APPENDIX 4H. Disclosure Checklist for Income Tax Basis Financial Statements. Financial Statement Date:

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1 4 51 APPENDIX 4H Disclosure Checklist for Income Tax Basis Financial Statements Entity: Prepared by: Financial Statement Date: Date: Explanatory Comments This checklist includes the more common disclosure and presentation considerations for financial statements of for profit nonpublic entities prepared using the income tax basis of accounting. It should be emphasized that this checklist is not a substitute for an accountant s exercise of professional judgment and knowledge of all authoritative pronouncements. Note, this is a disclosure checklist only, and accordingly guidance and measurement questions are generally not included. AU C 800, Special Considerations Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks, and SSARS No. 21, Statements on Standards for Accounting and Review Services: Clarification and Recodification [AR C 80.18(d) and AR C 90.40(d)], require financial statements prepared under the tax basis of accounting to contain items that are the same as, or similar to, items included in GAAP financial statements. AU C 800 and SSARS No. 21 [AR C 80.08(a)(iii) and AR C 90.09(a)(iii)] also require evaluation of whether additional disclosures related to matters not identified on the face of the financial statements, or other disclosures, may be needed for the tax basis financial statements to achieve fair presentation. Accordingly, the authoritative references on the checklist are primarily to generally accepted accounting principles. (Note that disclosures in income tax basis financial statements do not have to be identical to GAAP disclosures as long as they communicate the substance of the GAAP requirements. For example, if disclosing the terms of debt agreements communicates information about the minimum payments required over the next five years, disclosing a schedule of the future minimum payments related to debt agreements may not be necessary.) Most checklist questions include the relevant citation of the FASB Accounting Standards Codification (FASB ASC). The FASB ASC is the single source of authoritative nongovernmental U.S. accounting and reporting standards (other than SEC guidance). This checklist incorporates Accounting Standards Updates (ASUs) of the FASB ASC. An occasional reference is made to the AICPA auditing standards (AU C sections) or compilation and review standards (AR and AR C sections). Disclosure guidelines for certain financial statement items are in auditing standards. Inclusion of those disclosures without regard to whether the financial statements are audited or unaudited is generally accepted practice. Some checklist questions do not cite a specific authoritative reference but indicate that the disclosure is accepted practice. Many entities disclose that information even though a specific requirement in authoritative literature cannot be identified. Additional disclosures may be required, such as those identified in the Other Disclosures and Specialized Accounting and Reporting Principles sections of this checklist. In addition, depending on the facts and circumstances, additional disclosures may be needed so the financial statements will not be misleading. Accountants should consult the appropriate authoritative guidance if such disclosures are applicable. In addition, guidance can be found in the long form GAAP disclosure checklist in PPC s Guide to GAAP, PPC s Guide to Audits of Nonpublic Companies, PPC s Guide to Compilation and Review Engagements, PPC s Guide to Preparing Financial Statements, and various other PPC Guides. Update Information With the exceptions of (1) ASU , Revenue from Contracts with Customers (Topic 606), and certain related subsequent ASUs; (2) ASU , Financial Instruments Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities; (3) ASU , Leases (Topic 842); and (4) ASU , Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, discussed in the following paragraphs, this checklist is current through ASU , Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. For a list of disclosures required by subsequent standards, visit tax.thomsonreuters.com/products/brands/checkpoint/ppc/ and access Disclosure Checklist Updates. 1 Appendix 4H

