Fourth Quarter 2013 Accounting, Reporting and Auditing Developments. A&A Updates

Transcription

1 Fourth Quarter 2013 Accounting, Reporting and Auditing Developments A&A Updates Issue January 7, 2014

2 Contents Accounting and Financial Reporting Matters... 1 FASB... 1 Accounting Standards Updates...1 Revenue Recognition...1 Leases...1 Accounting for Financial Instruments...2 Insurance Contracts...2 Private Company Council U.S. GAAP Financial Reporting Taxonomy...3 GASB... 3 SEC... 4 Dodd-Frank Rulemaking Activity...4 Proposed Crowdfunding Rules...5 Other...5 Effective Dates Highlights... 6 Assurance Matters... 9 PCAOB... 9 COSO AICPA Technical Q&A (Auditing) Proposed SSARS: Preparation of Financial Statements, Compilation Engagements, and Association with Financial Statements Other Center for Audit Quality Appendix A Matters discussed in previous Quarterly Updates FASB - Accounting Standards Updates SEC Final Rules SEC Other i

3 Contents AICPA Financial Reporting Framework for SMEs (Non-GAAP) Technical Q&A (Accounting) Technical Q&A (Auditing) PCAOB Center for Audit Quality ii

4 Contents FOURTH QUARTER 2013 ACCOUNTING AND ASSURANCE UPDATE The developments included in this update are intended to be a reminder of recently issued accounting and auditing standards and other guidance that may affect our clients in the current reporting period. Developments that have been discussed in previous quarterly A&A updates that may be of interest can be found in Appendix A. This discussion is not intended to be all-inclusive. For questions or additional information, please contact your Dixon Hughes Goodman engagement team or local Dixon Hughes Goodman office dhgllp.com 2014 by Dixon Hughes Goodman LLP. All rights reserved. Permission is granted to view, store, print, reproduce and distribute any pages of this Newsletter provided that (a) no page is modified and (b) this page is included with any distribution. Disclaimer: This publication has been prepared by the Dixon Hughes Goodman LLP Professional Standards Group and contains information in summary form and is therefore intended for general guidance only; it is not intended to be a substitute for detailed research or the exercise of professional judgment. You should consult with Dixon Hughes Goodman LLP or other professional advisors familiar with your particular factual situation for advice concerning specific audit, tax or other matters before making any decision. To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. iii

5 Accounting and Financial Reporting ACCOUNTING AND FINANCIAL REPORTING MATTERS FASB Accounting Standards Updates ASU : Definition of a Public Business Entity An addition to the Master Glossary This Update amends the Master Glossary of the FASB Accounting Standards Codification to include the term public business entity. There are currently several definitions of a nonpublic entity and public entity within U.S. GAAP. While this Update will not change any existing guidance, it will provide a consistent definition for determining which entities are permitted to adopt the PCC s accounting alternatives, as well as provide a single definition to be used within U.S. GAAP by future Accounting Standards Updates (ASUs). As a result, there is no effective date; however, the term public business entity will be used in the two soon to be issued ASUs providing accounting alternatives for private companies (expected issuance is January 2014, see Dixon Hughes Goodman s A&A Update A Private Company Council Update). Revenue Recognition The FASB and the IASB (the Boards) have completed their redeliberations for the revenue recognition project and are expected to issue a final standard in the first quarter of When the Boards met in October 2013 their discussions revolved primarily around collectability, constraint and licenses. The Boards plan to create a joint transition revenue recognition resource group, comprised of preparers, auditors, regulators, users, and other stakeholders. The group will convene following the issuance of the final revenue recognition standard and will inform the Boards about various interpretative issues that arise in practice, but the group will not issue any guidance of its own. Most of the group s activities will be completed by 2017, when the standard is expected to take effect. Leases The FASB held a joint meeting in November 2013 with the International Accounting Standards Board (IASB) to discuss the feedback received on their joint exposure draft 1 (ED) issued in May Over 600 comment letters were submitted by investors, preparers and other constituents indicating the level of interest and perceived significance of this ED. The feedback received was mixed. While many support putting leases on the balance sheet, significant concerns were expressed about the cost and complexity of the proposals compared to the expected benefit to financial statement users. The FASB s Investment Advisory Committee did not support the FASB s ED because they do not view that it is an improvement to current accounting. On the other hand, credit analysts that the Boards consulted generally supported the changes being proposed, particularly recording leased assets and lease obligations in the balance sheet. The Boards plan to begin redeliberations during the first quarter of For additional information summarizing key provisions of the May 2013 FASB ED, refer to the Dixon Hughes Goodman A&A Update, Revised Lease Exposure Draft. 1

