presented by: ray g. stephens ohio university

Ray G. StephensOhio University

Presented by:

RAY G. STEPHENS Ray G. Stephens, D.B.A., C.P.A., C.M.A., CGMA, is Professor of Accountancy at Ohio University. He was James E. Daley Professor from 2004 to 2007, Director of the School of Accountancy from 1999 to 2007, and Director of the Ohio Center for Professional Accountancy from 2007 to 2011 at Ohio University. His current teaching and research interests are in corporate financial reporting and attest services. Professor Stephens earned his doctorate from the Graduate School of Business Administration, Harvard University (D.B.A.). . He was KPMG Peat Marwick Professor of Accounting at Kent State University for eight years, a faculty member at The Ohio State University for thirteen years, and has also held instructional positions at Harvard University, East Carolina University, Boston University, and the American College in Paris (France). Professor Stephens is the recipient in 2008 of the Ohio Society of CPAs 100th Anniversary Most Influential Accountant in First 100 Years award, was the recipient of the Ohio Society of CPA’s Gold Medal in 2004 and the 2004 National Beta Alpha Psi Business Information Professional in Education Award, was the 1995 Ohio Outstanding Accounting Educator, and formerly served a term on the Accountancy Board of Ohio (2001-2009; chair 2005-2006). He is serving as a member of NASBA’s Regulatory Response Committee and its International Task Force and on the AICPA’s FAR Subcommittee of the CPA Examination Content Committee (member 2008-11, Chair since 2011) and a member of the CPA Examination Content Committee. Professor Stephens has several years of banking experience, has been involved in consulting projects with public companies and has served extensively as a consultant and expert witness in accounting and auditing. He is a frequent instructor for executive and continuing education programs and was awarded an AICPA Outstanding CPE Instructor in 1991 and the Ohio Society of CPA's Outstanding Discussion Leader in 1995. Dr. Stephens serves as a managing member of Virginia Electronic & Lighting LLC and Appalachian Visiting Nurse Association, Hospice and Health Services, Inc. He is a former Academic Accounting Fellow at the Securities & Exchange Commission, a former Senior Academic Fellow in the Office of the Auditor of the State of Ohio, and a former Faculty Resident with Arthur Andersen & Co., and currently serves as the North American Accounting and Auditing Consultant for CPA Associates International, Inc. Professor Stephens has authored numerous books and articles. April 9, 2013\

A&A Update for GBQ Partners

1

Notes:

1


Presented by:Ray Stephens, CPA, CMA, CGMA, DBA

Professor of AccountancyOhio University(740)591-5892

Standards Setting Issues

2

Standard Setters

• FASB

• EITF (after approval by FASB)

• Private Company Council (after endorsement by the FASB)

• FINREC (industry standards and technical practice aids to implement standards, formerly AcSEC)

3


2

Notes:

4

FASB Board

• Russell Golden, Chairperson (2017)

• Daryl Buck (2015)

• James Kroeker, Vice Chairperson (2018)

• Thomas Linsmeier (2016)

• Harold Schoeder (2015)

• Marc Siegal (2018)

• Lawrence Smith (2017)

Private Company Council

• Now active

• FASB has issued a document about the issues to be considered when a private company would not have to meet standards of a public company (Private company definition under consideration – several definitions of nonpublic)

5

PCC Proposals

• Simplified accounting for interest rate swaps

• Recognition of identifiable intangibles only when based on contract or other legal requirements

• Goodwill to be amortized over life of primary assets, not longer than ten years, and impairment at the entity level

6


3

Notes:

Interest rate swap accounting

• Two methods available to all but public entities, not-for-profit entities, employee benefit plans, and financial institutions– (1) Combined instrument approach

– (2) Simplified hedge accounting approach

• Accounting policy choice applicable to all swaps

7

Combined instrument approach

• Same index

• Plain vanilla

• Amount equal to or less than the floating rate borrowing

• Approximately the same term

• Repricing, settlement, and effectiveness approximates the terms of borrowing

8

Combined instrument approach

• Disclosure of the settlement value

• Disclosure of amount under the swap and the amount not covered for a borrowing

• Contingent credit features and triggering events

• Gains and losses if any

9


4

Notes:

Simplified hedge accounting

• Same criteria as combined instruments approach except:– Term could be less than the borrowing

– Effectiveness not at the same time as the borrowing

• Accounting policy choice for individual swaps

10

Simplified hedge accounting

• Measurement would be the settlement value rather than fair value

• Determination as a hedge could occur within a few weeks rather than concurrently with the initiation of the swap

11

PCC Proposals

• Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements – would replace consolidation with disclosure under certain conditions but entity would apply ASC 840 (Leases) and ASC 460 (guarantees)

12


5

Notes:

Private Company

• Not a public entity

• Not a not-for-profit entity

• Not an employee benefit plan

13

VIE Replacement Criteria

• Entities under common control

• Private company has a leasing arrangement

• Substantially all of the activity between the entities are the leasing arrangement

14

Disclosure

• Key terms of the leasing arrangement

• Amount of debt or liabilities of the lessor entity

• Key terms of the debt arrangements

• Key terms of any other interest related to the lessor

15


6

Notes:

Removal for all

• The implicit variable interest entity requirements would be removed for all entities

16

17

Status of FINREC (AcSEC)

• Historically, AcSEC issued SOPs (subject to FASB clearance) which were authoritative standards (e.g., SOP 98-1 on internal use software and SOP 97-2 on software revenue recognition)

• In 2003, FASB announced that after a transition period, AcSEC would no longer be permitted to issue SOPs as authoritative standards

• Now – A&A Guides, TPAs

18

Grandfathered GAAP

• GAAP in category c or d of prior hierarchy if its effective date was prior to March 15, 1992

• EITFs in category c of prior hierarchy if its effective date was prior to March 16, 1993

• Superseded standards with continuing impact in financial statements, currently effective from SFAS 168 on next slides


7

Notes:

19

Superseded But Still Effective(not in the ASC)

• Poolings (APB 16)

• Business combinations under APB 16 or SFAS 141

20

No authoritative guidance

• First consider accounting principles within authoritative guidance unless– Prohibited application to transactions

– Prohibited use of analogy

• Use of nonauthoritative – see next slide

21

Nonauthoritative

• Industry practices

• FASB Concepts Statements

• AICPA Issues papers

• IASB standards

• AICPA Technical Practice Aids

• Accounting textbooks, handbooks and articles


8

Notes:

22

Impact of Commercial Substance

– Be alert for transactions whose form is different than their substance (commercial substance now defined in ASC 845-10)

– Accounting should always be based on substance• Non-substantive parts of transactions are ignored

– Indicators• Transactions undertaken or substantially revised in effort to obtain

particular accounting treatment

• Transactions that don’t appear to make economic sense on their own

– Often an issue in SEC enforcement cases

23

Accounting Standards Updates

• Replaces SFAS, FINs, FASB Staff Positions, EITF Abstracts

• Not authoritative in their own right

• Used to update the Codification

• Lists of ASUs issued in 2012 and 2013

ASU 2013-1

• Clarifies disclosures for off-setting for recognized assets and liabilities for derivatives, repurchase agreements, and securities lending transactions (originally in ASU 2011-11)

• Effective now

LIST OF 2012 ACCOUNTING STANDARDS UPDATES

ASU 2012-1 Continuing Care Retirement Communities – Refundable Advance Fees (ASC 954)

ASU 2012-2 Testing Indefinite-Lived Intangible Assets for Impairment (ASC 350)

ASU 2012-3 Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22

ASU 2012-4 Technical Corrections and Improvements (multiple topics)

ASU 2012-5 Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows (ASC 230)

ASU 2012-6 Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition

Date as a Result of a Government-Assisted Acquisition of a Financial Institution (Topic 805)

ASU 2012-7 Accounting for Fair Value Information That Arises after the Measurement Date

and Its Inclusion in the Impairment Analysis of Unamortized Film Costs (Topic 926)

LIST OF 2013 ACCOUNTING STANDARDS UPDATES1

ASU 2013-1 Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (Topic 210)

ASU 2013-2 Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive

Income (Topic 220) ASU 2013-3 Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic

Entities (Topic 825) ASU 2013-4 Obligations Resulting from Joint and Several Liability Arrangements for Which

the Total Amount of the Obligation Is Fixed at the Reporting Date; a consensus of the FASB Emerging Issues Task Force (Topic 405)

ASU 2013-5 Parent’s Accounting for the Cumulative Translation Adjustment upon

Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity; a consensus of the FASB Emerging Issues Task Force (Topic 830)

ASU 2013-6 Services Received from Personnel of an Affiliate; a consensus of the FASB

Emerging Issues Task Force (Topic 958) – (also has an effect under Topic 954) ASU 2013-7 Presentation of Financial Statements: Liquidation Basis of Accounting (Topic

205) ASU 2013-8 Financial Services—Investment Companies (Topic 946) ASU 2013-9 Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee

Benefit Plans in Update No. 2011-04 (Topic 820) ASU 2013-10 Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate)

as a Benchmark Interest Rate for Hedge Accounting Purposes (Topic 815) ASU 2013-11 Presentation of an Unrecognized Tax Benefit When a Net Operating Loss

Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists

1 Updated through November 1, 2013


9

Notes:

ASU 2013-1

• Gross amounts of assets and liabilities

• Amounts offset to determine net amounts

• Amounts subject to master netting arrangement or other similar

• Other amounts from either management decision not to off-set or collateral

• Net amounts if affected by prior bullet

ASU 2013-2

• Covers disclosures of reclassifications out of accumulated other comprehensive income