2 4 52 PHY 10/16 Revenue from Contracts with Customers In May 2014, the FASB issued ASU , Revenue from Contracts with Customers (Topic 606). The ASU introduced a comprehensive, principles based framework for recognizing revenue, and, when effective, will supersede the revenue recognition requirements in FASB ASC 605, Revenue Recognition, and virtually all industry specific revenue recognition guidance in the FASB ASC. The ASU is intended to improve GAAP by providing a framework to address revenue recognition issues, creating more consistency and comparability of revenue recognition practices across entities and industries, and improving the usefulness of information provided to financial statement users through more robust disclosure requirements. Subsequent to the issuance of ASU , the FASB issued a number of ASUs clarifying certain matters in ASU Those subsequent ASUs have the same effective dates as ASU (see discussion in the following paragraph). In August 2015, the original effective dates of ASU were deferred by one year through the issuance of ASU , Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. For entities other than public business entities, certain not for profit entities, and certain employee benefit plans, ASU (as revised) is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, Early application is allowed for such entities, but no earlier than annual reporting periods beginning after December 15, 2016, including interim reporting periods within that period. Alternatively, the ASU can be applied to annual reporting periods beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the year of initial adoption. Due to the delayed effective dates of ASU , this checklist does not incorporate the disclosure requirements and associated amendments of the ASU (and any related subsequent ASUs). A future disclosure checklist will incorporate such requirements and changes as the effective dates near. Users may download the ASUs from the FASB s website at or from Checkpoint at checkpoint.riag.com. PPC s Guide to GAAP and PPC s Guide to Preparing Financial Statements provide a summary of ASU Financial Instruments In January 2016, the FASB issued ASU , Financial Instruments Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities, which makes targeted improvements in the recognition, measurement, presentation, and disclosure of financial instruments. For entities other than public business entities, ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, Generally, such entities may adopt the provisions of the ASU earlier as of fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. However, the ASU allows entities that are not public business entities the option to (1) adopt the presentation guidance in FASB ASC through 45 7 regarding financial liabilities for which the fair value option is elected and (2) not disclose the information regarding the fair value of financial instruments set forth in FASB ASC in financial statements of fiscal years or interim periods that have not yet been made available for issuance. Users should refer to the ASU for the specific transition and disclosure requirements. Due to the delayed effective dates of ASU , this checklist does not incorporate the disclosure requirements and associated amendments of the ASU. A future disclosure checklist will incorporate such requirements and changes. Users may download the ASU from the FASB s website at or from Checkpoint at checkpoint.riag.com. PPC s Guide to GAAP and PPC s Guide to Preparing Financial Statements provide a summary of ASU Leases In February 2016, the FASB issued ASU , Leases (Topic 842), which, among other things, requires the recognition of lease assets and lease liabilities on the balance sheet of lessees for operating leases, along with the disclosure of key information about leasing arrangements. When effective, the ASU will supersede FASB ASC 840, Leases, and add Topic 842, Leases, to the FASB ASC. The ASU is effective for entities other than public business entities, certain not for profit entities, and certain employee benefit plans for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, Early adoption is permitted. In addition to replacing FASB ASC 840 with FASB ASC 842, the ASU amends and supersedes a number of other Topics throughout the FASB ASC. Users should refer to the ASU for additional information about specific transition and disclosure amendments and requirements. Due to the delayed effective dates of ASU , this Appendix 4H 2

3 4 53 checklist does not incorporate the disclosure requirements and associated amendments of the ASU. A future disclosure checklist will incorporate such requirements and changes. Users may download the ASU from the FASB s website at or from Checkpoint at checkpoint.riag.com. PPC s Guide to GAAP and PPC s Guide to Preparing Financial Statements provide a summary of ASU Credit Losses In June 2016, the FASB issued ASU , Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which affects all entities that hold financial assets and net investment in leases that are not accounted for at fair value through net income. The ASU is intended to provide users of financial statements with additional decision useful information about the expected credit losses on financial instruments and other commitments to extend credit. For entities other than public business entities, the ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, All entities may early adopt the ASU in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Users should refer to the ASU for additional information about specific transition and disclosure amendments and requirements. Due to the delayed effective dates of ASU , this checklist does not incorporate the disclosure requirements and associated amendments of the ASU. A future disclosure checklist will incorporate such requirements and changes. Users may download the ASU from the FASB s website at or from Checkpoint at checkpoint.riag.com. PPC s Guide to GAAP and PPC s Guide to Preparing Financial Statements provide a summary of ASU DISCLOSURE CHECKLIST FOR INCOME TAX BASIS FINANCIAL STATEMENTS Instructions This disclosure checklist should be completed in its entirety. A block has been provided for each major disclosure caption. If the major caption is not applicable to your client, simply place a ( ) in the block. It will then not be necessary to check N/A for each question under the major caption. Otherwise, respond to each question with a ( ) in the appropriate column: (1) Yes either the disclosure required by GAAP has been provided or information that communicates the substance of the disclosure has been provided; (2) No item present but no disclosure made (any item checked No should be explained in the checklist or in a separate memorandum); or (3) N/A either the item is not present or it is immaterial to the financial statements. STATEMENT OF ASSETS, LIABILITIES, AND EQUITY... 5 Cash... 5 Receivables... 5 Marketable Debt and Equity Securities... 6 Inventories... 6 Property and Equipment... 7 Liabilities (Except Income Taxes)... 7 Income Taxes... 9 Equity... 9 STATEMENT OF REVENUES AND EXPENSES STATEMENT OF CASH FLOWS GENERAL FINANCIAL STATEMENT DISCLOSURES General Disclosures Date of Management s Review Related Party Transactions and Common Control Pension and Other Postretirement Benefit Plans Defined Contribution Leases Leases in Financial Statements of Lessees Leases in Financial Statements of Lessors Appendix 4H

4 4 54 PHY 10/16 Contingencies, Risks, and Uncertainties Contingencies Significant Estimates Concentrations Obligations under Guarantees Going Concern Years Ending on or before December 15, Going Concern Years Ending after December 15, Imminent Liquidation Changes in Presentation of Comparative Statements Subsequent Events Accounting Changes and Correction of an Error Consolidations Construction type and Production type Contracts Nonmonetary Transactions OTHER POSSIBLE DISCLOSURES Other Disclosures Specialized Accounting and Reporting Principles Appendix 4H 4

