Book Governmental Title Accounting and Auditing Supplement No

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1 Book Governmental Title Accounting and Auditing Supplement No

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3 GOVERNMENTAL ACCOUNTING AND AUDITING SUPPLEMENT NO

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5 Chapter 1 GOVERNMENTAL ACCOUNTING AND AUDITING SUPPLEMENT NO INTRODUCTION This update includes the more significant accounting and auditing developments affecting state and local governments from April 1, 2017, through September 30, Included in this update are relevant standard-setting and project activities of the Auditing Standards Board (ASB), Professional Ethics Executive Committee (PEEC), GASB, the U.S. Government Accountability Office (GAO), and the Office of Management and Budget (OMB) 1. These developments, although believed to be complete at the date at which they were prepared for this course material, may not cover all areas within accounting and auditing relevant to all users of this -setting activity in the areas of accounting and financial reporting, audit and attest, and compilation, review, and preparation. Members of the Governmental Audit Quality Center (GAQC) may also periodically check the GAQC website for developments in government auditing standards, single audits, and audits of governmental financial statements. 1 This does not include the annual draft update to the Compliance Supplement. This can be reviewed at the OMB website guidanceforfederalrewards/ombdraft2017cs.html. Copyright 2017 AICPA Unauthorized Copying Prohibited 1-1

6 This update may refer you to other sources of information, in which case, you are strongly encouraged to review that information if relevant to your needs. After completing this course, you should be able to identify some of the more significant accounting and auditing developments from April 1, 2017, through September 30, Copyright 2017 AICPA Unauthorized Copying Prohibited

7 Audit and Accounting Final and Proposed Standards FINAL STANDARDS, INTERPRETATIONS, AND REGULATIONS Auditing Standards Board Auditing, Attestation, and Quality Control Standards and Interpretations Concepts Common to All Attestation Engagements: Attestation Interpretations of AT-C Section 105 May 2017 Background The ASB released a new interpretation under AT-C section 9105, Concepts Common to All Attestation Engagements (AICPA, Professional Standards), for members required to follow both the AICPA and another set of attestation standards, for example, the requirements specified in Government Auditing Standards issued by the Comptroller General of the United States. Main Provisions Item number four of the interpretation, Performing and Reporting on an Attestation Engagement Under Two Sets of Attestation Standards, indicates that a member may perform and report on an attestation engagement in accordance with AICPA attestation standards in addition to another set of attestation standards if both sets of attestation standards are followed in their entirety. A member who references both sets of attestation standards in the attestation report should amend the statement that the attestation engagement was conducted in accordance with attestation standards established by the AICPA to add that the engagement was also conducted in accordance with Government Auditing Standards. The interpretation provides illustrative reports with examples of additional language that a practitioner may include in attestation reports to indicate that the engagement was conducted in accordance with the AICPA attestation standards and other attestation standards. Effective Date The interpretation was effective upon issuance. SAS No. 133, Auditor Involvement With Exempt Offering Documents (AICPA, Professional Standards, AU-C section 945) July 2017 Background In an effort to establish when an auditor is involved with an exempt offering document and procedures required when involved, the ASB issued SAS No. 133, Auditor Involvement With Exempt Offering Documents (AICPA, Professional Standards, AU-C section 945). Copyright 2017 AICPA Unauthorized Copying Prohibited 1-3

