ACCOUNTING & AUDITING UPDATE

Transcription

1 Session 4 ACCOUNTING & AUDITING UPDATE Eric Ernest, CPA Partner Page 104

2 Objective To provide Accounting and Auditing updates covering: What s new and effective this year Reminders for the EBP season What s on the horizon from the regulators Page 105

3 NEW OR EFFECTIVE THIS YEAR Page 106

4 Accounting and Auditing Update New or effective this year ASU , Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) ASU , Technical Corrections and Improvements ASU , Plan Accounting Preparing financial statements (SSARS No. 21) when not the auditor Page 107

5 ASU , Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) Issued May 2015 Effective for fiscal years beginning after December 15, 2015 (public entities) and 2016 (other entities); early adoption permitted Retrospective application Eliminates the requirement to categorize investments for which fair values are measured using the net asset value per share as a practical expedient Page 108

6 ASU , Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) Sufficient information must be provided to permit reconciliation of the fair value of the assets categorized within the FV hierarchy table to amounts presented in the statement of net assets Continue to disclose investment strategy*, future investment commitments and redemption requirements * ASU removes the disclosure of investment strategy for funds that file Form 5500 as a Direct Filing Entity (DFE). Page 109

7 ASU , Technical Corrections and Improvements Changes the FASB definition of readily determinable fair value (paragraph 30 of ASU ): An equity security has a readily determinable fair value if it meets any of the following conditions: a. The fair value of an equity security is readily determinable if sales prices or bid-and-asked quotations are currently available on a securities exchange registered with the U.S. Securities and Exchange Commission (SEC) or in the over-the-counter market, provided that those prices or quotations for the over-the-counter market are publicly reported by the National Association of Securities Dealers Automated Quotations systems or by OTC Markets Group Inc. Restricted stock meets that definition if the restriction terminates within one year. b. The fair value of an equity security traded only in a foreign market is readily determinable if that foreign market is of a breadth and scope comparable to one of the U.S. markets referred to above. c. The fair value of an equity security that is an investment in a mutual fund or in a structure similar to a mutual fund (that is, a limited partnership or a venture capital entity) is readily determinable if the fair value per share (unit) is determined and published and is the basis for current transactions. Page 110

8 Just to be clear. NAV as a Practical Expedient Applies only to an investment that meets both of the following criteria: a. The investment does NOT have a readily determinable fair value b. The investment is in an investment company within the scope of 946 or is an investment in a real estate fund for which it is industry practice to measure investment assets at fair value on a recurring basis and to issue financial statements that are consistent with the measurement principles in Topic 946 Page 111

9 ASU , Plan Accounting FASB issued a three-part ASU to simplify financial reporting for benefit plans Part I: Fully Benefit-Responsive Investment Contracts Part II: Plan Investment Disclosures Part III: Measurement Date Practical Expedient Developed by FASB Emerging Issues Task Force (EITF) Responded to advocacy efforts by the AICPA s Employee Benefit Plans Expert Panel Identified the issues affecting a large number of plans with the goal of completing a project within a short period of time Effective: fiscal years beginning after December 15, 2015 Early application is permitted Plans can early adopt any of the ASU s three parts without early adopting the other parts Page 112

10 Part I: Fully Benefit-Responsive Investment Contracts The criteria for benefit responsiveness has been established by FASB, and all five of the following requirements must be met for an investment to be considered benefit responsive: The contract is between the plan and the issuer and cannot be sold or assigned without consent of the issuer. The contract issuer must be obligated to either repay principal and interest or provide prospective crediting rate adjustments with an assurance that the crediting rate will not be less than zero. The contract requires all participant-initiated transactions to occur at contract value (without any conditions, limits, or restrictions). An event that limits the plan s ability to transact with the issuer and with participants at contract value must be unlikely to occur. The plan must allow participants reasonable access to their funds. Page 113