5 4 55 STATEMENT OF ASSETS, LIABILITIES, AND EQUITY CASH 1. If the statement of assets, liabilities, and equity is presented in a classified format, has cash restricted as to use for other than current operations, for the acquisition of noncurrent assets, or for the liquidation of noncurrent liabilities been classified as a noncurrent asset? (FASB ASC ) 2. Are significant concentrations of credit risk arising from cash deposits in excess of federally insured limits disclosed? (FASB ASC ) RECEIVABLES 1. If the entity provides short term or long term financing to customers for sales of goods and services and uses the accrual method of accounting for tax reporting: a. Are the major categories of balances due under the financing arrangements presented separately in the statement of assets, liabilities, and equity or disclosed in the notes to the financial statements? (FASB ASC ) b. Is the use of the direct write off method disclosed? (FASB ASC ) c. If the arrangements are interest bearing: (1) Is the method used for recognizing interest income disclosed? (FASB ASC ) (2) Are the policies for when to recognize interest on delinquent balances disclosed? (FASB ASC ) (3) Is the carrying amount of balances for which interest is not being recognized disclosed? (FASB ASC ) (4) Is the carrying amount of balances that are past due 90 days or more and still accruing interest disclosed? (FASB ASC ) d. If balances have been factored and the conditions for sale accounting have been met, has the aggregate amount of gains or losses been presented separately in the statement of revenues and expenses or disclosed in the notes to the financial statements? (FASB ASC ) 2. Have the following amounts been included in determining the carrying amount of the related receivables (FASB ASC ): a. Deferred fees or costs? b. Discount from imputing interest? c. Unearned interest included in the face of recorded receivables? 3. Has gross profit deferred under the installment method been offset in determining the carrying amount of the related receivables? (FASB ASC ) 4. Have the following amounts included in determining the carrying amount of receivables been disclosed: (FASB ASC ) a. Deferred fees and costs? 5 Appendix 4H

6 4 56 PHY 10/16 b. Deferred gross profit? c. Discount from imputing interest? 5. If it is probable that the entity will be unable to collect a material portion of the carrying amount of receivables, is disclosure of the impairment sufficient to keep the financial statements from being misleading? (FASB ASC ) 6. Are amounts due from officers, employees, or affiliates presented separately in the statement of assets, liabilities, and equity or disclosed in the notes to the financial statements? (FASB ASC ) 7. If the statement of assets, liabilities, and equity is presented in a classified format, are amounts due from officers, employees, affiliates, and others included in current assets if they are collectible in the ordinary course of business within a year? (FASB ASC ) 8. Are significant concentrations of credit risk arising from receivables disclosed? (FASB ASC and 50 21) MARKETABLE DEBT AND EQUITY SECURITIES NOTE: Fair value disclosure requirements of FASB ASC are not included in this checklist. Such disclosures are not relevant in tax basis financial statements since investments in marketable debt and equity securities generally are carried at cost for tax reporting purposes. Nevertheless, entities are not precluded from disclosing information about the fair values of marketable debt and equity securities. 1. Are separate disclosures of the following made by major security type for all investments in debt securities: (FASB ASC , 50 3, and 50 5) a. Information about the contractual maturities as of the date of the most recent statement of assets, liabilities, and equity presented (disclosure can be by appropriate maturity groups)? b. Method used to allocate securities into maturity groups, if necessary? 2. For each period for which a statement of revenues and expenses is presented, have the following been disclosed: (FASB ASC ) a. Proceeds from sales of securities? b. Gross realized gains and losses from sales of securities? c. Method used to determine cost when calculating realized gains or losses (average cost or other method)? 3. If it is probable that the entity will be unable to realize a material portion of the carrying amount of marketable debt and equity securities, is disclosure of the impairment sufficient to keep the financial statements from being misleading? (FASB ASC ) INVENTORIES 1. Is the basis for stating inventories disclosed, including the method of determining cost? (FASB ASC ; ) Appendix 4H 6

