2014 accounting and auditing update...

12/11/2014

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© 2014 KSM Business Services, Inc.

2014 Accounting and Auditing Update Seminar

December 11, 2014

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▪ Revenue from Contracts with Customers (ASU 2014-09)Justin Hayes

▪ Reporting Discontinued Operations (ASU 2014-08) and Development Stage Entities (ASU 2014-10)Amanda McGinity

▪ Going Concern (ASU 2014-15)Jessica Boicourt

▪ Employee Benefit Plan UpdateBernadette Fletcher

Agenda

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▪ Revised Code of Professional ConductMatt Bishop

▪ Bridging Financial Reporting and Performance ReportingBob Bracale

▪ Private Company AlternativesJohn Henne

▪ Accounting for Leases: Another Year and Another UpdateJason Patch

▪ Statement on Standards for Accounting and Review ServicesScott Price

Agenda

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Revenue from Contracts with Customers

December 11, 2014

Justin Hayes, CPA

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▪ Revenue from Contracts with Customers – Topic 606▫ Core Principle

- “An entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”

New Standard for Revenue Recognition

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1. Identify the contract(s) with the customer

2. Identify the performance obligations in the contract

3. Determine the transaction price

4. Allocate the transaction price to the performance obligations

5. Recognize revenue when (or as) the entity satisfies a performance obligation

5 “Easy” Steps

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▪ Contract:▫ “Agreement between two or more parties that creates

enforceable rights and obligations.”

▪ When to Apply:1. Approval and commitment of the parties2. Identification of the rights of the parties3. Identification of the payment terms4. The contract has commercial substance5. It is probable that the entity will collect the consideration to

which it will be entitled in exchange for the goods or services

Step 1 – Identify the Contract(s) with a Customer

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▪ Performance Obligation: a promise in a contract to transfer a good or service to a customer

▪ Distinct if it meets both criteria:▫ Capable of being distinct

▫ Distinct within the context of the contract

▪ Not distinct if criteria above is not met:▫ Should be combined with other goods or services until the

entity identifies a bundle of goods or services that is distinct

Step 2 – Identify Performance Obligations in the Contract

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Step 3 – Determine the Transaction Price

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Step 4 – Allocate the Transaction Price to the Performance Obligations

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▪ Performance obligation (PO) satisfied over time if one of the following three criteria are met:▫ The customer simultaneously receives and consumes the

benefits provided by the entity’s performance as the entity performs

▫ The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced

▫ The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date

Step 5 – Recognize Revenue When (or As) a Performance Obligation is Satisfied

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▪ Disclosures▫ Should provide the user of the financial statements with

sufficient information to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers

Disclosures

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▪ Five easy steps to analyze contracts for revenue recognition▫ Step 1 – Identify the contract with a customer

▫ Step 2 – Identify the performance obligations in the contract

▫ Step 3 – Determine the transaction price

▫ Step 4 – Allocate the transaction price to the POs

▫ Step 5 – Recognize revenue when (or as) POs are satisfied

Key Takeaways

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Thank You

Justin Hayes, CPA

P 317.428.1158

E [email protected]


Reporting Discontinued Operations and Development Stage Entities

December 11, 2014

Amanda J. McGinity, CPA, CGMA

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ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property,

Plant, and Equipment (Topic 360)

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity

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▪ Who is impacted?▫ Entities which have either:

- A component that either is disposed of or classified as held for sale

- A business or nonprofit activity that, on acquisition, classified as held for sale

▪ Objectives:▫ Reduce complexity and cost

▫ Improve usefulness to users

ASU 2014-08 Background

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▪ Discontinued operation may include:▫ Component of an entity

▫ Group of components of an entity

▫ Business activity

▫ Nonprofit activity

ASU 2014-08 Main Provisions

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▪ Must be reported in discontinued operations if:▫ Disposal represents a strategic shift with major effect on

entity’s operations and financial results, and any of the following are true:- Meets criteria to be classified as held for sale

- Was disposed of by sale

- Was disposed of other than by sale

▫ Business or nonprofit activity that, on acquisition, meets criteria to be classified as held for sale


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▪ Statement of Financial Position – For each comparative period, report assets and liabilities of disposal group separately in the asset and liability sections, respectively

▪ Expanded Disclosures – Flow charts in implementation guidance provide assistance


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▪ Major classes of line items constituting the pretax profit or loss

▪ Either of the following:▫ Total operating and investing cash flows

▫ Depreciation, amortization, capital expenditures, and significant operating and investing noncash items

▪ Pretax profit or loss attributable to the parent, if discontinued operation includes a noncontrolling interest

ASU 2014-08 Expanded Disclosures

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▪ For a disposal of an individually significant component that does not qualify for discontinued operations presentation:▫ Pretax profit or loss attributable to the component

