Not-for-Profit Accounting and Auditing Supplement No

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1 Not-for-Profit Accounting and Auditing Supplement No

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3 Chapter 1 Not-for-Profit Accounting and Auditing Supplement No Introduction This update includes the more significant accounting and auditing developments affecting the not-forprofit industry from January 1, 2018, through March 31, Included in this update are standard setting and project activities of the Auditing Standards Board (ASB), Accounting and Review Services Committee (ARSC), Professional Ethics Executive Committee (PEEC), and FASB. 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 material. Readers are encouraged to visit the AICPA s Financial Reporting Center for additional resources, including various Standards Trackers for the most recent standard-setting activity in the areas of accounting and financial reporting, audit and attest, and compilation, review, and preparation. 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 January 1, 2018, through March 31, Association of International Certified Professional Accountants. All rights reserved. 1-1

4 Audit and accounting final and proposed standards Final standards, interpretations, and regulations AICPA Auditing Standards Board The ASB did not issue any new or revised standards or interpretations affecting not-for-profits during this period. Accounting and Review Services Committee The ARSC did not issue any new or revised standards or interpretations during this period. Professional Ethics Executive Committee Professional ethics standards nonauthoritative guidance Frequently asked questions: General ethics questions (as of March 20, 2018) Issue date March 2018 Background The AICPA s PEEC issued two new nonauthoritative frequently asked questions (FAQ) in its Frequently asked questions: General ethics that address the familiarity threat that can arise when senior members of an attest team serve a client for an extended period. The newly-published FAQ address two questions: (1) Does the familiarity threat to independence increase when senior personnel on an engagement team serve on the team for a long period of time?; and (2) If a significant familiarity threat exists, can a firm still perform the attest work? To answer whether the familiarity threat to independence increases when senior personnel on an engagement team serve on the team for a long period of time, the FAQ provides several factors the member should consider, such as: the length of time he or she been on the team, the role he or she played, and whether members of senior management or the governance board have recently changed. The answer to the second question (If a significant familiarity threat exists with respect to an attest team member, can a firm still perform the attest work?) states that safeguards may reduce the familiarity 2018 Association of International Certified Professional Accountants. All rights reserved. 1-2

5 threat to independence and allow the firm to perform the attest engagement. The following are examples of safeguards: The firm changes the individual s role on the engagement. The firm rotates the individual off the engagement. An internal or external quality review of the engagement is arranged. A person who was not associated with the attest work performs a review of the individual s work. However, if the firm is unable to apply safeguards to mitigate the threat, independence would be impaired, and the firm could not perform the attest engagement. FASB Accounting Standards Updates FASB Accounting Standards Update (ASU) No , leases (Topic 842): Land easement practical expedient for transition to Topic 842 Issue date January 2018 Background ASU No , Leases (Topic 842), increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. FASB has been assisting stakeholders with implementation questions and issues as organizations prepare to adopt FASB ASC 842. Many stakeholders inquired about the application of the new lease requirements in FASB ASC 842 to land easements. Land easements (also commonly referred to as rights of way ) represent the right to use, access, or cross another entity s land for a specified purpose. Due to diversity in practice, some entities apply current leases guidance in FASB ASC 840, Leases, for the accounting of their land easements while other entities apply other topics within the FASB Accounting Standards Codification, such as FASB ASC 350, Intangibles Goodwill and Other, or FASB ASC 360, Property, Plant, and Equipment. Entities that do not apply current leases guidance to land easements indicated that evaluating all existing or expired land easements in connection with the adoption of the new lease requirements to assess whether they meet the definition of a lease would be costly and complex (for example, because of the volume and age of those easements). Those entities also indicated that the benefits of applying the new lease requirements to those existing land easements would likely be limited because many of their land easements would not meet the definition of a lease or, even if they met that definition, many of their easements are prepaid and, therefore, already are recognized on the balance sheet. To address stakeholder concerns about the costs and complexity of complying with the transition provisions of the new lease requirements, this ASU provides an optional transition practical expedient to not evaluate under FASB ASC 842 existing or expired land easements that were not previously accounted for as leases under the current leases guidance in FASB ASC 840. An entity that elects this 2018 Association of International Certified Professional Accountants. All rights reserved. 1-3

