MHM Executive Education Series: Employee Benefit Plan Accounting Update. November 29, 2012

Transcription

1 MHM Executive Education Series: Employee Benefit Plan Accounting Update November 29, 2012

2 Agenda Employee benefit plan (EBP) basics Summary of fair value issues: fair values, NAV practical expedient, hard-to-value level 3 EBP Regulatory Issues: New service provider fee disclosure requirements at the plan level and individual participant level Other DOL/EBSA initiatives including proposed expanded definition of a fiduciary Areas of risk in employee benefit plans and common problems Auditing issues: AICPA Clarity Standards, EBP A&A Guide Overhaul 2

3 Employee Benefit Plan (EBP) Basics 3

4 Employee Benefit Plans (EBPs) Unique Accounting and Reporting Requirements GAAP financial statements ( large plans ) DOL reporting requirements IRS supplemental schedule requirements Regulated and Subject to Increased Scrutiny DOL enforcement initiatives EBPs and EBP auditors subject to DOL inspections EBP auditors subject to peer review requirements 4

5 Types of ERISA Plans Health and welfare benefit plans Defined benefit plans Defined contribution plans: 401(k) profit sharing ESOP 403(b) 5

6 EBP Audit Requirements: The requirement for an audit is dictated by ERISA regulations and based on the number of eligible participants at the beginning of the year, usually 100. Note: The beginning of the year participant number may not be the same number as the end of the year for the previous year if the plan allows for a January entry date. 80/120 Rule plans with participants at the beginning of the plan year may file the same Form 5500 as prior year (large plan-small plan) 6

7 Plan Audit Decision Tree 7

8 Types of EBP audits Limited Scope Full Scope 8

9 Limited Scope Plan assets in custody of a qualified institution Bank Insurance company Trust company 9

10 Limited Scope Qualified institution certifies: Accuracy of investment valuation (B/S date) Accuracy of investment activity (P&L activity) Complete and accurate 10

11 Limited Scope Accountants permitted to: Omit substantially all audit procedures on: Investment balances Investment earnings/losses Perform audit procedures on all other areas Disclaim an opinion on the plan s financial statements 11

12 Limited Scope If the certification is incomplete or unsatisfactory, full scope audit procedures must be extended to the investment securities. Further inquiry may be necessary in a DOL limited scope audit when: Cost equals fair value for investments. Fair value for certain investments have not changed for several years. Description of investments on the Schedule of Assets is inconsistent with other information and/or footnote disclosures. 12

13 Limited Scope Investments not included in the certification (must be audited as a full scope audit) Real estate, leases, mortgages, self-directed brokerage accounts and/or participant loans are often not covered by a certification by a qualified trustee, custodian or insurance company. 13

14 Full Scope No investment certification available Client requests full scope audit to be performed 11-K filer Must choose full or limited scope opinion-split reporting is not permitted 14

15 Full Scope Auditor is required to perform procedures on investments by: Confirming existence directly with holder of assets (may have multiple custodians) Year-end market value testing Purchases and sales testing Investment income testing Interest and dividends Realized gains and losses Unrealized gains and losses 15

16 16

17 EBP Internal Controls Service organizations (SOC 1, formerly SAS 70) Outsourced service providers Plan sponsor controls Parties involved in handling plan transactions Level of oversight at the plan sponsor 17

18 SSAE 16/SOC 1 Reports General overview Helps plan auditors understand and evaluate controls at service provider organizations Evaluate whether substantive testing can be reduced, but not eliminated Often referred to as a service auditors report Reports on the processing of transactions performed by service organizations; 18

19 SSAE 16/SOC 1 Reports Limited Scope Auditor still has responsibility to read the SSAE 16/SOC 1 report for items such as processing of participant level transactions. Full Scope Auditor should obtain and read the entire SSAE 16/SOC 1 report and consider both the report and the evidence provided by the tests of operating effectiveness (Type II) and relate them to the assertions in the user organization s financial statements. 19

20 SSAE 16/SOC 1 Reports Types of SSAE 16/SOC 1 Reports Type II Reports on controls placed in operation and tests of operating effectiveness (for a period of time, not less than 6 months) Differentiating factor: Includes Tests of Operating Effectiveness Identifies instances of non-compliance 20

