ACCOUNTING AND AUDIT UPDATE

Transcription

1 ACCOUNTING AND AUDIT UPDATE HFMA FL Regional Education Session - Hollywood January 19, 2017

2 Presenter Carlos Hernandez Southeast Assurance Leader 2

3 Agenda Accounting and Auditing Update Topic Field of study Minutes Accounting Update - Recent Accounting Standards Updates - Emerging Issues Auditing Update - Proposed/Recent Standards - Investments Auditing Update Accounting Governmental Auditing Governmental 50 10

4 Objectives Accounting and Auditing Update By the end of this section, you will be able to: Identify recent accounting pronouncements and reporting topics that directly affect the health care industry Be aware of emerging issues in accounting and auditing health care clients Apply the knowledge gained to your upcoming engagements

5 ACCOUNTING AND AUDITING UPDATE > ACCOUNTING UPDATE

6 ACCOUNTING AND AUDITING UPDATE > ACCOUNTING UPDATE > FASB UPDATE RECENT ASU S

7 Final standards recently issued - Revenue ASU , Revenue from Contracts with Customers (Topic 606) ASU , Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ASU , Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing ASU , Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients ASU , Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates and Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update)

8 ASU : Revenue from contracts with customers Issued in May 2014 with intent of providing a principles-based framework for addressing revenue recognition Core principle Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services Five-step model Identify the contract with a customer (Step 1) Identify the separate performance obligations in the contract (Step 2) Determine the transaction price (Step 3) Allocate the transaction price to the separate performance obligations (Step 4) Recognize revenue when (or as) each performance obligation is satisfied (Step 5)

9 ASU : New effective dates Effective date for calendar year-ends Permitted Required (Public companies and certain NFP) Required (Private companies)

10 ASU : Revenue from Contracts with Customers FASB and IASB established Joint Transition Resource Group (TRG) to address implementation issues identified and determine if additional standard setting is required AICPA has formed sixteen revenue recognition industry task forces (RRTFs) (including health care) to develop non-authoritative industry-specific implementation guidance Guidance developed will be incorporated in an Accounting Guide on Revenue Recognition, with a chapter for each industry Issues identified by the RRTFs are reviewed by AICPA s Revenue Recognition Working Group (RRWG) and Financial Reporting Executive Committee (FinREC)

11 Revenue Recognition Issue Review Process 1. Identified by industry RRTF 2. Submitted to AICPA RRWG 3. Submitted to FinREC 4. Submitted to FASB TRG (if applicable) 5. Technical corrections submitted to FASB by TRG 6. Exposed on AICPA website 7. Resubmitted to RRWG 8. Resubmitted to FinREC 9. Finalized for Accounting Guide on Revenue Recognition

12 Revenue Recognition Health Care Implementation Issues # Type Implementation Issue 1 General Application of step 1 (determine if there is a contract) and step 3 (determine the transaction price) for healthcare services provided to self-pay patients, including uninsured patient balances and self-pay patient balances arising from copayments and deductibles 1A General Consideration of implicit price concessions to uninsured patients 2 General Application of the portfolio approach to contracts with patients 3 CCRC Identifying and satisfying the performance obligation(s) and recognizing the monthly/periodic fees and nonrefundable entrance fees under Type A or life care contracts for continuing care retirement communities 4 CCRC Recognizing a CCRC s performance obligation(s) to provide future services and use of facilities to residents 5 General Significant financing component CCRC contracts, and patient and third-party payor amounts in arrears 6 General Disclosure requirements 7 General Accounting for contract costs 8 General Consideration of FASB ASC 606, Revenue from Contracts with Customers, for third party settlement estimates

13 Revenue Recognition Health Care Implementation Issues Implementation Issue 1 - Application to selfpay patient accounts 1A - Consideration of implicit price concessions Considerations Step 1 of the five-step model: Does an enforceable contract exist? Is patient committed to perform? Is collection probable? Step 3 of the five-step model: Do uncollectible amounts (including copays and deductibles for insured patients) constitute implicit price concessions? How to account for subsequent changes in estimate of transaction price? What constitutes an impairment loss/bad debt?