▫ Pretax profit or loss attributable to the parent, if component includes a noncontrolling interest


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▪ When an entity has significant continuing involvement with a discontinued operation:▫ Amount of any cash inflows/outflows from/to the discontinued

operation following disposal

▫ Information about a discontinued operation in which an entity retains an equity method investment after the disposal

- These disclosures are required until results of operations of the discontinued operation are no longer presented separately in the statement where net income is reported


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▪ Apply prospectively to years beginning on or after December 15, 2014

▪ Should not apply amendments to items classified as held for sale before the effective date even if disposal is after the effective date

▪ Early adoption permitted, but only for disposals (or classifications as held for sale) not previously reported

ASU 2014-08 Effective Date

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ASU 2014-10, Development Stage Entities (Topic 915)

Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance

in Topic 810, Consolidation

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▪ Who is impacted?▫ Development stage entities

▫ Entities with interests in development stage entities

▪ Objectives:▫ Reduce cost and complexity

▫ Eliminate disclosures with limited relevance and usefulness

▫ Improve relevance of information provided

ASU 2014-10 Background

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▪ Removes Development Stage Entity definition

▪ Eliminates:▫ Inception-to-date information

▫ Development Stage Entity label on financial statements

▫ Description of activities

▫ Disclosure in first year not a development stage entity that it had been in previous years


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▪ Clarifies that Topic 275, Risks and Uncertainties, is applicable

▪ Removes exception to VIE provisions


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▪ Elimination of inception-to-date information and other disclosures:▫ Applied retrospectively except Topic 275 clarification, which

is applied prospectively

▫ Annual reporting periods beginning after December 15, 2014


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▪ Elimination of VIE exception▫ Applied retrospectively

▫ Public Companies – Years beginning after December 15, 2015

▫ Other Entities – Years beginning after December 15, 2016

▪ Early application is permitted for all amendments


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Thank You

Amanda McGinity, CPA, CGMA

P 317.452.1020

E [email protected]

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Going ConcernDecember 11, 2014

Jessica Boicourt, CPA, MBA

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▪ Background

▪ Application of ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern

▪ Examples

▪ Other Considerations

Today’s Agenda

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▪ Under GAAP, continuation of an entity as a going concern is presumed as the basis for financial reporting unless and until the entity’s liquidation becomes imminent (“going concern basis of accounting”)

▪ Financial statement measurements and classifications are based on this presumption▫ For example: current versus long-term; fair value versus

historical cost

Going Concern – A Presumption Critical to Financial Reporting

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Prior to ASU 2014-15, there was no guidance on going concern…well, kind of…

GAAP

• No guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures.

U.S. Auditing Standards

• Require that an auditorevaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time not to exceed one year beyond the date of the financial statements being audited.

• Also required to consider financial statement effects and footnote disclosures.

U.S. Securities and Exchange Commission

• Same as US Auditing Standards AND

• Guidance on disclosures expected when an auditor’s report includes an explanatory paragraph that reflects substantial doubt about an entity’s ability to continue as going concern for a reasonable period of time.

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▪ ASU 2014-15▫ Issued in August 2014

▫ Objectives:- Provide guidance on management’s responsibility for the

evaluation regarding going concern uncertainty

- Reduce diversity in timing and content of disclosures

- Similar in concept to the auditing standards (AU-C 570)

Adding Authoritative Guidance

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▪ Applicable to all entities

▪ Effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted.

▪ Requires:▫ An evaluation every reporting period

▫ Specific disclosures

▫ An assessment for a period of one year after the date the financial statements are issued (or available to be issued)

ASU 2014-15: Basic Information

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Decision Tree, Part 1 (No Going Concern Disclosures are Required)

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▪ Substantial doubt about the entity’s ability to continue as a going concern exists when conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable).

So, What Is Substantial Doubt?

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▪ Should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable).▫ Typically these conditions and events relate to the entity’s

ability to meet its obligations as they become due.

▪ Initial evaluation should NOT take into consideration the potential mitigating effect of management’s plans that have not been fully implemented

Management’s Evaluation of the Conditions and Events

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Decision Tree, Part 2 – There Is Substantial Doubt (Disclosures are Required)

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Effective Implementation

• Based on the feasibility of implementation of management’s plans in light of an entity’s specific facts and circumstances

• Generally, to be considered effectively implemented, management must have approved the plan before the financial statements are issued.

Mitigates the Conditions/Events

• Consider the expected magnitude and timing of the mitigating effect of the plan in relation to the magnitude and timing of the conditions or events.

Make Sure It Is a Probable Plan!