21 SSAE 16/SOC 1 Reports Reviewing SSAE 16/SOC 1s Period of coverage should cover adequate time frame in relation to audit year end Subservice organizations evaluate need to include Key control objectives should cover all relevant aspects of processing transactions Test procedures evaluate for appropriateness Exceptions follow up/document impact User Control Considerations (UCCs) determine if your client is adequately addressing 21

22 Summary of Fair Value Issues: Fair Value, NAV practical expedient, Hard-to-Value level III 22

23 PCAOB inspection findings Fair Value PCAOB released several public documents citing fair value auditing deficiencies noted in their inspections: Dec 6, 2011, PCAOB Staff Audit Alert No.9 Sept 29, 2010, Rule 4010 Report On Observations Audit Risk Areas Affected by the Economic Crisis risis.pdf PCAOB Staff Audit Alerts Nos. 2, 3,

24 Plan Financial Statements Adoption Timeline - Fair Value Measurements FAS 35 Plan investments valued at fair value FAS 157 (adopt 2008) FAS 157 (adopt 2008) - - Apply new FV definition - - Hierarchy disclosures FSP FAS (adopt 2009) Disaggregate hierarchy disclosures by nature and risk category for equity and debt securities ASU NAV (adopt 2009) - Use of NAV as a practical expedient for valuation - Additional disclosures and hierarchy ASU (adopt 2010) - Disaggregate hierarchy disclosures by nature and risk class for all FV assets and liabilities - Disclose transfers between L1 and L2 - Other new disclosures ASU (adopt 2011) Expanded disclosure of L3 activity ASU (adopt 2012) - Description of valuation processes for L3 - Unobservable inputs table (quantitative) for L3 - Public entities to disclose all L1 and L2 transfers - Public entities to provide narrative description of sensitivity of FV to changes in unobservable inputs (qualitative)

25 Divergence in Practice in Fair Value Measurement Disclosures Common Issues/Challenges Failure to breakout investments by category or class Changes to leveling as a result of errors vs. changes in observability, etc. When NAV used as a practical expedient, missing required additional disclosures (strategies, restrictions, unfunded commitments) Issues with fair value leveling - classification of debt securities 25

26 Divergence in Practice in Fair Value Measurement Disclosures Common Issues/Challenges Sufficiency of information to permit a reconciliation of the fair value disclosures presented by class to the line items in the statement of net assets Errors in hierarchy levels resulting from not understanding the observability of the inputs used to measure fair value or not using the guidance in ASC 820 when fair value is measured using NAV as a practical expedient Descriptions of the valuation techniques used and the inputs used in determining the fair values of each class of investments 26

27 Fair Value Hierarchy by Nature and Risk Common Stock: Energy Healthcare Consumer Goods Open-Ended Mutual Funds: US Large Cap Equity International Stock Fixed Income Balanced Asset-Backed Securities: Residential Mortgage-Backed Securities Commercial Mortgage-Backed Securities Other Asset-Backed Securities Level 1 Level 2 Level 3 27

28 The following table sets forth a summary of the Plan s investments reported at NAV, (ASU ) (ASC A) Fair value Unfunded commitment Redemption Frequency Other redemption restrictions Redemption notice period STIF fund (a) $xxx immediate none Equity index pooled separate accounts (b) $xxx quarterly 60 days Venture Capital Funds (c) $xxx $xxx,xxx Semiannually No redemptions in initial 3 year holding period 120 days (a) (b) (c) Short-term investment fund strategies seek to invest in in high-quality, short-term securities. Equity index fund strategies seek to replicate the movements of an index of a specific financial market, such as the Standards & Poor s (S&P) 500 Index, regardless of market conditions. Venture capital funds invest in companies at their start-up phase primarily focused on the technology, telecommunications, industrial and life sciences sectors. 28

29 Fair Value Financial Instruments Some typical classifications within the hierarchy: Investment Level Traded equities Level 1 US T-Bills Level 1/2 US Treasuries Level 2 Municipal securities Level 2 US Agency securities Level 2 Private (hedge) funds Level 2/3 Private company equities Level 3 Private company debt Level 3 Funds - Net Asset Value (NAV) Level 2/3 Certificates of deposit Level 2 Mutual Funds Level 1/2 29

30 ASU : Fair Value Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS Effective for annual periods beginning after December 15, 2011 Prospective application Objective to converge U.S. GAAP and IFRS in this area Expanded Level 3 fair value measurement disclosures! Quantitative information about the unobservable inputs used in level 3 fair value measurements Information about the sensitivity of Level 3 fair value measurements 30