6 Accounting and Financial Reporting Accounting for Financial Instruments The accounting for financial instruments projects of the FASB and IASB include three main components: 1. Classification and measurement, 2. Credit Impairment, and 3. Hedge accounting (FASB redeliberations have not started) Classification and Measurement The FASB met on December 18, 2013 to discuss its financial instruments project. Previously, significant convergence with the IASB was achieved on the classification and measurement of financial instruments; however, the FASB unanimously voted to revoke the solely principal and interest model for debt investments proposed in the February 2013 ED and instead retain the current guidance for bifurcating embedded derivatives from hybrid financial instruments based on feedback received. This divergence from the IASB signals it is unlikely convergence will be achieved in the final standard. The FASB directed the staff to perform additional analysis around the best method for determining the classification and measurement of the host contract when the embedded derivative is separated, hybrid financial assets not requiring bifurcation, and all other financial assets. Credit Impairment The FASB issued an ED on accounting for credit losses in December 2012 which they have been refining ever since. Prior to the FASB s December 2012 ED the boards were largely converged on the impairment project; however, while the IASB decided to retain the initial three-bucket approach from the original ED, the FASB abandoned this approach in favor of using a simpler current expected credit loss model (onebucket model). In this approach, when estimating the loss, the allowance would reflect at inception, a current estimate of contractual cash flows not expected to be collected throughout the life of the financial asset. During the FASB s December 2013 meeting they decided to continue to refine the current expected credit loss model as they believe it provides the most decision-useful information to users of the financial statements. Insurance Contracts The FASB s June 2013 ED (as part of a joint project with the IASB) on insurance contracts has also received mixed feedback. Existing guidance for insurance contacts has evolved over the years leading to some inconsistencies in U.S. GAAP. Furthermore, the current guidance only applies to insurance entities, rather than to those entities that issue insurance-like contracts. Under the proposed ED the guidance would apply to all insurance contracts, as defined in the ED, rather than exclusively to insurance entities. This has resulted in comment letters from non-insurance entities stating they believe the ED is too costly and complex for preparers as well as too broad of a scope. Several insurance entities expressed concerns such as potential increased volatility in the income statement. The FASB plans to consider feedback and begin redeliberations in Private Company Council On December 23, 2013, the Financial Accounting Standards Board (FASB) and the Private Company Council s (PCC) issued the final Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies (the Guide). The Guide is designed to assist the PCC and the FASB in determining when and in what circumstances accounting alternatives should be provided to private companies. In July 2011, the FASB staff completed an assessment indemnifying five factors differentiating the financial reporting needs of users of private versus public company financial statements: the number of users and their access to management, primary users investment strategies, capital structure and ownership, accounting resources, and learning about new financial reporting guidance. The Guide also discusses five areas financial reporting may differ between public and non- 2