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▪ The entity should disclose information that enables users of the financial statements to understand all of the following:▫ Principal conditions or events that raised substantial doubt

about the entity’s ability to continue as a going concern (before consideration of management’s plans)

▫ Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations

▫ Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern

If Substantial Doubt Is Alleviated:

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▪ The entity should include a statement in the notes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued).

▪ The entity should also disclose information that enables users of the financial statements to understand all of the following:▫ Principal conditions or events that raise substantial doubt about

the entity’s ability to continue as a going concern▫ Management’s evaluation of the significance of those conditions or

events in relation to the entity’s ability to meet its obligations▫ Management’s plans that are intended to mitigate the conditions or

events that raise substantial doubt about the entity’s ability to continue as a going concern.

If Substantial Doubt Is Not Alleviated:

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Example 1GC Company Balance Sheet

December 31, 2016

Cash $100,000

Fixed Assets 100,000

Total Assets $200,000

Debt $150,000

Equity 50,000

Total Liabilities & Equity $200,000

Assumptions – Example 1

▪ Debt Due on March 31, 2017

▪ GC Company is in negotiations with bank to extend debt for 6 months (due September 30, 2017)

▪ Issuance Date is March 15, 2017

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Example 2GC Company Balance Sheet

December 31, 2016

Cash $100,000

Fixed Assets 100,000

Total Assets $200,000

Debt $150,000

Equity 50,000

Total Liabilities & Equity $200,000

Assumptions – Example 2

▪ Debt Due on March 31, 2018

▪ Issuance Date is March 15, 2017

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▪ SAS 126 (AU-C 570) indicates:▫ The auditor should consider the need for, and evaluate the

adequacy of, disclosure of the principal conditions or events that initially caused the auditor to believe there was substantial doubt

▫ The auditor’s consideration of disclosure should include the possible effects of such conditions or events, and any mitigating factors, including management’s plans

▫ Auditor is responsible to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time- Defined as a period of time not to exceed one year beyond the date of

the financial statements

Other Considerations

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▪ Effective for calendar year ends December 31, 2016▪ It is management’s responsibility for the evaluation

regarding going concern uncertainty▪ Substantial doubt – Probable▪ Evaluation of substantial doubt: within one year after the

date that the financial statements are available to be issued

▪ If there is substantial doubt, disclosures are required▪ Management’s plans can alleviate, not eliminate,

substantial doubt

In Summary – ASU 2014-15

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Thank You

Jessica Boicourt, CPA, MBA

P 317.452.1022

E [email protected]

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Employee Benefit Plan UpdateDecember 11, 2014

Bernadette Fletcher, CPA, MBA

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▪ Windsor decision revisited

▪ Defined contribution plan restatements

▪ Safe harbors for accepting rollover contributions

▪ Qualified longevity annuities in DC plans

▪ Locating “lost” participants

▪ 2015 plan limitations

Topics

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▪ IRS approach (Rev Rule 2013 -17): State of Celebration▫ If same-sex couple is legally married in a state, remain

legally married regardless of domicile

▫ Domestic partnerships and civil unions are NOT marriage

▪ DOL approach (Tech Release 2013 -14)▫ Used IRS approach for ERISA purposes

Windsor Decision (DOMA)

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▪ Pre June 26, 2013, decision▫ Windsor not required…but optional

▪ June 26 – September 14, 2013▫ Windsor required▫ May use state of celebration or state of residence

▪ After September 15, 2013▫ Windsor required▫ MUST use state of celebration

Notice 2014-19: Effective Dates

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▪ December 31, 2014

▫ To clarify “spouse” if needed

▫ To conform the document to what the plan actually did

Amendment Deadline (if required)

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▪ IRS now issuing “opinion letters” for pre-approved plans ▫ Prototypes▫ Masters▫ Volume Submitters

▪ Adopting employers must restate to the new documents before April 30, 2016

▪ Documents are based on IRS 2010 Cumulative List▪ “Determination letter” for individual plan▫ No, for master or prototype▫ Yes, for volume submitters if modifications are minor

DC Plan Restatements (Announcement 2014-16)

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▪ Rev. Rule 2014-9

▪ #1 - Plan to Plan Rollover▫ Receiving plan can conclude rollover is from a qualified plan

if no Code 3C (unqualified) on Form 5500, line 8a

▫ Receiving plan can also conclude:- Rollover does not include after-tax contributions

- Required minimum distributions were made PRIOR to the rollover

Safe Harbor Rollovers

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▪ #2 - IRA to Plan Rollover▫ Receiving plan can assume no after-tax money and

participant will not be age 70 ½ by end of year in which the rollover occurs- If attaining 70 ½, need documentation that RMD has been

done

▫ The agent for the rollover check denotes from IRA

Safe Harbor Rollovers (continued)

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▪ #3 - IRA to IRA▫ One 60 day rollover during a single year

▫ Effective for rollovers after December 31, 2014

▫ RO from traditional IRA to Roth IRA (conversion) permitted

Safe Harbor Rollovers (continued)

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▪ Part of participant account pays benefits after an extended age▫ Ensures participant will not outlive account balance

▫ Excluded from RMD (required minimums after age 70 ½)

▪ Restricted-entry Target Date Funds▫ At target date, fund converts to an annuity

Qualified Longevity Annuity Contracts

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▪ Send certified letter

▪ Check records of employer and other plans

▪ Attempt to locate beneficiaries

▪ Delete! IRS and SSA letter forwarding program

▪ New! Use free Internet searches▫ Search engines

▫ Public records (BMV, RE taxes, DL, etc.)

