8/29/2011. Relatively few new FASB, SSARS standards issued in past year. The Good News

Transcription

1 Accounting & Auditing Update Ron Clark Auburn, Alabama The Good News Relatively few new FASB, SAS, SSARS standards issued in past year. 1

2 There is a lot of new and revised standards coming your way! The Bad News Session Content O Financial i Accounting O Auditing & O Revenue Recognition O Leases O Goodwill Compilation & Reviews O Audit Clarity Standards O SSARS 19 O Ethics Proposals 2

3 ASU Testing for Goodwill Impairment When to perform step 2 for Reporting units with zero or negative carrying amounts Amends ASC topic 350, Intangibles 3

4 Goodwill Goodwill is not amortized, test for impairment annually Two step process: Step 1: Compare fair value of reporting unit with its carrying amount, including goodwill Step 2: Measure impairment loss if carrying amount exceeds fair value Qualitative Factors ASC 350 gives examples of events or circumstances indicating an impairment Legal factors Change in business climate Loss of key personnel Expectation reporting unit will be sold or disposed of 4

5 Effective Dates Public entities: Periods beginning after 12/15/2010. Early adoption not permitted. Nonpublic entities: Periods beginning after 12/15/2011. Early adoption permitted. Goodwill Issue If carrying amount is greater than zero and its fair value exceeds carrying amount, goodwill is considered not impaired Second step of impairment test is unnecessary 5

6 Goodwill Issue What if carrying amount of reporting unit is zero or negative? ASC assumed if carrying amount is zero or negative then fair value would exceed carrying value and step 2 not required Some questioned this assumption there may still be a goodwill impairment 6

7 Goodwill Exposure Draft Nonpublic companies have expressed concerns about the cost and complexity of performing the goodwill impairment test The proposals are intended to address those concerns and to simplify and improve the process for public and nonpublic entities alike Goodwill Exposure Draft Would allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test Current guidance requires an entity to test goodwill for impairment at least annually by first comparing the fair value of a reporting unit with its carrying amount, including goodwill 7

8 Goodwill Exposure Draft If the fair value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the amount of impairment loss, if any Goodwill Exposure Draft Under the proposed amendments, an entity would not be required to calculate the fair value of a reporting unit unless it determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount 8

9 Will we adopt IFRS? 9

10 A New Term for you: Condorsement SEC taking a middle-of-the-road approach A Blog Observation By the time the Securities and Exchange Commission figures out how to incorporate international financial reporting standards into American rulemaking, the term "condorsement" will likely be relegated to The Ridiculous Business Jargon Dictionary. Condorsement is the SEC's colloquialism for using a kinder, gentler 10

11 Blog approach to adopting international financial reporting standards in the U.S., an approach that calls for both convergence (another candidate for the RBJ Dictionary) and endorsement strategies to force American companies to use global standards. FINANCIAL INSTRUMENTS 11

12 Accounting for Financial Instruments Project This project will: Reconsider the recognition and measurement of financial instruments Address issues related to impairment of financial instruments and hedge accounting Increase convergence in accounting for financial instruments Board Decisions May 4, 2011 Refined criterion for classifying financial instruments Trade receivables and payables would generally meet the criterion. A financial ca instrument that meets the criterion would then be classified and measured on the basis of an entity s business strategy 12

13 Business Strategy Classify instruments based on how the entity manages those financial instruments rather than on the entity s intent for an individual financial instrument Classify all financial instruments into one of three categories: Amortized Cost Category FV-OCI (Fair Value Other Comprehensive Income) Category FV-NI (Fair Value Net Income) Category Equity Securities Equity securities would be measured at fair value with all changes in fair value recognized in net income Nonpublic entities would be provided a practicability exception to fair value measurement for investments in nonmarketable equity securities 13

14 Equity Securities The practicability exception would permit nonmarketable equity securities to be measured at cost less any otherthan-temporary impairment; upward adjustments in fair value would be recognized when information i about a change in price is observable Agreeing g to Disagree Netting Financial Assets & Liabilities 14