• If presented in its entirety to net income, examples are in the disclosure

• If amounts reclassified to assets or indirectly to expenses (for example, periodic pension cost), cross reference to those disclosures

ASU 2013-2

• Effective for periods beginning after December 15, 2012


10

Notes:

ASU 2013-3

• Clarifies that nonpublic entities of any size do not have to provide level of fair value disclosure when the fair value is only a disclosure, not on the statement of financial position

• Effective now

ASU 2013-4

• Specifies that the amount to be recorded when there is joint and several liability is the sum of:

• Amount it has agreed with its co-obligors to pay

• Additional amount it would have to pay on behalf of its co-obligors

ASU 2013-4

• Amount must be fixed as of the reporting date (but may change due to items such as additional borrowing or change in interest rate)

• Disclosure of the nature and amount of the joint and several liability

• Effective for fiscal years beginning after December 15, 2013


11

Notes:

ASU 2013-5

• Cumulative translation adjustment goes to net income when controlling interest is lost within a foreign entity (except in substance real estate sale or oil and gas conveyance) only when complete or substantial liquidation

• For equity method in a foreign entity, changes in ownership means partial amount goes to net income

ASU 2013-5

• If equity method and within a foreign entity, then reclassification only if complete or substantial liquidation

• For loss of control of a foreign entity or for an acquisition by stages, cumulative transition adjustment released into net income

ASU 2013-5

• Public entities: Prospectively in periods beginning after December 15, 2013

• Nonpublic entities: Prospectively in periods beginning after December 15, 2014


12

Notes:

ASU 2013-6

• Services received from an affiliate of a not-for-profit organization

• Applies when the affiliate does not charge personnel costs or fair value for the services

• Recognize contributions either at the cost to the affiliate or the fair value if different

• Effective prospectively for fiscal years beginning after June 15, 2014

ASU 2013-6

• Requires health care entities to recognize the amount as an equity increase in net assets

• Usual disclosures for contributed services

• FASB did not provide guidance on how to capture the amounts to be recognized

ASU 2013-7

• Liquidation basis of accounting for either voluntary or involuntary liquidation

• Statement of Changes in Net Assets in Liquidation

• Statement of Net Assets in Liquidation

• Required after December 15, 2013; early adoption allowed


13

Notes:

ASU 2013-8

• Financial Services—Investment Companies: Amendments to the Scope, Measurement, and Disclosure Requirements

• Effective for investment companies for fiscal periods beginning after December 15, 2013 – early implementation is prohibited

37

Investment Company Determination

• Entities subject to Investment Company Act of 1940

• Other entities which both:– Provide investment management services for

fund suppliers

– Only substantive activities are providing returns to its investors from investment income and capital appreciation (see additional guidance)

38

Measurement

• Assets measured at fair value under ASC 820

• Fair value practical expedient for net share evaluation included

• No longer equity method for any investments

39


14

Notes:

Disclosure

• Investment company status

• Change in status, if applicable

• Financial statement impact of change in status, if applicable

40

Transition

• Cumulative effect adjustment of if changed to investment company

• Entity not deemed to be an investment company shall discontinue use of investment company accounting prospectively

41

ASU 2013-9

• Deferral indefinitely of the disclosures for pension plans concerning the effective date for certain disclosures about investments held by a nonpublic employee benefit plan in the plan sponsor’s own equity securities


15

Notes:

ASU 2013-10

• Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes

43

ASU 2013-11

• Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists

• Public entities for periods beginning after December 15, 2013

• Nonpublic one year later

44

ASU 2013-11

• Present as a reduction in deferred tax asset except:– Jurisdiction does not allow

– Jurisdiction does not require and entity does not intend

• If liability, timing of use is used to present in a classified balance sheet

45


16

Notes:

46

International Convergence

• FASB/IASB Memorandum of Understanding (Oct 2002):– both the FASB and IASB pledged to use

their best efforts to• make their existing financial reporting

standards fully compatible as soon as is practicable and

• to coordinate their future work programs to ensure that once achieved, compatibility is maintained.

47

Objective of Convergence

• To achieve compatibility, the FASB and IASB agree, as a matter of high priority, to:– undertake a short-term project aimed at removing

a variety of individual differences between U.S. GAAP and IFRSs;

– remove other differences between IFRSs and U.S. GAAP that will remain at January 1, 2005, through coordination of their future work programs;

– continue progress on the joint projects that they are currently undertaking; and,

– encourage their respective interpretative bodies to coordinate their activities.

48

Revised Memorandum of Understanding

• Most recent version has most convergence projects being completed by 2011


17

Notes:

49

Convergence Issues

• IASB’s “macro-hedging” (IAS 39)

• IASB election to revalue nonmonetary assets

• LIFO inventory accounting

• Insurance issues

Convergence Issues

• Even joint convergence projects may not lead to identical standards

• Revenue recognition

• Leases

• Financial instruments

• Investment companies

50

SEC and IFRS

• Adoption

• Convergence

• Condorsement

• SEC Staff report on issues now out, but former SEC Chair Mary Shapiro said SEC is far away from decisions

51


18

Notes:

Revenue Recognition Changes in the forthcoming second

Re-Exposure ASU

52

Elements of Recognition

• (a) identify the contract with a customer,

(b) identify the separate performance obligations in the contract,

(c) determine the transaction price,

(d) allocate the transaction price to the separate performance obligations,

(e) recognize revenue when a performance obligation is satisfied.

53

Distinct Performance Obligations

(a) it is sold separately by the customer

(b) Customer can use either together or separately with other available resources

But treated as one if

(c) It is highly inter-related and entity bundles

(d) No significant modification occurs

54


19

Notes:

Distinct Performance Obligations

• Offerings in the distribution network at the time of sale would be a separate performance obligation

• Contract modifications are being changed so that it results in termination of old and creation of new (paragraph 22a)

• Practical expedient in paragraph 30 (delivery over same time removed)

55

Transaction Price

• Fixed versus variable

• If variable from rebates or contingencies, then probability weighted

• Must be able to identify possible outcomes and reasonably estimate probability of outcomes

56

Transaction Price

• Adjust for the time value of money if a significant financing component

• Collectability should not be considered in the recording of revenue

• May move the applicability of the constraint on revenue recognition to determination of the transaction price

57


20

Notes:

Transaction Price

• Constraint means not recognizing revenue subject to future reversal

58

Price allocation

• Allocate on standalone prices

• If standalone prices are not observable, then estimates of standalone prices

• Updated with changes over the life of the contract

59

Price allocation

• Residual method is retained when one or more distinct performance obligations are highly variable

• Allocation of discount (to multiple performance obligations) and contingent consideration (to a single performance obligation) were retained

60


21

Notes:

Satisfaction of obligation

• Discrete transfer of good or service –customer has right to direct the use and receive the benefit

• Continuous transfer – method best depicts– Output methods

– Input methods

– Passage of time

61

Satisfaction Conditions

• The customer has an unconditional obligation to pay for the asset (and the payment is nonrefundable).

• The customer has legal title to the asset (except in some cases).

• The customer can sell the asset to (or exchange the asset with) another party.

• The customer has physical possession of the asset (except in some cases).

• The customer has the practical ability to take possession of the asset.

62

Contract Costs

• Costs of obtaining a contract as incurred unless incremental costs expected to be recovered (selling, marketing, direct response advertizing)

• Direct costs of contract (or anticipated contract) fulfillment as an asset if– Generate resources for satisfaction of contract (some

may be under other standards such as inventory, PPE, and Software)

– Are Probable of recovery– Consideration of onerous performance

63


22

Notes:

Direct cost recognition

• If not covered by other standards, then amortize as goods and services are delivered

• Impairment testing by comparing carrying amount to amount recoverable

64

Methods

• Output methods

• Units produced or delivered

• Contract milestones

• Surveys of good or services transferred

• Input methods

• Percentage of costs incurred

65

Collaborative arrangements

• Not limited to development and commercialization

• May result in revenue if a customer

66


23

Notes:

Exceptions

• Leases – ASC 840

• Insurance Contracts – ASC 844

• Financial Instruments – See next slide

• Guarantees (other than product warranties) – ASC 460

• Nonmonetary exchanges to facilitate sales to customers

67

Financial Instruments

• (i) Topic 310 on receivables;

• (ii) Topic 320 on debt and equity securities;

• (iii) Topic 405 on extinguishments of liabilities;

• (iv) Topic 470 on debt;

• (v) Topic 815 on derivatives and hedging;

• (vi) Topic 825 on financial instruments; and

• (vii) Topic 860 on transfers and servicing;

68

Disclosures

• The nature of contracts that it enters into with customers and the related accounting policies

• The principal judgments used in accounting for contracts with customers

• A reconciliation of the beginning and ending net contract position(s) – public only

• The total amount of outstanding performance obligations and the expected timing of their satisfaction

• Information about onerous contracts, including the extent and amount of such contracts and the reasons for them becoming onerous.