11 Part I: Fully Benefit-Responsive Investment Contracts Affects defined contribution pension and health and welfare plans Definition of a fully benefit-responsive investment contract (FBRIC) in master glossary did not change Clarifies that contract value is the relevant measure for FBRICs because that is the amount participants would receive in a transaction Eliminates requirements to measure fair value and present related fair value measurement disclosures (no more SOP ) Responds to concerns about the cost and effort required to measure the fair value of FBRICs when fair value is not the relevant measure Page 114

12 Part I: Fully Benefit-Responsive Investment Contracts Instead, plans will present FBRICs at contract value in the statement of net assets available for benefits, either as Investments at contract value Fully benefit-responsive investment contracts at contract value No longer need to categorize in the fair value hierarchy Reduces disclosures related to interest crediting rate and average yield disclosures Page 115

13 Part I: Fully Benefit-Responsive Investment Contracts Instead, plans will present FBRICs at contract value in the statement of net assets available for benefits, either as Investments at contract value Fully benefit-responsive investment contracts at contract value Investment contracts that do not meet the definition of a FBRIC continue to be presented at fair value Apply new guidance retrospectively Page 116

14 A Reminder: Stable Value Type Investments in Defined Contribution (DC) Plans Most 401(k) plans have as an investment option (rather than offering a money market fund) Often comprises a significant proportion of the investment portfolio Page 117

15 Stable Value Investments 3 Types Traditional Guaranteed Investment Contracts (GICs) Contract with bank or insurance company Guarantees a specified rate of return Synthetic GICs Plan owns underlying assets Insurance company or bank issues a wrapper contract to simulate performance of GIC Stable Value Funds: common/collective trust funds Page 118

16 Illustrative Statements of Net Assets Available for Benefits: FBRICs Prior to Adoption of ASU (Part I) Statements of Net Assets Available for Benefits December 31, 20X1 and 20X0 (in thousands) 20X1 20X0 Assets: Investments at fair value $ 740, ,020 Notes receivable from participants 9,810 7,230 Net assets reflecting investments at fair value 750, ,250 Adjustment from fair value to contract value for fully benefitresponsive investment contracts (2,861) (5,210) Net assets available for benefits $ 747, ,040 Page 119

17 Illustrative Statements of Net Assets Available for Benefits: Traditional Investment Contract Marked-up for Adoption of ASU (Part I) Statements of Net Assets Available for Benefits December 31, 20X1 and 20X0 (in thousands) Assets: 20X1 20X0 Investments at fair value $ 721,098740, ,208612,020 Fully benefit-responsive investment contracts at contract value 16,491 17,602 Notes receivable from participants 9,810 7,230 Net assets reflecting investments at fair value 750, ,250 Adjustment from fair value to contract value for fully benefitresponsive investment contracts (2,861) (5,210) Net assets available for benefits $ 747, ,040 Page 120

18 Stable Value Investments 3 Types Traditional Guaranteed Investment Contracts (GICs) Contract with bank or insurance company Guarantees a specified rate of return Synthetic GICs Plan owns underlying assets Insurance company or bank issues a wrapper contract to simulate performance of GIC Stable Value Funds: Common/ Collective Trust Funds Page 121 FBRICs Technically not a FBRIC

19 Stable Value Common or Collective Trusts (CCTs) or Similar Investment Funds Guidance clarifies that indirect investments in FBRICs through investment companies (e.g., stable value CCTs) are not in the scope of the FBRIC guidance Plans should report these investments at fair value These funds typically qualify for measuring fair value using the net asset value (NAV) practical expedient These funds calculate NAV per share (or its equivalent) in a manner consistent with the measurement principles of ASC 946 Page 122

20 Stable Value Common or Collective Trusts (CCTs) or Similar Investment Funds Guidance clarifies that indirect investments in FBRICs through investment companies (e.g., stable value CCTs) are not in the scope of the FBRIC guidance As required by ASC 946, the NAV calculated by the fund is based on net assets which includes FBRICs at contract value This NAV represents the plan s fair value since this is the NAV at which the plan transacts with the fund The amount previously presented as contract value is now presented as fair value This does not change total net assets available for benefits The investments are now accounted for consistent with other CCTs or similar investment funds and are presented with investments at fair value Page 123