15 Proposed ASU Balance Sheet Offsetting Objectives Converge U.S. GAAP and IFRS Permit offsetting only in certain limited circumstances Improve financial information Presentation Requirements Offsetting required if Unconditional and legally enforceable right to set off eligible asset and eligible liability Entity intends to Settle the asset and liability on a net basis Realize the asset and liability simultaneously l 15

16 Disclosure Requirements Information about rights of setoff and related arrangements Enables users to understand the effect of those rights and the effect on the statement of financial position IASB Approach Allow netting where an entity intends to Allow netting where an entity intends to settle a given financial asset and financial liability net or simultaneously. 16

17 FASB Approach FASB: Offsetting of assets and liabilities is improper except where a right of setoff exists. Financial institutions in particular called on FASB to retain current allowances for companies to net derivatives that are subject to master netting agreements, and FASB has decided to permit it. Impact on Practice The new rules are significant because they will drive the total assets and liabilities that companies will report on their balance sheets, which in turn is critical to leverage and other key metrics that have a bearing on debt covenants and contractual agreements. 17

18 Netting VP at Moody's, says the inability of the two boards to agree on netting will allow one of the most significant disparities in IFRS vs. GAAP balance sheets to continue. Although this divergence has no differential impact on the underlying net equity, differences in the amounts reported for both total assets and total liabilities can be substantial REVENUE RECOGNITION CONVERGENCE PROJECT, 18

19 Revenue Project FASB been working on project for six years Neither U.S. GAAP nor IASB have a clear and concise model for revenue recognition Discussion paper provides some clues as to direction Current U.S. GAAP U.S. GAAP, revenue recognition guidance comprises more than a hundred standards many are industryspecific and some can produce conflicting results for economically similar il transactions 19

20 Current IFRS In IFRSs, the principles underlying the two main revenue recognition standards (IAS 18, Revenue, and IAS 11, Construction Contracts) are inconsistent and vague, and can be difficult to apply beyond simple transactions. RECORDING REVENUE To apply the proposed revenue recognition standard, an entity should take the following actions. Step 1: Identify the contact(s) with a customer. Step 2: Identify the separate performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the separate performance obligations. Step 5: Recognize revenue when the entity satisfies each performance obligation. 20

21 IMPACT ON CURRENT PRACTICE Revenue would be recognized only from the transfer of goods or services to a customer. That proposal would affect some longterm contracts Example: Percentage of completion revenue recognition would be allowed but only if the customer owns the workin-progress as it is built or developed IMPACT ON CURRENT PRACTICE A company would be required to account for all goods or services that are distinct. Hence, a company might separate a contract into different units of accounting from those identified in current practice. 21

22 IMPACT ON CURRENT PRACTICE Collectibility would affect how much revenue is recognized, rather than whether revenue is recognized. Greater use of estimates would be required in determining both the amount to allocate and the basis for that allocation, which would allow a company to better report the economics of a transaction. TENTATIVE DECISIONS FROM MAY 2011 MEETING 22

23 Multiple Deliverables Boards seem to be having some difficulty here: Combining contracts Single contracts Product and service contracts Determine the Transaction Price Collectibility: EDs proposed reducing the amount of promised consideration to reflect the customer s credit risk. Recognized ed as income or expense rather than as revenue 23

24 The Boards Tentatively Decided Entity should not reflect the effects of a customer s credit risk in the measurement of the transaction price Should recognize an allowance for any expected impairment loss from contracts with customers The amount presented as a separate line item adjacent to the revenue line (as contra revenue) Warranty The boards tentatively decided that an entity should account for a product warranty that relates to quality assurance by accruing warranty costs at the time revenue is recognized rather than by deferring revenue 24

25 Revenue Recognition Contract-Based Revenue Recognition Principle Recognize revenue when entity s net position in a contract with a customer increases Net Contract Position A combination of rights and obligations in a contract with a customer Contract asset Contract liability Net nil position Recognize revenue when contract asset increases or contract liability decreases Occurs when entity performs obligations 25

