Accounting and Auditing
Standards Update
June 2, 2011
Jennifer Smith, CPA
Scott Yandle, CPA
Objectives for Session
• Educate and inform you about the new
accounting pronouncements that will be in effect
for the current year or will be in effect in the
future.
• Discuss the impact the new accounting
pronouncements will have on financial reporting.
Charity Care
• EITF Issue No.09-L issued August, 2010
• Effective for fiscal years beginning after 12/15/10
with early adoption permitted
• Required to use cost as the measurement basis
for charity care disclosures, based on the direct
and indirect costs of providing the charity care
• Required to disclose a description of method
used to calculate cost
• Required to disclose reimbursements received
intended to compensate for providing charity care
3
GASB Codification P80
(formerly GASB 20)
• If your Governmental Hospital has elected
to apply GASB Codification P80 (formerly
GASB 20) then:
- The Hospital should apply all FASB
Statements and Interpretations issued after
November 30, 1989, except for those that
CONFLICT with or CONTRADICT GASB
pronouncements
- http://www.gasb.org/tech/index.html
4
ASC 805
Business Combination
(Formerly SFAS 164)
5
Not-for-Profit – Mergers and Acquisitions
• Effective Date
• Effective for mergers occurring on
or after December 15, 2009
• Effective for acquisitions for which
the acquisition date is on or after
the beginning of the first annual
reporting period beginning on or
after December 15, 2009.
6
Not-for-Profit – Mergers and Acquisitions
• Acquisition “is a combination in which a
not-for-profit acquirer obtains control of one
or more nonprofit activities or businesses
(The formation of a new entity is not a
significant factor in assessing whether one
entity has obtained control over another.)”’
7
Not-for-Profit – Mergers and Acquisitions
• Acquisition
• Similar to prior guidance (formerly SFAS 141R), with
exceptions made due to unique NFP considerations
• Goodwill recognized only if substantial portion of revenues are
supported from exchange transactions (business-type entity)
• Donor relationships not recognized as separate intangible
• No recognition of conditional promises to give unless criteria
under Topic 958 (formerly SFAS 116) met at acquisition
• No amortization of goodwill – evaluate each year for
impairment
• Applies to goodwill previously recorded as well – beginning with
12/31/10 year end entities
8
Not-for-Profit – Mergers and Acquisitions
• Acquisition Examples
• Physician practice
• Purchase price of $1,000,000 and company value
(net of identifiable assets and liabilities assumed) of
$850,000 = goodwill of $150,000
• Goodwill of $150,000 tested annually for impairment
• Foundation
• Purchase price of $1,000,000 and company value
(net of identifiable assets and liabilities assumed) of
$850,000
• No goodwill recorded – difference recorded through
statement of activities in year of acquisition
9
Not-for-Profit – Mergers and Acquisitions
• Merger “is a transaction or other event in which
the governing bodies of two or more not-for-profit
entities cede control of those entities to create a
new not-for-profit entity. If the participating entities
retain shared control of the new entity, they
have not ceded control. To qualify as a new
entity, the combined entity must have a newly
formed governing body; a new entity often is, but
need not be, a new legal entity.”
10
Not-for-Profit – Mergers and Acquisitions
• Merger
• Governing bodies cede control to create new
NFP
• Likely to be rare – neither predecessor entity can
retain control – e.g. current board/trustee
representation, etc. ceases
• Use “Carryover Method”
• Similar to pooling of interests except start from merger
date (the new entities initial reporting date) vs.
beginning of period
• No Goodwill
11
Non-controlling Interests
in Consolidated Financial
Statements
(ASC 810‐10‐65‐1, Transition Related to
FASB Statement No. 160)
12
Minority Interest
• Requires all entities to report noncontrolling (minority) interests in
subsidiaries in the same way—as equity in
the consolidated financial statements.
• For not-for-profit entities, this is effective for
fiscal years and interim periods within
those fiscal years, beginning on or after
December15, 2009.