7 [NOTE: This disclosure is no longer applicable once ASU is adopted. See Question 3 of this section.] For years beginning on or before December 15, 2016, have substantial and unusual losses that have resulted from electing the lower of cost or market method to determine the carrying amount of inventories been disclosed separately from cost of goods sold, either in the statement of revenue and expenses or the notes to the financial statements? (FASB ASC ) 3. [NOTE: The following disclosure results from the issuance of ASU , Inventory (Topic 330): Simplifying the Measurement of Inventory. The ASU is effective for fiscal years beginning after December 15, 2016, and interim periods in years beginning after December 15, Early adoption is permitted. For the purpose of determining disclosures required in tax basis financial statements, the authors believe this disclosure is optional until the effective date of the ASU. Once the ASU is adopted in tax basis financial statements, the disclosure requirement in Question 2 of this section is no longer applicable because the requirement is an amendment of FASB ASC ] Once this requirement of ASU is adopted, have substantial and unusual losses that result from the subsequent measurement of the inventory been disclosed? 4. If the entity uses LIFO, are any disclosures of annual income, profit, or loss on any basis other than LIFO made in the notes to the financial statements or in a supplementary schedule, rather than on the face of the financial statements? [IRS Reg (e)] 5. If it is probable that the entity will be unable to realize a material portion of the carrying amount of inventories, is disclosure of the unrecognized contingent loss from impairment sufficient to keep the financial statements from being misleading? (FASB ASC ) 6. If significant losses are expected on inventory purchase commitments, is disclosure of the expected losses sufficient to keep the financial statements from being misleading? (FASB ASC ) PROPERTY AND EQUIPMENT 1. Are the following disclosed relating to depreciable assets: (FASB ASC ) a. Balances of major classes of depreciable assets? b. Accumulated depreciation? c. A general description of the methods used to compute depreciation on the major classes of depreciable assets? d. Depreciation expense for the period? LIABILITIES (EXCEPT INCOME TAXES) 1. Are pledged assets and restrictive covenants disclosed? (FASB ASC ) 2. If the statement of assets, liabilities, and equity is presented in a classified format: a. Are current portions of obligations properly determined and presented as current liabilities? (FASB ASC and 45 9; and 45 2) 7 Appendix 4H

8 4 58 PHY 10/16 b. If short term obligations are excluded from current liabilities because they are expected to be refinanced, are they properly disclosed? (FASB ASC ) c. Is a total of current liabilities presented? (FASB ASC ) 3. Are maturities for the next five years disclosed? (FASB ASC ) 4. If the effective interest rate differs from the stated interest rate: a. Is the discount or premium resulting from the determination of present value reported as a direct deduction from or addition to the face amount of the note? (FASB ASC A) b. Is amortization of the discount or premium reported as interest expense? (FASB ASC ) c. Are the effective interest and the face amount of the obligation disclosed in the financial statements or in the notes to the financial statements? (FASB ASC ) 5. For debt issuance costs of liabilities that are not reported at fair value: (FASB ASC through 45 3) [NOTE: This disclosure related to debt issuance costs is pursuant to ASU , Interest Imputation of Interest (Subtopic ): Simplifying the Presentation of Debt Issuance Costs. Early adoption is allowed for financial statements that have not been previously issued. See FASB ASC for transition guidance.] a. For years beginning on or before December 15, 2015, have such costs been reported as a deferred charge? b. For years beginning after December 15, 2015, have such costs been reported as a direct deduction from the face amount of the related note and is amortization of such costs reported as interest expense? 6. [NOTE: The following disclosure is pursuant to ASU , Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date, which is effective for fiscal years ending after December 15, Early application is permitted.] If the entity has obligations resulting from joint and several liability arrangements: (FASB ASC ) a. Is the nature of the arrangement disclosed? b. Is the total amount outstanding under the arrangement disclosed? c. Is the carrying amount of any liability and related receivable recognized disclosed? d. Is the nature of any recourse provisions that would enable recovery from other entities of the amounts paid disclosed? 7. Do the financial statements disclose other information (such as conversion and subordination features) about obligations that, depending on the facts and circumstances, would be necessary to keep the financial statements from being misleading? (Accepted practice) Appendix 4H 8

9 4 59 INCOME TAXES 1. If the entity is an S corporation, partnership, or proprietorship, do disclosures explain why income tax expense is not recorded? (Accepted practice) 2. Are the amounts and expiration dates of operating loss and tax credit carryforwards disclosed? (FASB ASC ) 3. Are significant reconciling items between income tax expense attributable to continuing operations and income tax expense that would result from applying statutory rates to pretax income from continuing operations disclosed? (FASB ASC ) 4. If the entity is part of a group that files a consolidated tax return, are appropriate income tax disclosures included in its separately issued financial statements? (FASB ASC ) 5. Are all significant matters affecting comparability of information for all periods presented disclosed? (FASB ASC ) 6. If there is significant uncertainty in tax returns for open years, has sufficient disclosure of the unrecognized contingent loss been made to keep the financial statements from being misleading? (FASB ASC through 50 5) EQUITY 1. If the entity is a corporation, do the financial statements describe the pertinent rights and privileges of the classes of stock? (FASB ASC ) 2. If the entity is a limited liability entity: a. Do the financial statements describe any limitation on its equity holders liability? (FASB ASC ) b. Do the financial statements describe the different classes of equity interests and the respective rights, preferences, and privileges of each class? (FASB ASC ) c. Is the amount of equity for each class of equity holder disclosed? (FASB ASC ) d. If the entity has a finite life, do the financial statements disclose the date it will cease to exist? (FASB ASC ) 3. If the financial statements present both financial position and results of operations, have changes in the components of equity been disclosed? (FASB ASC and 50 3) (NOTE: The authors believe those requirements are relevant in income tax basis financial statements of all forms of entities.) 4. Are required redemptions of stock that is redeemable at fixed or determinable prices on fixed or determinable dates for each of the next five years disclosed? (FASB ASC ) 5. Is preferred stock with a preference in involuntary liquidation properly disclosed? (FASB ASC and 50 5) 9 Appendix 4H