14 Revenue Recognition Health Care Implementation Issues Implementation Issue 2 - Application of portfolio approach 3 - Performance obligations and revenue recognition under Type A or life care contracts Considerations How could a portfolio approach be applied (e.g., type of service, payor, patient responsibility)? Implications of not using portfolio approach Use of historical experience to estimate contractual adjustments, self-pay discounts and implicit price concessions How could performance obligations under life care contracts be identified and satisfied? How could monthly/period fees and nonrefundable entrance fees be considered in establishing transaction price? How could transaction price be allocated to performance obligations?

15 Revenue Recognition Health Care Implementation Issues Implementation Issue 4 - Performance obligations for future services / use of facilities 5 - Consideration of significant financing component 6 - Disclosure requirements Considerations How could the calculation of the obligation to provide future services / use of facilities be affected by the new revenue recognition model? How do health care organizations assess whether a significant financing component exists in determining transaction price? What disclosures would be required for revenue for health care entities? Determination of whether there are one or multiple categories of revenue to report and if there are operating segments or service lines Recommended additional disclosures relating to third-party settlement balances and activity

16 Revenue Recognition Health Care Implementation Issues Implementation Issue 7 - Accounting for contract costs 8 - Estimation of variable consideration for third-party reimbursement Considerations How could health care entities account for costs of acquiring and fulfilling contracts? How could variable consideration be estimated using either the expected value or most likely methods described in the ASU? How to apply constraint on variable consideration to third-party reimbursement?

17 Revenue Recognition Health Care Issue Status (as of 11/18/16) Implementation Issue Application to self-pay patient accounts Consideration of implicit price concessions Application of the portfolio approach to contracts with patients Performance obligations and revenue recognition under Type A or life care contracts for CCRCs Performance obligations for future services and use of facilities (CCRCs) Significant financing component CCRC contracts, and patient and third-party payor amounts in arrears Disclosure requirements Accounting for contract costs Consideration of ASC 606 for third-party settlement estimates Step 9 Final 9 Final 9 Final 2 RRWG 2 RRWG 2 RRWG 2 RRWG 3 FinREC 2 RRWG

18 ASU : Transition options Transition Approach Full retrospective Retrospective with one or more practical expedients: Completed contracts Completed contracts with variable consideration Omit disclosure of transaction price allocated to remaining performance obligations Retrospective with cumulative effect recognized as of date of adoption Implications Restate all contracts; cumulative effect presented as of beginning of earliest period presented Restate contracts, except: Don t restate completed contracts beginning and ending in same reporting period Use transaction price at contract completion date rather then estimating variable consideration in prior periods For periods prior to date of adoption, omit disclosure Do not restate contracts; cumulative effect presented as of date of initial application; disclosure of effects on current reporting period required

19 Implementation Paper Issue 8 1: Application of Step 1 and Step 3 to Self-Pay Patients Implementation topics addressed: Determining if an enforceable contract between a health care entity and a patient exists Determining if a patient is committed to perform his or her obligations and if it is probable that the entity will collect substantially all of the consideration to which it expects to be entitled Determining if amounts that are not probable of collection from patients with self-pay balances constitute implicit price concessions Determining how to account for subsequent changes in the estimate of the transaction price Determining what constitutes an impairment loss or bad debt

20 Implementation Paper Issue 8 1: Application of Step 1 and Step 3 to Self-Pay Patients Key take-aways: Medicaid pending accounts health care provider may use its historical experience to estimate which pending accounts will ultimately become Medicaid, charity and bad debt Health care provider may consider the following to determine if it intends to provide an implicit price concession Entity has a customary business practice of not performing a credit assessment prior to providing services Entity continues to provide services to a patient (or patient class) even when historical experience indicates collection of substantially all of the billed amount is not probable Changes in estimate of transaction price account for as adjustments to revenue, unless there is a patient-specific event known to the entity that suggests that patient no longer has intent and ability to pay