13
Minority Interest
• This statement shall be applied
prospectively as of the beginning of the
fiscal year in which this statement is initially
applied, except for the presentation and
disclosure requirements.
• The presentation and disclosure
requirements shall be applied
retrospectively for all periods presented.
14
Minority Interest
Hospital A
Consolidated Statement of Financial Position
As of December 31
20X3
20X2
Assets:
Cash
Accounts receivable
Investment securities
Plant and equipment
Total assets
$ 570,000
125,000
125,000
220,000
$1,040,000
$ 475,000
110,000
120,000
235,000
$ 940,000
Liabilities:
Total liabilities
$ 555,000
$ 459,000
Unrestricted net assets
Hospital A
Noncontrolling interest in Subsidiary A
Total unrestricted net assets
Total liabilities and net assets
459,000
26,000
485,000
$ 1,040,000
433,000
48,000
481,000
$ 940,000
15
Minority Interest
Hospital A
Consolidated Statement of Operations and
Other Changes in Unrestricted Net Assets
As of December 31
20X3
Unrestricted revenues, gains and other support
Net patient service revenue
Contributions
Net assets released from donors’
restrictions used for operations
Total revenues, gains and other support
Patient care and other operating expenses
Excess of revenues over expenses
(from continuing operations)
Discontinued operations of Subsidiary A, net
Change in net unrealized gains and losses
on other than trading securities
Sale of Subsidiary A shares to noncontrolling
shareholders
Purchase of Subsidiary A shares from
noncontrolling shareholders
Increase in unrestricted net assets
$
$
390,000
20X2
$
355,000
5,000
5000
395,000
366,000
360,000
337,000
29,000
-
23,000
(7,000)
5,000
15,000
-
15,000
(30,000)
4,000
$
81,000
16
Minority Interest
Hospital A
Notes to Consolidated Financial Statements
Changes in Consolidated Unrestricted Net Assets
Attributable to Hospital A and Transfers (to) from the Noncontrolling Interest
Year End December 31
Controlling
Interest
Total
Balance January 1, 20X2
Excess of revenue over expenses
(from continuing operations)
Discontinued operations, net of tax
Change in net unrealized gains and
losses on other than trading securities
Sale of Subsidiary A shares
to noncontrolling shareholders
Change in net assets
$
Balance December 31, 20X2
Excess of revenue over expenses
(from continuing operations)
Change in net unrealized gains and
losses on other than trading securities
Sale of Subsidiary A shares
to noncontrolling shareholders
Change in net assets
$
Balance December 31, 20X3
$
400,000
$
400,000
Noncontrolling
Interest
$
-
23,000
(7,000)
17,600
(5,600)
5,400
(1,400)
15,000
12,000
3,000
50,000
81,000
9,000
33,000
41,000
48,000
481,000
$
433,000
$
48,000
29,000
27,500
1,500
5,000
4,500
500
(30,000)
4,000
(6,000)
26,000
485,000
$
459,000
(24,000)
(22,000
$
26,000
17
ASU No. 2010-24: Healthcare
Entities (Topic 954)
Presentation of Insurance Claims and
Related Insurance Recoveries
18
ASU No. 2010-24
• Effective for fiscal years beginning on or
after December 15, 2010
– Early application is permitted
19
ASU No. 2010-24
• Applies to all healthcare entities
• Issued to address diversity in practice of
accounting for medical malpractice and
similar claims and their related
insurance recoveries
– Gross versus net
20
ASU No. 2010-24
• Clarifies that healthcare entities should not net
insurance recoveries against related claim
liabilities
– Entity should evaluate its exposure to losses arising from
claims and recognize a liability apart from any anticipated
insurance recoveries.
– If the entity is indemnified for losses, it should recognize a
receivable at the same time, measured on the same basis as
the related liability, subject to the need for a valuation
allowance for uncollectible amounts.