6 practical expedient should evaluate new or modified land easements under FASB ASC 842 beginning at the date that the entity adopts FASB ASC 842. An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in FASB ASC 842 to assess whether they meet the definition of a lease. This ASU affects entities with land easements that exist or expired before an entity s adoption of FASB ASC 842, provided that the entity does not account for those land easements as leases under FASB ASC 840. Main provisions/significant changes The ASU permits an entity to elect an optional transition practical expedient to not evaluate under FASB ASC 842 land easements that exist or expired before the entity s adoption of FASB ASC 842 and were not previously accounted for as leases under FASB ASC 840. An entity that elects this practical expedient should apply the practical expedient consistently to all its existing or expired land easements that were not previously accounted for as leases under FASB ASC 840, and prospectively to all new (or modified) land easements to determine whether the arrangement should be accounted for as a lease. An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in FASB ASC 842 to assess whether they meet the definition of a lease. Entities should continue to apply its current accounting policy for accounting for land easements that existed before the entity s adoption of FASB ASC 842. For example, if an entity currently accounts for certain land easements as leases under FASB ASC 840, it should continue to account for those land easements as leases before its adoption of FASB ASC 842. This update also amends Example 10 (paragraphs through 55-32) of FASB ASC , Intangibles Goodwill and Other General Intangibles Other Than Goodwill, and clarifies that an entity should determine whether land easements are leases in accordance with FASB ASC 842 before applying the guidance in that example. Effective date The amendments in this ASU affect the amendments in FASB ASU No , which are not yet effective but may be early adopted, and Example 10 of FASB ASC The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in FASB ASU No An entity that early adopted FASB ASC 842 should apply the amendments in this ASU upon issuance Association of International Certified Professional Accountants. All rights reserved. 1-4

7 ASU No , technical corrections and improvements to Financial Instruments Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities Issue date February 2018 Background ASU No , Financial Instruments Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities, retained the current framework for accounting for financial instruments in generally accepted accounting principles (GAAP) but made targeted improvements to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. In addition to amending FASB ASC 825, Financial Instruments, the board added FASB ASC 321, Investments Equity Securities, and made several consequential amendments to the codification. FASB has an ongoing project on its agenda about improvements to clarify the codification or to correct unintended application of guidance. Those items generally are not expected to have a significant effect on current accounting practice or to create a significant administrative cost for most entities. FASB decided to issue this ASU for technical corrections and improvements related to ASU No to increase stakeholders awareness of the amendments and to expedite the improvements. This ASU includes items brought to FASB s attention by stakeholders and clarifies certain aspects of the guidance issued in ASU No Effective date To allow entities to continue their current adoption plans for ASU No , FASB concluded that for public business entities, this ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, Public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in ASU No For all other entities, the effective date is the same as the effective date for ASU No All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, if they have adopted ASU No Staff questions and answers documents addressing implementation issues related to the Tax Cuts and Jobs Act Issue date January 2018 The FASB staff issued a Q&A document on January 11, 2018, regarding whether private companies and not-for-profits can apply Staff Accounting Bulletin (SAB) 118. Later in January, the staff issued four Staff 2018 Association of International Certified Professional Accountants. All rights reserved. 1-5