31 Expanded FV Disclosures - Issues? Calendar 2012 Plan Financial Statements ASU requires new disclosures with respect to how fair value is determined for level 3 securities. Private equity securities Other non-marketable securities These changes may reduce the ability to rely on the limited scope certification Will the trustee/custodian provide information and certify the required disclosures? If not, how will information be obtained? 31

32 Example 1: Quantifying Unobservable Inputs on Level 3 Assets (Valuation Techniques and Inputs) (Pending Content FASB ASC )

33 Example 1: Quantifying Unobservable Inputs on Level 3 Assets for a private company ESOP (Valuation Techniques and Inputs) Description Fair Value Valuation Technique(s) Sponsor Company Common Stock Unobservable Inputs $92,320,000 Discounted Cash Weighted average cost of capital Market Comparable Companies Long-term revenue growth rate Long-term pretax operating margin Discount for lack of marketability Rate Applied 11.1% 4.2% 10.3% 17% EBITDA multiple 11.3 Revenue multiple 2.0 Discount for lack of marketability 27% 33

34 Example 2: Additional Narratives to Help Evaluate Quantitative Disclosures For example, for RMBS, a plan might disclose the following: 1. The types of underlying loans (for example, prime loans or subprime loans) 2. Collateral 3. Guarantees or other credit enhancements 4. Seniority level of the tranches of securities 5. The year of issue 6. The weighted-average coupon rate of the underlying loans and the securities 7. The weighted-average maturity of the underlying loans and the securities 8. The geographical concentration of the underlying loans 9. Information about the credit ratings of the securities 34

35 Example 3: Disclosure of Plan s Process around Level 3 Assets a. Valuation policies and procedures: 1. Description 2. Who determines the policies/procedures 3. The internal reporting procedures in place (for example: whether and, if so, how pricing, risk management, or plan administrators discuss and assess the fair value measurements). b. The frequency and methods for calibration, back testing and other testing procedures of pricing models. c. The process for analyzing changes in fair value measurements from period to period. d. How the plan determined that third-party information, such as broker quotes or pricing services, used in the fair value measurement was developed in accordance with the rule. e. The method used to develop and substantiate the unobservable inputs used in a fair value measurement. 35

36 Example 3: Disclosure of Entity s Process around Level 3 Assets Private Company ESOP Fact Pattern: The fair value of the sponsor company common stock held by the plan is valued at fair value based upon an independent appraisal. This appraisal was based upon a combination of the market and income valuation techniques consistent with prior years. Plan management has concluded that market participants would also recognize a discount for lack of marketability. Disclosures: The valuation process involves plan management s selection of an independent appraiser under contract for a term of 3 years with the right to cancel such contract at any time. Plan management accumulates the data for the appraiser from the audited financial statements of the Company. The appraiser prepares a preliminary report which plan management, along with the ESOP trustee, reviews in detail, discusses and approves. The results of this process are documented in minutes of the plan fiduciary. 36

37 Example 3: Disclosure of Entity s Process around Level 3 Assets Private Company ESOP Disclosures The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in different fair value measurements at the reporting date. 37

38 Example 4: Sensitivity Analysis for Level 3 Assets (Public only) Narrative explaining the sensitivity of the fair value measurement to changes in significant unobservable inputs and the relationship between those unobservable inputs. See example for RMBS: The significant unobservable inputs used in the fair value measurement of the reporting entity s residential mortgage-backed securities are prepayment rates, probability of default, and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates. 38

39 Fair Value - ASU Nonpublic entities are exempt from certain disclosure requirements: A qualitative discussion of the sensitivity of the FV to changes in unobservable inputs and the interrelationships between those inputs. Transfers between Levels 1 and 2 of the FV hierarchy Disclosures applicable to fair value measurements required for a plan when FV is disclosed but not recognized in the financial statements 39

40 Fair Value - ASU Nonpublic entity, as defined by the codification, is any entity that does not meet any of the following conditions: a.its debt or equity securities trade in a public market either on a stock exchange b.it is a conduit bond obligor for conduit debt securities that are traded in a public market c. It files with a regulatory agency in preparation for the sale of any class of debt or equity securities in a public market. d.it is required to file or furnish financial statements with the Securities and Exchange Commission. e.it is controlled by an entity covered by criteria (a) through (d) 40