10 4 60 PHY 10/16 6. If the entity acquired some of its stock during the period and the cost of the acquisition significantly exceeds the fair value of the stock, is the method of allocating the cost to items other than the stock and the accounting treatment for such items disclosed? (FASB ASC ) 7. Are the following restrictions on retained earnings disclosed: a. Restrictions as to dividend payments? (FASB ASC ) b. If state laws relating to acquisition of stock restrict the availability of retained earnings for payment of dividends or have other effects of a significant nature, have those facts been disclosed? (FASB ASC ) c. If a portion of retained earnings is appropriated for loss contingencies, is the appropriation clearly shown as an appropriation of retained earnings within the stockholders equity section of the statement of assets, liabilities, and equity? (FASB ASC and 45 4) STATEMENT OF REVENUES AND EXPENSES NOTE: Some statement of revenues and expenses disclosures have already been addressed in the section on statement of assets, liabilities, and equity disclosures. 1. Are advertising costs properly disclosed? (FASB ASC ; ) 2. Are the amounts of interest incurred, expensed, and capitalized disclosed? (FASB ASC ; ) 3. For periods beginning on or before December 15, 2015, are material unusual or infrequently occurring items (other than extraordinary items) properly presented and disclosed? (FASB ASC ; ) 4. For periods beginning on or before December 15, 2015, are extraordinary items properly presented and disclosed? (FASB ASC through 45 11; ; ) [NOTE: This disclosure is superseded upon adoption of ASU , Income Statement Extraordinary and Unusual Items (Subtopic ): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, Early adoption is permitted if the guidance is applied from the beginning of the year of adoption.] 5. For periods beginning after December 15, 2015, are material unusual or infrequently occurring items properly presented or disclosed pursuant to ASU ? (FASB ASC ; ) 6. If the guidance in ASU is applied prospectively, if applicable, has disclosure been made of the nature and amount of an item included in income from continuing operations after the ASU is adopted that adjusts an extraordinary item that was previously classified and presented before the adoption date? (FASB ASC ) Appendix 4H 10

11 Is the accounting policy for classifying shipping and handling costs disclosed? (If shipping and handling costs are significant and are not included in cost of sales, the amount of such costs and the line item on the statement of revenues and expenses that includes such costs also should be disclosed.) (FASB ASC ) 8. When taxes assessed by governmental authorities on revenue producing transactions (e.g., sales, use, and similar taxes) are significant: a. Is the amount of those taxes that are included in both revenues and costs (i. e., presented on a gross basis) disclosed? (FASB ASC ) b. Is the policy for presenting those taxes on either a gross or net basis disclosed? (FASB ASC ) 9. Has the nature of incentives given to third party manufacturers or resellers been described and have the amounts of incentives recognized and how they are classified in the statement of revenues and expenses been disclosed? (FASB ASC ) STATEMENT OF CASH FLOWS NOTE: A statement of cash flows is not required in tax basis presentations. However, entities choosing to present a statement of cash flows should do so in a manner that communicates the substance of FASB ASC Are noncash investing and financing transactions excluded from the cash flow statement but disclosed, for example, in the notes to the financial statements and do they clearly relate the cash and noncash aspects of such transactions? (FASB ASC ) 2. If the indirect method of reporting cash flows from operating activities is used, are amounts of interest paid (net of amounts capitalized) and income taxes paid during the period disclosed? (FASB ASC ) Practical Consideration: ASU , Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, clarifies that the amounts of interest paid required to be disclosed in Question No. 2 includes the portion of payments made to settle zero coupon debt instruments or other debt instruments that have coupon interest rates that are insignificant compared to the borrowing s effective interest rate that are attributable to accreted interest related to the debt discount. For entities other than public business entities, ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, Entities are required to apply the provisions of the ASU retrospectively to all periods presented, unless impracticable. If retrospective application is impracticable, the ASU should be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. An entity that elects early adoption must adopt all of the amendments of the ASU in the same period. 3. In the first interim and annual period of the adoption of ASU , have the disclosures in item 1 in ACCOUNTING CHANGES AND CORRECTION OF AN ERROR been made? (FASB ASC ) 4. Is the policy for determining which items are treated as cash equivalents disclosed? (FASB ASC ) 5. If the entity received cash or made payments under a derivative during the period covered by the statement: (FASB ASC ) 11 Appendix 4H