8 Main Provisions and Significant Changes Involvement is determined by a two- (or review report on interim financial information) is included or incorporated by reference in an exempt offering document, and (2) the auditor performs one or more specified activities with respect to the exempt offering document. An example of a triggering activity is assisting the entity in preparing information included in the exempt offering document. When an auditor is involved with exempt offerings, SAS No. 133 requires the auditor to perform (a) procedures described in paragraphs 6-18 of AU-C section 720, Other Information in Documents Containing Audited Financial Statements, on the exempt offering; and (b) procedures designed to identify events submission of the exempt offering document that (had they been known to the auditor as of the date of The SAS also discusses requirements and considerations when the auditor identifies subsequent events or subsequently discovered facts. Effective Date This SAS is effective for exempt offering documents with which the auditor is involved that are initially distributed, circulated, or submitted on or after June 15, Professional Ethics Executive Committee The PEEC did not issue any new or revised standards or interpretations affecting state or local governments during this period. GASB Accounting Standards Updates GASB Statement No. 86, Certain Debt Extinguishment Issues May 2017 Background GASB issued a new statement to provide accounting and reporting guidance for transactions in which cash and other monetary assets acquired with only existing resources are placed in irrevocable trusts for the sole purpose of extinguishing debt. This is referred to as an in-substance defeasance of debt. Main Provisions and Significant Changes The statement requires that trusts established for in-substance defeasance of debt using only existing resources be accounted for in the same way as irrevocable trusts acquired with refunding debt proceeds to be used only for scheduled payments of principal and interest of the defeased debt. The statement also establishes additional disclosure requirements. According to the statement trusts are restricted to owning only monetary assets that are essentially risk-free as to the amount, timing, and collection of interest; 1-4 Copyright 2017 AICPA Unauthorized Copying Prohibited

9 the assets should be denominated in the currency in which the debt is payable; monetary assets for debt denominated in U.S. dollars are limited to direct obligations of the U.S. government, obligations guaranteed by the U.S. government, and securities backed by U.S. government obligations as collateral and for which interest and principal payments on the collateral generally flow immediately through to the security holder; and the cash flows generated by the monetary assets held in trust are required to align with the timing and amount of scheduled interest and principal payments on the defeased debt for the assets to qualify for defeasance purposes. If the trust does not prohibit the substitution of essentially risk-free monetary assets with those that are not essentially risk-free, governments should disclose this in the period in which the debt is defeased in substance. The amount of debt defeased in substance remaining outstanding for which the risk of substitution exists should be disclosed in subsequent years. Remaining prepaid insurance amounts related to an extinguished debt should be included in the net carrying amount of the debt for purposes of calculating the difference between the reacquisition price and the net carrying amount of the debt. New note disclosure requirements include the following: 1. A description of the defeasance of debt transaction for debt defeased using only existing resources 2. The amount of debt outstanding from an in-substance defeasance of debt using only existing resources 3. In the period that debt is defeased in substance, disclosure of the risk that substitution of essentially risk-free monetary assets with monetary assets that are not essentially risk-free is not prohibited 4. In all periods following an in-substance defeasance of debt, the amount of defeased in substance debt outstanding that is subject to substitution risk previously described in number 3. Effective Date The requirements of GASB Statement No. 86 are effective for reporting periods beginning after June 15, GASB Statement No. 87, Leases June 2017 Background GASB released Statement No. 87, Leases, to simplify lease reporting in the financial statements. One of the principal changes established by this statement is a single model for lease accounting rather than the historical approach of classifying leases as either operating or capital leases. This approach is representative of the principle that leases are financings of the right to use an underlying asset. The statement will require recognition of certain lease assets and liabilities for leases that were previously classified as operating leases. Main Provisions and Significant Changes The statement establishes definitions for key terms, including lease, lease term and short-term lease. A lease underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction. Copyright 2017 AICPA Unauthorized Copying Prohibited 1-5