69


24

Notes:

Product Warranties

• Latent defects – retains current guidance

• Defects arising after transfer – separate performance obligation

• Compensation for harm or damages under law – no separate, ASC 450-20 applies

70

Right of return

• No revenue recognition initially, refund liability for estimate

• Update refund liability

• Recognize asset for right to recover, initially measured as cost of goods

• Return service is not a separate asset

71

Licensing Contracts

• Entire and exclusive – consider as a sale

• Not entire, but exclusive – treat like a lease and recognize over time

• Others – a license with a single performance obligation

• Must consider whether contract includes other performance obligations

72


25

Notes:

Licensing Contracts

• Constraints an important issue for licensing contracts which have the impact of royalty payments based on sales by the licensee

73

Other Issues

• Accounts receivable (unconditional except for time – but not creditworthiness) versus contract asset or liability (only one)

• Options for further acquisitions by a customer

• Gross versus net

• Aggregation and separation of contracts

74

Other Issues

• Bill and hold sales

• Repurchase arrangements

• Consignment arrangements

• Lots of changes to industry guidance to bring into conformity

75


26

Notes:

76

CONSOLIDATIONS

77

Business Combinations

• Acquire a majority of the voting interests in a single transactions

• Acquire control by contract only

• Acquire control by stages

• Acquire control with no consideration

Addressing Potential for VIEs

• Does a company have:– Leases

– Loan guarantees

– Purchase options on leases

– Purchase contracts on leases

– Assignment of rights

– Implicit arrangements

– Purchase arrangements for materials, etc.78


27

Notes:

79

VIE CONSOLIDATION

• Involvement with entity

• Determination of variable interest entity

• Determination of primary beneficiary

• Consolidation by primary beneficiary– Book values

– Fair values

Involvement

• Determination of VIE status termed involvement– Involved with an entity in economic way

– Structuring the VIE by entity, related party, agent or de facto agent

– Involvement more than insignificant

• If none of the above, no determination required

80

81

Determination as VIE

• A variable interest entity or VIE meets either of the following five conditions:

• The equity investment is insufficient to allow the entity to finance its activities without additional subordinated financial support

– Presumptively less than 10% of total assets

– Must meet GAAP definition of equity

– OK to have voting and nonvoting classes in some circumstances


28

Notes:

82

Determination as VIE

• The equity investors as a group lack any of the three characteristics commonly associated with a controlling financial interest

– Voting or similar rights that control the entity (ASC 810-50-55; ASC 952-810-55)

– Unlimited obligation to absorb the entity’s losses

– Unlimited right to receive the entity’s residual returns

• The control differs significantly from its interests in one of the three categories above

83

When to Assess Scope Conditions

• Scope conditions assessed upon an entity’s initial involvement with another entity – due to changes may require annual reassessment from items such as:

1. Changes in governing documents of the entity or contractual arrangements among the parties involved with it

2. Distributions to equity investors that cause other parties to become exposed to expected losses

3. Changes to the activities of the entity or acquisition of additional assets that increase its expected losses

84

Expected Losses ASC 810-10-55• Entity’s expected losses =

A. Expected downside variability in net income or loss

B. Expected downside variability in FV of entity’s assets


29

Notes:

Expected Residual Returns

• Entity’s expected residual returns =

A. Expected upside variability in net income or loss

B. Expected upside variability in FV of entity’s assets

C. Fees paid to the decision maker (but see next slide)

D. Fees paid to certain guarantors

85

ASU 2010-10

• Fees paid to a decision maker for investment companies may not fall into expected residual returns if:– Commensurate with efforts

– No more than insignificant in relation to expected returns

• Employees exclusion for related parties removed

86

87

Implicit Variable Interest

• ASC 810-10-25, 810-10-55

• This is applicable to both nonpublic and public reporting enterprises. This issue commonly arises in leasing arrangements among related parties, and in other types of arrangements involving related parties and unrelated parties.

• FASB has proposed to remove this as part of Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements


30

Notes:

88


• An implicit variable interest is an implied pecuniary interest in an entity that changes with changes in the fair value of the entity’s net assets exclusive of variable interests.

• Indirectly receiving, rather than directly receiving, variability from an entity

89


• Agreements to replace impaired assets

• Other agreements to protect variable interest holders– Fair value guarantees (exit price guarantees)

– Relationship with a related party that would increase a lease payment in the event of increases in loan payments

90

Variability Considerations

• ASC 810-10-25, 810-10-55

• Two step process for determining variability and assignment to entities

• Determine nature of risks (variability)

• Determine how risks are transferred through liabilities, equities, contracts, subordination, and derivatives, and implicit arrangements


31

Notes:

Primary BeneficiaryQualitative Analysis

• Primary Analysis is a qualitative analysis– Power to direct matters significant to the

variable interest entity

– Right to receive benefits or obligation to absorb losses significant to the variable interest entity

• If cannot determine primary beneficiary under qualitative, then quantitative or implicit

91

92

Primary Beneficiary Quantitative Analysis

•Primary Beneficiary (PB) is the entity that– Absorbs a majority of the VIE’s expected losses AND / OR– Receives a majority of the VIE’s expected residual returns

•An enterprise that is considered a VIE’s decision maker is very likely to be the PB– Decision maker is the entity responsible for the purchase or sale

of assets or other operating decisions that significantly affect the VIE’s revenues, expenses, gains, or losses

– PB formula is weighted toward the decision maker when interests that bear expected losses are effectively dispersed

93

Primary Beneficiary, Continued

• If there is no variable interest holder that has either a majority of the VIE’s expected losses or a majority of the VIE’s expected residual returns, then the VIE has no PB and is not consolidated


32

Notes:

General Partners

• General partners cannot use control exemptions (kick out rights and substantive participations by limited partners) as a rationale for not being the primary beneficiary

94

95

Related Parties

• In addition to ASC 850-10-xx (SFAS No. 57) related parties, an entity must treat variable interests held by the following other parties as its own in determining if it is the PB– Consolidated VIEs– Parties that cannot operate without significant support

from the entity– Agents or de facto agents– Parties that received their interests as a contribution

from the entity– Board members of the entity– Employees of the entity

Related Parties

• If there is a related party group which meets which meets the requirements for primary beneficiary, then one member will be the primary beneficiary even though individually no entity meets the requirements

96


33

Notes:

97

Related Parties, Continued

• If the primary beneficiary is a related party group, the following hierarchy determines which party in the group consolidates:

1. In an agency relationship, the principal (not the agent)

2. The party with activities most closely associated with the VIE

98

When to Assess Primary Beneficiary

•PB assessment performed upon an entity’s initial involvement with a VIE – due to changes may require annual reassessment from items such as:

– A change in the VIE’s governing documents or contractual arrangements among the parties with interests in the VIE

– The original PB would reassess its status as PB if it sells or reduces its interest in the VIE

– A party that acquires newly issued interests of the VIE or some or all of the original PB’s interest in the VIE would reassess its status to determine if it is now the PB

99

Measurement

•PB must measure assets, liabilities, and noncontrolling interests of a VIE at fair value upon initial consolidation unless:

– The PB and the VIE are under common control

– The PB transferred assets and/or liabilities to the VIE at or shortly before becoming the PB


34

Notes:

100

Measurement, Continued

•Apply allocation methodology in ASC 805 to the excess fair value of net assets consolidated over consideration given and previous carrying value of interests in the VIE

•Recognize excess of consideration given and previous carrying value of interests in the VIE over fair value of net assets consolidated immediately as an extraordinary loss

Presentation

• Equity of consolidated variable interest entity not owned by the consolidating entity is shown as noncontrolling interest on the consolidated financial statements whether book consolidation or fair value consolidation.

• Intercompany transactions are eliminated.

101

102

Disclosure Requirements

• All entities with significant variable interests in a VIE must disclose:– Nature, purpose, size, and activities of the VIE

• PB must also disclose:– Carrying amount and classification of the assets of the

consolidated VIE that collateralize the VIE’s obligations– Restrictions on recourse from VIE’s creditors to the PB

• Enterprises other than the PB must also disclose:– Nature of involvement with the VIE and when that

involvement began– Maximum exposure to losses due to involvement with the

VIE


35

Notes:

103

Disclosure Requirements• Disclosure to separate:

• Non-consolidated but entity is sponsor or has a significant variable interest and methodology for making the determination

• Consolidated entities and changes in consolidation from prior period

Disclosure

• In many related party lease arrangements, the owners of the operating entity are also the owners of the variable interest entity being consolidated.

• Disclosure is not prohibited of that both the stockholders’ equity and the noncontrolling interest are the same parties.