21 Illustrative Statements of Net Assets Available for Benefits: CCT - Stable Value Fund Mark-up for Adoption of ASU (Part I) Statements of Net Assets Available for Benefits December 31, 20X1 and 20X0 (in thousands) Assets: 20X1 20X0 Investments at fair value $ 737,589740, ,810612,020 Notes receivable from participants 9,810 7,230 Net assets reflecting investments at fair value 750, ,250 Adjustment from fair value to contract value for fully benefitresponsive investment contracts (2,861) (5,210) Net assets available for benefits $ 747, ,040 Page 124

22 To table or not to table Hierarchy Table Considerations Investments presented at contract value (FBRICs) are not included in the hierarchy table Underlying securities of a synthetic investment contract are not included in the hierarchy table Indirect Investment in FBRICs: A. Readily determinable fair value are included in the hierarchy table B. NAV as practical expedient are not included in the hierarchy table with adoption ASU Page 125

23 Assets at Fair Value as of December 31, 20X0 Level 1 Level 2 Level 3 Total Mutual funds $3,650,000 $3,650,000 Common stocks 870, ,000 Corporate bonds , ,000 Stable Value Fund I 120, ,000 GIC Total assets at fair value 4,520, ,000 $4,895,000 SVF II measured at NAV 2,100,000 Investments at fair value $4,520,000 $345,000 $6,995,000 Page 126

24 Part II: Plan Investment Disclosures Affects all types of plans Simplifies the level of disaggregation for investments measured using fair value Disaggregate by general type of investment (e.g., common stocks, corporate bonds, mutual funds) Plans are exempt from the requirements of ASC B to disaggregate assets by class (e.g., nature, characteristics, risks) Disclosure of fair value information required by ASC 820 shall be provided by general type rather than class (e.g., valuation techniques, inputs, level 3 reconciliation) Page 127

25 Part II: Plan Investment Disclosures Simplifies the level of disaggregation for investments measured using fair value Self-directed brokerage accounts are one general type Applies to investments held in a master trust Provides consistency with the level of disaggregation provided by most trustees, custodians and insurance Page 128

26 Part II: Plan Investment Disclosures Disclosure simplifications No longer required: the significant investment strategies for an investment in a fund that files an annual report on Form 5500 as a direct filing entity (DFE) when the plan measures that investment using the NAV practical expedient Eliminates the requirement to disclose the net appreciation or depreciation in fair value of investments by general type Instead, plans only need to disclose this amount in the aggregate Plans are no longer required to disclose individual investments with a value equal to or greater than 5% of net assets available for benefits Applies to investments held in a master trust ASU is to be applied retrospectively Page 129

27 Part III: Measurement Date Practical Expedient Simplifies accounting for a plan with a fiscal year end (FYE) that doesn t coincide with a calendar month end Added to the project as a result of a similar practical expedient that the FASB recently issued for employers with FYEs that don t end at the end of a calendar month (ASU ) Allows a plan to measure its investments and investment-related accounts using the month end closest to its FYE (i.e., an alternative measurement date) Disclose as an accounting policy Disclose financial effects of contributions, distributions and/or significant events that occur between the alternative measurement date and the plan s fiscal year end Apply consistently year to year ASU to be applied prospectively Page 130

28 ASU , Plan Accounting: Resources The next published version of the AICPA Guide (Spring 2016) will be updated to reflect the new standard Archived August 26, 2015 webinar, Applying FASB's New Employee Benefit Plans Reporting Simplification Rules (ASU ), is on the Center website under Past Events vents/pages/cpeevents.aspx December 2015 AICPA conference: EBP Accounting, Auditing, Regulatory & Reporting Update (session #3) on ASU has expanded examples vents/pages/aicpaebpconference-december2015.aspx Page 131

29 Communications with Those Charged with Governance AU-C If the auditor expects to include an explanatory paragraph ( emphasis-of-matter in AICPA terminology) or other-matter paragraph in the auditor s report, the auditor should communicate with those charged with governance regarding this expectation and the proposed wording of this paragraph Page 132