10 The lease term is the period during which a lessee has a noncancelable right to use an underlying asset, plus the following periods: 1. Periods covered by option 2. Periods option A short-term lease is a lease that, at the commencement of the lease term, has a maximum possible term of 12 months or less, including any options to extend, regardless of whether it will be exercised. Short-term lease payments are recognized by the lessee and lessor as outflows of resources or inflows of resources, based on the payment provisions of the lease contract. Lessees recognize a lease liability and lease asset at the start of the lease term, unless it is a short-term lease or the lease transfers ownership of the underlying asset. Lessees also recognize amortization expense for using the lease asset over the shorter of the lease term or the useful life of the asset, interest expense on the lease liability, and note disclosures about the lease. Note disclosures include a general description of the leasing arrangement, the amount of lease assets recognized, and a schedule of future lease payments. Lessors should recognize a lease receivable and a deferred inflow of resources at the start of the lease term, with exceptions for leases of assets held as investments, certain regulated leases, short-term leases, and leases that transfer ownership of the underlying asset. Lessors also recognize lease revenue, interest revenue on the receivable, and note disclosures about the lease. Note disclosures include a general description of the leasing arrangement and the total amount of inflows of resources recognized from leases. Effective Date The requirements of GASB Statement No. 87 are effective for reporting periods beginning after December 15, GASB Implementation Guidance Update No Implementation Guidance Update2017 April 2017 Background GASB issued the annual implementation guide update in April of 2017 to address issues in practice. Main Provisions and Significant Changes Implementation Guide amends and supersedes several questions in Implementation Guide No and Implementation Guide No Implementation Guidance Update2016. New questions and answers are provided for new guidance regarding cash flows reporting, the financial reporting entity, plan and employer accounting and financial reporting for pensions, and accounting and financial reporting for certain investments and external investment pools. There are also additional questions addressing implementation of GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, and GASB Statement No. 77, Tax Abatement Disclosures. 1-6 Copyright 2017 AICPA Unauthorized Copying Prohibited

11 Effective Date The requirements of this implementation guide are effective for reporting periods beginning after June 15, GASB Implementation Guidance Update Update No Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans April 2017 Background and Main Provisions GASB Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, was issued in June 2015 and effective for fiscal years beginning after June 15, The statement addresses plan accounting and financial reporting for postemployment benefits other than pensions (OPEB). This implementation guide provides clarification on complying with the requirements of the statement. Effective Date The requirements of questions 4.80, 4.144, and are effective for reporting periods beginning after June 15, Earlier implementation is encouraged with the implementation of GASB Statement No. 85, Omnibus 2017, by topic, as outlined in paragraph 26 of GASB Statement No. 85. The remaining requirements of Implementation Guide are effective for reporting periods beginning after December 15, GAO The GAO did not issue any standards, interpretations, or regulations during this period. OMB The OMB did not issue any standards, interpretations, or regulations during this period. PROPOSED STANDARDS, INTERPRETATIONS, AND REGULATIONS AICPA Auditing Standards Board Proposed Statement on Auditing Standards, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA April 2017 Copyright 2017 AICPA Unauthorized Copying Prohibited 1-7

12 Comment Deadline and Effective Date Comments on the proposed statement were due September 28, 2017 (extended from the original deadline of August 21, 2017). The proposed SAS would be effective for audits of financial statements for periods ending on or after December 15, Background This proposed SAS is a result of efforts by the U.S. Department of Labor and a special task force of the ASB to improve the quality of employee benefit plans (EBP) audits through improvements to the EBP oduces a new reporting model for audits of employee benefit plans subject to the Employee Retirement Income Security Act of 1974 (ERISA) imposes a limitation on the scope of the audit, as permitted by ERISA (the ERISA-permitted audit scope limitation). The proposed SAS also includes new requirements for reporting findings from procedures performed on specific plan provisions relating to the financial statements. Main Provisions and Significant Changes The proposed SAS includes new engagement acceptance procedures and a new form of opinion when an ERISA-permitted audit scope limitation exists. Auditors of ERISA plans would include the following, based on the audit and based on the use of the certification of the investment information which the auditor was instructed not to audit, the financial statements are fairly stated in all material respects in accordance with the applicable financial reporting framework. The new form of report would also require: a new Basis for Limitation on the Scope of the Audit section; expanded management and auditor responsibilities sections; an opinion on the ERISA plan financial statements that is based on the audit and on the use of the certification of the investment information that the auditor was instructed not to audit, which includes disclosure of the audit procedures performed on the information not covered by the certification, an appropriate certification that is provided to the auditor, and the procedures performed on the certified information, as required by the proposed SAS; an other-matters paragraph that provides an opinion on whether the supplemental schedules are fairly stated in all material respects in relation to the financial statements as a whole; an opinion on whether the form and content of the supplemental schedules are presented in disclosure under ERISA; and a new report, Report on Specific Plan Provisions Relating to the Financial Statements, that reports findings on specific plan provisions relating to the financial statements. (This new reporting requirement can be included in e report.) The proposed SAS can be reviewed in its entirety at AccountingandAuditing/Pages/default.aspx. 1-8 Copyright 2017 AICPA Unauthorized Copying Prohibited

