Presented by:
Ray G. Stephens
Ohio University
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
Notes:
A&A Update for
GBQ Partners
Presented by:
Ray Stephens, CPA, CMA, CGMA, DBA
Professor of Accountancy
Ohio University
(740)591-5892
1
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
1
A&A Update for
GBQ Partners
Notes:
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)
4
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
2
A&A Update for
GBQ Partners
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
3
A&A Update for
GBQ Partners
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
4
A&A Update for
GBQ Partners
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
5
A&A Update for
GBQ Partners
Notes:
Removal for all
• The implicit variable interest entity
requirements would be removed for all
entities
16
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
17
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
18
6
A&A Update for
GBQ Partners
Notes:
Superseded But Still Effective
(not in the ASC)
• Poolings (APB 16)
• Business combinations under APB 16 or
SFAS 141
19
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
20
Nonauthoritative
•
•
•
•
•
•
Industry practices
FASB Concepts Statements
AICPA Issues papers
IASB standards
AICPA Technical Practice Aids
Accounting textbooks, handbooks and
articles
21
7
A&A Update for
GBQ Partners
Notes:
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
22
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
23
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
8
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 A&A Update for
GBQ Partners
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
9
A&A Update for
GBQ Partners
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
10
A&A Update for
GBQ Partners
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
11
A&A Update for
GBQ Partners
Notes:
ASU 2013-6
• Services received from an affiliate of a notfor-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
12
A&A Update for
GBQ Partners
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
13
A&A Update for
GBQ Partners
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
14
A&A Update for
GBQ Partners
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
15
A&A Update for
GBQ Partners
Notes:
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.
46
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.
47
Revised Memorandum of
Understanding
• Most recent version has most convergence
projects being completed by 2011
48
16
A&A Update for
GBQ Partners
Notes:
Convergence Issues
• IASB’s “macro-hedging” (IAS 39)
• IASB election to revalue nonmonetary
assets
• LIFO inventory accounting
• Insurance issues
49
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
17
A&A Update for
GBQ Partners
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
18
A&A Update for
GBQ Partners
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
19
A&A Update for
GBQ Partners
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
20
A&A Update for
GBQ Partners
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
21
A&A Update for
GBQ Partners
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
22
A&A Update for
GBQ Partners
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
23
A&A Update for
GBQ Partners
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
24
A&A Update for
GBQ Partners
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
25
A&A Update for
GBQ Partners
Notes:
CONSOLIDATIONS
76
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
77
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
26
A&A Update for
GBQ Partners
Notes:
VIE CONSOLIDATION
•
•
•
•
Involvement with entity
Determination of variable interest entity
Determination of primary beneficiary
Consolidation by primary beneficiary
– Book values
– Fair values
79
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
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
81
27
A&A Update for
GBQ Partners
Notes:
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 81050-55; 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
82
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
83
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
84
28
A&A Update for
GBQ Partners
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
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
87
29
A&A Update for
GBQ Partners
Notes:
Implicit Variable Interest
• 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
88
Implicit Variable Interest
• 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
89
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
90
30
A&A Update for
GBQ Partners
Notes:
Primary Beneficiary
Qualitative 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
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
92
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
93
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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
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
95
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
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A&A Update for
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Notes:
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
97
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
98
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
99
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A&A Update for
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Notes:
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
100
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
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
102
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A&A Update for
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Notes:
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
103
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
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A&A Update for
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Notes:
PROPOSED LEASE ASU
FASB re-exposure in 2013
106
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
107
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
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A&A Update for
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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
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A&A Update for
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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
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A&A Update for
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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
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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
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A&A Update for
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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
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A&A Update for
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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
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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
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A&A Update for
GBQ Partners
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
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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
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A&A Update for
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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
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A&A Update for
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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 of
right-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
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A&A Update for
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Notes:
Subsequent measurement of
right-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
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A&A Update for
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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
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A&A Update for
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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
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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
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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
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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
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A&A Update for
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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
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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
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Notes:
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?
166
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
167
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)
168
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A&A Update for
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Notes:
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
169
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
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Notes:
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
172
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
173
Level 3 Fair Values
• Traditional approach determining most
likely cash flows and adjusting at the riskadjusted rate
• Adjusting cash flows for risk and
discounting at the risk free rate
• Expected cash flows and discounting at the
risk-adjusted rate
174
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Notes:
ASC 820
Restrictions on Determinations
• Transaction costs are not part of the exit
price determination
• Blockage factors cannot be used in
determining the exit price
175
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
Markets Not Active
• ASC 820-10-35, 65 sections clarifies
application in markets not active
177
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A&A Update for
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Notes:
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
178
Fair value of liabilities
• ASC 820-10-35 has added paragraphs 16A
to 16G, also amends ASC 810-10-41, 81035-50, and 825-10-55-3
179
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
180
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A&A Update for
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Notes:
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
181
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
182
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
183
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Notes:
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.
184
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
185
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
186
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A&A Update for
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Notes:
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
187
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
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A&A Update for
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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 INSTRUMENTS
PROJECT
192
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A&A Update for
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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
65
A&A Update for
GBQ Partners
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
66
A&A Update for
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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 Measurement
Financial 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 Measurement
Financial 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.