7 Accounting and Financial Reporting public companies: recognition and measurement, disclosures, display (presentation), effective date, and transition method. In early January 2014 the FASB is expected to issue two ASUs on goodwill and simplified hedge accounting for private companies. Business entities (not-for-profits and employee benefit plans are excluded) which do not meet the definition of a public business entity as discussed earlier, will have the option of adopting the goodwill alternative while financial institutions (as described in ASC ) will be scoped out of the simplified hedge accounting alternative. The goodwill and simplified hedge accounting alternatives are aimed at providing less complex accounting alternatives for private companies in the accounting for goodwill and certain receive-variable, pay-fixed interest rate swaps. See the Dixon Hughes Goodman A&A Update, A Private Company Council Update, for a discussion of the specifics of each topic as well as the PCC. The FASB will consider if any of the PCC proposals should be extended to public business entities. While neither the goodwill nor simplified hedge accounting are expected to be extended to public companies in the upcoming ASUs, the FASB is considering whether the simplified goodwill approach should be extended to public companies. Furthermore, in November 2013, the FASB issued an ED to eliminate the development stage entity guidance from U.S. GAAP based on the recommendation of the PCC U.S. GAAP Financial Reporting Taxonomy The 2014 U.S. GAAP Financial Reporting Taxonomy is now available pending final acceptance by the SEC for public comment at the FASB s website. The Taxonomy contains updates for accounting standards and other improvements that have been implemented since the 2013 Taxonomy. GASB The Governmental Accounting Standards Board (GASB) released GASB 71, Pension Transition for Contributions Made Subsequent to the Measurement Date an amendment of GASB Statement No. 68. GASB 71 amends GASB 68 by requiring the recognition of a beginning deferred outflow of resources for pension contributions made during the time between the measurement date of the beginning net pension liability and the beginning of the initial fiscal year of implementation. This is in an effort to address a potential understatement of the restated beginning net position and expense when implementing GASB 68 in the first year. The provisions are effective concurrently with GASB 68 (effective for fiscal years beginning after June 15, 2014). To assist preparers and auditors with GASB 67 an online toolkit was released on November 11, The toolkit includes: An Implementation Guide, A video from GASB Chairman David Vaudt discussing key issues facing pension plans, A podcast the most significant changes as a result of GASB 67 as well as the types of pension plans affected, FAQs regarding GASB 67 and 68, Various documents addressing common misperceptions and identifying areas plan administrators and officials should consider when implementing the new standards, and An executive summary along with the full text of GASB 67 For more information see the press release on the GASB s website. 3

8 Accounting and Financial Reporting SEC Dodd-Frank Rulemaking Activity The Volcker Rule On December 10, 2013, the SEC, along with the Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation and Commodity Futures Trading Commission (the Agencies ) approved a final rule implementing Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act ), commonly referred to as the Volcker Rule. In connection with the Final Rule, the Federal Reserve granted a blanket one-year extension of the Volcker Rule conformance period for all banking organizations, allowing banks until July 21, 2015 to comply fully with most requirements of the Final Rule. Banking organizations with significant trading activities will be required to report quantitative metrics on their trading activities beginning in July The extension also requires banking organizations to use good faith efforts during the conformance period to conform to the Final Rule and promptly cease any stand-alone proprietary trading. There has been much controversy over certain provisions of the Final Rule, especially the broad definitions of ownership interests in covered funds. Ownership interests in covered funds by banks, other than the sponsor, are generally not allowed under the Final Rule, and banks are required to divest these interests by July 21, There is wide concern these definitions scope in a variety of structures in which community banks have invested, including collateralized debt obligations (CDOs) backed by trust preferred securities (TruPS), and certain other CDOs or collateralized loan obligations (CLOs). Securitizations issued by U.S Agencies and Government Sponsored Enterprises are exempt from the definition of covered funds, as are CLOs backed solely by loans. Banks with investments in these types of securities will need to analyze the structures to determine if they are not allowed under the Final Rule and must be divested. It may be possible to amend certain structures to bring them in compliance with the Final Rule, but banks will need to work with the sponsor of the securitization on any changes. On December 24, 2013, the American Banking Association along with two bank holding companies and their subsidiary banks filed a complaint in DC District Court challenging portions of the Final Rule that apply to TruPS CDOs. The Agencies have stated they intend to address this matter no later than January 15, The Agencies also stated their accounting staffs believe that it is consistent with generally accepted accounting principles to consider any actions that occur in January before the issuance of December 31, 2013 financial reports when preparing those financial reports. Most community banks classify their investments in these securities as held-to-maturity or available-forsale under the provisions of ASC Topic 320. Banks will have to consider the impact on classification and other-than-temporary impairment for securities that must be divested under the Final Rule, and should monitor developments in further rulemaking or guidance issued by the Agencies. Release , Removal of Certain References to Credit Ratings under the Investment Company Act This final rule replaces the reference to credit ratings in rule 5b-3 under the Investment Company Act with an alternative standard in determining when an investment company may treat a repurchase agreement as an acquisition of securities collateralizing the repurchase agreement and removes the requirement of using NRSRO credit ratings when presenting a portfolio s holdings by credit quality in Forms N-1A, N-2 and N-3. Effective Date: 180 days after they are published in the Federal Register. 4