8 Q&A documents that address various financial accounting and reporting implementation issues related to the Tax Cuts and Jobs Act. Topic 740, No. 1: Whether private companies and not-for-profit entities can apply SAB 118 Background The staff of the Division of Corporation Finance and the Office of the Chief Accountant of the SEC staff, from time to time, issue statements in SABs that express a view on the application of the FASB Accounting Standards Codification and/or other disclosure requirements. SABs do not establish official rules or interpretations of the SEC. Rather, they represent interpretations and practices followed by the SEC staff in administering the disclosure requirements of the federal securities laws. The SEC staff s views and interpretations are not directly applicable to private companies and not-forprofit entities (as defined in the FASB Codification Master Glossary). However, in the past, some private companies and not-for-profit entities have voluntarily applied the guidance in SABs. The SEC staff recently issued SAB 118 on the application of FASB ASC 740 on income taxes in the reporting period that includes the date on which the 2017 Tax Cuts and Jobs Act (Act) was signed into law. Question Given the longstanding practice of private companies electing to apply SABs, would the FASB staff object to private companies and not-for-profit entities applying SAB 118? Answer Based on the longstanding practice of private companies electing to apply SABs, the FASB staff would not object to private companies and not-for-profit entities applying SAB 118. If a private company or not-for-profit entity applies SAB 118, they would comply with GAAP. The FASB staff believes, however, that if a private company or a not-for-profit entity applies SAB 118, it should apply all relevant aspects of the SAB in its entirety. This would include the disclosures listed in SAB 118. The FASB staff also believes that a private company or a not-for-profit entity that applies SAB 118 should disclose its accounting policy of applying SAB 118 in accordance with paragraphs through 50-3 of the Accounting Standards Codification. Topic 740, No. 2: Whether to discount the tax liability on the deemed repatriation Background The Tax Cuts and Jobs Act (Act) imposes a tax on undistributed and previously untaxed post-1986 foreign earnings and profits. The Act permits a company to pay the one-time transition tax over eight years on an interest-free basis. The earnings are reported on the 2017 tax return, and the tax is generally due in annual installments of 8 percent per year for the first five years, 15 percent in year 6, 20 percent in 2018 Association of International Certified Professional Accountants. All rights reserved. 1-6

9 year 7, and 25 percent in year 8, if properly elected. The payments are due without regard to whether a company has future taxable income or losses. Question Does the FASB staff believe that the tax liability on the deemed repatriation of earnings should be discounted? Answer The FASB staff believes that the tax liability on the deemed repatriation of earnings should not be discounted. The FASB staff notes that paragraph prohibits the discounting of deferred tax amounts. Due to the unique nature of the tax on the deemed repatriation of foreign earnings, the staff believes that the guidance in paragraph should be applied by analogy to the payable recognized for this tax. Further, the FASB staff does not believe that FASB ASC on the imputation of interest applies to the unique circumstances related to this tax liability. The guidance in FASB ASC addresses the accounting for business transactions that often involve the exchange of cash or property, goods, or services for a note or similar instrument. FASB ASC is premised on the fact that when a note is exchanged for property, goods, or services in a bargained transaction entered into at arm s length, the interest rate should represent fair and adequate compensation to the supplier. The FASB staff believes that the transition tax liability is not the result of a bargained transaction and that the scope exception in paragraph (e) for transactions where interest rates are affected by tax attributes or legal restrictions prescribed by a governmental agency (such as, income tax settlements) would apply. The FASB staff also notes that the tax liability may not be a fixed obligation because it may be subject to estimation and future resolution of uncertain tax positions (for example, amount of earnings and profits from foreign subsidiaries, amount of earnings held in cash and cash equivalents, reduction of the tax for foreign tax credits). Any recognized uncertain tax position related to the deemed repatriation of foreign earnings would not be discounted, and the staff does not believe it is appropriate to have a discounted tax liability when the uncertain tax position is undiscounted. Topic 740, No. 3: Whether to discount alternative minimum tax credits that become refundable Background Under prior tax law, an entity paid the corporate alternative minimum tax (AMT) if the amount payable under the AMT system was greater than the amount payable under the regular tax system. An entity that paid the AMT received a tax credit (AMT credit carryforward) for the tax paid in excess of the amount owed under the regular tax system. This AMT credit carryforward has no expiration date. The AMT tax regime is repealed under the Tax Cuts and Jobs Act. Any existing AMT credit carryforward can be used to reduce the regular tax obligation in years 2018 through Any AMT credit carryforwards that do not reduce regular taxes generally are eligible for a 50 percent refund in Association of International Certified Professional Accountants. All rights reserved. 1-7

