in any one issuer aggregating more than 5 percent of net assets

In applying the 5-percent test, total long and total short positions in any one issuer should be considered separately.

c. Aggregate other investments (each of which is 5 percent or less of net assets) without specifically identifying the issuers of such investments, and categorize them as required by paragraph 10a above.

11. Investments in other investment companies (investees), such as investment partnerships and limited liability investment companies, should be considered investments in securities for the purpose of applying paragraphs 10a and 10b, above. If the reporting partnership's proportional share of any security owned by any individual investee exceeds 5 percent of the reporting partnership's net assets at the reporting date, each such security should be named as required in paragraph 10b above, and categorized as required in paragraph 10a above. If information about the investee's portfolio is not available, that fact shall be disclosed. These investee disclosures should be made either in the condensed schedule of investments (as components of the investment in the investee) or in a note to that schedule.

12. Statement of Operations. Investment partnerships should present their statements of operations in conformity with the requirements for statements of operations of management investment companies in paragraphs 5.24 through 5.35 of the Guide, which include, among other things, separate disclosure of dividend income and interest income and realized and unrealized gains (losses) on securities for the period.

13. Management Fees and Allocations. Investment companies organized as limited partnerships typically receive advisory services from the general partner. For such services, a number of partnerships pay fees chargeable as expenses to the partnership, whereas others allocate net income from the limited partners' capital accounts to the general partner's capital account, and still others employ a combination of the two methods. The amounts of any such payments or allocations should be presented in either the statement of operations or the statement of changes in partners' capital, and the method of computing such payments or allocations should be described in the notes to the financial statements.

EFFECTIVE DATE

14. This SOP is effective for financial statements issued for fiscal years beginning after December 15, 1994. Earlier application is encouraged but not required.

BASIS FOR CONCLUSIONS

15. This section discusses considerations that were deemed significant by members of the Accounting Standards Executive Committee (AcSEC) in reaching the conclusions in this SOP. It includes reasons for accepting certain views and rejecting others. Individual AcSEC members gave greater weight to some factors than to others.

16. Practice is diverse in applying the Guide's requirements to investment partnerships. Nevertheless, AcSEC believes that the Guide should apply, except for the requirement to present a detailed schedule of investments, to investment partnerships of all kinds, including hedge funds, limited liability companies, and limited duration companies. The Guide includes investment partnerships in its definition of investment companies. Paragraph 1.04 indicates that its principles and procedures "...generally apply to all investment companies, though the guide has been written primarily for auditors of mutual funds...under the 1940 Act" [emphasis added]. AcSEC agrees that some of the SEC Regulation S-X and 1940 Act requirements may not apply to nonpublic investment partnerships. AcSEC believes that the disclosure of material information, such as condensed information about the investment portfolio, dividend income, interest income, realized and unrealized gains or losses, and activities in partners' capital accounts, should be required for a fair presentation of financial statements of investment partnerships.

17. Schedule of Investments. Disclosure should provide financial statement users with information that aids decision making. FASB Statement of Financial Accounting Concepts No. 2, Qualitative Characteristics of Accounting Information, states in paragraph 40 that, "the benefits of information may be increased by making it more understandable and, hence, useful to a wider circle of users." The Guide requires a complete listing of investments consistent with the SEC's disclosure requirements. This SOP requires nonpublic investment partnerships to present at least a condensed schedule of investments in which investments are organized by type, focusing on geographic and industry concentrations, and requires that material investments (more than 5 percent of net assets) in any one investee be disclosed separately.(2) AcSEC concluded that a complete list of all investments that individually represents an immaterial portion of the investment portfolio would present little additional information that is of value to users of nonpublic investment partnerships' financial statements. The condensed disclosures required by this SOP of the types of investments, the geographical and industry concentrations, and the significant investees are informative to users without burdening them with unnecessary details. AcSEC believes this presentation will enable users to make their decisions focusing on the risk and opportunities associated with the type of investment, a geographical area, and industry by investee.