21 Implementation Paper Issue 8 1: Application of Step 1 and Step 2 to Self-Pay Patients Example 2 Implicit price concession Uninsured patient with uninsured discount Self-pay patient charges: $40,000 Provider has a self-pay discount policy that provides a 75% discount off charges to uninsured patients Expected collections based on historical experience: 10% ($1,000) Current Accounting Accounting Under Issue 8-1 Gross Charges Patient Revenue $ 40,000$ 40,000 Discount (30,000) Discount (30,000) NPSR before NPR bad Before debt Bad 10,000 Debt 10,000 Bad debt (9,000) NPSR Bad $ Debt 1,000 (9,000) Net Patient Revenue $ 1,000 No change in reporting of charity care Does not qualify as revenue Gross Patient Revenue $ 40,000 Explicit Price Concession (30,000) Implicit Price Concession (9,000) Net Patient Revenue $ 1,000 Bad Debt Expense $0

22 Implementation paper Issue 8 2: Application of the Portfolio Approach to Contracts with Patients Implementation topics addressed: Application of the portfolio approach to contracts with patients Impact of electing not to apply the portfolio approach Use of historical experience to estimate contractual adjustments from third-party payors, governmental programs, self-pay discounts and implicit price concessions

23 Implementation paper Issue 8 2: Application of the Portfolio Approach to Contracts with Patients Key take-aways: Contracts must have similar characteristics in order to be grouped together. Potential considerations in grouping contracts include: Type of service (inpatient, outpatient, skilled nursing, elective, non-elective, etc.) Type of payor (insurance/managed care, governmental payors, uninsured Type of patient responsibility (uninsured self-pay, co-pay/deductible after insurance, high deductible/coinsurance Whether contracts are entered into at or near the same time Portfolio data must be sufficient and homogeneous Portfolio approach may be appropriate for some, but not all, of a health care provider s patient population If portfolio approach is not applied, new revenue model would be applied on a contract-by-contract basis

24 Revenue Recognition Task Force C/AccountingFinancialReporting/Reven uerecognition/pages/rrtf- HealthCare.aspx

25 Revenue Recognition Task Force

26 Revenue Recognition Task Force

27 Revenue Recognition Task Force

28 ASU : Simplifying Presentation of Debt Issuance Costs Requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability (consistent with debt discounts) Amortization of debt issuance costs to be reported as interest expense Recognition and measurement guidance for debt issuance costs are not affected Effective for fiscal years beginning after Public business entities: fiscal years beginning after 12/15/15 and interim periods within those years Other than public business entities: fiscal years beginning after 12/15/15 and interim periods in fiscal years beginning after 12/15/16 Applied retrospectively; change in accounting principle Early adoption is permitted

29 ASU : Debt Issuance Costs Associated with Line-of-Credit Arrangements ASU requires entities to present debt issuance costs as a direct deduction from the carrying amount of the related debt How should debt issuance costs for line-of-credit arrangements be treated? ASU issued to codify in the ASC an SEC staff announcement No objection if an entity defers and presents these debt issuance costs as an asset (regardless of whether a balance is outstanding) and subsequently amortizes these costs over the line-of-credit arrangement s term

30 ASU : Customer s Accounting for Fees Paid in a Cloud Computing Arrangement Provides guidance to customers about whether a cloud computing arrangement includes a software license Yes Includes software license? No Account for the software license element of the arrangement consistent with the acquisition of other software licenses (ASC ) Account for the arrangement as a service contract (other GAAP)

31 ASU : Fair Value Hierarchy Disclosures for Investments Measured at NAV ASC 820 provides a practical expedient to measure the fair value of certain investments using net asset value (NAV) per share Under existing guidance: Investments are either categorized as Level 2 or Level 3 All entities eligible to elect the practical expedient are required to provide certain disclosures (regardless of whether they actually make the election) ASU removes requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient

32 ASU : Fair Value Hierarchy Disclosures for Investments Measured at NAV ASU also removes requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient Required disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient Requires disclosure of amounts of excluded investments so that financial statement user can reconcile amounts in the fair value table to the balance sheet Effective retrospectively for fiscal years beginning after Public business entities: fiscal years beginning after 12/15/15 and interim periods within those years Other than public business entities: fiscal years beginning after 12/15/16 and interim periods within those years Early adoption is permitted