104

Combined Financial Statements

• No requirement to consolidate

• Entities under common control

• Always a book combination

105


36

Notes:

PROPOSED LEASE ASU

FASB re-exposure in 2013

106

107

Current Lease Standards

• IAS 17 versus SFAS 13 capital leases

• Both use title transfer

• Both use bargain purchase

• Substantially all versus Present value greater than 90% of fair value

• Major part versus 75% of life

Lease Codification

• ASC 840 would be replaced by ASC 842

• All industry specific guidance with an 840 subtopic would be eliminated

• No effective date set yet

108


37

Notes:

Two Lease Models

• Interest and amortization model (the model in the original exposure draft) – Now Type A

• Straightline lease expense model (the new alternative adopted on June 12, 2012) –Now Type B

109

Separating Types

• Type A – for assets other than buildings or parts of building

• Type B – for leases of building or parts of buildings

110

ASU Exposure Draft

• Issued originally August 17, 2010

• Re-exposed on May 16, 2013

• Would replace current ASC 840

• Effective date to be determined later

111


38

Notes:

Lease

• A contract in which the right to use a specified asset (the underlying asset) is conveyed for a period of time, in exchange for consideration

112

Right to control requirements

• Right to use the asset or direct others to use the asset while obtaining more than an insignificant amount of output or utility OR

• Right or ability to control physical access while obtaining more than an insignificant amount of output or utility OR

113

Right to control requirements

• Entity obtains all but an insignificant amount of output or utility of the asset BUT does not pay a contractually fixed amount or the current market price per unit of output or utility (this will be treated as payment for product or service – not a lease)

114


39

Notes:

Leases

• Applies to all leases, including subleases, of right-of-use assets except those scoped out

• Right-of- use assets refer to the lessee

• “underlying assets” refer to the lessor, which leases part of the asset to the lessee who records the right-of-use asset

115

Scope Exceptions

• Leases of intangible assets – ASC 350– Revenue recognition proposal would put only

licenses which are non-exclusive and non-entire term under proposal for leases

• Leases of biological assets – ASC 905 on agriculture

116

Scope Exceptions (continued)

• Leases to explore for or use minerals, natural gas and similar non-regenerative resources – ASC 930 on mining and ASC 932 on oil and gas

• Not specific in the exposure draft, inventory and precious metals would not be included under leases

117


40

Notes:

Scope Exceptions (continued)

• Contracts which represent a purchase or sale of an underlying asset– Transfer of control and all but trivial amount of

risks and benefits

– Lease after the lessee has exercised option to purchase – treated as a purchase (lessee) and sale (lessor) at the point

118

Objective

• Establish principles that lessees and lessors shall apply to report relevant and representationally faithful information to users of financial statements about the amounts, timing and uncertainty of the cash flows arising from leases.

119

Multiple Element Contracts - I

• Lessee and lessor would have to determine if contract had service elements and lease elements – distinct or not distinct

• ED on revenue recognition for multiple element arrangements would be used to determine if service element is distinct from lease element using concept of stand-alone value

120


41

Notes:

Multiple Element Contracts - II

• Stand-alone value:– Sold by vendor separately

– Sold by others separately

– Sold by customer

• If contract did not meet requirements of multiple elements, entire contract would be treated as a lease

121

Multiple Element Contracts - III

• Multiple element determination would also apply to existing leases at transition and if met, only the lease element would be capitalized

122

Distinct service elements

• Entity or another entity sells the service separately

• Distinct function

• Distinct profit margin

123


42

Notes:

LESSEE ACCOUNTING

124

Two Lease Models

• Interest and amortization model (the model in the exposure draft)

• Straightline lease expense model (the new alternative adopted on June 12, 2012)

• See next page for details of separation

125

Recognition Interest and Amortization Model

• Recognize a right-of-use asset and a liability to make lease payments at the date of commencement of lease

• Make the same recognition for all existing leases at the effective date

126


43

Notes:

Lease Term I

• The lease term is the noncancellable period for which the lessee has contracted with the lessor to lease the underlying asset, together with any options to extend or terminate the lease when there is a significant economic incentive for an entity to exercise an option to extend the lease, or for an entity not to exercise an option to terminate the lease.

Lease term II

• Extensions and lease terminations shall be considered in determining the more likely than not term – contractual terms

• Non-contractual terms such as alternatives and financial consequences of lease extensions and terminations

128

Lease term III

• Business factors such as crucial assets for operations, location factors, and specialized assets

• Lessee factors such as intentions and past practice

129


44

Notes:

Initial Measurement of lease liability

• Present value of lease payments over the lease term would be a liability based on interest rates by lessee for similar terms

• Would apply to all leases in existence at the time of transition at the date of opening balance sheet of the earliest comparative period as a retrospective application

130

Lease payments

• Probability weighted cash flows including– Contingent rentals payable – using forward

rates or indices if available, other current rates or indices

– Residual value guarantees

– Payments under term option penalties

• Price of purchase option is not included

131

Residual values

• Depend on the longest term more likely than not

• Contractual obligation for residual values if returned to lessor at the end of that term

• Lessee would estimate the amount to be paid under the residual value guarantee

132


45

Notes:

Discount rates

• Rate the lessor charges the lessee if it can be readily determinable

• Otherwise, the lessee’s incremental borrowing rate -- rate for similar terms and similar security the lessee would have to pay to purchase a similar underlying asset

133

Right-of-use assets

• Right-of-use asset is “An asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.”

• Once recognized, ASC 840 would not apply to the right-of-use asset except that (1) amortization is required and (2) impairment testing is required (ASC 350)

134

Initial Measurement of right-of-use asset

• Amount of lease liability

• Plus the amount of initial direct costs –recoverable costs directly attributable to negotiating and arranging a lease that would not have been incurred had the lease transaction not have been made

135


46

Notes:

Initial direct costs - I

• Commissions

• Legal fees

• Evaluation of credit worthiness

• Evaluation and recording of guarantees, collateral and other security arrangements

• Negotiating lease terms

136

Initial direct costs - II

• Preparing and processing lease documents

• Closing the transaction

• Other direct cost incremental to the specific lease

137

Not initial direct costs

• General overheads

• Unsuccessful origination efforts

• Idle time

• Lessor costs for advertising, solicitation, servicing existing leases, or other ancillary activities

138


47

Notes:

Subsequent measurement of lease liability - I

• Adjust the lease liability for changes in the lease term – this will be a balance sheet change in the lease liability

• Adjust the lease liability for changes in contingent rentals, residual value guarantee estimates, and term option payment estimates

139

Subsequent measurement of lease liability - II

• Changes in other than lease term related to prior or current period will be income statement impact in current period

• Changes in other than the lease term related to future periods will adjust the lease liability – a balance sheet change in the lease liability

140

Subsequent measurement ofright-of-use asset I

• Systematic amortization in accordance with ASC 350 over shorter of lease term or useful life – significant discussion now going on in joint meetings

• Impairment in accordance with ASC 350 with impairment test required at each reporting date

141


48

Notes:

Subsequent measurement ofright-of-use asset II

• Changes in the lease term

• Changes in other than the lease term (contingent rental estimates, residual value guarantee estimates, term option payment estimates) that relate to future periods

142

Expensing

• Lease liability is amortized using the interest amortization method and the expense (cash payment minus lease liability amortization) is termed “interest expense”

• The amortization of the lease asset is termed “depreciation expense” or “amortization expense”

143

Straightline Lease Expense Model

• Recognize a right of use asset

• Recognize a liability for the discounted expected cash payments

• Total expense is straightlined over the lease term

• Expense is termed “lease expense”

144


49

Notes:

Straightline Lease Expense Model

• Lease liability is adjusted based on interest amortization model

• Leased asset is adjusted for the amortization of the liability plus any amount needed to straightline the expense

145

Statement of cash flows

• Lease payments are operating activities

• The right of use asset is treated as supplemental non-cash transaction

146

Less than one year economic term

• Use of simplified method and amounts for less than one year with option

• Record asset and liability without discounting

• Do not record either asset or liability

147


50

Notes:

Subleasing by a Lessee

• Intermediate Lessor is treated both as a lessee and a lessor.

• Presentation– Right-to-use asset

– Right to receive payments

– Lease liabilities

– Reported net

148

TRANSITION - Lessees

149

Date of Transition

• Recognize the impact of all existing lease on the beginning balance sheet of the earliest year presented and retrospectively adjust comparative periods as if the accounting principle had been in place

• Simplified retrospective method follows

150


51

Notes:

Existing Capital Leases

• No change required unless there are:– Options

– Contingent rentals

– Term option penalties

– Residual value guarantees

• Required to recalculate if any of the above are in place

151

Existing Short-term Operating Leases

• Recognize a liability at the amount of future lease payments (undiscounted)

• Recognize a right-of-use asset at the same amount

• The election allowed in paragraph 64-66 is not allowed at transition

152

Existing Other Operating Leases

• Recognize a liability for each lease measured at the present value of remaining lease payments

• Recognize a right-of-use asset at the amount of the liability, unless impaired

• Adjust the right-of-use asset for any prepaid or accrued lease payments

153


52

Notes:

Lease Disclosures

154

Nature of lease arrangements - I

• General description

• Contingent rentals

• Existence and contingencies for options, including renewals and termination

• Description of which options were and were not included as part of the right-of-use asset

• Terms allowing purchase of the asset

155

Nature of lease arrangements - II

• Amortization assumptions and judgments and changes

• Residual value guarantees

• Initial direct costs during the period and those included in the right-of-use asset

• Restrictions imposed by lease arrangements

• Information about leases not yet commenced

156


53

Notes:

Other Disclosures

• Nature and amount of subleases

• Short-term leases and for lessees, amount recognized (if the option to record is chosen)

157

Lessee Disclosure

• Sale and leaseback transaction disclosure

• Reconciliation of right-to-use assets and lease obligations for interest and amortization leases

• Single maturity analysis for both models

158

Lessee Disclosure

• Reconciliation of gross obligation and amounts of assets and liabilities in the financial statements for interest and amortization leases (not convergence)

• Information to aid user in understanding

159


54

Notes:

Lessor Accounting

160

Lessor Accounting

• The two model approach would also be used by lessors

• In addition, the lessor would have to determine whether to record as a reduction in assets (originally the derecognition approach, now the receivable and residual approach)

161

Lessor Accounting

• If not the receivable and residual approach, treat like an operating lease

• Leveraged leases would be treated like any other lease, no special accounting

162


55

Notes:

Receivable and residual approach

• Recognize a receivable at discounted cash flows using interest rate

• Initially recognize the underlying asset at the gross residual amount which includes deferred gross profit

• Accrete over the lease term to the gross residual amount

163

Receivable and residual approach

• Do not recognize the deferred gross profit until the asset is sold

164

FINANCIAL INSTRUMENTS

165


56

Notes:

166

Measuring at Fair Value

• Issue 1: What constitutes a financial instrument and should all financial instruments be included? What about nonfinancial assets and liabilities?