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A&A Update for
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Notes:
Subsequent Measurement
Financial 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
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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
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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
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Notes:
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
211
Fair value model for hedging
Carrying value of entire hedged item adjusted for
changes in fair value during the hedged
period
Late hedging permitted
212
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 (??)
213
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A&A Update for
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Notes:
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 overand 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
214
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
215
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
216
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Notes:
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
217
Quick Recap of SSARS 19 and
ISSUES
218
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
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A&A Update for
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Notes:
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
220
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
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A&A Update for
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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
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A&A Update for
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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
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A&A Update for
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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
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A&A Update for
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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 SCorp 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
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A&A Update for
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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
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A&A Update for
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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
SFAS 140
• SFAS 140 was standard for transfers of
financial assets (ASC 860-xx-xx and 405xx-xx primarily) that was originally
codified
240
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A&A Update for
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Notes:
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
241
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
242
Transfers of Financial Assets
• 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
243
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A&A Update for
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Notes:
Transfers of Financial Assets
• 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
244
Transfers of Financial Assets
• 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)
245
Transfers of Financial Assets
• 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)
246
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Notes:
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
247
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
248
Transfers and Repurchase
Financing Transactions
• Initial transfer
• Repurchase agreement
• Settlement
249
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A&A Update for
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Notes:
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
250
ACCOUNTING FOR
RESTRUCTURINGS AND
IMPAIRMENTS
251
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
252
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A&A Update for
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Notes:
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
253
Loans Accounted for as Pool
• Credit deterioration at time of purchase
prospectively 310-30-15-6 and 316-40-1511d
• Removal not allowed – ASC 310-40
• Disclosures 250-10-50-1 to 3 on adoption
254
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
255
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Notes:
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
256
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
257
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
258
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A&A Update for
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Notes:
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
259
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
260
Obligations Associated With Disposal
Activities — ASC 420-10-xx
(SFAS No. 146)
Scope => disposal activities, broadly construed
Costs associated with disposals of long-lived assets
Employee terminations
Restructurings
Restructuring is not defined by the FASB
Reference to IAS 37
IAS 37: Program that is planned and controlled by management
IAS 37: Materially changes either scope of business or manner of
conducting business
261
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A&A Update for
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Notes:
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)
262
Restructuring Charges
• ASC 360-10-45-9 Plans
– Consideration of SFAS No. 144
– Communication of enhancements
– Disclosures
263
Obligations Associated With Disposal
Activities
General principle
Recognize liability at fair value when it is incurred
EITF 94-3 called for recognition when management adopted plan
Recognized at fair value => income statement
Timing of recognition
One-time termination benefits
As earned, if employees must render future service
Contract termination costs
When contractual asset is no longer used in operations
For 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
264
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A&A Update for
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Notes:
Obligations Associated With Disposal
Activities
Reporting
Costs => continuing operations unless a discontinued operation is
involved
Changes in costs (from whatever cause) => same line item on income
statement as original reported cost
Disclosures
For each type of cost
Total expected to be incurred
Reconciliation of beginning and ending balances of recorded costs
Costs incurred, costs settled, adjustments to costs
Line items in income statement where costs are reported
Costs disaggregated by segment
265
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)
266
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
267
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Notes:
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)
268
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
269
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)
270
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A&A Update for
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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
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)
272
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
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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
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A&A Update for
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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
Statement of
Comprehensive Income
• 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
Statement of
Comprehensive Income
• 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
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A&A Update for
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Notes:
FEES to Federal Government
• ASU 2010-27 for Pharmaceutical
Manufacturers
• ASU 2011-6 for Health Insurers
280
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
281
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
282
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A&A Update for
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Notes:
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
283
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
284
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
285
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A&A Update for
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Notes:
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
286
Non-recognized Subsequent Events
• Changes in fair value or foreign currencies
after the balance sheet date
• Entering significant commitments or
contingent liabilities
287
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
288
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A&A Update for
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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 period
289
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
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
291
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A&A Update for
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Notes:
Special Purpose Frameworks
US GAAP Special Purpose
Frameworks
• Employee Benefit Plans
• GAAP for Individuals
• Liquidation Basis of Accounting
293
Auditing
Special Purpose Frameworks
• Includes the four “other comprehensive
bases of accounting”
• FRF for SMEs
294
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A&A Update for
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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
99
A&A Update for
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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
100
A&A Update for
GBQ Partners
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
101
A&A Update for
GBQ Partners
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
102
A&A Update for
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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
103
A&A Update for
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Notes:
Leases
• Basically current income tax rules
• Transfers substantially all of value in an
asset as capital lease by lessee and salestype 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
104
A&A Update for
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Notes:
Income Taxes
• Accounting policy choice to use either:
– Income taxes payable method
– Deferred taxes method
313
Financial Instruments and Longterm 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
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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.
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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;
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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
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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.
Tax Compliance Services
• 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
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Notes:
Tax Compliance Services
• 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.
Tax Compliance Services
• 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.
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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
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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?
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Questions about Client
• Are you required to routinely propose many
changes in account coding and/or journal
entries?
• Are source documents lacking or
incomplete for many items?
Questions about Client
• 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?
Questions about Client
• 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?
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Questions about Client
• 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?
Questions about Client
• 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?
Questions about Client
• 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?
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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.
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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
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Notes:
Impact
• Does your client expect that whatever
procedures you perform will result in an
adjusting entry?
349
Questions
350
117