41 Fair Value Measurements and Disclosures Final Thoughts Plan management is responsible for valuation of investments and presenting the f/s in accordance with GAAP Requires sufficient understanding of the nature of the plan s investments May use outside service provider or pricing service Management/auditor must obtain an understanding of the plan s process for determining Fair value measurements Fair value disclosures, including fair value hierarchy levels Limited scope audit Certification does not change management s responsibilities 41

42 EBP Regulatory Issues: New service provider fee disclosure requirements at the plan level and individual participant level Other DOL/EBSA initiatives including proposed expanded definition of a fiduciary 42

43 Informed Decision Making and Excessive Fees The Three Legged Stool Disclosures by plans to participants of certain plan and investment-related information (ERISA 404) Disclosures to plan fiduciaries to assist in assessing reasonableness of compensation and potential conflicts of interest (ERISA 408(b)(2)) Disclosures to public and government on electronically filed Form 5500 Annual Report including indirect compensation Form 5500, Schedule C 43

44 Fee & Expense Disclosures Plan to Participant (ERISA 404) Effective Annual statements August 1, 2012 Quarterly statements Nov.14, 2012 Requires fiduciaries to: Give workers quarterly statements of plan fees & expenses deducted from their accounts Give workers core information about investments available under the plan Use standardized methodologies when calculating and disclosing expense and return information 44

45 Fee & Expense Disclosures Plan to Participant (ERISA 404) (continued) Centerpiece a requirement to provide investmentrelated advice in a format that permits workers to comparison shop among investment options DOL has developed a model chart for complying with this requirement The reg., model chart, and fact sheet may be viewed at 45

46 408(b)(2) Disclosures Applies only to defined contribution and defined benefit plans Does not apply to: SEP s or SIMPLE plans Individual IRA s Health and Welfare Plans Non-ERISA 403(b) Plans Church plans Certain frozen 403(b) plans 46

47 Fee & Expense Disclosures Service Providers to Plans (ERISA 408(b)(2)) Brings new transparency to the process of selecting and monitoring of plan service providers Establishes comprehensive disclosures from service providers concerning services, fees, and potential conflicts of interest Applies to plan contracts or arrangements for services in existence on or after 7/1/12, extended from 4/1/12, 7/16/11 and 1/1/12 Applies to contracts $1,000 47

48 408(b)(2) Disclosure Rules Service Providers Covered Persons who provide services as an ERISA fiduciary or under the Investment Advisors Act of Persons who provide certain recordkeeping or brokerage services and make available investment options to be offered by the plan Persons who receive or may receive indirect compensation for the following services: accounting, auditing, actuarial, appraisal, banking, consulting, custodial, insurance, investment advisory (plan or participants), legal, recordkeeping, brokerage, TPA, or valuation 48

49 Clarification of the Meaning of Reasonable Arrangement in 408(b)(2) Disclosure Rules All service agreements be in writing (no prescribed format) Impose new service provider disclosure obligations before or at the time the plan enters a service agreement 49

50 408(b)(2) Required Disclosures Service providers are required to disclose (before the parties enter into an agreement for services): All services to be provided under the agreement The compensation or fees to be received for each service The manner of receipt of compensation or fees Information about conflicts of interest. Establishes disclosure burden on service provider integrated with 2009 Form 5500 Schedule C Reporting 50

51 What Happens if 408(b)(2) Is Not Followed? Plan fiduciary should make a written request for the disclosure If service provider fails to provide disclosure within 90 days of written request, the plan fiduciary is obligated to notify the Department of Labor. The plan fiduciary is obligated to terminate the contract as expeditiously as possible. 51

52 Consequences of Non Disclosure = Prohibited Transaction Contract or arrangement will not be reasonable and violates 408(b)(2) Responsible Plan Fiduciary violates 406(a)(1)(c) by participating in the prohibited transaction Service provider is a disqualified person under IRS prohibited transaction rules and is subject to excise taxes under Code section 4975 Should be reported on Schedule G of Form

53 EBP auditor s inquiries will most likely address: Which EBPs are subject to the service provider fee disclosures requirements? Who are the service providers from whom disclosures must be obtained? Whether the plan sponsor has a process to ensure all disclosures are received and reviewed timely? Whether participant level fee disclosures are made in a timely manner? More guidance is expected from the DOL. 53