18. The Investment Company Act of 1940 and the Internal Revenue Code define investment portfolio diversification to exclude, for certain purposes, securities whose values represent more than 5 percent of the total value of an investment company's assets. The implication of those definitions is that investment concentrations above 5 percent impose a level of risk that requires special consideration. After reviewing the comments to the exposure draft, AcSEC concluded that a 5 percent of net assets criterion should be included as a requirement of this SOP. Net assets (instead of total assets) was chosen because net asset value is the focus of investment company financial reporting.

19. AcSEC recognizes that the 5 percent of net assets criterion for reporting separate investments is arbitrary. Accounting, however, contains many arbitrary disclosure criteria.

20. Statement of Operations. Because the operations of public (SEC registered) investment companies and nonpublic investment partnerships are similar (they both invest in securities to generate dividend income, interest income, and realized or unrealized gains), AcSEC concluded that investment partnerships' statements of operations should be presented in conformity with the Guide as required by paragraph 12 above.

21. Management Fees and Allocations. A number of partnerships record an expense for fees due the general partner, a number allocate net income from the limited partners' capital accounts to the general partner's capital account, and others combine the two methods. Typically, accounting for such arrangements is based on the partnership agreement that specifies the fee or allocation arrangement. In a typical limited investment partnership agreement, the general partner is entitled to a fixed advisory or management fee (such as one percent of net assets), plus an allocation of profits (such as 20 percent of net realized and unrealized gains). Public investment companies or public partnerships normally do not have incentive arrangements, but if they do, they are generally limited to an amount that does not exceed one percent of net assets. The relatively material allocation of profits provided for in nonpublic partnership agreements may be considered either a disproportionate partnership income allocation, based on the fact that the general partner has incurred material cost and effort in organizing the partnership, managing the partnership, and incurred disproportionate risk as the general partner (that is, unlimited personal liability), or a compensation arrangement. Although AcSEC recognizes that issuing definitive standards is desirable, it believes that this SOP cannot provide definitive guidance on accounting for payments to general partners because such guidance would have to result from deliberation of broader partnership issues. AcSEC therefore concluded that the accounting should conform to the structure of the partnership agreement, with the financial statement disclosures set forth in paragraph 13 of this SOP.

Accounting Standards Executive Committee (1993-1994)

NORMAN N. STRAUSS, Chair

PHILIP D. AMEEN

ERNEST F. BAUGH, JR.

G. MICHAEL CROOCH

H. JOHN DIRKS 

GEORGE P. FRITZ 

STUART H. HARDEN 

JAMES E. HEALEY

SALLY L. HOFFMAN

JAMES A. JOHNSON 

KRIS M. KALAND

ROBERT S. KAY

ARAM G. KOSTOGLIAN

JAMES T. PARKS

EDWARD W. TROTT

Investment Companies Committee (1993-1994)

STEVEN E. BULLER, Chair

SUSAN C. COTE

JEROME L. DUFFY

ALAN M. EISNER

GARY L. FRENCH

ALAN R. LATSHAW

MARTIN S. LAX

PHILIP P. MANNINO

JAMES H. MULLER 

PHILLIP O. PETERSON

ROBERT W. UEK 

DENNIS F. WASNIEWSKI

JOHN WOODCOCK, JR.

AICPA Staff

JOHN F. HUDSON, Vice President, Technical Standards and Services

AL GOLL, Technical Manager, Accounting Standards

ARLEEN RODDA THOMAS, Director, Accounting Standards

Auditing Interpretation

Interpretations are issued by the Audit Issues Task Force of the Auditing Standards Board to provide timely guidance on the application of pronouncements of that Board. Interpretations are reviewed by the Auditing Standards Board. An interpretation is not as authoritative as a pronouncement of that Board, but members should be aware that they may have to justify a departure from an interpretation if the quality of their work is questioned.

AU SECTION 9341

Interpretation of AU Section 341, "The Auditor's Consideration of an Entity's Ability To Continue as a Going Concern"

Eliminating a Going-Concern Explanatory Paragraph From a Reissued Report

.01 Question--An auditor may be asked to reissue his or her report on financial statements and eliminate the going-concern explanatory paragraph that appeared in the original report. Such requests ordinarily occur after the conditions that gave rise to substantial doubt about the entity's ability to continue as a going concern have been resolved. For example, subsequent to the date of the auditor's original report, an entity might obtain needed financing. In such circumstances, may the auditor reissue his or her report and eliminate the going-concern explanatory paragraph that appeared in the original report?