• Issue 2: What constitutes fair value and how should it be measured?

• Issue 3: How should changes in fair value be included in the financial statements?

167

ASC 820-10-xx (SFAS 157)

• Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

• Definition now effective for all fair values in US GAAP

168

ASC 820 (SFAS 157) did not change

• Did not require any fair values, only defines fair values and disclosures for fair values otherwise required

• Did not change the applicability of SFAC No. 7 (as originally specified in SFAS 149)


57

Notes:

169

Exceptions from ASC 820

• Share Based Payments in ASC 718 (SFAS 123R) – voted to change wording

• VSOE – Vendor specific objective evidence requirements

• ASC 330 (ARB 43 inventory pricing)

• Lease assets and liabilities

• Practicability exceptions not overridden

ASU 2011-4 FAIR VALUES

• Convergence with IFRS

• Effective for public entities for interim and annual periods beginning after December 15, 2011, no early adoption

• Effective for nonpublic for fiscal periods beginning after December 15, 2011

• Disclosures covered later

170

ASU 2011-4 FAIR VALUES

• Convergence standard

• Measurements in US GAAP– Blockage factors (premium or discount) limited

for level 2 and level 3 fair values

– Highest and best use only applies to nonfinancial assets

– Fair value for equity instruments

– Portfolio management

171


58

Notes:

172

ASC 820 Levels of Fair Values

• Three levels in SFAS ASC 820

• Level 1 – Quoted prices in active markets for identical items

• Level 2 – Observable market inputs other than quoted prices in active markets for identical items

• Level 3 – Measurements based on entity inputs –developed by the entity and not derived or corroborated by market inputs

173

ASC 820 Level 2 Fair Values

• Types of Level 2– Prices for similar items

– Interest rates

– Yield curves

– Volatilities

– Prepayment speeds

– Credit risks

– Foreign exchange rates

– Published indexes

Level 3 Fair Values

• Traditional approach determining most likely cash flows and adjusting at the risk-adjusted rate

• Adjusting cash flows for risk and discounting at the risk free rate

• Expected cash flows and discounting at the risk-adjusted rate

174


59

Notes:

175

ASC 820Restrictions on Determinations

• Transaction costs are not part of the exit price determination

• Blockage factors cannot be used in determining the exit price

Principal (or Most Advantageous) Market

• What if there is more than one market for the asset or liability? Which price is fair value?

• Measurement assumes transaction occurs in the principal (or most advantageous) market:– Look for a Principal market – i.e., market with most volume or level of

activity

– If there is no principal market, look to the most advantageous market (i.e., highest price, considering transaction costs)

• Transaction costs only used for market determination, fair value reported

176

177

Markets Not Active

• ASC 820-10-35, 65 sections clarifies application in markets not active


60

Notes:

178

ASC 820-10-65-4

• Provides indicators of markets not active

• Provides indicators of lack of orderly transactions

• Requires fair values still

• Defines major security types

• Disclosures concerning changes in valuation techniques

179

Fair value of liabilities

• ASC 820-10-35 has added paragraphs 16A to 16G, also amends ASC 810-10-41, 810-35-50, and 825-10-55-3

180

Fair value of liabilities

• Fair value hierarchy for valuing– Quoted prices of identical liability as a liability

– Quoted prices identical liability as an asset

– Quoted prices of similar liability as an asset

– Income or market valuation technique

• Required to maximize the use of observable inputs


61

Notes:

181

Investments in Mutual Funds - I

• Estimating the Fair Value of Investments in Investment Companies That Have Calculated Net Asset Value per Share in Accordance with the AICPA Audit and Accounting Guide, Investment Companies

• Provides that net investment prepared under the Guide could be used without further adjustment

182

Investments in Mutual Funds - II

• Disclosures to allow investors to understand the fair value measurement used, including:

– Remaining life

– Funding commitments

– Restrictions on redemptions and conditions which could cause restrictions

183

Recurring Examples

• Trading or available-for-sale securities • Derivatives at fair value through earnings • Servicing assets & liabilities at fair value through

earnings• Financial assets and liabilities for which the FVO

has been elected • Investments carried at fair value in accordance

with the AICPA Audit & Accounting Guide, Investment Companies

• Pension assets (sponsor’s books) – annual only


62

Notes:

184

Non-recurring Examples• Impairment of goodwill

• Impairment of long-lived assets held and used• Long-lived assets held for sale accounted for at the

lower of cost or fair value (less cost to sell) • Impaired HTM securities• Impaired equity method or cost investments (APB

18) • Impairment of loans using the practical expedients

in Statement 114. • Mortgage loans held for sale accounted for at the

lower of cost or fair value.

185

Presentation – Balance Sheet

• Require presentation of available-for-sale separately from held-to-maturity (fair value versus other measurements)

– Separate line items

– Aggregate total with fair value shown separately

• August 9, 2012 FASB vote to exempt nonpublic

186

ASC 820-50 Disclosure

• Fair values in financial statements

• Level of fair value measurement (nonpublic if disclosure only)

• Special disclosure for Level 3

• Special disclosure for assets measured on the fair value on a nonrecurring basis, such as impairment


63

Notes:

187

ASC 820-50 Disclosure

• Tabular reconciliation including– Gains and losses, realized and unrealized and

placement in the income statement– Purchases, issuances, sales and settlements

(net)– Transfers

• Amount of unrealized gains and losses held at balance sheet date

• Annual only, valuation techniques

ASC 820-10-50 and 55

• Defines classes of securities requiring separate disclosures

188

Disclosures

• Transfers between levels 1 and 2 (ASU 2011-4 eliminated this for nonpublic)

• Requires disclosures of purchases, sales, issuances and settlements in level 3

• Defines level of aggregation for disclosures

189


64

Notes:

Disclosures

• Valuation processes for level 3 fair values

• Sensitivity of level 3 fair value measurements (nonpublic not required)

• Level of fair value where fair value is only required for disclosure, not presentation (nonpublic not required)

190

Disclosures

• Use by an entity different from its highest and best use when the highest and best use fair value is either presented or disclosure

191

FINANCIAL INSTRUMENTSPROJECT

192


65

Notes:

Current Status

• Revised proposed ASU issued on April 12, 2013 with comment period expiring May 15, 2013

• 345 page document substantially revising almost all parts of the ASC concerning financial instruments

193

Large Changes

• Trading, available for sale, and held to maturity classifications go away.

• New classifications are fair value net income, fair value other comprehensive income, and amortized cost.

194

Contractual Cash Flow

• Objective of holding the asset to collect contractual cash flows (principal and interest only)

• Selling the asset (no determination has been made to either hold the asset to collect contractual cash flows or to sell the asset)

• Asset held does not meet the above


66

Notes:

Categorization

• Would require that all financial assets and financial liabilities be measured into one of the three categories unless equity method

• Equity method would require significant influence and be in an entity related to the business operations of the investor

196

Fair value

• ASC 820 required -- which eliminates certain options for loans by re-discounting at current rates

• Fair value option essentially eliminated

197

Hybrid Financial Instruments

• Financial assets do not bifurcate the embedded derivative

• Financial liabilities refer to other sections to determine if bifurcation is required


67

Notes:

Fees and Costs

• Financial assets: capitalized and treated as a yield adjustment unless at fair value

• Financial liabilities: capitalized and treated as a yield adjustment unless at fair value

• Both if at fair value: immediately expensed

Subsequent MeasurementFinancial Assets

• Held to collect contractual cash flows at amortized costs

• Held to collect contractual cash flows and to sell at fair value with changes in OCI (fair value through OCI)

• Others at fair value with changes in net income (fair value through net income) including those with contractual cash flow

Subsequent MeasurementFinancial Assets

• Practical expedient for equity investments without a readily determinable fair value is in ASC 820-10-35-59. If this cannot be met, then at cost adjusted for impairment.


68

Notes:

Subsequent MeasurementFinancial Liabilities

• At amortized cost unless:

• Business strategy is to transfer to third party

• Results from a short sale

• Cash flows from a related financial asset (fair value changes like those from the asset)

Presentation

• Categorization impacts how the financial assets are presented

• Financial liabilities would be at fair value

203

Income effects - I

• If strategy is to hold, then the changes in fair value of investments in equity and debt would be to OCI -- consideration of effective maturity – called FVOCI

• Otherwise, net income – called FVNI

• Reclassifications not permitted at modification or change in bifurcation

204


69

Notes:

Income effects - II

• Convertible debt accounting dramatically changed

• Liability component now at fair value

• Measure of the separation for equity component changed – measure liability first with remainder to equity

205

Income effects - III

• Reporting amounts could change because of the classification of interest income and impairment

206

Impairment

• August 1, 2012 FASB determination that the three bucket approach was to be reconsidered for an approach that was more understandable, operable and auditable. It also would not use a dual measurement approach.

207


70

Notes:

Impairment

• FASB approach now is to consider qualitatively whether the investment is impaired based on factors like credit, history of losses, cash generation, etc.