54 Other DOL/EBSA Initiatives 54

55 Proposed Regulation Definition of Fiduciary The DOL proposed new regulations in October 2010 to update and expand the definition of fiduciary for purposes of ERISA. The determination of who is a fiduciary under ERISA has been ascertained by applying a five-part test under DOL regulations in place for more than 30 years. The retirement plan industry and financial investment community have changed dramatically due to the rise of the 401(k) plan and the rapid growth of IRAs. 55

56 Proposed Regulation Definition of Fiduciary The financial investment community, retirement plan industry and members of Congress argued that the new definition was too ambiguous and broad. The EBSA announced in September 2011 that it would withdraw the proposed regulations and re-propose them to address these concerns The re-proposed regulations may include some special exemptions from the prohibited transaction rules where it is obvious that the participant would benefit from such exemption. 56

57 Investment Advice Final rule published in the Federal Register October 25, 2011 Designed to improve participant access to fiduciary investment advice Permits a fiduciary investment adviser who receives additional fees from investment providers if certain conditions are met Use of a computer model that is certified as unbiased by an independent expert or Through an adviser compensated on a level-fee basis, meaning that the fees do not vary based on investments selected May be viewed at 57

58 DOL/EBSA s Current Focus on EBP Audits: High Risk Audit Engagements Multi-employer Plans Defined Benefit Pension Plans Defined Contribution Pension Plans Single Employer Defined Benefit Pension Plans Health and Welfare Plans ESOPs 403(b) Plans 58

59 DOL/EBSA s Current Focus on EBP Audits: High Risk Audit Engagements The DOL is increasingly concerned about any plan with more than 5% of hard-to-value assets and these plans may be subject to further review by the DOL. 59

60 EBSA Audit Quality Initiatives CPA Firm Inspection Program Mini-Reviews Workpaper reviews 60

61 What does the DOL/EBSA do about deficient EBP audits? Inquiry letter to plan administrator Review of audit workpapers Statement of Preliminary Findings Rejection of plan filing Assessment of civil penalties Referral to AICPA/state regulators 61

62 Areas of risk in employee benefit plans and common problems 62

63 Types of Plan Errors Operational Errors Plan Document Errors Demographic Failure Employer Eligibility Failure Fiduciary Errors 63

64 Operational Failures Failure to administer the Plan in accordance with its terms. Can usually be corrected using the IRS Employee Plans Compliance Resolution System. 64

65 Common Operational Failures Eligibility (inclusion and exclusion) Vesting (service year hours/time, period) Contributions (employee and employer) Nondiscrimination Testing Distributions (qualifications met, vesting) Plan Loans (terms/administration, repayment) 65

66 Plan Document Errors Failure to timely amend for changes in the law. Plan provision that on its face violates Section 401(a) or Section 403(a). 66

67 Demographic Failure Failure to satisfy the requirements of Sections 401(a)(4), 401(a)(26) or 410(b). Failure is not an operational failure or an employer eligibility failure. 67

68 Employer Eligibility Failure Adoption of a 401(k) plan by an employer that fails to meet the employer eligibility requirements to establish a Section 401(k) plan. Failure is not a plan document, operational or demographic failure. 68

69 Fiduciary Errors Plan Investments Plan Expenses 69

70 Defined Contribution Plans Common Pitfalls Applying new accounting principles through the Accounting Standards Updates (ASU s) Fair value measurement and disclosures (Valuation of investments is incorrect) Untimely remittance of employee contributions Incorrect participant data o DOH, hours worked, compensation, etc. Allocation of contributions and earnings (i.e. wrong %) Incorrect vesting provision applied Using correct definition of Compensation when calculating EE and ER contributions 70

71 Defined Contribution Plans Common Pitfalls Valuation of Investments Participant Data - test the items that actuary uses in calculation (Gender, DOB, DOH, Wages, etc.) Qualifications of Actuary (Document as required by SAS 73) Assumptions used by actuary discount rates Incorrect calculation of benefits Consider independent review of actuarial report Need Form 5500, Schedule SB to agree employer contributions 71

72 Health & Welfare Plans Common Pitfalls Accounting Challenges Value of Assets Qualifications of TPA and actuary Unrecorded liabilities for TPA fees Not as common so may be more difficult to gather info to understand the plan basics Application of recent legislation 72