10 through 2020 and a 100 percent refund in This generally will result in the full realization of any AMT credit carryforwards existing at December 31, 2017, irrespective of future taxable income. Question Does the FASB staff believe that AMT credit carryforwards should be discounted at December 31, 2017, because they will be refundable in future years? Answer The FASB staff notes that paragraph prohibits discounting deferred taxes. Accordingly, any AMT credit carryforwards presented as a deferred tax asset would not be discounted. Likewise, the FASB staff believes that any AMT credit carryforward presented as a receivable should not be discounted because the staff does not believe that Subtopic on the imputation of interest applies. The guidance in Subtopic addresses the accounting for business transactions that often involve the exchange of cash or property, goods, or services for a note or similar instrument. Subtopic is premised on the fact that when a note is exchanged for property, goods, or services in a bargained transaction entered into at arm s length, the interest rate should represent fair and adequate compensation to the supplier. The FASB staff believes that the AMT credit carryforward is not the result of a bargained transaction and that the scope exception in paragraph (e) for transactions where interest rates are affected by tax attributes or legal restrictions prescribed by a governmental agency (such as, income tax settlements) would apply. The FASB staff notes that paragraph requires an entity to disclose the amounts of tax credit carryforwards for tax purposes. The staff believes this disclosure would apply whether an entity presents the AMT credit carryforward as a deferred tax asset or a receivable and would provide useful information to investors in evaluating the amount that is to be used or refunded. Topic 740, No. 4: Accounting for the base erosion anti-abuse tax Background Under the Tax Cuts and Jobs Act, an entity must pay a base erosion anti-abuse tax (BEAT) if the BEAT is greater than its regular tax liability. The BEAT calculation eliminates the deduction of certain payments made to foreign affiliates (referred to as base erosion payments) but applies a lower tax rate on the resulting BEAT income. Question Does the FASB staff believe that deferred tax assets and liabilities should be measured at the statutory tax rate of the regular tax system or the lower BEAT tax rate if the taxpayer expects to be subject to BEAT? 2018 Association of International Certified Professional Accountants. All rights reserved. 1-8

11 Answer The FASB staff believes that the BEAT is similar to the AMT under prior tax law. The AMT was a parallel tax system that resulted in a minimum level of corporate taxation in situations in which regular taxable income was lower than the alternative minimum taxable income due to preference items that were not deductible for AMT purposes. An entity that paid the AMT received a tax credit for the tax paid in excess of the amount computed on the basis of the regular tax system. An entity subject to the BEAT does not receive a tax credit for the tax paid in excess of the amount computed on the basis of the regular tax system, but the FASB staff believes that the BEAT is similar to the AMT in that it is designed to be an incremental tax in which an entity can never pay less, and may pay more, than their regular tax liability. Paragraphs and address the AMT and require an entity to measure deferred taxes using the statutory tax rate under the regular tax system. Paragraph states: [I]t would be counterintuitive if the addition of alternative minimum tax provisions to the tax law were to have the effect of reducing the amount of an entity s income tax expense for financial reporting, given that the provisions of alternative minimum tax may be either neutral or adverse but never beneficial to an entity. Therefore, the FASB staff believes that an entity that is subject to BEAT should measure deferred tax assets and liabilities using the statutory tax rate under the regular tax system. The FASB staff believes that measuring a deferred tax liability at the lower BEAT rate would not reflect the amount an entity would ultimately pay because the BEAT would exceed the tax under the regular tax system using the 21 percent statutory tax rate. Although an entity may believe that it expects to be subject to the BEAT for the foreseeable future, paragraph further states that no one can predict whether an entity will always be an alternative minimum tax taxpayer. The FASB staff believes that a similar conclusion could be applied to BEAT. In addition, taxpayers may take measures to reduce their BEAT exposure and, therefore, ultimately pay taxes at or close to the 21 percent statutory tax rate. The FASB staff believes that the guidance in FASB ASC 740 therefore indicates that the incremental effect of BEAT should be recognized in the year the BEAT is incurred and an entity would not need to evaluate the effect of potentially paying the BEAT in future years on the realization of deferred tax assets recognized under the regular tax system because the realization of the deferred tax asset (for example, a tax credit) would reduce its regular tax liability, even when an incremental BEAT liability would be owed in that period. Regardless of any year-over-year effective tax rate fluctuations, the effective tax rate (excluding other permanent items) under this approach would always be equal to or in excess of the statutory tax rate of 21 percent Association of International Certified Professional Accountants. All rights reserved. 1-9