26 Satisfaction of Obligations Revenue is recognized only when a performance obligation has been satisfied Recognize revenue when a promised asset (good or service) has been transferred to and the customer controls the asset (service consumes) Measurement For most sales this would be the transaction price (promised consideration) For contracts comprising multiple performance obligations, transaction price allocated to obligations on relative standalone selling prices Recognize revenue when individual performance obligations are satisfied 26

27 Effects on Practice Construction-type contracts: recognize revenue during construction only if customer controls item as it is constructed Estimate standalone selling prices Capitalization of costs only if in accordance with other standards Costs of Obtaining Contract Capitalize incremental costs of obtaining a contract that entity expects to recover Present separately on balance sheet 27

28 LEASES OBSERVATION Under the proposed rules, a company would book an operating lease as a liability and an asset to reflect its ability to access the item being leased. But the asset would be less than the debt incurred, as it wouldn't include financing expense or the residual value of the item when it is returned at the end of the lease. Similarly, rent expense would be replaced with amortization and interest charges, which could reduce earnings, especially in the early years of the lease, though inflate them in later years. 28

29 May 25, 2011 In deciding how companies should account for leases, the FASB and the International Accounting Standards Board initially proposed: All leases treated like financing transactions, with companies recognizing a liability to make lease payments and putting an asset on the balance sheet reflecting the right to use the asset for the term of the lease 29

30 Companies swallowed the treatment for long-term lease agreements that look and feel a lot like the financed purchase of an asset, but they cried foul for short-term leases that look and feel more like simple rental agreements FASB and IASB acquiesced and agreed they would work on a two-model approach 30

31 Now, however, the boards have reversed course and decided they won't establish a two-model approach. FASB and IASB said they're going to stick with their original idea as described in the exposure draft for a single model for all leases Proposed ASU Leases Objectives Converge U.S. GAAP and IFRS Address perceived weaknesses in accounting for operating leases Coordinate lessor accounting with the revenue recognition ii project 31

32 Proposed ASU Leases Scope: all leases except Leases of intangible assets Leases to explore for or use minerals, oil, natural gas, and similar non-regenerative resources Leases of biological i l assets Before covering details, let s look at an example based on Exposure Draft Microsoft Excel Worksheet 32

33 FedX UPS Total debt (bil) $1.93 $10.85 Debt/market capitalization 7% 15% After inclusion of operating leases Debt + est. operating leases $16.28 $15.96 (bil) Debt + est. operating leases/market cap 56% 22% The Impact on Operating Leases Changes Coming We need to start planning for some changes Pretty good bet there will be significant changes in lease accounting 33

34 Some comments from others responding to Exposure Draft Questions needing Answers How will these changes affect financial ratios required by debt covenants? Do loan documents allow for changes to these ratios affected by new lease accounting treatment? 34

35 Questions needing Answers How will the change affect the timing of expenses? Rental payment expenses will no longer be straight lined over the term, but will result in larger expenses in earlier years Are there any compensation agreements that base payments on measurements such as EBITDA? Questions needing Answers Should these be amended to reflect increase in depreciation and interest charges? Should the decision to lease or buy be revisited? If the financial statements are similar when leasing as opposed to buying, is there still a solid business reason to lease the property? 35

36 Real Estate John McAslan an Associate at ProTenant said "the impact of this proposed change will have a significant impact on leasing behavior. Lessees of single tenant buildings will ask themselves why not just own the building, if I have to record it on my financial statements anyway?" Real Estate In all likelihood, existing operating leases, signed prior to the implementation of the new rules, will require reclassification as capital leases that must be accounted for on the balance sheet. 36

37 Real Estate Since operating lease obligations can Since operating lease obligations can represent a larger liability than all balance sheet assets combined, lease reclassification can significantly alter the businesses balance sheet. 37

38 Lessee Issues Initial Recognition Recognize a liability at inception of lease Discounted minimum lease payments Recognize right-of-use asset Lessee Issues Subsequent Measurement Amortize lease obligation using effective interest method Amortize right-of-use asset over lesser of Lease term Estimated t useful life of asset Subject to impairment provisions of Topic