9 Accounting and Financial Reporting Release , Removal of Certain References to Credit Ratings under the Securities Exchange Act of 1934 This final rule eliminates certain references to credit ratings related to broker-dealer financial responsibility and confirmations of securities transactions under the Securities Exchange Act of Effective Date: 180 days after they are published in the Federal Register. Proposed Crowdfunding Rules In October 2013 the SEC proposed new rules related to crowdfunding, which is a method of raising funds by pursuing small individual contributions from a large number of people. These proposed rules are part of implementing the Jumpstart Our Business Startups Act (JOBS Act) and allow private companies to raise up to $1 million in any twelve month period. However, individuals would be limited as to the amount they could invest and companies would be required to provide certain disclosures as well as conduct the transactions through certain intermediaries registered as broker-dealers or a funding portal. The disclosure requirements are scaled, and include, for example, audited financial statements for raises over $500,000, as well as annual reporting requirements. Comments for the proposed rule are due February 3, Also, as mandated by the JOBS Act, the SEC proposed amendments to Regulation A which would exempt offerings up to $50 million annually from the registration requirements of the Securities Act. The proposal would create two tiers of Regulation A offerings, Tier 1, offerings up to $5 million in a twelvemonth period, and Tier 2, offerings up to $50 million in a twelve-month period. Additional requirements for Tier 2 offering include audited financial statements in the offering document and on-going reporting. Comments for the proposed rule will be due 60 days after publication in the Federal Register. Other The most recent Financial Reporting Manual can be found on the SEC s website. At the time this document was prepared, the most recent version was updated October 29, 2013 for revisions through June 30,

10 Effective Dates Highlights EFFECTIVE DATES HIGHLIGHTS Accounting Standards Update ASU : Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ASU : Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes ASU :Fair Value Measurement: Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No ASU : Financial Services Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements ASU : Liquidation Basis of Accounting ASU : Not-for-Profit Entities (Topic 958): Services Received from Personnel of an Affiliate ASU , Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity ASU , Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date ASU , Financial Instruments (Topic 825): Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities ASU , Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ASU , Accounting for Fair Value Information That Arises after the Measurement Date and Its Inclusion in the Impairment Analysis of Unamortized Film Costs Public Entities Fiscal years, and interim periods within those years, beginning after December 15, 2013 Effective Date Nonpublic Entities Fiscal years, and interim periods within those years, beginning after December 15, 2014 Early Adopt? Transition Prospective or Retrospective (1) Qualifying new or redesignated hedging relationships entered into on or after July 17, 2013 Prospective Only applicable to nonpublic entities Upon issuance Prospective Interim and annual reporting periods in fiscal years beginning after December 15, 2013 Prospective Annual reporting periods beginning after December 15, 2013 and interim reporting periods therein. Prospective Fiscal years beginning after June 15, 2014, and interim and annual periods thereafter. Fiscal years, and interim periods within those years, beginning after December 15, 2013 Fiscal years, and interim periods within those years, beginning after December 15, 2013 Reporting periods beginning after December 15, 2012 Impairment assessments performed on or after December 15, 2012 The first annual period beginning after December 15, 2014, and interim and annual periods thereafter Fiscal years ending after December 15, 2014, and interim and annual periods thereafter Prospectively (2) Prospective (3) Retrospective (4) Upon issuance Prospective Reporting periods beginning after December 15, 2013 Impairment assessments performed on or after December 15, 2013 (5) Prospective Prospective 6