12 4 62 PHY 10/16 a. If the derivative had an other than insignificant financing element at inception, are the cash receipts and payments classified according to their nature, without regard to whether they are intended as a hedge of another item? b. If the derivative did not have an other than insignificant financing element at inception, such as a plain vanilla interest rate swap or forward contract that did not require a payment at inception, and the cash receipts and payments are classified in the same category as the cash flows from the items being hedged, is the offsetting policy disclosed? GENERAL FINANCIAL STATEMENT DISCLOSURES NOTE: These are additional note disclosures that have not been addressed in previous checklist questions. GENERAL DISCLOSURES 1. Is the nature of operations disclosed? (FASB ASC ) (See Question 8 in the Other Disclosures section if planned principal operations have not commenced.) 2. Is a description of the basis of accounting and its primary differences from GAAP disclosed? [AU C ; AR and AR 90.32; AR C 80.08(a)(i) and AR C 90.09(a)(i)] 3. If the financial statements contain estimates, is the fact that preparing the income tax basis financial statements requires the use of management s estimates disclosed? (FASB ASC ) 4. Are all significant accounting policies disclosed, preferably in the first note or in a schedule preceding the notes? (Such policies should include those for which there is a selection from existing acceptable alternatives for income tax reporting purposes, principles and methods peculiar to the industry in which the entity operates, and unusual items such as, in the authors opinion, items accounted for differently from how they would be under GAAP.) (FASB ASC through 50 6) DATE OF MANAGEMENT S REVIEW 1. Have the following been disclosed: (FASB ASC ) a. The date through which subsequent events were evaluated? b. Whether the date in item (a) is the financial statement issuance date or the date the financial statements were available to be issued? 2. For revised financial statements, have the dates through which subsequent events were evaluated for both the original and revised financial statements been disclosed? (FASB ASC ) RELATED PARTY TRANSACTIONS AND COMMON CONTROL 1. Do disclosures of material related party transactions include a description of the transactions, including the nature of the relationship(s), dollar amounts of the transactions, and amounts due from or to related entities and the terms and manner of settlement? (FASB ASC ) Appendix 4H 12

13 If related party transactions are disclosed based on the definitions included in the IRC rather than the definition included in FASB ASC , is that policy disclosed as a difference between the tax basis and the GAAP basis in the summary of significant accounting policies? (Accepted practice) 3. Can representations that related party transactions were consummated on terms equivalent to those that prevail in arm s length transactions be substantiated? (FASB ASC ) 4. If the entity and one or more other entities are under common control and the existence of that control could result in operating results or financial position of the entity significantly different from those that would have been obtained if the entities were autonomous, is the nature of the control relationship disclosed? (FASB ASC ) 5. The VIE Subsections require disclosing information about an election not to consider the VIE Subsections for certain related party leasing relationships and about relationships that require consideration of the VIE Subsections. Although the required measurement of the VIE Subsections is not relevant to the income tax basis, the required disclosure that does not relate to consolidation is relevant because it provides information about the risk associated with the relationship. a. Related party leasing relationships that would not require consideration of the VIE Subsections under GAAP. The disclosure requirements are provided in connection with an optional election of an accounting alternative that excludes these leasing relationships from the relationships that require consideration of the VIE Subsections. The stated effective date is years beginning after December 15, 2014, but early application is permitted. The authors believe early application should be presumed for the purpose of determining disclosures required in income tax basis financial statements. Accordingly, when (a) the reporting entity leases property from an entity that is commonly controlled, (b) substantially all the activity between the reporting entity and the lessor entity relates to the lease, and (c) if the reporting entity explicitly guarantees or provides collateral for any lessor obligation related to the asset being leased, the principal amount of the obligation does not exceed the value of the leased asset as of the inception date of the collateral arrangement or guarantee, do the financial statements disclose: (FASB ASC AD) (1) The key terms and amounts of any obligations of the lessor entity that expose the reporting entity to providing financial support to the lessor entity, including implicit guarantees? (2) A qualitative description of any other circumstances that expose the reporting entity to providing financial support to the lessor entity? b. Relationships that would require consideration of the VIE Subsections under GAAP. If the reporting entity has a relationship with another entity that would require consideration of the VIE Subsections under GAAP, do the financial statements disclose information about: (FASB ASC AA) (1) The significant judgments and assumptions made by the reporting entity in determining whether disclosure of a VIE is required? 13 Appendix 4H