33 ASU : Fair Value Hierarchy Disclosures for Investments Measured at NAV Before 2014 Description Level 1 Level 2 Level 3 Total Money market fund $ 7,135,423 $ - $ - $ 7,135,423 Fixed income securities U.S. Treasuries 29,387, ,387,239 Corporate bonds 13,164, ,164,205 Developing markets 13,220, ,220,167 Equities U.S. large cap 74,011, ,011,034 U.S. small cap 13,094, ,094,930 International 72,285, ,285,211 Emerging markets 52,407, ,407,323 Energy - 29,984,285-29,984,285 Global REIT 17,761, ,761,881 Alternative investments Private (Opportunistic) ,542,917 17,542,917 Absolute return - 2,766,399 49,618,087 52,384,486 Long short ,141,225 34,141,225 Commodities ,203,124 18,203,124 $ 292,467,413 $ 32,750,684 $ 119,505,353 $ 444,723,450 After 2014 Description Level 1 Level 2 Level 3 Total Money market fund $ 7,135,423 $ - $ - $ 7,135,423 Fixed income securities U.S. Treasuries 29,387, ,387,239 Corporate bonds 13,164, ,164,205 Developing markets 13,220, ,220,167 Equities U.S. large cap 74,011, ,011,034 U.S. small cap 6,369, ,369,670 International 62,285, ,285,211 Emerging markets 43,838, ,838,384 $ 249,411,333 $ - $ - 249,411,333 Investments measured at NAV: Equity funds: U.S. small cap 6,725,260 International 10,000,000 Emerging markets 8,568,939 Energy 29,984,285 Global REIT 17,761,881 Alternative investments: Private (Opportunistic) 17,542,917 Absolute return 52,384,486 Long short 34,141,225 Commodities 18,203, ,312,117 Total Investments $ 444,723,450

34 ASU : Inventory Intended to simplify the measurement of inventory Currently, under FIFO and Average Cost methods, valued at the lower of cost or market Problem: Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin Entity should measure inventory at the lower of cost or net realizable value Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation Does not apply to inventory that is measured at last-in, first-out (LIFO) or the retail inventory method In reality, this conforms GAAP to actual practice Effective for periods beginning after 12/15/16 Applied prospectively

35 ASU : Recognition and Measurement of Financial Assets and Financial Liabilities Under current investment accounting guidance, investments may be classified as: For-profit: held-to-maturity, available-for-sale, or trading Not-for-profit: other-than-trading or trading For investments classified as something other than trading, unrealized gains and losses are excluded from the performance indicator of a health care entity, unless an unrealized loss is considered other-than-temporary (OTT) ASU requires all investments in equity securities (other than those that qualify for equity method accounting or that are consolidated), to be reported at fair value, with changes in fair value reported through income Concept of OTT impairment goes away for equity securities

36 ASU : Recognition and Measurement of Financial Assets and Financial Liabilities ASU also removes, for entities other than public business entities, required disclosures of fair value of financial instruments measured at amortized cost (e.g., debt) Effective for fiscal years beginning after Public business entities: fiscal years beginning after 12/15/17 and interim periods within those years Other than public business entities: fiscal years beginning after 12/15/18 and interim periods within fiscal years beginning after 12/15/19 Early adoption is not permitted, except for: Elimination of disclosure requirement of fair value of financial instruments measured at amortized cost Certain changes in presentation within OCI the change in the fair value of certain liabilities resulting from a change in credit risk

37 ASU : Leases Effective date: Fiscal years beginning after 12/15/2018 Public business entity Not-for-profit entities with conduit bonds that are traded An employee benefit plan that files financial statements with the SEC Fiscal years beginning after 12/15/2019 for all other organizations A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration Short-term leases with a term of less than 12 months are exempt and no longer based on maximum possible term, now aligned with definition of lease term

38 ASU : Leases Current* U.S. GAAP (IFRS) IASB FASB Capital (Finance) Leases Lessee Model Approaches All leases (more than 12 months) are recognized on the lessee s balance sheet Type A Type A Operating Leases Type A Type B All leases are the same. * Current is prior to adoption of ASU Not all leases are the same. Classification is based on existing U.S. GAAP/IFRS.