11 Effective Dates Highlights Accounting Standards Update ASU No , Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government- Assisted Acquisition of a Financial Institution ASU No , Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows ASU No , Testing Indefinite- Lived Intangible Assets for Impairment ASU , Continuing Care Retirement Communities Refundable Advance Fees ASU , Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities ASU No , Disclosures about Offsetting Assets and Liabilities ASU No , Derecognition of in Substance Real Estate ASU No , Disclosures about an Employer s Participation in a Multiemployer Plan ASU No , Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities ASU No , Fees Paid to the Federal Government by Health Insurers ASU No , Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No ASU No , Presentation of Comprehensive Income Public Entities Effective Date Nonpublic Entities Early Adopt? Transition Fiscal years, and interim periods within those years, beginning after December 15, 2012 Prospective Fiscal years, and interim periods within those years, beginning after June 15, 2013 (6) Retrospective or Prospective Fiscal years beginning after September 15, 2012 Prospective Annual periods beginning after December 15, 2012 Annual periods beginning after December 15, 2013 Retrospective Annual periods beginning on or after January 1, 2013 and interim periods within those annual periods Retrospective Fiscal years, and interim periods within those years, beginning on or after June 15, 2012 Annual periods ending after December 15, 2011 Fiscal years, and interim periods within those years, beginning after December 15, 2011 Annual periods ending after December 15, 2013 and interim and annual periods thereafter Prospective Annual periods ending after December 15, 2012 Retrospective Annual periods ending after December 15, 2012 and interim and annual periods thereafter Retrospective (7) Calendar years beginning after December 31, 2013 Prospective Fiscal years, and interim periods within those years, beginning after December 15, 2011 Fiscal years ending after December 15, 2012 and interim and annual periods thereafter Retrospective ASU No , A Creditor s Determination of Whether a Restructuring Is a Troubled Debt Restructuring Interim or annual periods beginning on or after June 15, 2011 Annual periods ending on or after December 15, 2012, including interim periods within those annual periods Retrospective (8) 7

12 Effective Dates Highlights (1) Prospective application should be applied to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. (2) A recipient not-for-profit may apply the amendments using a modified retrospective approach under which all prior periods presented upon the date of the adoption should be adjusted, but no adjustment should be made to the beginning balance of net assets of the earliest period presented. (3) If an entity elects to early adopt the amendments, it should apply them as of the beginning of the entity s fiscal year of adoption. (4) The amendments in this Update should be applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability arrangements within the Update's scope that exist at the beginning of an entity's fiscal year of adoption. An entity may elect to use hindsight for the comparative periods (if it changed its accounting as a result of adopting the amendments in this Update) and should disclose that fact. Early adoption is permitted. (5) Earlier application is permitted, including for impairment assessments performed as of a date before October 24, 2012, if, for SEC filers, the entity s financial statements for the most recent annual or interim period have not yet been issued or, for all other entities, have not yet been made available for issuance. (6) Early adoption from the beginning of the fiscal year of adoption is permitted. For fiscal years beginning before October 22, 2012, early adoption is permitted only if an NFP s financial statements for those fiscal years and interim periods within those years have not been made available for issuance. (7) Except for disclosures to be provided prospectively. (8) Retrospective application to the beginning of the annual period of adoption. 8