21
ASU No. 2010-28: Intangibles –
Goodwill and Other
(Topic 350)
22
ASU No. 2010-28
• For nonpublic entities, this is effective
for periods beginning after December
15, 2011. Nonpublic entities may elect
to adopt the provisions for periods
beginning after December 15, 2010.
• Affects entities that have recognized
goodwill and have one or more reporting
units whose carrying value is zero or
negative
23
ASU No. 2010-28
• Goodwill impairment testing
involves 2 steps (no change)
• Step 1: Assess whether the carrying
amount of goodwill exceeds fair value
• Step 2: Determine whether goodwill
has been impaired, and if so, calculate
the amount of impairment
24
ASU No. 2010-28
• Entity is required to perform Step 2
of the goodwill impairment test if it is
more likely than not that a goodwill
impairment exists
• In determining “more likely than
not,” the entity should consider
whether there are any adverse
qualitative factors indicating
impairment
25
ASU No. 2010-28
• Examples of when impairment might
be more likely than not:
• A significant adverse change in legal
factors or in the business climate
• An adverse action or assessment by a
regulator
• Unanticipated competition
• A loss of key personnel
26
ASU No. 2010-28
• Examples of when impairment might
be more likely than not (continued):
• 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
• The testing for recoverability of a
significant asset group within a
reporting unit
27
ASU No. 2010-28
• Examples of when impairment might
be more likely than not (continued):
• Recognition of a goodwill impairment
loss in the financial statements of a
subsidiary that is a component of a
reporting unit
28
Intangible Assets
(GASB Codification Section 1400 formerly GASB 51)
29
GASB Codification 1400 (formerly GASB 51) Accounting
and Financial Reporting for Intangible Assets
• Intangible assets lack physical
substance, is non-financial in nature and
has an initial useful life extending
beyond a single reporting period.
• These assets include easements,
computer software, water rights, timber
rights, patents, and trade marks
• Goodwill is explicitly excluded from the
scope of GASB Codification 1400.
30
Accounting and Financial Reporting
for Derivative Instruments
(GASB Codification D40 – formerly
GASB 53)
31
GASB Codification D40 (formerly GASB No. 53) – Accounting and
Financial Reporting for Derivative Instruments
• Effective – for fiscal periods beginning after
June 15, 2009. (June 30, 2010 and afterwards)
Earlier application is encouraged.
• Reason – to enhance the usefulness and
comparability of derivative instrument
information reported in the financial statements.
• Key – have to evaluate effectiveness of hedge
to determine how entry is recorded.
32
GASB Codification D40 (formerly GASB No. 53) – Accounting and
Financial Reporting for Derivative Instruments
Effective hedge:
• Balance Sheet entry, no longer adjust unrealized
gain/loss through “Nonoperating Revenues
(Expenses)”
• Unrealized gain/loss gets classified as a “Deferred
inflow/outflow of resources” on the Balance Sheet.
Ineffective hedge:
• Adjust unrealized gain/loss through “Nonoperating
Revenues (Expenses)” with offsetting asset or liability
recorded on the Balance Sheet
33
GASB Codification D40 (formerly GASB No. 53) – Accounting and
Financial Reporting for Derivative Instruments
Termination of Hedge Accounting:
• Hedging derivative instrument fails to meet the criteria
for effectiveness (previous slides)
• Likelihood that a hedged expected transaction will
occur is no longer probable
• Hedged asset or liability is sold or retired
• Hedging derivative instrument is terminated
• Current refunding or advanced refunding resulting in
the defeasance of the hedged debt
• Hedged expected transaction occurs
34
GASB Codification D40 (formerly GASB No. 53) – Accounting and
Financial Reporting for Derivative Instruments
Examples of Terminating Events:
• Converting variable rate bonds to fixed rate bonds
(variable rate bonds had swap agreement)
• Swap became an asset, and unrealized gain (loss) flows
through investment income
• Issuance of new bonds which refund existing bonds
outstanding (bonds refunded had swap agreement)
• At the time of refunding, the fair market value of the swap is
included in the calculation of the gain/loss on refunding and is
amortized
• Going forward, the unrealized gain/loss flows through
nonoperating revenues (expenses)
35
OPEB Measurements by Agent
Employers and Agent MultipleEmployer Plans (GASB
Codification P50 and Pe5 –
formerly GASB 57)
36
GASB Codification P50 and Pe5 (formerly GASB
57) – Agent Employer Plans
• Introduces alternative measurement
method for post retirement benefits other
than pensions (formerly GASB 45 plans)
• Would save employers participating in
agent multi employer plans or plans
having less than 100 participants on cost
of having actuarial valuations annually and
coinciding with balance sheet date
37
Effective Date
• Effective for periods beginning after
June 15, 2011. Earlier implementation
is encouraged.