39 Lessee Issues Presentation Statement of Financial Position Liability shall be reported separately Right-of-use assets Within property, plant, and equipment Reported separately Lessee Issues Presentation Income Statement Amortization of right-to-use asset, separate from other amortization Interest on liability, separate from other interest 39

40 Lessee Issues Presentation Statement of Cash Flows Classify as financing activities Separate presentation from other financing activities Lessor Issues Methods Two Methods Performance Obligation Approach Use when significant risks or benefits related to underlying asset are retained Derecognition Approach Use when significant risks or benefits related to underlying asset are not retained 40

41 Lessor Issues Performance Obligation Approach Initial Measurement Right to receive lease payments Present value of minimum lease payments Any initial direct costs incurred by the lessor Lease liability Present value of lease payments Subsequent Measurement Amortize asset using interest method Lease liability based on pattern of use of underlying asset Lessor Issues Performance Obligation Approach Presentation Statement of Financial Position Presentation Statement of Financial Position Net Lease liability as net of Underlying assets Rights to receive lease payments Lease liabilities Presentation Income Statement Net lease income or expense as net of Net lease income or expense as net of Interest income on a right to receive lease payment Lease income resulting from the satisfaction of a lease liability Depreciation expense on the underlying asset 41

42 Lessor Issues Derecognition Approach Recognition Issues Statement of Financial Position Recognize right to receive lease payments Derecognize underlying asset Reclassify as residual asset retention of underlying asset, if applicable Lessor Issues Derecognition Approach Recognition Issues Income Statement Lease income for the year Interest income on right to receive lease payments Income or expense on reassessment of lease term Any changes in lease terms Impairment losses or right-to-receive payments or residual asset 42

43 Lessor Issues Derecognition Approach Initial Measurement Right to receive lease payments Present value of lease payments Residual asset, if any Subsequent Measurement Amortize right-to-receive lease payments Effective interest method Lessor Issues Derecognition Approach Presentation Statement of Financial Position Right to receive lease payments as a separate asset Subleases shall be shown separately Residual assets Separately within property, plant, and equipment Distinguish assets that arise under a sublease 43

44 Lessor Issues Derecognition Approach Presentation Income Statement Present as a separate line item as either Gross amounts Net amounts Presentation Statement of Cash Flows Classify as operating cash flows Present separately from other cash flows Leases Short Term Option to use undiscounted lease payments Lease term must have an initial lease term of 12 months or less All other provisions of the standard shall apply Remaining months at B/S date of short term lease measure and present as liability and asset 44

45 FinRec (AICPA) Comments on Lease Proposal Question 1: Lessees Do you agree that a lessee should recognize a right-of-use asset and a liability to make lease payments? We agree with the boards conclusion that a lessee should recognize a rightof-use asset and a liability to make lease payments. 45

46 Question 2: Lessors Do you agree that a lessor should apply (i) the performance obligation approach if the lessor retains exposure to significant risks or benefits associated with the underlying asset during or after the expected lease term and (ii) the derecognition approach otherwise? Question 2: Lessors The majority of FinREC members do not support the boards hybrid (lease classification) approach to lessor accounting instead, they support the derecognition approach as the single lessor accounting model. 46

47 Other Issues FinRec generally agrees with proposals on Financial Instruments and Revenue Recognition but does suggest clarfying changes So, What Do You Think??? 47

48 Does anyone want Little GAAP for Nonpublic companies? Blue-Ribbon Panel January 2011 panel issued document outlining several conclusions regarding GAAP for nonpublic entities Panel considered three approaches to simplifying GAAP for smaller entities 48

49 Nonpublic Standards The three primary models that were under consideration were: U.S. GAAP with Exclusions for Private Companies with enhancements U.S. GAAP Baseline GAAP with Public Company Add-Ons Separate, Stand-Alone GAAP Based on Current U.S. GAAP (similar to SMEs) Private Company Financial Reporting Report of the Blue-Ribbon Panel Near term Focus on exceptions for private companies Do not issue complete set of separate standards for private companies Establish Private Company Board under FAF Make recommendations for appropriate modifications and exceptions from existing and proposed GAAP March 2011 FAF formed Trustee Working Group to address issues 49