13 Assurance Matters ASSURANCE MATTERS PCAOB In October 2013 the PCAOB adopted Auditing Standard (AS) No. 17, Auditing Supplemental Information Accompanying Audited Financial Statements, to establish auditor s responsibility when reporting on supplemental information of broker-dealers and others in connection with an audit. AS 17 is subject to SEC approval; however, if approved will be effective for reports on supplemental information accompanying financial statements for fiscal years ending on or after June 1, The PCAOB also issued two new attestation standards in October 2013, Examination Engagements Regarding Compliance Reports of Brokers and Dealers and Review Engagements Regarding Exemption Reports of Brokers and Dealers, and related amendments. These standards relate to audits of brokers and dealers and are in response to SEC Rules and (see Appendix A) and set forth responsibilities of the auditor in regards to examining or reviewing statements included in broker-dealer s compliance and exemption reports. They are subject to SEC approval; however, if approved, will be effective for examination and review engagements of fiscal years ending on or after June 1, The PCAOB issued a revised Standard-Setting Agenda as of December 31, 2013 which includes plans to: Adopt standards related to Related Parties in the first quarter of 2014, Propose standards and consider comments on recent proposals in the first half of 2014 related to: o o o o Identification of the engagement partner and other participants of the audit (proposed standard released in December 2013, see below), A framework for reorganizing PCAOB auditing standards, The auditors responsibility with respect to other accounting firms, specialists and individual accountants, and Going concern (timing dependent upon the FASB s going concern project) Other active projects noted in the Standard-Setting Agenda were standards related to: Quality control standards Auditing accounting estimates, including fair value measurements and related disclosures Auditor independence, objectivity and professional skepticism Confirmations Subsequent events The PCAOB released two proposed rules which would significantly change the auditor s standard report. Under the August 2013 proposed rule the current pass/fail model would remain; however, additional information would be included in the auditor s report, such as critical audit matters. These matters would be the most complex and difficult sections of the audit due to the extent of auditor judgment that was needed, difficulty in obtaining sufficient evidence or difficulty in forming an opinion on the financial statements. An explanation as to why they were considered critical audit matters would be provided along with reference to the applicable financial statement accounts and disclosures. Additional information would be included in the auditor s report such as duration the firm has provided assurance services, information about the firm s independence and further descriptions of the auditor s responsibilities. The proposed rule includes new requirements aimed at improving auditor s procedures and increasing the auditor s responsibilities regarding other information (information in a company s annual report filed with the SEC that also contains audited financial statements). Comments were due by December 11,

14 Assurance Matters The PCAOB re-proposed an amendment to PCAOB auditing standards in December 2013 to require the engagement partner and information about other participants in the audit to be identified in the auditors report. Comments are due by February 3, The PCAOB issued Staff Audit Practice Alert No. 11, Considerations for Audits of Internal Control Over Financial Reporting, dated October 24, 2013 in light of significant auditing practice issues observed by the PCAOB staff in the past three years relating to audits of internal control over financial reporting ("ICFR audits"). The practice alert highlights certain requirements of the PCAOB auditing standards in aspects of ICFR audits in which significant auditing deficiencies have been cited frequently in PCAOB inspection reports. The alert discusses various topics including risk assessment, selecting controls to test, testing management review controls, information technology considerations, roll-forward of tests performed at an interim date, and using the work of others. On December 6, 2013, the PCAOB released a report that provides information about registered audit firms' implementation and compliance with Auditing Standard No. 7, Engagement Quality Review. AS 7 requires an engagement quality review for every audit engagement and every engagement to review interim financial information. According to the report, while firms' methodologies generally were consistent with the requirements of AS 7, they did not always result in an appropriately executed engagement quality review. The report notes that in a number of engagements in which the PCAOB Inspection staff identified audit deficiencies, the staff concluded the audit deficiency should have been identified by the engagement quality reviewer. COSO On May 14, 2013 the Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued its updated Internal Control Integrated Framework (2013 Framework). This is an update to the original framework published in 1992 (1992 Framework) which was written to help organizations design and implement internal control. The updates will broaden the application of internal control in addressing operations and reporting objectives as well as clarify requirements for determining effective internal control. COSO also issued a document with illustrations to assist users in assessing whether a system of internal control meets the requirements set forth in the updated framework. Furthermore, the September 25, 2013 meeting minutes of the SEC Regulations Committee state that the SEC Staff indicated that the longer issuers continue to use the 1992 framework, the more likely they are to receive questions from the staff about whether the issuer s use of the 1992 framework satisfies the SEC's requirement to use a suitable, recognized framework (particularly after December 15, 2014 when COSO will consider the 1992 framework to have been superseded by the 2013 framework). See the Dixon Hughes Goodman A&A Update, COSO s Updated Integrated Framework, for more information. AICPA Technical Q&A (Auditing) TIS , Using Current Auditing Standards for Audits of Prior Periods This TPA clarifies that auditors may perform and report on an entity s prior period financial statements using the clarified auditing standards even if they were not effective for the prior period being audited. Documentation should be included in the file stating whether the auditor followed auditing standards effective for the prior period or current auditing standards. 10