30 Other Considerations Change in Auditor in Year of Adoption Who will take responsibility for retrospectively adjusting the financial statement Page 133

31 PCAOB AS No. 18, Related Parties Effective for audits of financial statements for fiscal years beginning on or after December 15, 2014 The objective of the auditor is to obtain sufficient appropriate audit evidence to determine whether related parties and relationships and transactions with related parties have been properly identified, accounted for and disclosed in the financial statements Communications with the Audit Committee Page 134

32 PCAOB AS No. 18, Related Parties Enhanced scrutiny in the risk assessment process, including consideration of fraud Make additional inquiries of management, others and audit committee Understand and evaluate management s process and related controls, including evaluating design and implementation and, for integrated audits, testing of operating effectiveness Examine the entity s documentation of policies and procedures for authorization of related party transactions Perform additional procedures to determine whether any exceptions to management's policies and procedures were granted, evaluate financial capability of related parties and perform other necessary procedures Evaluate management s identification of related parties and related party transactions, including testing completeness and accuracy of management s list Scalable audit responses, including enhanced basic procedures and additional procedures required for significant risks and instances where previously undisclosed related parties are identified Page 135

33 SSARS No. 21 Statements on Standards for Accounting and Review Services Issued October 2014 Effective for periods ending on or after December 15, Early implementation is permitted Comprises four sections Section 60, General Principles for Engagements Performed in Accordance with SSARS Section 70, Preparation of Financial Statements Section 80, Compilation Engagements Section 90, Review of Financial Statements Page 136

34 SSARS No. 21 Section 70 applies when the accountant is engaged to prepare financial statements but is not engaged to perform an audit, review or a compilation on those statements Requires a legend on each page stating no assurance is provided Requires an engagement letter Does not require the accountant to be independent Page 137

35 REMINDERS FOR THE EBP SEASON Page 138

36 Reminders for 2017 (2016 Plan Year Filings) PCAOB standards SEC Due 180 days after year end DOL Generally accepted auditing standards Due 7 months after year end Do not file PCAOB auditor s report with the Form 5500 Preparing the financial statements may violate auditor s independence Auditors should not provide typing and word processing services nor financial statement templates that are not publicly available Remarks were made at the PCAOB Forum on Auditing Smaller Broker-Dealers (May 28, 2014) Page 139

37 PCAOB AS 17 Auditing Supplemental Information Accompanying Audited Financial Statements Effective for audit procedures and reports on supplemental information that accompanies financial statements for fiscal years ending on or after June 1, 2014 Provides audit procedures on supplemental information Requires representations from management Example auditor s report The [identify supplemental information] has been subjected to audit procedures performed in conjunction with the audit of [Company's] financial statements. The [supplemental information] is the responsibility of the Company's management. Our audit procedures included determining whether the [supplemental information] reconciles to the financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the [supplemental information]. In forming our opinion on the [supplemental information], we evaluated whether the [supplemental information], including its form and content, is presented in conformity with [specify the relevant regulatory requirement or other criteria, if any]. In our opinion, the [identify supplemental information] is fairly stated, in all material respects, in relation to the financial statements as a whole. Page 140

38 Statement on Auditing Standard 128, Using the Work of Internal Auditors (AU-C 610) Issued February 2014 Effective for Financial Statements ending on or after December 15, 2014 SAS No. 128 addresses the external auditor s responsibilities if using the work of internal auditors. Including (a) using the work of the internal audit function in obtaining audit evidence and (b) using internal auditors to provide direct assistance under the direction, supervision, and review of the external auditor. Page 141

39 Statement on Auditing Standard 128, Using the Work of Internal Auditors (AU-C 610) SAS 128 (AICPA AU-C ) introduced the following new requirement related to using internal auditors to provide direct assistance: Prior to using internal auditors to provide direct assistance, the external auditor should obtain written acknowledgment from management or the audit committee, as appropriate, that internal auditors providing direct assistance to the external auditor will be allowed to follow the external auditor s instructions, and that the entity will not intervene in the work the internal auditor performs for the external auditor. Page 142