13 Proposed Statement on Standards for Attestation Engagements, Selected Procedures September 2017 Comment Deadline and Effective Date Comments on the proposed standard are due by December 1, The proposed standard would be effective for reports dated on or after May 1, This effective date is provisional, due to the interaction with a broader project being considered by the ASB, however the effective date will not be earlier than May 1, Background The ASB and the Accounting and Review Services Committee (ARSC) have been discussing a beyond that currently provided by AT-C section 215, Agreed-Upon Procedures Engagements. Main Provisions and Significant Changes The proposed standard would change practice in three major ways. 1. The proposed standard would not require the specified parties to either establish the procedures or agree to the sufficiency of the procedures for their purposes. In a selected procedures engagement, the practitioner may determine the procedures to be performed and no party would be required to take responsibility for the sufficiency of the procedures. This allows the practitioner to perform the engagement in situations in which the specified parties may not have the ability or willingness to fully develop or determine the procedures, without having to perform a separate consulting services engagement. 2. The proposed standard would not include a requirement to either request an assertion or disclose in appropriate party may not have the ability or may not otherwise be willing to perform its own measurement or evaluation of the subject matter. 3. The proposed standard would not include a requirement for the practitioner to restrict the use of the report. This allows the report to be used by wider audience including parties who are unwilling or unable to agree to the sufficiency of the procedures for their purposes. More detail is included in the full draft at AccountingandAuditing/DownloadableDocuments/ a_ED_Selected_Procedures.pdf. Professional Ethics Executive Committee Proposed Interpretation and other guidance State and Local Government Entities (formerly Entities Included in State and Local Government Financial Statements) July 2017 Comment Deadline and Effective Date Comments on the proposed ethics interpretation were due October 16, The proposed interpretation would be effective for engagements covering periods beginning on or after June 15, The ASB has also undertaken a separate but related project to consider amending the attestation standards for examination, review, and agreed-upon procedures engagements to address situations in which a responsible party does not provide a written assertion to the practitioner. Copyright 2017 AICPA Unauthorized Copying Prohibited 1-9

14 Background The PEEC issued this exposure draft to propose a Conceptual Framework approach to determining when a member needs to be independent of a state or local government for which the member is not providing financial statement attest services. This differs from the current interpretation which general interpretation would supersede the current interpretation, Entities Included in State and Local Government Financial Statements (ET sec ). Main Provisions and Significant Changes The proposed interpretation may have a significant impact on auditor independence considerations in ter AICPA Code of Professional Conduct. It changes guidance related to auditor independence of downstream entities, upstream entities, and investments. A downstream entity is defined as an entity that is upstream entity is defined as The need to attest client is to the financial statements and how much influence it has over the accounting and financial reporting process. In a group audit situation, the current interpretation allows for an independence exemption for immaterial funds or component units and material funds and component units where the primary government does not have more than minimal influence over the accounting and reporting process. In the proposed interpretation, auditors of downstream entities would be exempted from independence considerations under the Conceptual Framework for those funds and component units that are either immaterial to the financial statements or that do not have more than minimal influence over the accounting and financial reporting process. Current guidance does not address funds and component units that are included in the financial reporting entity but are excluded from the financial statements. Under the proposed interpretation, consideration of auditor independence would be required for funds or component units that are excluded from the financial statements but are required to be included in the financial reporting entity if they are material to the financial statements or have more than minimal influence over the accounting and financial reporting process. The proposed interpretation includes a carve out for prohibited nonattest services when certain specified conditions exist. The current interpretation does not require independence of an upstream entity that the auditor does not audit. However, covered members and their immediate family and close relatives could not have a key position. The proposed interpretation would require evaluation of auditor independence of an upstream entity that is not a financial statement attest client using the Conceptual Framework when 1. the downstream financial attest client is material to the financial reporting entity; and 2. the primary government of the financial reporting entity has more than minimal influence over the accounting and financial reporting process of the downstream entity. The current interpretation provides no specific guidance directed to investments. Evaluation of auditor independence of investments using the Conceptual Framework would be applicable, under the proposed interpretation, only to (1) controlling investments that are not de minimis to the financial statement attest client as a whole; and (2) investments that give the financial statement attest client significant influence over the entity and that is material to the financial statement attest client as a whole Copyright 2017 AICPA Unauthorized Copying Prohibited