208

New Disclosures

• Different between financial institutions and entities not financial institutions (although definitions need to be developed)

• Financial institutions seem to be those whose business model earns based on interest rate spread

209

New Disclosures

• Financial institutions provide both liquidity and interest rate risk disclosures

• Other than financial institutions provide only liquidity disclosures – cash, cash equivalents and access to credit

210


71

Notes:

211

Hedging

• Would apply to both fair value hedges and cash flow hedges

• No change in scope of what can be hedged• No shortcut method• No critical terms match• No bifurcation-by-risk• Qualitative assessment under reasonable

probability

212

Fair value model for hedging

Carrying value of entire hedged item adjusted for changes in fair value during the hedged period

Late hedging permitted

213

What is permitted for hedging

• Hedged risk must be the risk of all changes in fair value or all changes in cash flows except:– Permitted to designate only foreign currency

risk

– Permitted to designate only interest rate risk for its own fixed or variable rate debt but no late hedging (??)


72

Notes:

214

Fair value model for hedging

• Effective portion of derivative gain or loss deferred in AOCI and recognized when hedged item is recognized in earnings

• Ineffective portion of derivative (for both over-and under- hedges) recognized immediately in earnings

• Ineffectiveness measured as difference in the change in fair value of actual derivative and the present value of the cumulative change in expected future cash flows on the hedged transaction

215

ASC 815-15-25 (SFAS 155)

• Permits fair value measurement for any hybrid financial instrument that otherwise would require bifurcation– Requires irrevocable election at inception to

fair value the whole instrument at fair value –made on instrument-by-instrument basis

– Instrument cannot be designated as a hedging instrument

216

ASC 815-15-25

• Clarifies that interest-only strips and principal-only strips are not subject to ASC 815

• Requires evaluation of securitized financial assets to determine if free-standing derivatives or hybrid instruments requiring bifurcation

• Credit risk held by issuing entity is not a derivative


73

Notes:

217

ASC 815-15-25

• Subordination of credit risk is not considered an embedded derivative (change from ASU 2010-11 which eliminated concentration)

• Impact of ASU 2009-16 (Codification of SFAS 166) removed QSPE thus elimination restrictions on a QSPE holding passive financial instruments that are or contain a derivative is no longer applicable

218

Quick Recap of SSARS 19 and ISSUES

Documentation

• On compilation and reviews:– Engagement letters required

– Document significant findings (material misstatements and their resolution)

– Document communications of fraud or illegal acts

• Representation letter changed a little, and must be tailored to engagement

219


74

Notes:

220

Review Procedures

• “Review risk” concept requires tailoring of inquiry and analytical procedures– No formal risk analysis required

– Inquiry procedures must include management’s responses

– Inquiry and analytical procedures must be linked

Reports

• Reporting– Must be titled

– Dated as of the date of the completion of compilation or review procedures (representation letter date)

– Must be signed

– Reference to report on each page of the statements and notes

221

Independence in Compilations

• Rules for determining independence impairment and disclaiming independence are not changed

• May now briefly explain reason for impairment; (direct financial interest, employment of a family member, and non-attest services)

• Explanation must include all impairments

• You are required to disclaim if impaired, but explanation of reason is optional

222


75

Notes:

Review

• Reporting– Must be titled “Independent Accountant’s

Review Report”

– Dated as of the date of the completion of review procedures (representation letter)

– Must be signed

– Reference to report on each page of the statements and notes

223

SSARS 20

• Technical change, applies only if annual statements are or will be audited, and interim statements will be reviewed.

• Such reviews will be performed under auditing standards, not SSARS.

224

SSARS Interpretation

• ARSC has issued an interpretation (part of AR Section 9100) related to IFRS.

• Describes how to report on statements prepared under IFRS

225


76

Notes:

Applications and Situations

226

Engagement letters I

• Question: The SSARS 19 examples do not include identification of engagement partner or non-attest services. Am I allowed to include these items?

• Answer: Yes. PPC has examples

227

Engagement letters II

• Question: The “SSARS 8” engagement letter does not mention basis departures or disclosure omissions. Am I still required to include these items?

• Answer: Yes; tailor the letter accordingly.

228


77

Notes:

Personal Financial Statements

• Question: Is there any guidance for applying SSARS 19 to personal financial statements?

• Answer: Yes; there is an exhibit in the AICPA AAG Compilation and Review Engagements. Also: AR 300 for prescribed-form reports

• Also: AR 600/9600 for personal financial statements included in written personal financial plans.

229

Subsequent Events

• Question: I have to disclose the date through which management evaluated subsequent events. Do I now have to search for and evaluate such events?

• Answer: No. You must inquire (in a review), and must evaluate any that you become aware of (compilation or review), but you do not have to do a search.

230

Signatures

• SSARS 19 requires that compilation and review reports bear the “manual or printed” signature of the firm. Are electronic signatures allowed?

• Answer: Yes. This was an ARSC oversight, and will be corrected in a future standard.

231


78

Notes:

Disclosure Omitted Reports I

• Can you include a paragraph in a disclosure-omitted report explaining that the company is an S-Corp? (PPC’s Compilation and Review Service includes an example of this in Appendix 12-B4.)

• Answer: You can include this emphasis of a matter only if the statements disclose the S-Corp status. (PPC explains this.)

232

Disclosure Omitted Reports II

• My client wants to omit disclosures. Should I add a paragraph to my report disclosing that there is a going-concern issue?

• Answer: No, you cannot emphasize matters that are not disclosed. You can convince client to disclose as “Selected Information” and then emphasize that matter. (Consider: are statements misleading otherwise?)

233

“Supplemental” v. “Selected”

• What’s the difference between Supplemental Information and Selected Information?

• Answer: Selected Information is information (footnotes) that would otherwise be required for full-disclosure statements. Supplemental Information (schedules) would not be required for full-disclosure statements.

234


79

Notes:

Report Reference

• Question: SSARS requires a reference to the report on each page of the financial statements. My peer reviewer said this includes footnote pages, but PPC says you don’t have to put it in the notes.

• Answer: SSARS defines “financial statements” to include the notes. However…

235

Successor Accountant

• Our firm merged with another; how should we report on the prior year when we present comparative statements?

• Answer: 3 options:– Refer to predecessor without naming them

– Name predecessor and indicate merger

– Accept responsibility for predecessor work (may require some additional work)

236

Other Unique Applications I

• AR Section 100/9100 contains guidance and example reports for:– Specified elements, accounts or items of a

financial statement

– Pro forma financial information

– Reports on IFRS statements

• AR Section 200/9200 contains guidance and example reports for comparative statements.

237


80

Notes:

Other Unique Applications II

• AR Section 300/9300 contains guidance and example reports for prescribed-form statements

• AR 400 covers predecessor/successor communication (not required)

238

TRANSFERS OF FINANCIAL ASSETS AND DISCLOSURES

239

240

SFAS 140

• SFAS 140 was standard for transfers of financial assets (ASC 860-xx-xx and 405-xx-xx primarily) that was originally codified


81

Notes:

241

ASU 2009-16 (SFAS 166)

• Amended Codification to eliminate the concept of a qualified special purpose entity (QSPE)

• Effective date is transfers in fiscal periods beginning after November 15, 2009, early application was prohibited

• Disclosure provisions apply to all transfers

242

Transfers of Financial Assets

• Transfer requires two items– Isolation – even in bankruptcy creditors cannot

take the assets

– Loss of Control – benefits flow to the transferee, not the transferor – not only must the transferor (including any consolidated entity) lose control, the transferee must gain control

243


• Loss of control analysis extended to any agreement in connection with the transfer

• Use of a bankruptcy remote entity for isolation– Retention of servicing

– Subordination by transferor


82

Notes:

244


• Participating financial interest– Equal priority

– No recourse or subordination

– No cash receipt priority

• Transfer of portion– Must be participating financial interest

– Meet the requirements for surrender of control

245


• All transferor’s beneficial interests are new assets:– Participating interests (continue

accounting)– Servicing rights– Cash and other collateral posted by the

transferor (account as appropriate)

246


• Limitation on involvement by parties to obtain more than trivial incremental benefit

• Cannot have any control through repurchase agreement, etc, except clean-up call (or other item for the benefit of the transferee)


83

Notes:

247

Secured Borrowings

• Transfers of an asset, a group of assets, or a portions of asset not meeting the requirements for transfer under accounting is to be treated as a collateralized borrowing.