39 ASU : Leases Impacts to Health Care Entities: Debt covenants (debt to equity covenant ratios) Bonus calculations Perception by potential lenders, partners, or others Start thinking about Inventory of leases Pro-forma effects of adoption of ASU Conversations with lenders to negotiate covenants Discussions with your board and other key stakeholders

40 NFP Financials Comment Letters on ED Mixed feedback received General support for: Simplified presentation of net assets, underwater endowments, investment return Concept of an operating measure (but no consensus on how to define it) Flexibility in reporting between different types of NFPs Mixed or limited support for: Eliminating requirement for performance indicator for health care NFPs Proposed changes to statement of cash flows, including realignment of certain items within statement

41 NFP Financials Phase I ASU Phase II Net asset classification Reporting of expenses / Investment return Operating measure: improving disclosures when reported Liquidity: improving disclosures Cash flow statement: methods of presenting operating cash flow Operating measure: all other elements, including intermediate measures Cash flow statement: realignment of certain items Pending decision whether to wait to deliberate at same time as Financial Performance Reporting project for business entities

42 ASU : NFP Financials Key areas impacted by the ASU Net asset classification Reporting of expenses/ investment return Liquidity Cash flow statement Disclosures on Measure of Operations Footnote disclosures

43 ASU : NFP Financials Net Assets Current GAAP Unrestricted Temp. Restricted Perm. Restricted Revised GAAP Without Donor Restrictions With Donor Restrictions Disclosures Amount, purpose, and type of board designations (new) Nature and amount of donor restrictions

44 ASU : NFP Financials Expenses Reporting of expenses By natural classification either on the face of the statements or in the notes Retain requirement to report by functional classification on the face of the statements or in the notes Require all expenses be reported by function and nature in one location (face, separate statement, or notes) Enhanced disclosures about method(s) used to allocate costs among program and support functions

45 ASU : NFP Financials Investment Returns Investment Returns Presented net of external and direct internal investment expenses Permitted but not required to disclose investment expenses that are netted against returns Permitted to present net investment return managed differently or from different services on multiple line items No longer required to display the investment return components in the endowment net asset rollforward Precluded from including investment expenses that have been netted against returns in the functional expenses FASB staff is working on implementation guidance for the reporting of net investment return for entities that present a performance indicator

46 ASU NFP Financials Liquidity Information Useful in Assessing Liquidity Qualitative information (in the notes) on how the entity manages its liquid resources to meet cash needs for general expenditures within one year of the balance sheet date Quantitative information that communicates the availability of current financial assets at the balance sheet date to meet cash needs Availability affected by: Nature of financial asset External limits imposed (donors, laws, contracts) Internal limits imposed by governing board Example illustrations are included in the ASU

47 ASU : NFP Financials Cash Flows Cash Flow Statement Allowed to use either the direct or indirect method of presenting operating cash flows If using the direct method, no longer required to provide the indirect reconciliation of operating cash flows

48 ASU : NFP Financials Operating Measure Disclosures If not apparent from details on face of the statements, footnote to describe nature of reported measure, or items excluded from operations (No change) Examples of classifications within the statement: Operating and non-operating Expendable and nonexpendable Recognized and unrecognized Recurring and nonrecurring In other ways

49 ASU : NFP Financials Effective date: Years beginning after 12/15/2017 Early adoption: Permitted, but subject to transition provisions Transition: For year of adoption, apply all provisions For comparative years, apply all provisions on a retrospective basis, except: Analysis of expenses by nature and function Disclosures around liquidity and availability of resources

50 ASU : Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments Effective date: Public entities Years beginning after 12/15/17 All other entities Years beginning after 12/15/18 (no carve out for conduit bond obligors to be early adopters) Early adoption: Permitted Must then adopt all amendments in same period Retrospective transition method