50 AUDITING UPDATE SAS No. 118 Other Information in Documents Containing Audited Financial Statements Documents containing audited financial statements refers to annual reports Effective Date December 15,

51 SAS No. 118 Guidance for considering other information in documents containing audited financial statements Establishes requirement to read the other information for credibility Looking for material inconsistencies Requires communications with those charged with governance Material Inconsistencies Discuss with management: Inconsistencies in other included information Misstatement of fact If management refuses to change other information, include explanatory paragraph to disclaim opinion on such information 51

52 SAS No. 119 Supplementary Information in Relation to the Financial Statements as a Whole SAS 119 and 120 require same procedures for supplementary information requested by client or required under an accounting standard Effective December 15, 2010 SAS No. 119 Addresses auditor s responsibility when engaged to report on whether supplementary information is fairly stated in relation to financial statements as a whole Defines supplementary information as information presented outside the basic financial statements, excluding required supplementary information Establishes several presumptively mandatory requirements for opining on supplementary information 52

53 Requirements Determine that all of the following conditions are met: The supplementary information was derived from the underlying accounting and other records used to prepare the financial statements Requirements The supplementary information relates to the same period as the financial statements The financial statements were audited The supplementary e information o will accompany the entity s audited financial statements 53

54 Reporting If supplementary information is presented with the financial statements Add explanatory paragraph following the opinion paragraph in the auditor s report on the financial statements or In a separate report on the supplementary information SAS 120 Required Supplementary Information Addresses the auditor s responsibility when a designated accounting standard setter requires supplementary information to accompany an entity s basic financial statements (info not part of Notes) Effective December 15,

55 SAS No. 120 Requires auditor s report to Describe whether the supplementary information is presented and Communicate when required supplementary information has not been presented in accordance with standard-setter setter requirements SAS No. 121 Amends applicability of AU 722, Interim Financial Information (SAS 116) Now applies when Accountant audited prior year financial statements but expects a new auditor to be appointed for current year audit and Appointment of new auditor is not effective prior to beginning of period covered by review 55

56 SAS 116 Interim Financial Information Types of Reviews SAS 116 reviews of Interim Financial Information when CPA audited prior annual statements or expects to audit current annual statements Traditional Reviews under SSARS 56

57 SAS 116 Review Interim financial information prepared with same financial reporting framework as used for annual statements Condensed Information If interim financial information is condensed information: Conforms to FASB ASC, Interim Reporting or IAS 34 Contains note that information does not represent complete financial i statements t t Condensed information accompanied by latest audit statements or they are readily available 57

58 Guidelines Apply to condensed or full set of statements Report should refer to applicable financial reporting framework (meaning GAAP or IFRS) Report only required if client issues report and states information reviewed by CPA AICPA Clarity Project 58

59 Overview of ASB s Clarity Project Mirrors the IAASB s Clarity Project Address concerns over the clarity, use of terms, and the length and complexity of auditing standards Improve understandability and consistent application of auditing standards Make structural improvements to format of standards Primary Impact of Clarity Project To establish objectives of each of the standards that provide a conceptual framework for the Application of professional judgment and Obligation related to the objective Make structural and drafting changes to make SASs easier to read and understand and to simplify the SASs by restructuring them 59

60 Clarity Drafting Provisions Begin with Introduction of Standard Establish objectives for each standard Include definitions Separate requirements from applications Numbers application and other explanatory material paragraphs p using A prefix Use formatting techniques, such as bulleted lists Include special considerations for small, less complex and government audits Redrafted Standards Several redrafted standards issued in final form Several redrafted standards issued in final form SAS Nos already effective because they address current issues Numerous other redrafts have been finalized but cannot be early applied Effective Date: Except for SAS Nos , all clarified SASs will be effective for audits of financial statements for periods ending on or after December 15,