15 The proposal also gives guidance concerning evaluation of brother-sister relationships (essentially equivalent to the concept of an affiliate) and guidelines for determining when an entity has more than minimal influence. Materiality is considered at the financial reporting entity rather than opinion unit level. GASB GASB Implementation Guide No. 201X-Z, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions (and Certain Issues Related to OPEB Plan Reporting) June 2017 Comment Deadline and Effective Date Comments on the proposed implementation guide were due September 25, The requirements of certain questions in the proposed implementation guide would be effective in the first reporting period in which the measurement date of the (collective) net OPEB liability is on or after June 15, The remaining questions were effective for reporting periods beginning after June 15, Background and Main Provisions GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions was issued in June 2015, and effective for fiscal years beginning after June 15, The statement addresses accounting and financial reporting by state and local governments for OPEB. Implementation Guide 201X-Z provides clarification on complying with the requirements of GASB Statement No. 75. A majority of the questions were developed based on questions in other existing implementation guides addressing pensions and OPEB. Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placementsan amendment of GASB Statements No. 34 and No. 38 June 2017 Comment Deadline and Effective Date Comments on the proposed statement were due September 15, The requirements of the proposed statement would be effective for reporting periods beginning after June 15, Background Due to diversity in practice and governmental risk exposure, GASB began to research the current practice of debt disclosure in the state and local government arena in April GASB researched (1) the information governments disclose about debt in their financial statements; (2) the issues preparers and auditors face in complying with current debt disclosure requirements; and (3) the needs of governmental financial statement users regarding information about debt. As a result of information collected during research and other deliberations, this proposed statement was issued in June Main Provisions and Significant Changes The proposed statement establishes a definition of debt for disclosure purposes only as a liability that arises from a contractual obligation to pay cash (or other assets that may be used in lieu of payment of cash) in one or more payments to settle an amount that is fixed at the date the contractual obligation is established. Leases and trade accounts payable are excluded from the definition of debt. Copyright 2017 AICPA Unauthorized Copying Prohibited 1-11