51 ASU : Statement of cash flows Cash Flow Issue Debt Prepayment or Debt Extinguishment Costs Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing Summary of Amendments Cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities The issuer should classify the portion of the cash payment attributable to the accreted interest related to the debt discount as cash outflows for operating activities, and the portion of the cash payment attributable to the principal as cash outflows for financing activities

52 ASU : Statement of cash flows Cash Flow Issue Contingent Consideration Payments Made after a Business Combination Summary of Amendments Cash payments not made soon after the acquisition date of a business combination by an acquirer to settle a contingent consideration liability should be separated and classified as cash outflows for financing activities and operating activities. Cash payments up to the amount of the contingent consideration liability recognized at the acquisition date (including measurement-period adjustments) should be classified as financing activities; any excess should be classified as operating activities. Cash payments made soon after the acquisition date of a business combination by an acquirer to settle a contingent consideration liability should be classified as cash outflows for investing activities.

53 ASU : Statement of cash flows Cash Flow Issue Proceeds from the Settlement of Insurance Claims Proceeds from the Settlement of Corporate- Owned Life Insurance Policies, including Bank- Owned Life Insurance Policies Summary of Amendments Cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage (that is, the nature of the loss). For insurance proceeds that are received in a lump sum settlement, an entity should determine the classification on the basis of the nature of each loss included in the settlement. Cash proceeds received from the settlement of corporate-owned life insurance policies should be classified as cash inflows from investing activities The cash payments for premiums on corporate-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities

54 ASU : Statement of cash flows Cash Flow Issue Distributions Received from Equity Method Investees Summary of Amendments When a reporting entity applies the equity method, it should make an accounting policy election to classify distributions received from equity method investees using either of the following approaches: Cumulative earnings approach: Distributions received are considered returns on investment and classified as cash inflows from operating activities, unless the investor s cumulative distributions received less distributions received in prior periods that were determined to be returns of investment exceed cumulative equity in earnings recognized by the investor. When such an excess occurs, the current-period distribution up to this excess should be considered a return of investment and classified as cash inflows from investing activities. Nature of the distribution approach: Distributions received should be classified on the basis of the nature of the activity or activities of the investee that generated the distribution as either a return on investment (classified as cash inflows from operating activities) or a return of investment (classified as cash inflows from investing activities) when such information is available to the investor.

55 ASU : Statement of cash flows Cash Flow Issue Beneficial Interests in Securitization Transactions Separately Identifiable Cash Flows and Application of the Predominance Principle Summary of Amendments A transferor s beneficial interest obtained in a securitization of financial assets should be disclosed as a noncash activity, and cash receipts from payments on a transferor s beneficial interests in securitized trade receivables should be classified as cash inflows from investing activities. The classification of cash receipts and payments that have aspects of more than one class of cash flows should be determined first by applying specific guidance in GAAP. In the absence of specific guidance, an entity should determine each separately identifiable source or use within the cash receipts and cash payments on the basis of the nature of the underlying cash flows. An entity should then classify each separately identifiable source or use within the cash receipts and payments on the basis of their nature in financing, investing, or operating activities.

56 ASU : Restricted Cash ASU eliminates diversity in practice in classification and presentation of restricted cash in statement of cash flows Requires amounts generally described as restricted cash and cash equivalents to be included with cash and cash equivalents when reconciling beginning and ending cash and cash equivalents in the statement of cash flows Requires disclosure of information about nature of restrictions on cash, cash equivalents and amounts generally described as restricted cash and cash equivalents When cash, cash equivalents and amounts generally described as restricted cash and cash equivalents are presented in more than one line in the statement of financial position, requires presentation on face of statement of cash flows (or footnote disclosure) where such amounts are reported in the statement of financial position

57 ASU : Restricted Cash Effective for fiscal years beginning after Public business entities: fiscal years beginning after 12/15/17 and interim periods within those years Other than public business entities: fiscal years beginning after 12/15/18 and interim periods within fiscal years beginning after 12/15/19 Retrospective application required Early adoption is permitted. If early adopted in an interim period, adjustments should be reflected as of the beginning of the fiscal year that includes the interim period