▫ Obituaries

▫ Social media

Locating “Lost” Participants

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▪ For larger accounts, extend search

▪ Can charge the expense to the participant’s account

▪ How to handle unclaimed accounts▫ Preferred solution: Roll to IRA

▫ Interest bearing savings account

▫ Escheat to state (unclaimed property)

Locating “Lost” Participants (continued)

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Plan Limitations2015 2014

Deferrals: 401(k), 403(b), 457 $18,000 $17,500

Catch up (over age 50) 6,000 5,500

Sec 415 limit (DC plan) 53,000 52,000

Compensation limit 265,000 260,000

Highly Compensated EE 120,000 115,000

Taxable Wage Base 118,500 117,000

IRA 5,500 5,500

IRA Catch up 1,000 1,000

SIMPLE IRA 12,500 12,000

SIMPLE IRA Catch up 3,000 2,500

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Thank You

Bernadette Fletcher, CPA, MBA

P 317.580.2134E [email protected]


Revised Code of Professional ConductDecember 11, 2014

Matt Bishop, CPA, MBA, CCIFP

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AICPA Code of Professional Conduct

▪ The Code covers:▫ Ethics

▫ Independence

▫ Overall professional responsibilities

▪ Increased attention

▪ Other governing bodies

▪ Revision of the Code

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Revision of the Code

▪ Codification

▪ Online

▪ Intent

▪ Expansion

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Changes of Note

▪ Ethics Rulings Ethics Interpretations

▪ Rulings▫ Narrow scope

▪ Interpretations▫ Broadened

▫ Codified

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Changes of Note (continued)▪ Four parts:▫ Preface: Applicable to All Members▫ Part 1: Members in Public Practice▫ Part 2: Members in Business▫ Part 3: Other Members

▪ Familiar structure:▫ Topics▫ Subtopics▫ Sections

▪ Numerical hierarchy

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Changes of Note (continued)

▪ Mapping document with cross references

▪ Nonauthoritative information ▫ “Boxed” text

- Templates, Q&As, etc.

▪ New conceptual framework▫ For situations not specifically addressed

▫ Tweaked for public practice vs. business members

▫ Failure to apply is failure to comply

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Changes of Note (continued)▪ Applicable to the evaluation of the following rules:

▫ Integrity and Objectivity▫ General Standards▫ Compliance with Standards▫ Accounting Principles▫ Confidential Client Information▫ Contingent Fees▫ Acts Discreditable▫ Advertising and Other Forms of Solicitation▫ Commissions and Referral Fees▫ Form of Organization and Name

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▪ For the new, risk-based framework, members must:1. Identify potential threats to compliance

a. Not specifically addressed

b. Reasonable and informed third party / acceptable level

2. If threat is not at acceptable level, apply safeguards

3. If threat is not at acceptable level, rule is violateda. Discontinue services

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▪ Threats to compliance are defined as:▫ Adverse Interest threat

▫ Advocacy threat

▫ Familiarity threat

▫ Management Participation threat

▫ Self-interest threat

▫ Self-review threat

▫ Undue Influence threat

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▪ The Code also lists examples of safeguards that can be applied to reduce or eliminate threats

▪ Reliant upon judgment▫ Documentation will be key

▪ Delayed implementation of new conceptual frameworks

▪ Effective dates▫ Revised Code – December 15, 2014

▫ New conceptual frameworks – December 15, 2015

▫ Early implementation permitted

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Other Recent Updates

▪ Periods beginning on or after December 15, 2014▫ “Partner Equivalent”

▫ Cumulative effect of nonattest services

▫ Ancillary services- Financial statement preparation

- Cash to accrual conversions

- Reconciliations

- Trend was to treat as part of engagement itself

- Will be separate nonattest services

- Stipulations listed for independence to NOT be impaired

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Other Recent Updates (continued)

▪ Routine activities

▪ Main management responsibilities (for members to avoid):▫ Authorizing transactions

▫ Preparing source documents

▫ Reporting to TCWG on management’s behalf

▫ Accepting responsibility for designing internal controls

▫ Deciding which recommendations to implement

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Other Recent Updates (continued)

▪ Interpretations on threats to compliance relative to specific nonattest services:▫ Valuations

▫ Benefit plan administration

▫ Bookkeeping

▫ Information systems

▫ Tax, etc.