14 4 64 PHY 10/16 (2) The nature of risks from the reporting entity s involvement with the VIE and changes in those risks? (3) How the involvement with the VIE affects the reporting entity s financial position, financial performance, and cash flows? PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS DEFINED CONTRIBUTION 1. Is the following information about the entity s defined contribution pension or other postretirement benefit plan(s) disclosed separately from the entity s defined benefit plan(s): (FASB ASC ) a. The amount of cost recognized during the period? b. A description of the nature and effect of any significant changes during the period affecting comparability (such as a change in the rate of employer contributions, a business combination, or a divestiture)? LEASES Leases in Financial Statements of Lessees 1. Are leasing transactions with related parties disclosed? (FASB ASC ) 2. Do disclosures include a general description of the entity s leasing arrangements? (FASB ASC ) 3. Has disclosure of the following been made for operating leases having initial or remaining noncancelable lease terms in excess of one year: (FASB ASC ) a. Future minimum rental payments required as of the date of the latest statement of assets, liabilities, and equity presented, in the aggregate and for each of the five succeeding fiscal years? b. The total amount of minimum rentals to be received in the future under noncancelable subleases as of the date of the latest statement of assets, liabilities, and equity presented? 4. Is rental expense disclosed for each period for which a statement of revenues and expenses is presented, with separate amounts for minimum rentals, contingent rentals, and sublease rental income? (NOTE: Rental payments under leases with terms of one month or less that were not renewed need not be included.) (FASB ASC ) 5. Are capital leases properly disclosed? (FASB ASC and 45 2; and 50 2) 6. Are sale leaseback transactions properly disclosed? (FASB ASC and 50 2) Leases in Financial Statements of Lessors 1. Are leasing transactions with related parties disclosed? (FASB ASC ) 2. Have the following disclosures been made for operating leases if leasing, other than leveraged leasing, is a significant part of the lessor s business activities in terms of revenue, net income, or assets: Appendix 4H 14

15 4 65 a. General description of the lessor s leasing arrangements? (FASB ASC ) b. For the latest statement of assets, liabilities, and equity presented: (FASB ASC ) (1) Cost and carrying amount, if different, of property of the lessor held for leasing by major classes of property according to nature or function, and the total amount of accumulated depreciation thereon? (2) Future minimum rentals on noncancelable leases in the aggregate and for each of the next five fiscal years? c. Disclosures regarding contingent rentals? (FASB ASC ; ) CONTINGENCIES, RISKS, AND UNCERTAINTIES Contingencies 1. Has appropriate disclosure been made of losses that have not been recognized but either have been incurred or there is at least a reasonable possibility they will be incurred? (NOTE: The information in the disclosures required by FASB ASC , 50 3, and 50 4 may be necessary in order to keep the financial statements from being misleading.) 2. Have contingencies that might result in gains been adequately disclosed? (FASB ASC ) Significant Estimates 3. If the financial statements contain significant estimates, is appropriate information about those estimates that, based on information available before the financial statements are issued or available to be issued, have at least a reasonable possibility of changing within one year due to one or more future confirming events disclosed if the effect of the change in estimate would be material to the financial statements? (FASB ASC and 50 9) Concentrations 4. Have the following concentrations and the general nature of the risk associated with each been disclosed if, based on information known to management before the financial statements are issued or available to be issued, (a) the concentration exists at the financial statement date, (b) the concentration makes the entity vulnerable to the risk of a near term severe impact, and (c) it is at least reasonably possible that the events that could cause the severe impact will occur in the near term: (FASB ASC ; ; ) a. Concentrations in the volume of business transacted with a particular customer, supplier, lender, grantor, or contributor? (NOTE: It is always considered at least reasonably possible that any customer, grantor, or contributor will be lost in the near term.) b. Concentrations in revenue from particular products, services, or fund raising events? 15 Appendix 4H

16 4 66 PHY 10/16 c. Concentrations in the available sources of supply of materials, labor, or services, or of licenses or other rights used in the entity s operations? d. Concentrations in the market or geographic area? e. Concentrations of labor subject to collective bargaining agreements, including the percentage of the labor force covered by those agreements and the percentage covered by agreements that will expire within one year? f. Concentrations of operations outside the entity s home country, including the carrying amounts of net assets and the geographic areas in which they are located? (NOTE: It is always considered at least reasonably possible that operations located outside an entity s home country will be disrupted in the near term.) Obligations under Guarantees 5. For each guarantee or group of similar guarantees, even if the likelihood of having to make payments under the guarantee is remote, do the financial statements disclose the following (FASB ASC ): a. Nature of the guarantee, including its term, how it arose, and the events and circumstances under which the entity would have to perform under the guarantee? b. The current status, as of the date of the statement of assets, liabilities, and equity, of the payment/performance risk of the guarantee? c. The maximum potential amount of future payments the entity could be required to make under the guarantee, or the reasons why such an estimate cannot be made? If there is no limitation to the maximum, that fact should be disclosed. d. Recourse provisions that would enable the entity to recover amounts paid under the guarantee or collateral that could be sold? Going Concern Years Ending on or before December 15, 2016 NOTE: The following requirements are effective prior to the adoption of ASU , Presentation of Financial Statements Going Concern (Subtopic ): Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern. ASU is effective for years ending after December 15, 2016, and interim periods within years beginning after December 15, Early application is permitted. 6. If substantial doubt exists about the entity s ability to continue as a going concern for a period not to exceed one year beyond the date of the financial statements, do the financial statements include adequate disclosures, such as: (Accepted practice; AU C and.a4 and AR Exhibit B) a. The principal conditions or events giving rise to the assessment of substantial doubt about the entity s ability to continue as a going concern for a period not to exceed one year from the date of the financial statements? b. The possible effects of such conditions or events? c. Management s evaluation of the significance of those conditions or events and any mitigating factors? Appendix 4H 16