12 Topic 740, No. 5: Accounting for global intangible low-taxed income Background The Tax Cuts and Jobs Act requires a U.S. shareholder of a foreign corporation to include in income its global intangible low-taxed income (GILTI). In general, GILTI is described as the excess of a U.S. shareholder s total net foreign income over a deemed return on tangible assets, which is defined as 10 percent of its foreign qualified business asset investment reduced by certain interest expense amounts. There is no loss carryforward mechanism to allow GILTI losses in one year to offset GILTI income in another year. The Tax Cuts and Jobs Act allows a deduction of 50 percent of GILTI, but this deduction is limited by the taxpayer s taxable income. An entity also is allowed a deemed paid foreign tax credit of up to 80 percent of foreign taxes attributable to the underlying foreign corporation. Unused foreign tax credits associated with GILTI cannot be carried forward or back or used against other foreign source income. A U.S. shareholder would increase its tax basis in the foreign corporation for the GILTI inclusion. Question Does the FASB staff believe that an entity should recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or should the tax on GILTI be included in tax expense in the year it is incurred? Answer The FASB staff does not believe that FASB ASC 740 is clear as to the treatment of GILTI. Account for taxes on GILTI as period costs similar to special deductions Some stakeholders believe it would not be appropriate to provide deferred taxes on individual inside basis differences or the outside basis difference (or portion thereof) because a taxpayer s GILTI is based on its aggregate income from all foreign corporations. Because the computation is done at an aggregate level, the unit of account is not the taxpayer s investment in an individual foreign corporation or that corporation s assets and liabilities. These stakeholders believe that the guidance on deferred tax accounting in FASB ASC 740 using the asset and liability approach does not address taxes on aggregated income because basis differences of a foreign corporation in one jurisdiction may be offset by basis differences in a foreign corporation in another jurisdiction and ultimately may never be taxed. Further, these stakeholders believe that the GILTI computation is dependent on contingent or future events (for example, future foreign income versus loss, the amount of foreign qualified business asset investment in a given year, future foreign tax credits, future taxable income), which suggests that taxes on GILTI should be accounted for as period costs similar to special deductions Association of International Certified Professional Accountants. All rights reserved. 1-10

13 Recognize deferred tax assets and liabilities when basis difference exist that are expected to affect the amount of GILTI inclusion on reversal Other stakeholders believe that the current tax imposed on GILTI is similar to the tax imposed on existing Subpart F income. Deferred taxes generally are provided under FASB ASC 740 for basis differences that are expected to result in Subpart F income upon reversal. Because GILTI is included in the U.S. shareholder s taxable income when earned by the foreign corporations, similar to Subpart F income, these stakeholders believe that a U.S. shareholder should recognize deferred tax assets and liabilities when basis differences exist that are expected to affect the amount of GILTI inclusion upon reversal. Given these diverse views, the FASB staff believes that FASB ASC 740 is not clear as it relates to the accounting for GILTI, and an entity may apply either interpretation of FASB ASC 740. The staff believes that an entity must disclose its accounting policy related to GILTI inclusions in accordance with paragraphs through The staff plans to monitor how entities that pay tax on GILTI are accounting for and disclosing its effects by reviewing annual or quarterly reports issued over the next few quarters. Following this review, the staff will provide an update to FASB so it can consider whether improvements may be needed for the accounting or disclosures for the tax on GILTI. Proposed standards, interpretations, and regulations AICPA Proposed auditing, attestation, or quality control standards Auditing Standards Board The ASB did not propose any new or revised standards or interpretations during this period. Accounting and Review Services Committee The ARSC did not propose any new or revised standards or interpretations during this period. Professional Ethics Executive Committee Exposure draft: (ET sec ) Issue date March 15, 2018 Comment deadline/effective date Comments on this proposal are due by June 15, If adopted, the final interpretation would become effective one year after the interpretation is published in the Journal of Accountancy Association of International Certified Professional Accountants. All rights reserved. 1-11