.02 Interpretation--An auditor has no obligation to reissue his or her report.(3) However, if the auditor decides to reissue the report,(4) the auditor should perform the following procedures when determining whether to reissue the report without the going-concern explanatory paragraph that appeared in the original report:

* Audit the event or transaction that prompted the request to reissue the report without the going-concern explanatory paragraph.

* Perform the procedures listed in paragraph 12 of AU Section 560, "Subsequent Events," [of AICPA Professional Standards] at or near the date of reissuance.

* Consider the factors described in paragraphs 6 though 11 of Statement on Auditing Standards No. 59, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern (AU Section 341), based on the conditions and circumstances at the date of reissuance.

The auditor may perform any other procedures that he or she deems necessary in the circumstances. Based on the information that the auditor becomes aware of as a result of performing the procedures mentioned above, the auditor should reassess the going-concern status of the entity.

Ethics Interpretations And Rulings

Ethics interpretations and rulings are promulgated by the executive committee of the professional ethics division to provide guidelines as to the scope and application of the rules but are not intended to limit such scope or application. Publication of an ethics interpretation or ruling in the Journal of Accountancy constitutes notice to members. A member who departs from interpretations or rulings shall have the burden of justifying such departure in any disciplinary hearing.

INTERPRETATION 102-6: PROFESSIONAL SERVICES INVOLVING CLIENT ADVOCACY

A member or a member's firm may be requested by a client--

1. To perform tax or consulting services engagements that involve acting as an advocate for the client.

2. To act as an advocate in support of the client's position on accounting or financial reporting issues, either within the firm or out-side the firm with standard setters, regulators, or others.

Services provided or actions taken pursuant to such types of client requests are professional services [ET section 92.10 of AICPA Professional Standards] governed by the Code of Professional Conduct and shall be performed in compliance with Rule 201--General Standards, Rule 202--Compliance with Standards, and Rule 203--Accounting Principles, and interpretations thereof, as applicable. Furthermore, in the performance of any professional service, a member shall comply with rule 102, which requires maintaining objectivity and integrity and prohibits subordination of judgment to others. When performing professional services requiring independence, a member shall also comply with rule 101 of the Code of Professional Conduct.

Moreover, there is a possibility that some requested professional services involving client advocacy may appear to stretch the bounds of performance standards, may go beyond sound and reasonable professional practice, or may compromise credibility, and thereby pose an unacceptable risk of impairing the reputation of the member and his or her firm with respect to independence, integrity, and objectivity. In such circumstances, the member and the member's firm should consider whether it is appropriate to perform the service.

RULING NO. 99 UNDER RULE OF CONDUCT 102 AND RULING NO. 21 UNDER RULE OF CONDUCT 301: MEMBER PROVIDING SERVICES FOR COMPANY EXECUTIVES

Question--A member has been approached by a company, for which he or she may or may not perform other professional services, to provide personal financial planning or tax services for its executives. The executives are aware of the company's relationship with the member, if any, and have also consented to the arrangement. The performance of the services could result in the member recommending to the executives actions that may be adverse to the company. What rules of conduct should the member consider before accepting and during the performance of the engagement?

Answer--Before accepting and during the performance of the engagement, the member should consider the applicability of Rule 102--Integrity and Objectivity [ET section 102.01]. If the member believes that he or she can perform the personal financial planning or tax services with objectivity, the member would not be prohibited from accepting the engagement. The member should also consider informing the company and the executives of possible results of the engagement. During the performance of the services, the member should consider his or her professional responsibility to the clients (that is, the company and the executives) under Rule 301--Confidential Client Information [ET section 301.01].

INTERPRETATION 102-2: CONFLICTS OF INTEREST

(This interpretation replaces the previous interpretation 102-2, which has been withdrawn.)