58 ACCOUNTING AND AUDITING UPDATE > ACCOUNTING UPDATE > GASB UPDATE

59 GASB Statement 72 Fair Value Measurement and Application Effective: December 31, 2016 Key Definitions/Terms Unit of account Stand-alone asset or liability or a group of assets or liabilities Determined by the particular standards that require fair value measurement Price Not adjusted for transaction costs

60 GASB Statement 72 Fair Value Measurement and Application Key Definitions/Terms Investment A security or other asset that a government holds primarily for the purpose of income or profit and with a present service capacity that is based solely on its ability to generate cash or to be sold to generate cash Held primarily for income or profit acquired first and foremost for future income and profit Service capacity refers to a government s mission to provide services When market information is not available Estimate the price at which an orderly transaction would take place between market participants at that date (for example, a valuation technique)

61 GASB Statement 72 Fair Value Measurement and Application Apply valuation technique(s) that best represents fair value in the circumstances market approach, cost approach, and income approach Inputs: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities, most reliable Level 2: quoted prices for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other than quoted prices that are observable Level 3: unobservable inputs, least reliable

62 GASB Statement 72 Fair Value Measurement and Application Example of fair value classification table: Level 12/31/ Investments Domestic equity securities $ 12,000 $ 12,000 $ - $ - Internation equity securities 14,000 14, U.S Treasury and Agency Obligations 7,000 7, U.S. Corporate Bonds 7,900 4,500 3,400 - Asset Backed Securities 11,000-11,000 - International REITs 9, ,000 Total $ 60,900 $ 37,500 $ 14,400 $ 9,000

63 GASB Statement 79 Certain External Investment Pools and Pool Participants Effective December 31, 2016 This Statement addresses accounting and financial reporting for certain external investment pools and pool participants. Specifically, it establishes criteria for an external investment pool to qualify for making the election to measure all of its investments at amortized cost for financial reporting purposes. An external investment pool qualifies for that reporting if it meets all of the applicable criteria established in this Statement

64 GASB Statement 79 Certain External Investment Pools and Pool Participants An external investment pool may elect to measure all its investments at amortized cost for financial reporting purposes if it meets all of the following criteria : Transacts with participants at stable net asset value per share $1.00 per share Meets certain portfolio maturity requirements Meets certain portfolio quality requirements Meets certain portfolio diversification requirements Meets certain pool liquidity requirements Meets shadow pricing requirements

65 GASB Statement 79 Certain External Investment Pools and Pool Participants If a pool meets the criteria in this Statement and measures its investments at amortized cost, its participants also should measure their positions in the pool at amortized cost If a pool does not meet the criteria or elects to measure its investments at fair value, its participants also should measure their positions in the pool at fair value DISCLOSE: Fair value measurement DISCLOSE: The presence of any limitations or restrictions on participant withdrawals, such as redemption notice periods, maximum transaction amounts, and the pools authority to impose liquidity fees or redemption gates

66 GASB Statement 83 Certain Asset Retirement Obligations Effective December 31, 2019 Addresses accounting and financial reporting for certain asset retirement obligations (AROs). An ARO is a legally enforceable liability associated with the retirement of a tangible capital asset. A government that has legal obligations to perform future asset retirement activities related to its tangible capital assets should recognize a liability based on the guidance in this Statement. Establishes criteria for determining the timing and pattern of recognition of a liability and a corresponding deferred outflow of resources for AROs.

67 GASB Statement 83 Certain Asset Retirement Obligations

68 Exposure Draft Leases Projected timeline Exposure draft approved January 2016 Final statement expected May 2017 Different approach than FASB ASU Single model No classification of leases into operating/capital or other categories Underlying assumption that leases are financings Exceptions: short-term leases and those that transfer ownership

69 Exposure Draft Leases How should leases be initially recorded? Lessee ASSET - Intangible asset (right to use) value of lease liability plus prepayments and initial direct costs that are ancillary to place asset in use LIABILITY - Present value of future lease payments DEFERRED INFLOW - NA Lessor ASSET - Lease receivable (generally including same items as lessee liability). Continue to report leased asset LIABILITY - NA DEFERRED INFLOW - Equal to lease receivable plus any cash received up front that relates to a future period