• Basis in the asset cannot be changed when a secured borrowing is recognized

248

ASC 860-10-50 Disclosures

• Continuing involvement of any type in transfers requires disclosure

• For both derecognized and continued to be recognized, information about credit quality and risks. For receivables,– Delinquencies

– Chargeoffs and recoveries

249

Transfers and Repurchase Financing Transactions

• Initial transfer

• Repurchase agreement

• Settlement


84

Notes:

250

Conditions for Separate Accounting

• Conditions required for separate accounting

– Not contractually committed, including pricing and performance of initial transfer

– Recourse to the initial transferee

– Readily obtainable in the marketplace

– Maturity not co-terminus

ACCOUNTING FOR RESTRUCTURINGS AND

IMPAIRMENTS

251

252

Impairment - I

• ASC 360-10-xx– non-financial, non-current assets other than indefinite life intangible –recovery of costs – based on some finding (see also FASB on renewable intangibles)

• ASC 350-xx-xx– indefinite life intangibles – fair value – annual


85

Notes:

253

Impairment - II

• ASC 320-10-xx– available for sale securities and others in certain situations –fair value when decline in fair value is other than temporary

• ASC 310-10-xx and 310-40-xx –receivables – earn the original interest rate from the expected cash flows

Loans Accounted for as Pool

• Credit deterioration at time of purchase prospectively 310-30-15-6 and 316-40-15-11d

• Removal not allowed – ASC 310-40

• Disclosures 250-10-50-1 to 3 on adoption

254

255

Application Of ASC 360-10-xx

• Applies to:– Assets held for use in operations

– Assets held for disposal other than sale—not able to dispose of immediately

– Assets held for sale —in a position to immediately dispose

– Discontinued operations


86

Notes:

256

Assets Held For Use

• Events or circumstances test

• If indicated by events/circumstances, project future cash flows – likely means some level of aggregation is needed

• Compare projected future cash flows (UNDISCOUNTED) to carrying amount of property

257

Indicators of Impairment

• A significant decrease in the market price asset• A significant adverse change in the extent or manner in which

asset is being used or in its physical condition• A significant adverse change in legal factors or in the business

climate that could affect the value of asset, including an adverse action or assessment by a regulator

• An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of asset

• A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of asset

• A current expectation that, more likely than not, asset will be disposed of significantly before the end of its previously estimated useful life

258

Grouping Assets and Liabilities

• Group assets and liabilities at the lowest level with identifiable cash flows

• Group may include liabilities and assets that are outside the scope of ASC 360-10-xx

• Assets which do not have identifiable cash flows (corporate headquarters, certain software applications) are evaluated at entity level. If management estimates that entity as a whole will generate sufficient cash flows, no impairment for these assets


87

Notes:

259

Estimating Undiscounted Cash Flows

• Estimated future cash flows should:– Include only cash flows directly associated with

use and disposition of assets– Be based on the life of the primary asset

included in the group – Should include expenditures necessary to

maintain existing service potential– ASC 360-10-xx permits, but does not require

probabilistically determined future cash flows

260

Recoverability Test

• Compare projected cash flows to carrying amount:– If CF > Carrying Amount—NO

IMPAIRMENT LOSS RECOGNIZED

– If CF < Carrying Amount—IMPAIRMENT LOSS RECOGNIZED BASED ON FAIR VALUE—subsequent recoveries CANNOT be recognized

261

Obligations Associated With Disposal Activities — ASC 420-10-xx

(SFAS No. 146)

Scope => disposal activities, broadly construedCosts associated with disposals of long-lived assetsEmployee terminationsRestructurings

Restructuring is not defined by the FASBReference to IAS 37IAS 37: Program that is planned and controlled by managementIAS 37: Materially changes either scope of business or manner of conducting business


88

Notes:

262

Obligations Associated With Disposal Activities

Separated in 2001 from SFAS 144 ASC 360-xx-xx

Supersedes EITF 94-3 (restructuring costs)

Did not affect EITF 95-3 (restructurings in connection with business combinations but this was changed by SFAS 141R ASC 805-xx-xx)

263

Restructuring Charges

• ASC 360-10-45-9 Plans– Consideration of SFAS No. 144

– Communication of enhancements

– Disclosures

264


General principleRecognize liability at fair value when it is incurredEITF 94-3 called for recognition when management adopted planRecognized at fair value => income statement

Timing of recognitionOne-time termination benefits

As earned, if employees must render future serviceContract termination costs

When contractual asset is no longer used in operationsFor operating leases not terminated, fair value of obligation for remaining lease rentals is reduced by sublease rentals that could reasonably be obtained

Other costs => recognize as incurred


89

Notes:

265


Reporting Costs => continuing operations unless a discontinued operation is involvedChanges in costs (from whatever cause) => same line item on income statement as original reported cost

DisclosuresFor each type of cost

Total expected to be incurredReconciliation of beginning and ending balances of recorded costsCosts incurred, costs settled, adjustments to costs

Line items in income statement where costs are reportedCosts disaggregated by segment

266

Impairment Goodwill and Other Indefinite Life Intangible Assets

• Goodwill shall not be amortized, only annually tested for impairment

• Goodwill shall be tested for impairment annually at the reporting unit level (goodwill put in different reporting units requires individual impairment test by reporting unit – no aggregation)

267

Reporting Unit

• A reporting unit is the same level or one level below an operating segment under ASC 280 (SFAS No. 131)

• Determined based upon whether management assesses performance at that level and whether discrete financial information is available


90

Notes:

268

Reporting Unit—nonpublic entities

• Applies to nonpublic companies that are not required to report segment information. Such an entity may have only one reporting segment (the entity)

269

Assignment of Assets/Liabilities

• Assets acquired (including goodwill) and liabilities assumed should be assigned to one or more reporting units depending upon where they are employed and where they would be acquired as a stand-alone entity

• Reasonable, supportable, consistent

270

Impairment Test for Goodwill

• Applied at least annually (unless specific criteria are met)

• Can be performed at any time during fiscal year—but consistently applied

• In some cases more frequent tests may be required (e.g., significant adverse change in business climate)


91

Notes:

Impairment Test Step Zero

• ASU 2011-8

• Carrying out step 1 (consideration of the fair value of the reporting unit) of the impairment test is only required when it is more likely than not that fair value is less than carrying value

• Provides guidance in making estimate

271

272

Impairment Test for Goodwill

• Two step process– Compare fair value of reporting unit to carrying

value• If FV < CV there is a potential impairment, go to

second step

– Compare implied fair value of goodwill to carrying amount of goodwill (determine value of assets/liabilities first)

Impairment Test Additional

• Added by ASU 2011-28

• If carrying value is zero or negative, then the second step is required when it is more likely than not

• Consideration of the adverse qualitative factors from ASC 350-20-25-30 is required in considering whether more likely than not

273


92

Notes:

ASC 350-20-25-30 Factors

a. A significant adverse change in legal factors or in the business climate b. An adverse action or assessment by a regulator c. Unanticipated competition d. A loss of key personnel e. A more-likely-than-not expectation that a reporting unit or a significant

portion of a reporting unit will be sold or otherwise disposed of f. The testing for recoverability under the Impairment or Disposal of

Long-Lived Assets Subsections of Subtopic 360-10 of a significant asset group within a reporting unit

g. Recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.

274

Other Indefinite Life Intangibles

• ASU 2012-2

• Essentially applies same qualitative judgments for determining whether impairment has occurred to all indefinite life intangibles

• Provides guidance on making qualitative judgment

275

OTHER INITIATIVES

276


93

Notes:

Statement of Comprehensive Income

• ASU 2011-5 Effective Dates– Public companies for interim and annual

periods beginning after December 15, 2011

– Private companies for annual periods ending after December 15, 2012

• No transition since currently permitted

• Early adoption means selection of alternative already permitted

277


• ASU 2011-5 will require a single statement of comprehensive income OR consecutive statements of income and comprehensive income

• Subtotal for net income within the statement if single statement

• Above net income not changed

278


• Other comprehensive income items shown either (a) net of tax effect or (b) gross with separate tax effect

• Reclassifications required on face of statement of comprehensive income was deferred

279


94

Notes:

FEES to Federal Government

• ASU 2010-27 for Pharmaceutical Manufacturers

• ASU 2011-6 for Health Insurers

280

281

ED Going Concern

• The same as the previous auditing standard with two exceptions:

• The date was changed to “at least, but not limited to, twelve months from the end of the reporting period”

• Requirement to disclose when financial statements not prepared on a going concern

282

ASC 855-10-xx (SFAS 165)

• Moves accounting for subsequent events to GAAP

• All subsequent events except where covered by other GAAP

• Effective for interim or annual periods ending AFTER June 15, 2009


95

Notes:

283

Period and Disclosure of Date

• Requires disclosure of the date through which subsequent events were evaluated for non-SEC filers (ASU 2010-9 removed for SEC filers and added new disclosure)– Whether date is financial statements were

available to be issued or were issued

• Introduces the concept of available to be issued for non-public companies

284

Two types

• Recognized Subsequent Events that provide information about measurements made at the balance sheet date such as estimate

• Unrecognized Subsequent Events that provide information about conditions that did not exist at balance sheet date

285

Recognized Subsequent Events

• Settlement of litigation existing at the time of the balance sheet

• Culmination of conditions (e.g., accounts receivable, inventories, settlement of liabilities) that existed over period of time


96

Notes:

286

Non-recognized Subsequent Events

• Sale of bonds or stock

• Business combination

• Settlement of litigation not existing at the time of the balance sheet

• Losses from fires or natural disasters

• Losses on receivables from customer casualty after the balance sheet date

287

Non-recognized Subsequent Events

• Changes in fair value or foreign currencies after the balance sheet date

• Entering significant commitments or contingent liabilities

288

Disclosure of non-recognized subsequent events

• Required when need to make the financial statements not materially misleading

• Disclosures

– Nature of the event

– Estimate of financial statement effect or that an estimate is not available

• May provide proforma financial information


97

Notes:

Joint and several liability

• New disclosures will be required for joint and several liability (ASC 450)unless role is guarantor (ASC 460)– Nature

– Total amount

– Carrying value

– Recourse

– Changes during period289

Employee benefit plans

• New disclosure will be required for both defined benefit and defined contribution plan if future votes remain the same

• FASB considering fair value less costs to sell for defined contribution plans if costs are significant

290

291

EPS Convergence

• Definition of convergence is that the same number should occur in the denominator (but there still may be differences in the numerator)

• ED Issued jointly by the FASB and IASB


98

Notes:

Special Purpose Frameworks

US GAAP Special Purpose Frameworks

• Employee Benefit Plans

• GAAP for Individuals

• Liquidation Basis of Accounting

293

AuditingSpecial Purpose Frameworks

• Includes the four “other comprehensive bases of accounting”

• FRF for SMEs

294


99

Notes:

Other Allowed Bases

• IFRS

• IFRS for SMEs

295

Modified Cash Basis Issues

• Any modifications must be based on the result of a cash transaction – either receipt of cash or payment of cash.