14 Background The AICPA s PEEC proposed revisions to the independence rule under ET section 1.295, Nonattest Services, of the AICPA Code of Professional Conduct that applies when a member performs information systems services to an attest client. If adopted, the proposed interpretation, Information System Services, would replace the current interpretation entitled, Information Systems Design, Implementation or Integration (ET section ). Main provisions/significant changes Defines financial information system as an information system that aggregates source data underlying the financial statements or generates information that is significant to the financial statements or financial processes as a whole Distinguishes systems-related services based on whether they relate to a financial information system (as defined), with rules applicable to financial information systems being more stringent to protect against self-review threats to independence Would allow a member to design or develop a template that performs a discrete function (e.g., depreciation calculation) in a financial information system if the template does not perform an activity that, if performed directly by the member, would impair independence Describes the various types of implementation services related to commercial (pre-packaged) offthe-shelf financial information system software, that is, installation, configuration, data translation, interfacing or customization services, and their impact on independence Clarifies the kinds of system and network maintenance, support, or monitoring services members may perform postimplementation on an information system, and that taking on the responsibility for an ongoing function, process or activity would impair independence (The proposal provides examples of services that would or would not impair independence.) FASB Proposed ASU Proposed Accounting Standards Update Leases (Topic 842) Targeted Improvements Issue date January 5, 2018 Comment deadline February 5, 2018 Background On February 25, 2016, FASB issued ASU No , Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. FASB has been assisting stakeholders with implementation questions and issues as organizations prepare to adopt the new lease requirements. During this process, stakeholders have inquired about the following two requirements: 2018 Association of International Certified Professional Accountants. All rights reserved. 1-12

15 Comparative reporting for initial adoption Comparative reporting at adoption requires entities to adopt the new lease requirements using a modified retrospective transition method. An entity initially applies the new lease requirements at the beginning of the earliest period presented in the financial statements (January 1, 2017, for calendaryear-end public business entities that adopt the new lease requirements on January 1, 2019), which means that lessees must recognize lease assets and liabilities on the balance sheet for all leases, and must provide the new and enhanced disclosures, for each period presented (including comparative periods). FASB took this approach in part to allow entities to adopt the new lease requirements in a cost-effective manner with relatively limited changes to systems. However, as entities have started to implement the new lease requirements, many preparers have encountered unanticipated costs and complexities associated with the modified retrospective transition method, particularly the comparative period reporting requirements and have asked for an additional (and optional) transition method for transitioning to the new lease requirements. This ASU would allow another transition method in addition to the existing requirements to transition to the new lease standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Separating lease and nonlease components in a contract and allocating the consideration in the contract to the separate components The new lease guidance requires an entity to separate lease components from nonlease components (for example, maintenance services or other activities that transfer a good or service to the customer) in a contract so that they may be accounted for under various codification topics. That is, the lease components are accounted for in accordance with the new lease requirements, but the entity would account for the nonlease components in accordance with other topics (for example, Topic 606, Revenue from Contracts with Customers). The consideration in the contract is allocated to the lease and nonlease components on a relative standalone price basis (for lessees) or in accordance with the allocation guidance in the new revenue standard (for lessors). The new lease guidance also provides lessees with a practical expedient, by class of underlying assets, to not separate nonlease and related lease components. If a lessee makes that accounting policy election, it is required to account for the nonlease components together with the related lease component as a single lease component and to provide certain disclosures. Lessors are not afforded a similar practical expedient. This proposed update addresses stakeholders concerns about the requirement for lessors to separate components of a contract by providing lessors with a similar practical expedient, by class of underlying assets, to not separate nonlease components from the related lease components. However, the lessor practical expedient would be limited to circumstances in which both (1) the timing and pattern of revenue recognition are the same for the nonlease component(s) and related lease component and (2) the combined single lease component would be classified as an operating lease. The amendments in this proposed update related to transition relief on comparative reporting at adoption would affect all entities with lease contracts that choose the transition option, while the 2018 Association of International Certified Professional Accountants. All rights reserved. 1-13