61 Re-Issuance of Redrafted All redrafted SASs will be issued as a new SAS No. 12X That standard will supersede all SASs preceding SAS No. 117 AU sections s will be renumbered ed Some differences in requirements, although not major differences OCBOA The term OCBOA replaced with Special Purpose Framework Does not change ability to audit OCBOA statements 61

62 Revised Report from Clarity Project Microsoft Word Document Compilations & Review Compilations & Review SSARS Update 62

63 SSARS 19 Definitions Attest engagement: requires independence Assurance engagement: accountant issues report containing an opinion related to fairness of financial statement presentation Attest Engagements Attest Engagements Compilation No Assurance Review Limited Assurance Audit Reasonable Assurance 63

64 Compilation SSARS allows a non-independent accountant to compile financial statements as long as report discloses lack of independence Common Elements While there are many common elements between compilations and reviews, the major differences are: For review, must be independent, perform certain procedures, may provide limited assurances For compilations, do not have to be independent, fewer procedures, may perform Management-Use only engagement, no report 64

65 Professional Requirement SSARS 19 defines: Unconditional requirements: words must and is required Presumptively mandatory requirements: word should New SSARSs Guidance SSARS No. 20, Revised Applicability of SSARS SSARS No. 19, Compilation and Review Engagements 65

66 SSARS 20 Relates to SAS 116 SSARS do not apply when reviewing Interim Financial Information under SAS 116 Key Provisions of SSARS No. 19 Key components: Key components: Separate compilation and review guidance Emphasis on limited assurance obtained from review procedures Provision for disclosure of reason for lack of independence in a compilation report Requires accumulation of review evidence Requires accumulation of review evidence Importance of understanding industry and client in designing review procedures Documentation requirements New reports 66

67 Disclosure of Lack of Independence in Compilation I am (We are) not independent with respect to XYZ Company. SSARS 19 provides for voluntary disclosure of reasons for lack of independence Direct financial interest Family relationship Performed accounting functions (most likely bookkeeping services) Financial Interest I am (We are) not independent with respect to XYZ Company as of and for the year ended December 31, 20XX, because I (a member of the engagement team) had a direct financial interest in XYZ Company 67

68 Family Relationship I am (We are) not independent with respect to XYZ Company as of and for the year ended December 31, 20XX, because an individual of my immediate family (an immediate family member of one of the members of the engagement team) was employed by XYZ Company Performed Accounting Services I am (We are) not independent with respect to XYZ Company as of and for the year ended December 31, 20XX, because I (we) performed certain accounting services (the accountant may include a specific description i of those services) that impaired my (our) independence. 68

69 White Paper on Independence Q: Required to state reasons why not independent? A: No Q: Can I disclose reasons in one period and not in a subsequent period? A: Yes 69

70 White Paper on Independence Q: Any limitations on description of reasons? A: No, just that all reasons for impairment must be described Q: If I maintain several controls for client must I describe each control? A: No, actually may be misleading to do so. State t maintaining i i some aspects of controls OTHER SSARS 19 PROVISIONS 70

71 Documentation Requirements in Compilations Evidence (programs) that CPA complied with SSARS Engagement letter Communications to management regarding g fraud or illegal acts Any findings or issues related to the financial statements that come to the CPA s attention What Else? Copy of financial statements Trial balance Some CPAs suggest keeping other accounting workpapers in separate file, ie., Accounting File vs. Compilation o File Copy of Report 71

72 Documentation Requirements in Review Engagements Engagement letter Performance of analytical procedures Any additional review procedures Significant matters covered in inquiries Any findings or issues deemed significant Significant unusual matters Communications regarded fraud or illegal acts Representation letter Analytic Expectations An accountant cannot under any An accountant cannot, under any circumstances, perform effective analytical procedures without first developing expectations 72

73 Developing Expectations Budgets Forecasts Last year s analytics adjusted for changes Financial models Going-Concern During the performance of compilation procedures, If information comes to the accountant's attention indicating uncertainty about entity's ability to continue as a going concern, request management consider need for related disclosure. 73