73 403(b) Plan Audits Prior to 2009, 403(b) plans had limited reporting requirements and were not subject to the audit requirement. Because of this, recordkeeping for these plans was lax. The implementation of the new reporting requirements and the audit requirement applicable to large plans has placed great challenges on sponsors of 403(b) plans. Due to the nature of the assets held in many 403(b) plans (i.e. individual custodial contracts or individual annuity contracts) it can be extremely difficult, if not impossible, to locate and identify all of a plan s assets. Many EBP auditors were in the difficult position of having to disclaim opinions on incomplete financial statements. 73

74 403(b) Plan Audits - A Second Year Look What auditors found More plan assets! Accounts and contracts not reported in prior year but should have been included Plan elected to exclude accounts and contracts this year but included them last year Accounts and contracts excluded last year but no longer met the exclusion test this year (e.g., participant transfers) 74

75 403(b) Plan Audits - A Second Year Look What auditors found, continued Commingling of assets (e.g., ee and er plans) Safe harbor plans merged into ERISA plans Vendors certified accounts and contracts last year but would not certify this year Misunderstanding of excluded accounts and contracts (i.e., auditor did not know to disclaim) Predecessor auditor issued clean limited scope report last year; successor auditor issued disclaimer report this year 75

76 ESOPs An ESOP is a unique form of defined contribution plan. Under the prohibited transaction statutory exemptions, an ESOP has the ability to borrow money and to concentrate plan investments in qualifying employer securities. Frequently these securities are not publicly traded. 76

77 ESOPs DOL Focus on ESOPS Need to appropriately evaluate and review the valuation report prepared by a qualified appraisal firm Release of stock valuation report 77

78 Example 1: Quantifying Unobservable Inputs on Level 3 Assets for a Private Company ESOP (Valuation Techniques and Inputs) Description Fair Value Valuation Technique(s) Sponsor Company Common Stock Unobservable Inputs $92,320,000 Discounted Cash Weighted average cost of capital Market Comparable Companies Long-term revenue growth rate Long-term pretax operating margin Discount for lack of marketability Rate Applied 11.1% 4.2% 10.3% 17% EBITDA multiple 11.3 Revenue multiple 2.0 Discount for lack of marketability 27% 78

79 ASU Fair Value Expanded Level III Investment Disclosures in 2012 Plan administrator in conjunction with fiduciary, valuation advisor and attorney need to start now in thinking about how to draft these footnotes Consideration must be given to the fact that this is public information, i.e. all 5500s including the audited financial statements are PUBLICLY accessible on the DOL s EFAST2 website: n=e1s1 GAAP departure is possible, but Form 5500 requires disclosure of a GAAP departure 79

80 ASU Other Implications for Auditors Limited scope audit Trustee certifies accuracy of financial statements Auditor does not have to audit any investments information CERTIFIED Avoids the issue of the auditor having to agree that valuation is reasonable What about the new footnotes? Can or will the trustee certify to the footnote information? If not, does the auditor have to audit the footnote information? If so, will full scope procedures be required on the company stock? 80

81 Economic Considerations and Trends Terminating defined benefit plans Managed portfolios Becoming more popular with smaller plans Privacy, security and fraud issues Hardship withdrawals Other Credit rating downgrades New/emerging investment products 81

82 Auditing Issues: AICPA Clarity Standards 82

83 Convergence Considerations 83

84 Convergence with ISAs Harmonize, not adopt Most audits performed internationally are of nonpublic entities therefore, ASB and IAASB have a similar focus Avoid unnecessary differences with PCAOB ASB standards more use of should than in ISAs, but fewer than in existing SASs 84

85 Changes to Existing Standards Primary difference relates to group audit standard More specific as to what group engagement partner is responsible for Additional quality control (QC) guidance QC responsibilities for the audit more specifically described Overall QC function remains firm responsibility, but responsibilities are engagement partner s and engagement team s Some changes in audit report to more clearly describe management s responsibility New format to use report headings 85

86 Examples of Effect of Selected Standards Auditor Reports Examples of Impact of Selected Standards Auditor Reports Exposure Drafts Headings and subheadings Management s responsibilities Opinion (Basis for qualified, adverse, or disclaimer) Emphasis of matter Matters appropriately presented or disclosed Other matter To understand audit matters Other auditor reporting responsibilities 86

87 No substantive changes to requirements Audit documentation Auditor s communication with those charged with governance Risk assessment standards External confirmations Analytical procedures Audit sampling Auditing accounting estimates Written representations Subsequent events Consideration of omitted procedures after the report release date 87