15 Assurance Matters Proposed SSARS: Preparation of Financial Statements, Compilation Engagements, and Association with Financial Statements In October 2013 the AICPA s Accounting and Review Services Committee (ARSC) released an exposure draft related to three services: Preparation of Financial Statements, Compilation Engagements, and Association With Financial Statements. In order to address inconsistency in the application of AR Section 80, Compilation of Financial Statements, regarding the determination of whether the accountant, management or both prepared the financial statements the ARSC revised the scope of the compilation standards to only apply when the accountant is engaged to perform a compilation engagement. The proposed Statements on Standards for Accounting and Review Services (SSARS), Preparation of Financial Statements, would be applicable when no report is provided with the engagement. Furthermore, under this proposed SSARS the accountant would not need to determine if they are independent nor disclose if they are not. The proposed SSARS, Compilation Engagements, requires a report to be issued for each compilation engagement; as a result, the distinction between financial statements issued for general use and management use only financial statements has been removed. The guidance on association with financial statements, previously codified in the Auditing Standards (AU section 504, Association With Financial Statements) is being moved to the SSARS with the proposed SSARS, Association With Financial Statements. The proposed SSARS address the circumstances in which the accountant permits the use of the accountant s name in a report, document, or written communication that contains financial statements on which the accountant has not issued a compilation, review, or audit report. Comments on the exposure draft are due May 2, Other In October 2013 the AICPA released FAQs related to third-party verification letters. It is becoming more common for CPAs to receive requests from interested parties to confirm client information in what many refer to as comfort letters. This is not the same term defined in AU-C 920, Letters for Underwriters and Certain Other Requesting Parties. The letters many third parties are requesting are verification letters. Ten FAQs are provided to illustrate best practices when CPAs respond to verification letters from clients. This will be a live document and updated as new questions arise. Center for Audit Quality The CAQ s SEC Regulations Committee regularly meets with the staff of the SEC to discuss emerging financial reporting issues related to SEC rules and regulations. Summaries of meetings can be found on the CAQ s Web Site. In a collaborative effort with other noteworthy governance and policy organizations, the CAQ jointly issued a Call to Action to entreat public company audit committees of all sizes to proactively consider strengthening their public disclosure to more effectively convey key elements of their critical work to investors and stakeholders. The press release can be found on the CAQ s website. In December 2013, the CAQ issued an alert, Select Auditing Considerations for the 2013 Audit Cycle, to remind audit firms of certain audit considerations for the current year s audits. Included are audit areas that are complex and judgmental as well as audit areas the regulators are currently focusing on. While the list is not all inclusive it is a good reminder of audit considerations for the 2013 audit cycle. The CAQ plans to update the document at least annually or sooner if needed. 11

16 Appendix A Matters discussed in previous Quarterly Updates APPENDIX A MATTERS DISCUSSED IN PREVIOUS QUARTERLY UPDATES FASB - Accounting Standards Updates ASU : Receivables (Topic 310): A Creditor s Determination of Whether a Restructuring Is a Troubled Debt. The Update clarifies which loan modifications constitute troubled debt restructurings. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. Note that this Update also addresses the deferral of the disclosures required by ASU relating to troubled debt restructurings. For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. For nonpublic entities, the amendments to the Codification in the Update are effective for annual periods ending on or after December 15, 2012, including interim periods within those annual periods. Early application is permitted. ASU : Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The amendments in this Update allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this Update should be applied retrospectively. ASU , discussed below, delayed the effectiveness of the provisions of this ASU requiring the presentation on the face of the income statement of the components of net income that are being reclassified from accumulated other comprehensive income. ASU , discussed below, finalized the reporting requirements for reclassifications out of accumulated other comprehensive income (AOCI). The remaining provisions of ASU were not deferred. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. For issuers previously reporting other comprehensive income and total comprehensive income in the shareholders equity statement that file a registration statement after reflecting adoption of the provisions of this Update in their first quarter 10-Q, you are reminded that Regulation S-X requires the annual audited financial statements to be revised to reflect retrospective application of this accounting change (if material). While this is typically done via filing the required revised audited financial statements on a Form 8-K or an amended Form 10-K, the SEC Staff indicated during its September 2011 meeting with the CAQ SEC Regulations Committee that they would not object if the registrant concludes and its auditor agrees that there is no need to retrospectively revise previously issued annual audited financial statements incorporated by reference in the filing, as long as the filing includes prominent transparent disclosure (e.g. in a selected financial data type table) of the primary components of a statement of comprehensive income. See the minutes of the September 27, 2011 meeting at the Center for Audit Quality website for additional information. 12

