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The look ahead: Europe’s factories, US consumers look for signs of hope 

August 08 2012

Industrial production in the euro zone and the European Union increased in May, raising hopes after back-to-back decreases in March and April that Europe would avert an economic contraction in the second quarter. Eurostat’s scheduled release on Tuesday of June industrial production figures, and initial estimates for full-quarter GDP, will tell whether the promise held.

Interest in Europe’s economic health extends past the continent. The euro-zone debt crisis is cutting into manufacturing activity in Asia and European sales of US consumer products as unemployment soars in euro-zone countries adopting austerity measures to qualify for financial bailouts.

Industrial output rose 0.6% in the euro zone and 0.5% in the EU in May, but a comparison to how much the sector produced a year earlier highlighted the continued weakness of the sector and the euro-zone economy. The 2.8% year-over-year drop in industrial output was the biggest in the euro zone since December 2009, according to The Wall Street Journal.

Other gauges of economic activity in Europe provided more discouraging news. Italy’s National Institute for Statistics released preliminary GDP estimates that suggested a second-quarter decline of 0.7%. That’s the fourth consecutive quarterly GDP contraction. Economic outputs in Belgium and Spain were also down in the second quarter.

UK labour market

The UK economy, which has been struggling to get out of recession, could receive a boost August 15th, when the Office of National Statistics (ONS) releases labour market figures for the three months ending in June.

Jobs created by the Olympic Games helped decrease the unemployment rate to 8.1% in the three months through May, a nine-month low, according to Bloomberg.

An adjustment that the ONS plans to make in Wednesday’s release may further help reduce the UK unemployment rate, MarketWatch reported. To correct an error in the jobs data, the ONS will take as many as 35,000 workers in government-sponsored training and employment programmes off the unemployment rolls.

US consumers tightening up

More clues of cooling consumer sentiment in the US could come in the week ahead. On Tuesday, the US Census Bureau will release an estimate of retail sales figures for July, and final data for June.

Early June figures indicated retail sales had fallen 0.5%—marking three straight months of declines for the first time since 2008. That news was followed by the US Federal Reserve’s announcement this week that consumer borrowing rose just $6.5 billion in June—less than what economists had predicted.

Growth in employment has been slow in recent months, and the unemployment rate remains elevated. Meanwhile, household spending has been rising at a somewhat slower pace than earlier in the year, the Federal Open Market Committee said in a statement on June 1st.

On August 17th, The University of Michigan will release preliminary consumer confidence figures for August. Consumer confidence fell in July to a five-month low.

“The good news is that consumers do not expect the economic slowdown to prompt an economy-wide recession; the bad news is that consumers do not expect the pace of economic growth to revive job and income prospects,” Richard Curtin, director of the Thomson Reuters/University of Michigan Surveys of Consumers, said in a statement. “Consumers never willingly choose to lower their aspirations; that change is slowly forced on them by unrelenting adversity. The greatest concern to consumers is that wage and job growth will remain depressed in the foreseeable future, and that these meagre gains are likely to be diminished in the years ahead by rising taxes and benefit cutbacks.”

Not-for-profit guide coming

A working draft of a proposed audit and accounting guide, Not-for-Profit Entities, is scheduled for release August 15th by the American Institute of CPAs Financial Reporting Executive Committee (FinREC).

Enhancements to the proposed guide, which addresses many new accounting issues that have emerged over recent years, will include:

  • A greatly expanded section about reporting relationships with other entities.

  • New sections about reporting and measuring non-cash gifts.

  • A greatly expanded section about municipal bond debt.

  • New guidance for reporting the expiration of donor-imposed restrictions.

  • Greatly expanded discussion about the legal and regulatory environment in which not-for-profit entities operate.

The working draft will not include general and specific auditing considerations, analytical procedures or reporting or considerations of internal control.

The AICPA will be requesting that comments on the proposed guide be provided during a 60-day period, ending October 15th. FinREC will consider these comments before issuing a final version. The draft will be available on the AICPA website.

Vote coming on auditing standards proposal

The AICPA Auditing Standards Board (ASB) will vote August 16th on whether to issue an exposure draft to propose amending two clarified standards that take effect December 15th.

In response to member requests for further clarity, the ASB plans to propose Omnibus Statement on Auditing Standards—2012. This proposed statement on auditing standards would amend the following two sections of SAS No. 122, Statements on Auditing Standards: Clarification and Recodification:

  • Section 600, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors) (AICPA, Professional Standards, AU-C sec. 600).

  • Section 800, Special Considerations—Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks (AICPA, Professional Standards, AU-C sec. 800).

The exposure draft proposes to amend AU-C section 600 to, among other things, permit making reference to the audit of a component auditor in the auditor’s report on the group financial statements when the component’s financial statements are prepared using a different financial reporting framework than that used for the group financial statements, if certain criteria are met. The ASB is specifically seeking comments on this issue.

In addition, the exposure draft proposes to amend AU-C section 800 to add a definite set of criteria having substantial support that is applied to all material items appearing in financial statements to the bases of accounting defined as special-purpose frameworks.

The vote on whether to issue the proposed SAS for exposure will take place during an open ASB meeting to be held by conference call at 10am ET on August 16th. Those who wish to attend the call can register on the ASB’s meeting page at the AICPA’s website or contact Sherry Hazel at shazel@aicpa.org. The proposed SAS may be viewed on the ASB meeting page.

The comment period on the ED is expected to end October 30th, and the ASB plans to issue a final SAS to be effective December 15th.

—Compiled by CGMA Magazine staff editors.

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