88 Changes to be Alert to AU-C 240 Consideration of Fraud in a Financial Statement Audit AU-C 250 Consideration of Laws and Regulations in an Audit of Financial Statements AU-C 500 Audit Evidence AU-C 550 Related Parties AU-C 580 Written Representations AU-C 620 Using the Work of an Auditor s Specialist 88

89 Implementation Timeline Clarity project will greatly affect audits of periods ending on or after December 15, Summary of differences between clarified SASs and existing SASs can be found at: adabledocuments/clarity/clarity_sas_summary_of_differe nces.pdf 89

90 Auditing Issues: AICPA Employee Benefit Plan Audit and Accounting Guide Overhaul 90

91 EBP Guide Overhaul Project Guide last issued over 20 years ago Has not been revised or amended other than for conforming changes Significant changes have occurred Types of retirement plans offered Plan administration Types of investments Numerous changes to the rules and regulations by the DOL, IRS and PBGC ERISA GAAP vs. GAAP GAAP Divergence in practice Lack of consistency 91

92 EBP Guide Overhaul Project Accounting chapters include: Defined contribution retirement plans Defined benefit pension plans Health and welfare plans Investments Illustrative financial statements Guide will include the clarified auditing standards Chapters containing auditing guidance will be reviewed and cleared by the ASB Guide expected to be released after in January

93 What s New All Plan Types Added FinREC recommendations for: Dividends and Distributions reinvested Dividends should be considered investment income and shown separately from changes in fair value Capital gain distributions should be considered either investment income and shown separately from changes in fair value or included as part of the net change in fair value Cash Balances Interest bearing cash should be shown as an investment Since no cash flow statement is required there is no need to classify short term investments as cash equivalents 93

94 What s New All Plan Types, cont d Added FinREC recommendations for: Separate disclosure of employer contributions relating to the correction of operational defects or other nonrecurring items Additional disclosures Benefits paid Other income Other employer contributions Expense offset arrangements 94

95 What s New All Plan Types, cont d Additional disclosures and discussion Transfers of assets to of from other plans Frozen or merged plans enhanced discussion Full or partial terminations Employee Stock Ownership Plans How a leveraged ESOP plan works ESOP financial statements for leveraged ESOPs Income tax expense and plan tax status 95

96 What s New Defined Contribution Plans Added FinREC recommendations for: Excess contributions/corrective contributions Should be netted against contributions received in the statement of changes with additional footnote disclosure Include refund or payment as a payable to participant Contributions receivable Additional guidance added to include the factors that should be reviewed in determining whether a receivable should be recognized and the relationship between employer and employees as compared to a DB plan Participant loans classified as a note receivable with additional disclosures for valuation, interest income, etc. 96

97 What s New Defined Contribution Plans, cont d Added FinREC recommendations for: Forfeitures Added more discuss about forfeitures and use of forfeitures with required disclosures Rollover Contributions Significant rollovers should be shown as a separate line item on the statement of changes in net assets available for benefits Discussion as to when a rollover is really a plan transfer 97

98 What s New Defined Benefit Plans Added FinREC recommendations for Contributions receivable ERISA minimum required contribution be recorded as a contribution receivable and any excess amounts would be considered a non recognized subsequent event unless there was evidence of a formal commitment Funding waivers Expanded guidance on funding waivers and recommended that a receivable be recorded for the minimum contribution that is not received and consider whether an allowance for uncollectible amounts is necessary 98

99 What s New Health & Welfare Plans Added FinREC recommendations for: Contributions receivable A receivable should be recorded equal to the liability for claims IBNR if there is a legal obligation by the employer as of the date of the financial statements to fund the specific amount. (Generally does not exist in single employer plans) Postretirement medical benefit obligations Claims IBNR Disclosure of where retiree IBNR is calculated to ensure that obligation is properly reported, not double counted or omitted entirely. Consider disclosing where it is recorded 99

100 What s New Health & Welfare Plans, cont d Added FinREC recommendations for: Trust arrangements Added guidance that all transactions of the plan whether or not paid out of the trust need to be accounting for in the plan Reporting entity and the combination of plans Added guidance for how to account for a plan when multiple plans are wrapped into one plan for regulatory filing requirements Other receivables rebates from service providers and other subsidies Added criteria on when a plan should record a receivable 100

101 What s New Health & Welfare Plans, cont d Added FinREC recommendations for: Stop-loss arrangements Capturing all activity associated with the plan is most meaningful Stop-loss premiums generally should be recorded as an expense of the plan Refunds recorded as reduction of benefits paid Recognized that this issue is complicated Claims Processor Accounting for liabilities should be on the same basis as for obligations 101