70 Exposure Draft Leases How should leases be subsequently recorded? Lessee ASSET - Amortize over shorter of useful life or lease term LIABILITY - Reduce by lease payments (less amount of interest expense) DEFERRED INFLOW - NA Lessor ASSETS a) Depreciate leased asset. b) Reduce receivable by lease payments LIABILITY - NA DEFERRED INFLOW - Recognize revenue over the lease term on a systematic and rational basis

71 ACCOUNTING AND AUDITING UPDATE > AUDITING UPDATE

72 ACCOUNTING AND AUDITING UPDATE > AUDITING UPDATE > PROPOSED/RECENT STATEMENTS

73 Proposed Statement on Auditing Standards Auditor Involvement With Exempt Offering Documents Certain securities are exempt from registration under the 1933 Act, but remain subject to the antifraud provisions of that act which prohibit misrepresenting or omitting material facts in an offering or sale of securities SEC cannot directly regulate such offerings, so there is no SEC requirement for auditor involvement with exempt offerings AICPA audit guides provide guidance when an auditor s report was included in municipal security offering document During the accounting standards codification process, the clarified auditing standards revised certain wording such that the clarified standards do not address what actions constitute auditor involvement nor do they define auditor requirements

74 Proposed Statement on Auditing Standards Auditor Involvement With Exempt Offering Documents Proposed standard includes performance requirements when the auditor is involved with an exempt offering document, as defined Involvement is determined by a two-benchmark model: The auditor s report on the financial statements or the auditor s review report on interim financial information is included or incorporated by reference The auditor performs one or more activities with respect to the document Auditors are not precluded from becoming voluntarily involved with an offering document in other circumstances

75 Proposed Statement on Auditing Standards Auditor Involvement With Exempt Offering Documents Specified activities that trigger involvement: Assisting with preparing information included in the document Reading a draft of the offering document at the entity s request Issuing a comfort or similar letter in accordance with AU-C section 920, Letters for Underwriters and Certain Other Requesting Parties, or an attestation engagement report in lieu of a comfort or similar letter on information included in the offering document Participating in due diligence discussions with underwriters, placement agents, broker-dealers, or other financial intermediaries in connection with an offering document

76 Proposed Statement on Auditing Standards Auditor Involvement With Exempt Offering Documents Specified activities that trigger involvement: Issuing an attestation report on information relating to the offering Providing written agreement (for example, an inclusion letter) for the use of the auditor s report in the offering document Signing a copy of the auditor s report for inclusion in the offering document

77 Proposed Statement on Auditing Standards Auditor Involvement With Exempt Offering Documents There are three issues in the proposed standard for which commenters were asked to provide feedback (comment period ended October 13, 2016): Issue 1 The types of offerings to be included in the scope of the standard Issue 2 Are the activities listed on the preceding slides activities that should trigger involvement, or are there additional activities that should be considered triggers Issue 3 Should the auditor be required to perform subsequent event procedures when the auditor is involved with an exempt offering

78 Proposed Statement on Auditing Standards Auditor Involvement With Exempt Offering Documents If the auditor is deemed involved: The auditor should perform the procedures described in AU-C section 720, Other Information in Documents Containing Audited Financial Statements, on the offering document When performing the procedures the auditor should determine that the auditor s name is not being used in a way that indicates that the auditor s responsibility is greater than the auditor intends The auditor should perform the certain of the procedures described in AU-C section 560, Subsequent Events and Subsequently Discovered Facts

79 Recent Statement on Auditing Standards SAS 129 Letter for Underwriters and Certain Other Requesting Parties Clarifies that in addition to having no obligation to accept a comfort letter engagement, auditor is not required to provide comfort on every matter requested Provides the auditor with more flexibility in the matter in which the communication can be made Group auditor must read comfort letters issued by each component auditor Provides example comfort letter illustrating negative assurance

80 QUESTIONS AND ANSWERS

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