16 amendments in this proposed update related to separating components of a contract would affect only lessors whose lease contracts qualify for the practical expedient. Main provisions Transition Comparative reporting at adoption This proposed ASU would provide entities with an additional (and optional) transition method to adopt the new lease requirements by allowing entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption consistent with the request by preparers. Consequently, an entity s reporting for the comparative periods presented in the financial statements in which the entity adopts the new lease requirements would continue to be in accordance with current GAAP (FASB ASC 840), including disclosures. Separating components of a contract This proposed ASU would provide lessors with a practical expedient, by class of underlying assets, to not separate nonlease components from the related lease components and, instead, to account for those components as a single lease component, if both of the following conditions are met: The timing and pattern of revenue recognition for the nonlease component(s) and related lease component are the same The combined single lease component would be classified as an operating lease A lessor electing this proposed practical expedient would be required to disclose the class or classes of underlying assets for which it has elected the practical expedient and the nature of the nonlease components included within the single lease component. Effective date This proposed ASU would affect the amendments in ASU No , which are not yet effective but can be early adopted. The effective date and transition requirements for this proposed ASU would be the same as the effective date and transition requirements in ASU No Proposed Accounting Standards Update-Intangibles Goodwill and Other Internal-Use Software (Subtopic ) Customer s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract; Disclosures for Implementation Costs Incurred for Internal- Use Software and Cloud Computing Arrangements (consensus of the FASB Emerging Issues Task Force Issue) Issue date March 1, 2018 Comment deadline April 30, Association of International Certified Professional Accountants. All rights reserved. 1-14

17 Background In April 2015, FASB issued ASU No , Intangibles Goodwill and Other Internal-Use Software (Subtopic ): Customer s Accounting for Fees Paid in a Cloud Computing Arrangement, to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. If a cloud computing arrangement includes a license to internal-use software, then the customer accounts for the software license in accordance with Subtopic , which generally means that an intangible asset is recognized for the software license, and if the customer pays for the software license over time, a liability also is recognized. If a cloud computing arrangement does NOT include a software license, the entity should account for the arrangement as a service contract. This generally means that the fees associated with the hosting element (service) of the arrangement are expensed as incurred. During the comment period and after the issuance of ASU No , several stakeholders requested that FASB provide additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. Because the guidance in the Accounting Standards Codification is not explicit in that area, FASB decided to issue this proposed ASU to address the diversity in practice. This proposed ASU on the accounting for implementation, setup, and other upfront costs (collectively referred to as implementation costs) would apply to entities that are a customer in a hosting arrangement (as defined in the Master Glossary) that is a service contract. The proposed amendments for the qualitative and quantitative disclosures about implementation costs would apply to entities that capitalize implementation costs in accordance with the internal-use software guidance under FASB ASC or in accordance with this proposed ASU. Main provisions This proposed ASU would align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The proposed amendments would not affect the accounting for the service element of a hosting arrangement that is a service contract. The proposed ASU would require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in FASB ASC on internal-use software to determine which costs to implement the service contract would be capitalized as an asset related to the service contract and which costs would be expensed. Costs to develop or obtain internal-use software that cannot be capitalized under FASB ASC , such as training costs and certain data conversion costs, also would not be capitalized for a hosting arrangement that is a service contract. Therefore, an entity (customer) in a hosting arrangement that is a service contract would determine which project stage (that is, preliminary project stage, application development stage, or post-implementation stage) an implementation activity relates to. Costs for implementation activities in the application development stage would be capitalized depending on the 2018 Association of International Certified Professional Accountants. All rights reserved. 1-15