17 Appendix A Matters discussed in previous Quarterly Updates ASU : Other Expenses (Topic 720): Fees Paid to the Federal Government by Heath Insurers. The amendments in this Update specify that the liability for the fee should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that is payable. Additionally, this Update indicates that the fee would not meet the definition of an acquisition cost, as defined in ASU The amendments in this update are effective for calendar years beginning after December 31, 2013, when the fee initially becomes effective. ASU : Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities. The amendments in this Update require certain health care entities to change the presentation of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts), as well as to provide enhanced disclosures about policies for recognizing revenue and assessing bad debts. The amendments also require disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. For public entities, the amendments in this Update are effective for fiscal years and interim periods within those fiscal years beginning after December 15, For nonpublic entities, the amendments are effective for the first annual period ending after December 15, 2012, and interim and annual periods thereafter. Early adoption is permitted. ASU : Compensation Retirement Benefits Multiemployer Plans (Subtopic ). For employers that participate in multiemployer pension plans, the amendments in this Update require an employer to provide additional quantitative and qualitative disclosures. The amended disclosures provide users with more detailed information about an employer s involvement in multiemployer pension plans, including the level of the employer s participation in significant multiemployer plans, the financial health of the plans, including an indication of the funded status, and the nature of employer commitments to the plan. For public entities, the amendments are effective for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted. For nonpublic entities, the amendments are effective for annual periods for fiscal years ending after December 15, 2012, with early adoption permitted. The amendments should be applied retrospectively for all prior periods presented. ASU : Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate a Scope Clarification. The objective of this Update is to resolve the diversity in practice about whether the guidance in Subtopic , Property, Plant, and Equipment -- Real Estate Sales, of Topic 360, applies to a parent that ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary s nonrecourse debt. This Update provides that when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary s nonrecourse debt, the reporting entity should apply the guidance in Subtopic to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness. That is, even if the reporting entity ceases to have a controlling financial interest under Subtopic , the reporting entity would continue to include the real estate, debt, and the results of the subsidiary s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt. The amendments should be applied on a prospective basis to deconsolidation events occurring after the effective date; with prior periods not adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. For public entities, the 13

18 Appendix A Matters discussed in previous Quarterly Updates amendments are effective for fiscal years, and interim periods within those years, beginning on or after June 15, For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2013, and interim and annual periods thereafter. Early adoption is permitted. ASU : Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments in this Update require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This Update affects all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section or Section or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in Section This information is intended to enable users of an entity s financial statements to evaluate the effect or potential effect of netting arrangements on an entity s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this Update. The amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. ASU : Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No The amendments in this Update are effective at the same time as the amendments in ASU No , so that entities will not be required to comply with the presentation requirements in ASU No that this Update is deferring. The amendments are being made to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No All other requirements in ASU No are not affected by ASU No , including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities are required to apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, Nonpublic entities are required to apply these requirements for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. As discussed in the FASB s other developments below, the FASB issued an ED to address the reasons for this deferral. ASU : Health Care Entities (Topic 954) Continuing Care Retirement Communities Refundable Advance Fees. The amendments in the Update clarify that a health care entity should classify an advance fee as deferred revenue when a continuing care retirement community has a resident contract that provides for payment of the refundable advance fee upon reoccupancy of a unit by a subsequent resident, which is limited to the proceeds of reoccupancy. Refundable advances that are contingent upon reoccupancy by a subsequent resident but are not limited to the proceeds of reoccupancy should be accounted for and reported as a liability. For public entities (including conduit bond obligors), the amendments are effective for fiscal periods beginning after December 15, 2012, with early adoption permitted. For nonpublic entities, the amendments are effective for fiscal periods beginning after December 15, 2013, with early adoption permitted. The amendments should be applied retrospectively by recording a cumulative-effect adjustment to opening retained earnings (or unrestricted net assets) as of the beginning of the earliest period presented. 14