▪ Independence rules now applicable to client affiliates

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Conclusion

▪ AICPA Code of Professional Conduct▫ Applicable to all members

▫ Revised

▫ Free

▫ Electronic

▫ Fluid

▫ Snapshot printouts available online

▫ http://pub.aicpa.org/codeofconduct/Ethics.aspx

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Thank You

Matt Bishop, CPA, MBA, CCIFP



Bridging Financial Reporting and Performance Reporting

Identifying, Linking, and Presenting Vital Signs

December 11, 2014

Bob Bracale, Senior ConsultantKSM Consulting, LLC

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Presentation Goal

Financial Reporting Performance

Reporting

Visually Representing Vital Signs

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What Is the CFO/Controller’s Role?

Historically: Reporting of results.

Goal: Actionable information for Managing results.

Sales Revenue 15,400,000$

Cost Of Goods Sold 11,185,000$

Gross Profit 4,215,000$

SG&A 4,500,000$

Net Loss (285,000)$

P&L ‐ GAAP Basis

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What is driving the results?

Redirect organizational focus to the future.




SG&A 4,500,000$

Net Loss (285,000)$

P&L ‐ GAAP Basis

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Performance Reporting

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Deconstruct/Reconstruct Cost of Sales

To draw attention to the extent of how “fixed” the cost structure really is


Material Costs 6,985,000$

Contribution Margin 8,415,000$

Change in Inventory (110,000)$

Mfg. Labor and Overhead 4,310,000$

SG&A 4,500,000$

Net Loss (285,000)$

P&L ‐ Economics




SG&A 4,500,000$

Net Loss (285,000)$

P&L ‐ GAAP Basis

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Can You Read This?

The haumn bairn is the wrlods bset perattn rceniogoitn sytesm

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Pattern Recognition Creates Focus

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Vital signs guide us forward.

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Vital Signs Create Focus

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“When addressing issues, leadership teams spend most of their time discussing the heck out of everything, rarely identifying anything, and hardly ever solving something. It’s truly epidemic within the business world”

- “Traction” by Gino Wickman

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Case Study: What’s the Problem?

Revenue 5,815,818$ 100.00% 7,073,922$ 100.00%

Raw Material 2,712,398 46.64% 3,012,179 42.58%

Mfg Expense 2,316,049 39.82% 2,659,979 37.60%

Change in Inventory (691,777) (11.89%) 132,576 1.87%

Cost of Sales 4,336,670$ 74.57% 5,804,734$ 82.06%

Gross Margin 1,479,148$ 25.43% 1,269,188$ 17.94%

SG&A 1,381,200 23.75% 1,461,145 20.66%

Net Income (Loss) 97,948$ 1.68% (191,957)$ (2.71%)

Memo ‐

Units Sold 1,082,817 1,286,672

Units Produced 951,630 1,179,155

20XX 20XY

Comparative P&L

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Vital Signs Highlight Issues

Capacity – Contribution – SpendEconomic CTX's

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

Operating Expense

Op Exp Brk Even Level UCL

$0.25

$0.45

$0.65

$0.85

$1.05

$1.25

$1.45

$1.65

$1.85

Contribution Per Unit Sold

Cm/unit UCL Brk Even Level

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

1,100,000

Production Output

Prod UCL

Brk Even Level Desined UCL

Designed LCL

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Focus on vital signs to drive outcomes.

Economic CTX's

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

Operating Expense

Op Exp Brk Even Level UCL

$0.25

$0.45

$0.65

$0.85

$1.05

$1.25

$1.45

$1.65

$1.85

Contribution Per Unit Sold

Cm/unit UCL Brk Even Level

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

1,100,000

Production Output

Prod UCL

Brk Even Level Desined UCL

Designed LCL

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Conclusion

Visually Representing Vital Signs

Financial Reporting Performance

Reporting

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Thank You

Bob BracaleKSM Consulting, LLC


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Private Company AlternativesDecember 11, 2014

John Henne, CPA, CFE, CISA, MPA

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▪ ASU 2014-07: Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements

▪ ASU 2014-02: Accounting for Goodwill

▪ ASU 2014-03: Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps (Simplified Hedge Accounting Approach)

Accounting Standards Updates Covered

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▪ Annual periods beginning after December 15, 2014; early application permitted

▪ These updates apply to private company financial statements

▪ Private companies must elect to use the alternatives

Effective Date for Accounting Standards Updates

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Why You Should Care

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▪ Most popular ASU issued impacting privately held businesses