A conflict of interest may occur if a member performs a professional service for a client or employer and the member or his or her firm has a relationship with another person, entity, product, or service that could, in the member's professional judgment, be viewed by the client, employer, or other appropriate parties as impairing the member's objectivity. If the member believes that the professional service can be performed with objectivity, and the relationship is disclosed to and consent is obtained from such client, employer, or other appropriate parties, the rule shall not operate to prohibit the performance of the professional service. When making the disclosure, the member should consider Rule 301--Confidential Client Information [ET section 301.01].

Certain professional engagements, such as audits, reviews, and other attest services, require independence. Independence impairments under rule 101 [ET section 101.01], its interpretations, and rulings cannot be eliminated by such disclosure and consent.

The following are examples, not all-inclusive, of situations that should cause a member to consider whether or not the client, employer, or other appropriate parties could view the relationship as impairing the member's objectivity:

* A member has been asked to perform litigation services for the plaintiff in connection with a lawsuit filed against a client of the member's firm.

* A member has provided tax or personal financial planning (PFP) services for a married couple who are undergoing a divorce, and the member has been asked to provide the services for both parties during the divorce proceedings.

* In connection with a PFP engagement, a member plans to suggest that the client invest in a business in which he or she has a financial interest.

* A member provides tax or PFP services for several members of a family who may have opposing interests.

* A member has a significant financial interest, is a member of management, or is in a position of influence in a company that is a major competitor of a client for which the member performs management consulting services.

* A member serves on a city's board of tax appeals, which considers matters involving several of the member's tax clients.

* A member has been approached to provide services in connection with the purchase of real estate from a client of the member's firm.

* A member refers a PFP or tax client to an insurance broker or other service provider, which refers clients to the member under an exclusive arrangement to do so.

* A member recommends or refers a client to a service bureau in which the member or partner(s) in the member's firm hold material financial interest(s).

The above examples are not intended to be all-inclusive.

The following ethics rulings are withdrawn: RULING NO. 57 UNDER RULE OF CONDUCT 102: MAS ENGAGEMENT TO EVALUATE SERVICE BUREAUS

Question--A client has asked a member's firm to evaluate and recommend service bureaus for processing a client's accounting records. Partners in the member's firm hold material financial interests in one of these service bureaus. Does a conflict of interest exist?

Answer--Yes. Under rule 102 [ET section 102.01] if the partners' financial interests in the service bureau are disclosed to the client and the client's consent is obtained for the performance of the engagement, the rule would not operate to prohibit the performance of the engagement.

RULING NO. 78 UNDER RULE OF CONDUCT 102: SERVICE ON GOVERNMENTAL BOARD

Question--May a member serve on a governmental board (for example, board of tax appeals, zoning commission) if, at the same time, the member provides professional services for a client or employer who comes before the board?

Answer--Rule 102 would prohibit the member from serving on the board unless the member (1) discloses this to the client or employer, the board, and any other appropriate parties and (2) receives consent from all parties to participate as a board member with respect to matters involving the client or employer.

(1)Audits of Brokers and Dealers in Securities currently specifies requirements for broker-dealers and commodity pools. A revised draft of that Guide has been exposed for comment. In addition, a new Guide that will apply to futures commission merchants and commodity pools is being prepared for comment.

(2)AcSEC has not reconsidered the Guide's disclosure requirements for public investment partnerships. Further, AcSEC does not have the authority to amend SEC requirements concerning disclosures in filings with the SEC.

(3)If the auditor decides not to reissue his or her report, the auditor may agree to be engaged to audit the financial statements for a period subsequent to that covered by the original report. This might be the case, for example, if the entity is experiencing profitable operations.

(4)Paragraph 5 of AU Section 530, "Dating of the Independent Auditor's Report," [of AICPA Professional Standards] states that an auditor may either "dual-date" or "later-date" his or her reissued report.

(5)In the absence of a definitive plan for the sale or securitization of the related mortgage loans, the cost of purchasing or originating the right to service mortgage loans is included as part of the cost of the loans for purposes of determining the lower of cost or market value.

(6)Loan type refers to the various conventional or government guaranteed or insured mortgaged loans and adjustable-rate or fixed-rate mortgage loans.