74 Going-Concern May emphasize an uncertainty about an entity's ability to continue as a going concern, provided that the uncertainty is disclosed in the financial statements Subsequent Events A material subsequent event may come to the accountant's attention: During the performance of compilation procedures Subsequent to the date of the accountant's compilation report but prior to the release of the report 74

75 Subsequent Events Request management disclose An emphasis paragraph may be added provided that the matter is disclosed in the financial statements PROPOSED REVISION TO INTERPRETATION NO , PERFORMANCE OF NONATTEST SERVICES, UNDER RULE 101, INDEPENDENCE 75

76 Non-Attest Services Non-Attest Accounting Services, Bookkeeping Attest Compilation Review Audit Unadjusted Trial Balance Activities Related to Attest Services The following are considered a normal part of the attest engagement and would not constitute performing a nonattest service subject to this interpretation Assisting client in selection and application of accounting standards or policies and financial statement disclosure requirements 76

77 Activities Related to Attest Services the appropriateness of the client s methods used in determining the accounting and financial reporting proposing adjusting journal entries for client management consideration making suggestions about the form or content of the financial statements Activities Related to Attest Services However the member should exercise judgment to determine whether the member s involvement has become so extensive as to constitute nonattest services (for example, bookkeeping) subject to this interpretationi 77

78 General Requirements for Performing Nonattest Services Italicized/Bold words are new. Words in Brackets [ ] are deleted. General Requirements The member should not assume The member should not assume management responsibilities [perform management functions or make management decisions] for the attest client 78

79 In connection with an engagement to perform nonattest services, the member should determine that the client [must] agrees to [perform the following functions in connection with the engagement to perform nonattest services]: Management Responsibilities a. [Make] Assume all management responsibilities [decisions and perform all management functions]. b. [Designate] Oversee the service, by designating an individual, preferably within senior management, who possesses suitable skill, knowledge, and/or experience [preferably within senior management, to oversee the services]. 79

80 Management Responsibilities The member should be satisfied that such individual understands the services to be performed sufficiently to oversee them. However, the individual is not required to possess the expertise to perform or reperform the services. Management Responsibilities Evaluate the adequacy and results of the services performed Accept responsibility for the results of the services. 80

81 Independence Impaired If client unable or unwilling to assume these responsibilities (for example, the client [does not have an individual with suitable skill, knowledge, and/or experience to] cannot oversee the nonattest services provided, d or is unwilling to [perform such functions] carry out such responsibilities due to lack of time or desire) Management Responsibilities While Proposal gives several other examples of management responsibilities, two are especially important that would impair independence Supervising employees Internal controls 81

82 Supervising Client Employees Directing or accepting responsibility for the actions of the client s employees in the performance of their normal recurring activities [Supervising client employees in the performance of their normal recurring activities] Routine Activities Activities that are routine and administrative are deemed not to be a management responsibility. Advising clients the dates for filing statutory returns is deemed not to be a management responsibility. Providing advice, research materials, and recommendations. 82

83 Internal Controls Accepting responsibility for designing, implementing, [Establishing] or maintaining internal controls [including performing ongoing monitoring activities] for a client. The above, by definition, includes ongoing monitoring of controls Monitoring Controls Accepting responsibility for designing Accepting responsibility for designing, implementing, [Establishing] or maintaining internal controls [including performing ongoing monitoring activities] for a client. 83

84 Monitoring Ongoing monitoring procedures are built into the routine, recurring operating activities of an organization. Therefore, the management participation threat created by a member performing ongoing monitoring i procedures is so significant that no safeguards could reduce the threat to an acceptable level. Monitoring However, separate evaluations often are performed by individuals who are not directly involved in the operation of the controls being monitored. As such, it is possible for a member to provide an objective analysis of control effectiveness by performing separate evaluations without creating a significant management participation threat that would impair independence. 84