38
The Financial Reporting Entity:
An Amendment of GASB
Statements No. 14 and No. 34
(GASB 61)
39
GASB 61
• Effective for periods beginning after
June 15, 2012. Earlier application is
encouraged.
• Will result in restatement in the initial
year of application
• Improves guidance for including,
presenting, and disclosing
information about component units
and equity interest transactions
40
GASB 61
• Amends Financial Accountability Concept
• Must be fiscally dependent on primary
government (same as before)
• A financial benefit or burden relationship must
also be present for the component unit to be
included
41
GASB 61
• If any one of these conditions exists, then
there is a financial benefit or burden
relationship:
• Primary government is legally entitled to or
can otherwise access the organization’s
resources
• Primary government is obligated in some
manner for the debt of the organization
42
GASB 61
• Financial Benefit or Burden Relationship
(continued) –
• Primary government is legally obligated or has
otherwise assumed the obligation to finance the
deficits of, or provide financial support to, the
organization
43
GASB 61
• Amends Major Component Unit
Requirements
• Clarifies types of relationships that affect
determination of major component units
• Eliminates requirement that the determination
include consideration of each component
unit’s significance relative to other component
units
44
GASB 61
• Amends the criteria for blending
component units
• When the governing bodies of the two
entities are substantively the same, a
financial benefit or burden must also exist
for blending to occur
• Blending will occur for component units
whose total debt outstanding is expected to
be repaid entirely or almost entirely by the
primary government
45
GASB 61
• Amends requirements for reporting the
funds of a blended component unit
• For financial reporting purposes, funds of a
blended component unit have the same
financial reporting requirements as the
primary government
• Provides reporting guidance if the primary
government is a business type activity that
reports in a single column
46
GASB 61
• Amends requirements for reporting equity
interests in component units
• Primary government must report an asset for
its equity interest in a discretely presented
component unit
47
GASB 61
• Amends note disclosures
• Governments should disclose the rationale for
including each component unit and the
manner in which it is included
48
Codification of Accounting and
Financial Reporting Guidance
Contained in Pre-November 1989
FASB and AICPA Pronouncements
(GASB 62)
49
GASB 62
• Effective for periods beginning after
December 15, 2011. Earlier application
is encouraged.
• Brings the accounting guidance together
in one place
• Will eliminate the need for users to
determine which FASB and AICPA
pronouncements apply to governments
50
GASB 62
• Going forward, governmental
entities will just rely on GASB
standards
• If GASB doesn’t have a standard that
addresses the issue, then FASB
codification can be used as an
example and guide (but not
authoritative)
51
GASB 62
Specific topics addressed in GASB 62:
• Accounting changes and
error corrections
• Capitalization of interest
costs
• Contingencies
• Extinguishments of debt
• Imputation of interest
costs
• Investments in common
stock
• Leases
• Regulated operations
• Special and
extraordinary items
• Statement of net assets
classification
52
Contact Information
Jennifer Smith, Manager
864-213-5402
[email protected]
Scott Yandle, Senior Associate
864-213-5354
[email protected]
53
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Auditing and Accounting Standards Update ( file)