16 The proposed statement also establishes new requirements regarding items related to debt to be disclosed in the notes to the financial statements. These items include information related to amounts of unused lines of credits, collateral pledged as security for debt, and various terms specified in debt agreements. Governments would also report debt disclosures regarding direct borrowings and direct placements of debt separately from disclosures regarding other debt. GAO Government Auditing Standards, 2017 Exposure Draft April 2017 Comment Deadline and Effective Date Comments on the exposure draft were due July 6, The effective date of guidance will be included when the revised Government Auditing Standards are issued in final form. Background In April 2017, GAO issued an exposure draft containing proposed changes to Government Auditing Standards, December 2011 Revision (generally accepted government auditing standards or GAGAS). When issued in final form, the revision will supersede the December 2011 revision of the standards. The final revision to Government Auditing Standards, also referred to as the Yellow Book, is expected to be issued sometime in The effective date of guidance will not be known until the revised Government Auditing Standards are issued in final form. Main Provisions and Significant Changes The proposed revisions update the Yellow Book to reflect changes in current standards and guidance for example, SSAE 18, Attestation Standards: Clarification and Recodification (AICPA, Professional Standards), Standards for Internal Control in the Federal Government (Green Book), and the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Furthermore, the revisions emphasize specific considerations applicable to the government environment. Information regarding some of the more notable proposed revisions are found in the following paragraphs. Format of the standards. Requirements for a topic are differentiated from the application guidance, with the requirements being clearly identified and the application guidance directly following the related requirements. This format simplifies the identification of the requirements and assists in linking the application guidance to the requirement. Chapters are reorganized and realigned. The exposure draft contains nine chapters versus seven chapters in the 2011 Yellow Book because part of this the content has been reorganized. For example, the exposure draft has a separate chapter on Ethics, Independence, and Professional Judgment and a separate chapter on Competence and Continuing Professional Education (CPE). Independence. The requirements are expanded to state that any services performed by auditors relating to preparing accounting records and financial statements (other than those prohibited by the Yellow Book) create significant threats to auditors independence and that auditors should document the threats and safeguards applied to eliminate and reduce threats to an acceptable level or decline to perform the service. In addition, the exposure draft further explains the independence requirements of the auditor when the 1-12 Copyright 2017 AICPA Unauthorized Copying Prohibited

17 engaging party differs from the responsible party. Examples are also provided for when this situation might occur. CPE. The requirements have been revised to require a new four-hour requirement in GAGAS topics each time a new version of GAGAS is issued. Additionally, application guidance is provided concerning the topics required by the 80-hour GAGAS CPE requirement, and to incorporate some of the guidance from the current GAO CPE guidance document addressing common CPE questions. Peer Review. Requirements are expanded to provide requirements and guidance for organizations affiliated with recognized organizations peer review programs (for example, AICPA or National State Auditors Association) and those not affiliated with recognized organizations peer review programs. Quality Control. Audit organizations will need to, at least annually, obtain written affirmation of compliance with policies and procedures on independence from all audit organization personnel required to be independent. Additionally, requirements are added and guidance is provided for engagement performance, documentation, and reporting, including requirements for policies and procedures pertaining to the review and supervision of engagement work performed by the engagement team. Financial Audits. The requirements related to financial audits are expanded to address a new concept referred to as waste. Waste is defined in part as the act of using or expending resources carelessly, extravagantly, or to no purpose. Auditors will be required to perform audit procedures to ascertain the potential effect on the audit objectives if they become aware of waste that could be quantitatively or qualitatively significant to the audit objectives. Auditors will also need to report findings of waste when they conclude based on sufficient, appropriate evidence that instances of waste have occurred that have a material effect, either quantitatively or qualitatively, on the financial statements. Finally, auditors are required to communicate findings of waste in writing to audited entity officials when the auditors detect potential instances that do not have a material effect on the financial statements but warrant the attention of those charged with governance. Attestation Engagements. The chapter on attestation engagements is updated to incorporate Statement on Standards for Attestation Engagements No. 18 and Statement on Standards for Accounting and Review Services No. 21, section 90 (Review of Financial Statements), as well as to introduce the concept of waste described in the previous bullet. Performance Audits. The performance audit chapters are revised to, among other things, further explain that management assertions are not required when conducting a performance audit in accordance with GAGAS, discuss suitable criteria, and to introduce the concept of waste previously described for financial audits. Although this listing does not include all of the proposed revisions to the standards, it provides the extent and variety of revisions proposed. Keep in mind that the areas of revision described previously may chan draft. For more information on specific revisions, or for an update on the status, go to the GAO website at OMB The OMB did not issue any proposed standards, interpretations, or regulations during this period. Copyright 2017 AICPA Unauthorized Copying Prohibited 1-13

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