40 Changes to the Determination Letter Program IRS Notice Effective 1/1/17, the IRS will eliminate the staggered 5-year remedial amendment cycle (Cycle A filers have until 1/31/17 to file a final submission) for individually designed plans (IDP) IRS will no longer accept determination letter applications other than for: Initial plan qualification Plan termination (Form 5310) IRS makes a special exception IRS will publish a Required Amendment List annually (1 October of each year) An IDP must be amended to retain its qualified plan status for each item on the list by the end of the 2nd calendar year following the year the list is published Discretionary amendments are required by the end of the plan year in which the amendment is operationally put into effect Eliminating the expiration dates on determination letters Extended the adoption period for certain pre-approved defined contribution plans (April 30, 2017, instead of April 30, 2016) Page 143

41 Mortality Improvement Scales The Society of Actuaries' (SOA s) Retirement Plans Experience Committee (RPEC) has released the final report of the Mortality Improvement Scale MP-2014 (MP-2014) in October 2014, called the RP-2014 tables SOA issued MP-2016 improvement scale on October 20, 2016 The IRS issued Notice , Updated Static Mortality Tables for Defined Benefit Pension Plans for 2017, which provides updated static mortality tables to be used for defined benefit pension plans under IRC 430(h)(3)(A) and ERISA 303(h)(3)(A) for purposes of calculating the funding target and other items for valuation dates occurring during calendar year The Pension Benefit Guaranty Corporation (PBGC) has issued the ERISA Section 4044 Mortality Table for 2017 Valuation Dates, which is used to determine the present value of annuities in involuntary terminations and distress terminations of single employer plans Separately, the Treasury Department and IRS have issued proposed regulations prescribing mortality tables to be used by most defined benefit pension plans for plan years beginning on or after January 1, 2018 to calculate the present value of a stream of expected future benefit payments for determining the minimum funding requirements and the determination of lump sum values. Page 144

42 WHAT S ON THE HORIZON FROM THE REGULATORS Page 145

43 Accounting and Auditing Update (Relevant to 11-Ks) On the horizon PCAOB transparency rules New Master Trust Reporting Requirements Cyber Security Increasing Transparency of the EBP Audit Report Page 146

44 New PCAOB Transparency Rules Subject to approval by the SEC, on Dec 15, 2015, the PCAOB approved new rules that require audit firms to disclose the name of the engagement partner and information about certain other audit participants on a new PCAOB Form AP, Auditor Reporting of Certain Audit Participants (PCAOB Release No ). Will affect SEC filings (including 11-K) for auditor s reports issued on or after Jan 31, 2017 (or 3 months after SEC approval, whichever is later). Page 147

45 New Master Trust Reporting Requirements Exposure draft issued July 28, 2016 Highlights on Emerging Issues Task Force (EITF) decisions: Single line reporting of plan s interest in MT on face of plan s financial statements Disclose MT investments by general type and other assets/other liabilities Disclose plan s proportionate interest in MT investments by general type and other assets/other liabilities No requirement will be added to US GAAP for look through disclosures of the underlying investments held by a MT Present 401(h) disclosures in DB plan only (reference name of DB plan in H&W plan financial statements) ASU final version is expected in early 2017 Effective for fiscal years beginning after December 15, 2018 (early adoption permitted) Retrospective application required Page 148

46 Increasing Transparency of the EBP Audit Report Auditor s report project Key Audit Matters (KAMs) as determined by the auditor in a new section of the report New elements added related to auditor independence, auditor tenure, and the auditor s responsibility for and results of auditor s evaluation of other information outside the financial statements Enhanced language re: auditor s responsibility for fraud and the notes to the financial statements Provide information on compliance and internal control material weaknesses and significant deficiencies Identify audit engagement partner and peer reviewer firm New report on specific plan provisions relating to the financial statements Page 149

47 Questions? Speaker Contact Information Name: Eric Ernest, CPA Tel: , Page 150

48 Thank You for Participating! Page 151