102 What s New Health & Welfare Plans, cont d Added FinREC recommendations for: COBRA postemployment obligations COBRA should be treated as a postemployment obligation and should include IBNR Includes COBRA subsidy information and how to account for such subsidy FSAs, HRAs and HSAs FSAs and HRAs--Amounts available to participants at year end be included in the plans financial statements HSAs disclosure that the arrangement exists but that the associated activity be excluded from the plans fiancial statements as the plan is not obligated to pay benefits 102

103 What s New Health & Welfare Plans, cont d Added FinREC recommendations for: Added two new appendices The annual health care process Examples of health and welfare arrangements 103

104 What s New Investments Added FinREC recommendations for: Master Trust Arrangements Fees and expenses specific to the plan should be recorded in the plan s financials statements Allocated fees and expenses should be included in the master trust financial statements Contributions and distributions should be reported in the plan s financial statements and should be reported in the master trust financial statements as a transfer in or a transfer out Presentation of all master trust activity in the footnotes to the financial statements not just investments and income 104

105 What s New Investments, cont d Added FinREC recommendations for: Master Trust Arrangements Disclosure of the plan s percentage interest in each investment type where the plan has a specific interest and not an undivided interest For undivided interests disclosure of those investments that are greater than 5% of the master trust For specific interests disclosure of those investments that are greater than 5% of the plan s investments Master trust disclosures are not relevant for a H&W plan with a 401(h) account but should be considered 105

106 Auditing Topics Audit areas being enhanced Risk assessment considerations Payroll Receipt of benefit payments Allocations to individual participants Investment and Investment income Claims Distributions and census data Other 106

107 Speaker Biography Hal Hunt, CPA Shareholder Mayer Hoffman McCann P.C Hal leads MHM s Employee Benefit Plan Audit Practice. With over 25 years of diverse experience with employee benefit plan accounting, auditing and compliance issues, he is also a member of the firm s Professional Standards Group as subject matter expert on EBP plan audits, as well as Business Combinations and Leasing. As the National Practice Leader for EBP Audits, Hal is responsible for providing internal training on the subject, along with providing technical support to engagement teams, serving as engagement quality reviewer and developing resource tools for our EBP audit professionals. 107

108 Speaker Biography Mike Loritz, CPA Shareholder Mayer Hoffman McCann P.C Mike has 15 years of public accounting experience with financial and service based companies, including the engineering and construction industry. He is a member of MHM's Professional Standards Group, providing accounting knowledge leadership in the areas of derivative financial instruments, share-based compensation, fair value, leasing, revenue recognition and others. Mike's experience includes over 14 years with a Big Four firm where he was responsible for client service for large and small SEC filers and non-public entities, audit/accounting technical expertise and training instruction and delivery. 108

109 Speaker Biography Chris Wittig, CPA Shareholder Mayer Hoffman McCann P.C Based in the Boca Raton office, Chris serves as the local Attest Practice Leader and the East region Employee Benefit Plan Audits leader. He has in-charge responsibilities for audit engagements including Employee benefit plan, not-for-profit, manufacturing, real estate development and construction, wholesale distribution and general business clients. In his leadership roles, Chris helps set firm-wide policy and teaches EBP audit practices at local offices and national training conferences. 109

110 Speaker Biography Linda Lauer, CPA, CEBS Shareholder Mayer Hoffman McCann P.C Linda leads the Employee Benefit Plan Audit segment for MHM s Memphis office. She is the main contact for benefit plan audit engagements and is responsible for overall coordination and efficient utilization of firm resources. Linda has more than 25 years of experience with international and local accounting firms and employee benefit administration for Fortune 500 companies. She frequently conducts seminars and webinars on plan audits as well as plan administration issues and fiduciary responsibilities. 110

111 Speaker Biography Anthony Hakes, CPA Shareholder Mayer Hoffman McCann P.C Tony is based in our Phoenix office and joined the organization in June He has approximately 15 years of experience with national and international public accounting firms and serves as the Western Region EBP Audit Leader for MHM and is a member of the MHM ERISA Task Force. Through these roles, Tony participates in designing and implementing MHM's audit approach as well as ensuring audit quality for approximately 650 ERISA audit clients firm wide. 111

112 Questions? 112