▪ Impact is significant for private companies

▪ Allows private companies to deconsolidate certain variable interest entities

▪ Accomplishes what the user needs through disclosure of leasing arrangements versus consolidation

ASU 2014-07

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Entities Impacted by ASU 2014-07

▪ Real Estate ▪ Leasing

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Common Control

Leasing Arrangement

Leasing Activity

Guarantee/Collateral

Four Criteria

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▪ Common Control - Not defined by guidance; intuitive in nature; target is exact same ownership

▪ Leasing Arrangement - Leasing an asset (real estate and equipment); employees are excluded

▪ Leasing Activity - Substantially all the activity between the private company/lessee and the VIE/lessor are related to leasing activities

▪ Explicit Guarantee or Collateral -- Provide a guarantee or collateral for the VIE/lessor related tothe asset leased by the private company

- Principal amount of the debt cannot exceed the value of theasset leased by the private company from the VIE/lessor

Four Criteria

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▪ Removal of VIE from the consolidated financial statements

▪ Prepare comparative financial statements and note disclosures

▪ A disclosure would be added to the notes of the financial statements discussing the change in accounting principle

▪ The notes to the financial statements would also need to be updated for related party rent or lease expense, future minimum rentals and any guarantees

▪ If an audit, emphasis of a matter added in the auditors’ report

Impact on Financial Statements and Disclosures

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▪ Allows private companies to amortize goodwill over a 10 year period

▪ Saves time and money by eliminating the two-step impairment test

▪ Satisfies the users of the financial statements needs as it removes an asset that a bank would not allow a company to borrow against

ASU 2014-02

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▪ Number that was agreed upon by the PCC

▪ Tax law requires goodwill be amortized over a 15 year period

10 Year Amortization Period

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▪ Required only in instances where there are indicators of impairment (trigger-based impairment test)

▪ Some indicators of impairment would include the following:

- Significant downturn in the economy

- Internal issues such as the loss of key personnel or

customers

▪ If indicators identified, apply one-step test

▪ Need to test goodwill impairment at the reporting unit level or entity level

Impairment Test

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▪ A disclosure would be added to the notes of the financial statements discussing the change in accounting principle

▪ Prior year financial statements are not adjusted

▪ If an audit, emphasis of a matter added in the auditors’ report


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▪ Applies to plain vanilla interest rate swaps that are receive-variable, pay-fixed swaps

▪ This type of hedging arrangement allows the private company to swap a variable interest rate loan for a fixed interest rate loan to hedge the risk of rising interest rates

▪ Typically swap arrangements are embedded within the loan agreement with the bank

ASU 2014-03

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Private Company –Pays Fixed

Interest Rate

Bank –Receives

Variable Interest Rate

Counterparty –Plays the Float Between the

Fixed and Variable Interest

Rates

Parties Involved in an Interest Rate Swap Arrangement

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1. Debt and the swap have to be based on the same interest rate index and same reset period

2. There is no floor or cap on the variable rate amount3. The repricing and settlement dates on the swap and debt are

the same date or do not differ by more than a couple days4. The fair value of the swap should be at or near zero at

inception5. The notional amount of the swap should match the principal

being hedged6. All interest payments occurring on the borrowings during the

term of the swap are designated as hedged whether in total or in proportion to the principal amount of the borrowings being hedged

Six Conditions for Application

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▪ The borrower has until the date the financial statements are issued to document the hedge relationship

▪ Hedge effectiveness is assumed

▪ Private company can assume that settlement value equals fair value

▪ Private company can value the derivative without taking into account non-performance risk on the part of the counterparty

▪ Private company still books the derivative with the offset to other comprehensive income as an unrealized gain or loss

Simplified Hedging Approach

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▪ Entity will still have all the disclosures it would normally have with any derivative

▪ Notes to the financial statements will still include the tabular format with Level 1, Level 2 and Level 3

▪ Only difference is that settlement value can be assumed to be fair value

▪ Essentially there is no disclosure relief▪ Change in accounting policy would be added to the notes

to the financial statements▪ If an audit, emphasis of matter added in the auditors’

report


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▪ Accounting for Identifiable Intangible Assets in a Business Combination

- Only recognize and measure assets capable of being

sold or licensed independently

- Two assets not meeting this criteria include

non-compete agreements and customer related

intangibles

- Final ASU has not been issued yet

PCC Issue No. 13-01A

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Thank You

John Henne, CPA, CFE, CISA, MPA



Accounting for Leases: Another Year and Another Update

December 11, 2014

Jason Patch, CPA

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▪ What sources are these excerpts from?▫ Accounting for leases is a subject which has been thoroughly

studied over a long period of time.

▫ The Board received 306 position papers and comment letters on its Discussion Memorandum.

▫ The Board received 250 comment letters when it issued the original Exposure Draft.