85 From Clarification Document The addition of the phrase accepting responsibility for is intended to clarify that practitioners are able to assist their clients by performing services to design, implement, or maintain certain aspects of internal control when management accepts responsibility for such services and the other general requirements of the interpretation are met. Independence Not Impaired Record transactions which mgt has determined or approved the appropriate account classification, or post coded transactions to a client s general ledger Prepare financial statements based on information in trial balance Post client-approved entries to trial balance 85

86 Independence Not Impaired (New) Prepare a reconciliation (ex. Bank, A/R) that identifies reconciling items for client s evaluation Propose journal entries to client provided client reviews entries and member satisfied that mgt understands nature of entries and impact on financial statements Independence Impaired Authorizing, executing or consummating a transaction, or otherwise exercising authority on behalf of a client or having the authority to do so Preparing source documents, in electronic or other form, evidencing the occurrence of a transaction Having custody of client assets 86

87 Independence Impaired (New) Accepting responsibility for the preparation and fair presentation of the client s financial statements in accordance with the applicable financial reporting framework Owner/Manager Basic understanding of bookkeeping, financial statements, internal controls Accept responsibility for these activities Authorize all transactions including account classifications and journal entries ti Willing to spend sufficient time with CPA to review CPA s work and accept responsibility for financial statements 87

88 Understanding Financial Statements Definition of assets, liabilities, equity GAAP vs. OCBOA Purpose of different fin statements Nature of accruals Fixed assets and purpose of depreciation Purpose of footnotes Understanding Financial Statements Why net income not equal to cash balance Purpose of internal controls Concept of materiality General idea of why we have accounting and auditor/compilation standards 88

89 Questions, Comments? The End 89

90 Finally Thanks for coming and for participating It s been a real hoot For copies of slides or questions: rclark@business.auburn.edu Ron Clark ASUs related to Financial Institutions 90

91 ASU Troubled Debt Restructuring Delays implementation of Troubled Debt Restructuring provisions in ASU Rest of ASU effective. ASU Improve disclosures Disaggregate by portfolio segment New disclosures ASU Disclose roll forward of allowance by portfolio segment May require system modifications to capture information on portfolio segment basis 91

92 ASU In past, banks have included an unallocated allowance to adjust for uncertainty in estimates New disclosures will probably eliminate these unallocated amounts ASU Business Combinations Pro Forma Information for public entities Disclose revenue and earnings of combined entity as though the combination had occurred as of beginning of the prior period only 92

93 ASU Relates to acquisition costs of insurance companies Certain costs related to acquisition of new and renewal contracts should be capilatized ASU Loans to participants by defined contribution plans Classify as notes receivable Previously reported as investments Measure at unpaid principal balance Measure at unpaid principal balance plus accrued interest 93

94 Health Care Entities reporting of malpractice claims and related insurance recoveries Some entities reported net amounts ASU requires es disclosure gross presentation ASU Revenue Recognition using Milestone Method Research or development entities such as drug research study may recognize milestone payment as revenue if substantive criteria are met 94

95 Milestone Criteria Consideration commensurate with vendor s performance or value of item delivered Related to past performance Reasonable ab e relative e to all deliverables e es and payment terms in arrangement Entity may use other reasonable methods of recognizing revenue ASU Subsequent Events disclosure No changes for non-publics disclose date through which subsequent events have been evaluated, generally same as audit report date Public companies evaluate events through filing date 95

96 ASC 958 & ASU Not-For-Profit Combinations ASU Applies accounting measurement and disclosures from FASB 141R to Not- For-Profits Methods of accounting for combination Merger (similar to APB pooling-of-interest) Acquisition (follows FASB 141R, ASC 805) 96

97 Methods Acquisition: recognizes assets and liabilities of acquired entity in acquirer s financial statements at fair value Merger: Two or more Not-For-Profit entities cede control to a new Not-For- Profit entity New entity combines assets and liabilities of the merging entities Combined Financial Statements and Uncertain Tax Positions Microsoft Word Document 97

98 Exposure Draft on Peer Review Peer Review Compilation Options Accounting Basis GAAP OCBOA (TAX) SME 98