17 4 67 d. Possible discontinuance of operations? e. Management s plans (including relevant prospective financial information)? f. Information about the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities? 7. If substantial doubt about the entity s ability to continue as a going concern for a period not to exceed one year beyond the date of the financial statements is alleviated, to the extent considered necessary, do the financial statements adequately disclose the following matters: (Accepted practice; AU C and AR Exhibit B) a. The principal conditions or events that initially caused the substantial doubt? b. The possible effects of such conditions or events? c. Any mitigating factors, including management s plans? Going Concern Years Ending after December 15, 2016 NOTE: The following requirements are effective after the adoption of ASU , Presentation of Financial Statements Going Concern (Subtopic ): Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern. The ASU is effective for years ending after December 15, 2016, and interim periods within years beginning after December 15, Early application is permitted for periods for which financial statements have not previously been issued. [Substantial doubt about the entity s ability to continue as a going concern is considered to exist when conditions and events, when considered together, indicate that it is probable that the entity will not be able to meet its obligations when due within one year after the date that the financial statements are issued (or are available to be issued).] 8. If substantial doubt about the entity s ability to continue as a going concern is alleviated after considering management s plans, has information been disclosed to enable financial statement users to understand the following: (FASB ASC ) a. The principal conditions or events that raised substantial doubt about the ability of the entity to continue as a going concern, prior to considering the plans of management? b. Management s evaluation of the significance of those conditions or events as they relate to the ability of the entity to meet its obligations? c. The plans that alleviated the substantial doubt? 9. If substantial doubt about the entity s ability to continue as a going concern is not alleviated after considering management s plans, do the notes to the financial statements include the following: (FASB ASC ) a. A statement indicating that there is substantial doubt about the ability of the entity to continue as a going concern within one year after the date that the financial statements are issued (or are available to be issued)? b. Information that enables financial statement users to understand the following: 17 Appendix 4H

18 4 68 PHY 10/16 (1) The principal conditions or events that raise substantial doubt about the ability of the entity to continue as a going concern? (2) Management s evaluation of the significance of those conditions or events as they relate to the ability of the entity to meet its obligations? (3) The plans intended to mitigate the conditions or events that raise substantial doubt? 10. If conditions or events continue to raise substantial doubt about the ability of the entity to continue as a going concern in subsequent reporting periods (annual or interim), do the notes to the financial statements include the following: (FASB ASC ) a. The disclosures in Question Nos. 8 and 9? (However, as additional information becomes available about relevant conditions or events and management s plans, disclosures should become more extensive.) b. An explanation that provides appropriate context and continuity regarding how conditions or events have changed between reporting periods? 11. In the period that substantial doubt no longer exists (before or after considering the plans of management), has disclosure been made about how the relevant conditions or events that raised substantial doubt were resolved? (FASB ASC ) Imminent Liquidation 12. If liquidation is imminent, is disclosure of the liquidation sufficient to keep the financial statements from being misleading, such as disclosures about the entity s plan for liquidation and the expected duration of the liquidation process? (FASB ASC and 50 2) CHANGES IN PRESENTATION OF COMPARATIVE STATEMENTS 1. If, because of reclassifications or other reasons, changes have occurred in the manner of or the basis for presenting corresponding items in comparative statements, are the changes explained? (FASB ASC ) SUBSEQUENT EVENTS 1. For subsequent events that have not been recognized at the date of the statement of assets, liabilities, and equity, are the following disclosed to keep the financial statements from being misleading: (FASB ASC ; ) a. The nature of the event? b. An estimate of its financial effect or range of loss, or a statement that such an estimate cannot be made? 2. For significant nonrecognized subsequent events (including events that would have been recognized under GAAP, but were not recognized under the income tax basis), has consideration been given to whether the disclosure can best be made through supplemental pro forma financial data either in the notes or in columnar form on the face of the financial statements? (FASB ASC ) Appendix 4H 18