▫ The Board received 283 comment letters when it issued the revised Exposure Draft.

A Little Trivia

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▪ Excerpts are from FAS 13 – “Basis for Conclusions”

▪ Issued in 1976 – Yes, almost 40 years ago!

The Answer Is …..

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▪ Limited information included in financial statements about operating leases

▫ Many users indicate they must make adjustments to financial statements to utilize information

▫ Contractual rights and obligations (assets and liabilities) are not recorded on the balance sheet - An estimated $1.25 trillion of off-balance sheet operating lease

commitments for SEC registrants

What's the Point of the Project?

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▪ Lease classification for Lessor would be Type A or Type B based upon framework underlying existing US GAAP▫ The “residual and receivable” approach outlined in the original

exposure draft has not been retained

▪ Type A▫ Investment in asset on the Balance Sheet▫ Interest income and any profit through Income Statement

▪ Type B▫ Continued recognition of asset on the Balance Sheet▫ Lease income through Income Statement

Lessor Model Update

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▪ Leases must be classified as either a capital or operating

▪ Capital lease if any one of the following criteria exist:▫ Ownership transfers to lessee at end of lease▫ Lease contains a bargain purchase option▫ Lease term is 75% (or more) of estimate economic life of the

property▫ Present value of minimum lease payments is 90% (or more)

of property’s FMV

▪ Operating lease if not a capital lease

A Quick Reminder of Today’s Rules

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▪ Capital Lease:▫ Asset and liability recorded on balance sheet▫ Expense recognized as depreciation and interest - Front-load

expense recognition

▪ Operating Lease:▫ No asset or liability recorded on balance sheet▫ Straight-line rent expense recognized on income statement

▪ Operating lease often preferred as no liability on balance sheet and straight-line expense recognition

A Quick Reminder of Today’s Rules

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▪ Asset and liability to be recognized by Lessees for all leases except those deemed to be short-term leases

▪ Subsequent accounting will be determined based on classification as either Type A or Type B lease

▪ Type A Lease: Treatment similar to capital lease (amortization and interest expense) - Front-load expense recognition

▪ Type B Lease: Treatment similar to operating lease (rent expense) - Straight-line expense recognition

Key Tentative Decisions

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▪ Term of 12 months or less

▪ Lease renewal (or termination) options to be considered only if the Lessee is reasonably certain to exercise having considered relevant economic factors

▪ Lease term to be reassessed only upon significant changes in circumstances that are within the Lessee’s control

Revised Definition of Short-Term Lease

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▪ Classification of lease based upon criteria in International Accounting Standard (IAS) 17

▪ IAS 17 is similar to existing US GAAP, but does not provide for a bright-line test and is more principals based▫ Guess what … In practice, those interpreting IAS 17 often

look to the bright-line test of existing US GAAP …

Type A and Type B Lease Classification

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Proposed Lessee Accounting

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▪ Initial Measurement of Right-of-Use Asset and Lease Liability:▫ Measurement is same for both Type A and Type B

▫ Lease Liability:- Equal to present value of future lease payments

- Use lessee’s incremental borrowing rate as discount rate

▫ Right of Use Asset:- Equal to liability plus initial direct expenses less lease incentives

Initial Measurement

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▪ Type B lease to be recognized evenly over lease term as straight-line rent expense. Two components to be measured:▫ Lease liability to be amortized in manner consistent with

any other debt

▫ Right of use asset amortization represents difference between straight-line rent expense and interest from lease liability

▫ The sum of these two components would be recorded as rent expense in the income statement

Subsequent Accounting – Type B

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▪ The Facts:▫ 5 year lease term with annual rent of $12,000

▫ 5% incremental borrowing rate

▫ $5,000 of direct costs to obtain the lease in Year 1

▫ Assumption made that this is a Type B lease

Type B Example

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Type B ExampleDirect Total Amort.

Yr Lease Lease Lease Interest Principal of SL

Costs Pymts. Costs Reduct. Asset Rent

(plug) Exp

58,211 (53,211)

1 5,000 12,000 17,000 2,211 9,780 10,798 13,000 47,442 43,422

2 - 12,000 12,000 1,943 10,057 11,057 13,000 36,365 33,365

3 - 12,000 12,000 1,428 10,572 11,572 13,000 24,793 22,793

4 - 12,000 12,000 887 11,113 12,113 13,000 12,690 11,680

5 - 12,000 12,000 320 11,680 12,680 13,000 -0- -0-

Tot 5,000 60,000 65,000 6,789 53,211 58,220 65,000

53,211 PV at 5% =

Balance Sheet

Asset Liability

JE: ROU Asset 58,211 Lease Liability 53,211 Cash 5,000

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▪ FASB and IASB continue to discuss alternatives; full convergence may not occur