• Cash receipts– Credit card receipts

– Lender payments directly to supplier

296

Income Tax Basis Issues

• Follow the tax reporting for any transactions based on current tax reporting or expected tax reporting

297


100

Notes:

FRF for SMEs

• Concepts & Principles

• Transition

• Risks and Uncertainties

• Accounting Changes, Estimates, Errors

• Measurement Uncertainty

• Current assets/liabilities

298

FRF for SMEs

• Statement of Income

• Balance Sheet

• Statement of Cash Flows

• Business Combinations

• Subsidiaries

• Consolidation and NCI

• Joint Ventures 299

FRF for SMEs

• Push-Down Accounting

• FX Translation

• Nonmonetary Transactions

• Inventories

• Investments

• Property, Plant & Equipment

• Intangible Assets 300


101

Notes:

FRF for SMEs

• Leases

• Equity

• Subsequent Events

• Commitments

• Contingencies

• Revenue

301

FRF for SMEs

• Retirement and Other Postemployment Benefits

• Income Taxes

• Long-Lived Assets & Disc Ops

• Related Party

• Financial Instruments and Long-Term Debt

302

• EPS guidance

• Segment reporting

• Other comprehensive income

• Interim reporting

• Stock compensation

• Many of the complex issues associated with debt/equity

303


102

Notes:

Fair Value Reduced

• Historical cost is the measurement basis primarily utilized

• Departs from increased use of fair value for many instruments required by GAAP

• Only equity securities held-for-sale measured at fair value

304

Inventories

• Inventories are measured at the lower of cost or net realizable value.

• Cost assigned by using FIFO, LIFO, or weighted average cost

• No disclosure of the difference between FIFO and LIFO pools

• �Allows reversal of previously recorded inventory impairment losses

305

Investments

• < 20% ownership presumed investor does not have significant influence

• > 20% ownership rebuttable presumption of significant influence exists

• Significant influence exists = equity method

• Allows reversal of previously recognized impairments

306


103

Notes:

Subsidiaries

• Consolidation is an accounting policy choice for controlled entities

• Parent company only financial statements are allowed with subsidiaries accounted for using equity method

• No variable interest entity consolidation

307

Depreciation

• Recognized over the life of the asset as the greater of:– the cost, less salvage value or

– the cost, less residual value

• Allows capitalization of finance costs

• Allows reversal of impairments (impairments under recovery method)

308

Goodwill

• Goodwill is not tested for impairment.

• Goodwill should be amortized:

– the same period as that used for federal income tax purposes or

– if not amortized for federal income tax purposes, then amortized over 10 years.

309


104

Notes:

Leases

• Basically current income tax rules

• Transfers substantially all of value in an asset as capital lease by lessee and sales-type lease by lessor

• Transfers only limited amounts then as operating lease by lessee and lessor

310

Revenue

• Recognized when performance is complete and high probability of cash receipt

• Services and long-term contracts can use either percentage of completion or completed contract

• Limited discussion of multiple element arrangements or gross versus net

311

Defined Benefit Plans

• Accounting policy choice to use either:– Current contribution as expense

– Follow one of the accrued benefit options for expensing

312


105

Notes:

Income Taxes

• Accounting policy choice to use either:– Income taxes payable method

– Deferred taxes method

313

Financial Instruments and Long-term Debt

• Investments in equity securities at cost, less impairment, unless held for sale

• All other investments at amortized cost

• Long-term debt at amortized cost

• Held for sale at fair value, with changes in income

• Impairments can be reversed

314

Other

• Push-down accounting allowed if 80% ownership

• Going concern assessment by management required

• Disclosure of adverse issues

315


106

Notes:

Ethics and Independence

316

PEEC Independence

• Independence of mind—The state of mind that permits the performance of an attest service without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism

PEEC Independence

• Independence in appearance—The avoidance of circumstances that would cause a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of a firm or a member of the attest engagement team had been compromised.


107

Notes:

PEEC Threats to Independence

• Self Review

• Advocacy

• Adverse Interest

• Familiarity

• Undue Influence

• Financial Self-Interest

• Management Participation

Interpretation 101-3

• Original 101-3 was about maintaining independence when performing nonattest services

320

Nonattest Services

• The client must agree to perform the following functions in connection with the engagement to perform nonattest services:– a. Make all management decisions and

perform all management functions;

– b. Designate an individual who possesses suitable skill, knowledge, and/or experience, preferably within senior management, to oversee the services;


108

Notes:

Nonattest Services

– c. Evaluate the adequacy and results of the services performed;

– d. Accept responsibility for the results of the services; and

• The member should be satisfied that the client will be able to meet all of these criteria and make an informed judgment on the results of the member's nonattest services

Preparing Bookkeeping Entries

• Preparation of bookkeeping entries would not impair independence if the client approves the account to which the entry will be made

323

Proposing Adjusting Entries

• Proposing adjusting entries would not impair independence if client approves adjusting entry after accountant communicates the reason for the adjusting entry and its impact on the financial statements

324


109

Notes:

Financial Accounting Systems

• Installation of financial accounting systems would not impair independence if the accountant did not modify the software

325

Tax Compliance Services

• Generally, preparation and transmission of tax returns to the taxing authority does not impair independence, if the client provides proper oversight.


• Signing and filing a tax return on behalf of client management would impair independence, unless the member has the legal authority to do so and the client provides a signed statement meeting provisions.

327


110

Notes:


• Authorized representation of a client in administrative proceedings before a taxing authority would not impair a member’s independence provided the member obtains client agreement prior to committing the client to a specific resolution with the taxing authority.


• Representing a client in a court to resolve a tax dispute would impair a member’s independence.

Appraisal, Valuation, and Actuarial Services

• Independence would be impaired if a member performs an appraisal, valuation, or actuarial service for an attest client where the results of the service, individually or in the aggregate, would be material to the financial statements and the appraisal, valuation, or actuarial service involves a significant degree of subjectivity.


111

Notes:

Forensic Accounting Services

• Nonattest services that involve the application of special skills in accounting, auditing, finance, quantitative methods and certain areas of the law, and research, and investigative skills to collect, analyze, and evaluate evidential matter and to interpret and communicate findings and consist of: – Litigation services; and

– Investigative services.

Is Independence Important?

• It Depends on

• What the client needs

• What the CPA is willing to provide

Independence

• Required for all Attest Services

• Audits

• Reviews

• Some Compilations


112

Notes:

Client Relationship Management

• Client Relationship Management (CRM) focuses on the needs of the client not the desires of the CPA.

• Would your client be better served if you were not independent?

• Have you ever declined a request from a client because of independence concerns?

Independence Needed?

• Number of clients who require independence

• Number of audit clients

• Number of review clients

• Number of compilation clients

Questions about Client

• Does your client possess the expertise to compute fair values for his/her financial statements?

• Does your client have a hard time understanding proposed changes?


113

Notes:


• Are you required to routinely propose many changes in account coding and/or journal entries?

• Are source documents lacking or incomplete for many items?


• Is the client’s checkbook in good order?

• Does the client routinely not take advantage of discounts from vendors?

• Does the client ask you to sign payroll or other checks when he/she is on vacation or absent?

• Is the client’s system of control for approval of vendor invoices sloppy or nonexistent?


• Does the client have trouble making policy decisions about its benefit plans?

• Does the client have trouble explaining its benefit plan to employees and others?

• Does the client want you to serve as a fiduciary for its benefit plan?


114

Notes:


• Does your client press you for decisions on investments?

• Have you ever been asked to pick up or delivery investment securities by your client?

• Is your client uncomfortable with hiring or termination decisions?


• Is your client often uncertain about qualifications necessary for a job position?

• Does your client seem lost when dealing with his/her corporate financial transactions?

• Does your client have a good grasp of his/her business risk?


• Does your client understand his/her control processes for business risk?

• Does your client need a local area network?

• Does your client’s financial information system need modification?

• Is your client’s financial information system adequately supervised?


115

Notes:

Is Independence Needed

• Will both you and your client be better off if you are not independent?

Ethics 101-3 Revised

• Revised March 2013for Non-attest Services

• Effective for engagements for fiscal periods beginning after December 15, 2014

Ethics 101-3 Non-attest services

• For example, activities such as financial statement preparation, cash-to-accrual conversions, and reconciliations are considered outside the scope of the attest engagement and, therefore, constitute a nonattest service. Such activities would not impair independence provided the requirements of this interpretation are met.


116

Notes:

Impact

• Will require separate engagement

• Will require changes to compilation and review standards

• Will raise questions about when the nonattest service ended and the attest services began if you perform both

346

101-3 Internal Audit

• Passed March 2013

• Effective for engagements for fiscal periods beginning after December 15, 2013

101-3 Internal Audit

• Performing separate evaluations on the effectiveness of a significant control such that the member is, in effect, performing routine operations that are built into the client’s business process

• Having client management rely on the member’s work as the primary basis for the client’s assertions on the design or operating effectiveness of internal controls


117

Notes:

Impact

• Does your client expect that whatever procedures you perform will result in an adjusting entry?

349

350

Questions

presented by: ray g. stephens ohio university

Documents