18 nature of the costs, while costs incurred during the preliminary project, and post-implementation stages would be expensed as the activities are performed. This proposed ASU also would require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement and present that expense in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement. The term of the hosting arrangement would include the noncancelable period of the arrangement plus periods covered by an option to extend the arrangement if the customer is reasonably certain to exercise that option, terminate the arrangement if the customer is reasonably certain not to exercise the termination option, and extend (or not to terminate) the arrangement in which exercise of the option is in the control of the vendor. The proposed ASU also would require an entity to disclose certain qualitative and quantitative information about implementation costs associated with internal-use software and hosting arrangements. Current GAAP does not specifically address the accounting for implementation costs of a hosting arrangement that is a service contract. Accordingly, this proposed update would improve current GAAP by clarifying that accounting, align the accounting for implementation costs for hosting arrangements, and increase the information provided to users of financial statements about implementation costs incurred for internal-use software and hosting arrangements. Effective date The task force will consider the effective date and the ability to early adopt based on stakeholder feedback on this proposed ASU. The proposed ASU would be applied either prospectively or retrospectively. Under a prospective transition, an entity would apply the proposed amendments to hosting arrangements that are entered into, renewed, or materially modified on or after the effective date of the proposed amendments. Under a retrospective transition, an entity would be required to apply the proposed amendments retrospectively to all hosting arrangements, with the cumulative effect of applying the proposed amendments to hosting arrangements entered into before the beginning of the earliest period presented in the financial statements recognized in retained earnings Association of International Certified Professional Accountants. All rights reserved. 1-16

19 Knowledge check 1. Kim, CPA, leads the audit of G Company. Which action would help Kim determine whether her firm could perform information system services for G Company under a proposed AICPA independence rule? a. Kim should ask whether G Company is willing and able to test the information system before her team performs next year s audit. b. Kim should inquire about the competence of personnel performing the nonattest services. c. Kim should describe in the audit report any firm relationships with G Company that may bear upon her firm s independence. d. Kim should determine whether the services will affect G Company s financial information systems. 2. Which change to the codification did FASB propose in the first quarter of 2018 due to stakeholder feedback? a. Comparative reporting for a company s initial adoption of the new leases standard. b. Goodwill impairment testing when a company acquires another entity. c. Revenue recognition for nonpublic companies during a transition period. d. Interest capitalization during long-term construction projects Association of International Certified Professional Accountants. All rights reserved. 1-17

20 2018 Association of International Certified Professional Accountants. All rights reserved. 1-18

21 NOT-FOR-PROFIT ACCOUNTING AND AUDITING SUPPLEMENT NO Solutions NFP1 GS A

22 The AICPA publishes CPA Letter Daily, a free e-newsletter published each weekday. The newsletter, which covers the most important stories in business, finance, and accounting, as well as AICPA information, was created to deliver news to CPAs and others who work with the accounting profession. Besides summarizing media articles, commentaries, and research results, the e-newsletter links to television broadcasts and videos and features reader polls. CPA Letter Daily's editors scan hundreds of publications and websites, selecting the most relevant and important news so you don't have to. The newsletter arrives in your inbox early in the morning. To sign up, visit smartbrief.com/cpa. Do you need high-quality technical assistance? The AICPA Auditing and Accounting Technical Hotline provides non-authoritative guidance on accounting, auditing, attestation, and compilation and review standards. The hotline can be reached at

23 Solutions Chapter 1 Knowledge check solutions a. Incorrect. Seeking an answer to that question might be relevant, but it would not necessarily help Kim determine whether her firm could perform the services. b. Incorrect. Competence of personnel performing nonattest services is very important but would not be a determinant in considering the firm s independence. c. Incorrect. There is no such requirement mentioned in the AICPA proposal or in the auditing literature regarding disclosure of potential independence matters in an audit report. d. Correct. The proposed independence interpretation would likely lead to different answers based on whether the firm s information system services would impact the company s financial information system. a. Correct. Due to concerns raised, FASB is proposing an additional transition method for comparative reporting of leases during initial adoption. b. Incorrect. FASB did not address this issue with a proposed ASU in the first quarter of FASB did propose changes related to derivatives and hedging. c. Incorrect. Revenue recognition for private companies was not addressed this quarter in a FASB proposed ASU. There is no difference in the requirements for revenue recognition for private companies. d. Incorrect. Interest capitalization on construction projects was not addressed this past quarter in a proposed ASU by FASB. FASB did propose targeted improvements related to leases Association of International Certified Professional Accountants. All rights reserved. Solutions 1

24 2018 Association of International Certified Professional Accountants. All rights reserved. Solutions 2

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