▪ All leases would result in recognition of asset and liability

▪ Subsequent expense recognition dependent on type of lease:▫ Type A: Similar to capital lease

▫ Type B: Similar to operating lease

▪ Deliberations continue

Summary of Considerations

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Thank You

Jason Patch, CPA



Statement on Standards for Accounting and Review Services

(SSARS) No. 21December 11, 2014

Scott C. Price, CPA

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▪ SSARS No. 21 structured as follows:▫ Section 60: General Principles for Engagements Performed

in Accordance With SSARS

▫ Section 70: Preparation of Financial Statements

▫ Section 80: Compilation Engagements

▫ Section 90: Review of Financial Statements

▪ Effective for engagements performed in accordance with SSARSs for periods ending on or after December 15, 2015

SSARS No. 21

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▪ Includes requirements and guidance on the following:▫ Ethics▫ Professional judgment▫ Conduct of engagement▫ Engagement level quality control▫ Acceptance & continuance of relationships/engagements

▪ Accountant is required to obtain a signed engagement letter for any engagement performed in accordance with SSARS. Must be signed by management or TCWG, or both, depending on the entity structure.

SSARS No. 21 – Section 60

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▪ Section 70 applies when an accountant is engaged to prepare financials but is not engaged to perform an audit, review or compilation of those financial statements.

▪ Statement required on each page:▫ No assurance is provided on these financial statements.▫ These financial statements have not been subjected to an audit,

review or compilation engagement, and no assurance is provided on them.

▪ Disclaimer (optional)▫ See example


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Appropriate Addressee

The accompanying financial statements of XYZ Company as of and for the year ended December 31, 20XX, were not subject to an audit, review or compilation engagement by us and, accordingly, we do not express an opinion, a conclusion, nor provide any assurance on them.

Signature of Accounting Firm

Accountant’s City and State

Date

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▪ Section 70 applies:▫ Preparing FS prior to

audit/review by another accountant

▫ Mgt-use only FS

▫ Single FS (i.e., BS) or FS with disclosures omitted

▫ Using GL information to prepare FS outside of software system

▪ Section 70 does not apply:▫ Preparing FS when

engaged to perform audit, review or compilation

▫ Proposing adjustments▫ Drafting FS notes▫ Bookkeeping services▫ Preparing FS related to

valuation services▫ Preparing FS related to

litigation services

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▪ Pre-clarity AR Section 80 applies when an accountant is either 1) engaged to report on compiled financial statements or 2) submits (prepares and presents) financial statements to the client or third parties.

▪ Eliminates the need for the accountant to determine who prepared the financial statements by eliminating the submission requirement and making the compilation literature apply when the accountant is engaged to perform a compilation service.


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SSARS No. 21 – Section 80 Primary changes in

compilation literature:• Report now required by

all compilation engagements

• Financials prepared and presented for internal use by management is now covered by Section 70

• Compilation reports streamlined to differentiate from assurance reports

▪ See example for standard report

▪ Additional paragraphs:▫ Special-purpose/OCBOA

frameworks

▫ Omit disclosures

▫ Independence impairment

▫ Known departure

▫ Supplementary information

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Accountants’ Compilation Report

Appropriate Addressee

Management is responsible for the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20XX and 20XX, and the related statements of income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements in accordance with accounting principles generally accepted in the United States. We have performed compilation engagements in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. We did not audit or review the financial statements nor were we required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, we do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements.

Signature of Accounting Firm

Accountants’ City and StateDate

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▪ Section 90 has very few changes from the previous literature.

▪ Accountants’ Review Report▫ See example

▫ Requires use of headings in the report


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Independent Accountants’ Review Report

We have reviewed the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20XX and 20XX, and the related statements of income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements. A review includes primarily applying analytical procedures to management’s financial data and making inquiries of company management. A review is substantially less in scope than an audit, the objective of which is an expression of an opinion regarding the financial statements as a whole. Accordingly, we do not express such an opinion.

Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement whether due to fraud or error.

Accountants’ ResponsibilityOur responsibility is to conduct the review engagements in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. Those standards require us to perform procedures to obtain limited assurance as a basis for reporting whether we are aware of any material modifications that should be made to the financial statements for them to be in accordance with accounting principles generally accepted in the United States. We believe that the results of our procedures provide a reasonable basis for our conclusion.

Accountants’ ConclusionBased on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with accounting principles generally accepted in the United States.

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▪ Emphasis-of-matter or other-matter paragraph required relating to the following matters:▫ Special-purpose/OCBOA framework

▫ Known departure

▫ Reporting on comparative financial statements when prior period audited

▫ Required supplementary information

▫ Revisions to financial statements because of subsequently discovered facts


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Thank You

Scott Price, CPA
