First Quarter 2014 Accounting, Reporting and Auditing Developments. A&A Updates

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1 First Quarter 2014 Accounting, Reporting and Auditing Developments A&A Updates Issue April 9, 2014

2 Contents Accounting and Financial Reporting Matters... 3 FASB... 3 Accounting Standards Updates...3 Revenue Recognition...5 Leases...5 Accounting for Financial Instruments...5 Insurance Contracts U.S. GAAP Financial Reporting Taxonomy...6 SEC... 6 Dodd-Frank Rulemaking Activity...6 Adoption of Updated EDGAR Filer Manual...7 Proposed Crowdfunding Rules...7 Other...7 Effective Dates Highlights... 8 Assurance Matters PCAOB COSO AICPA Auditing Standards Proposed SSARS Center for Audit Quality Appendix A Matters discussed in previous Quarterly Updates GASB i

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

4 Accounting and Financial Reporting ACCOUNTING AND FINANCIAL REPORTING MATTERS FASB Accounting Standards Updates ASU : Investments Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force) This Update revises the criteria required to elect the measurement and presentation alternative under ASC and simplifies the method of amortization of the investment for entities investing in flowthrough limited liability entities that manage or invest in affordable housing projects qualifying for the lowincome housing tax credit. As a result of the Update, it is expected more entities will meet the required criteria to qualify to present the investment performance net of income tax expense to better represent the economics of the investment (rather than traditional investment accounting under the equity or cost method). If the entity qualifies for the measurement and presentation alternative, they may amortize the initial cost of the investment in proportion to the related tax credits received (the proportional allocation method). The decision to apply the proportional allocation method is an accounting policy election made for all qualifying investments. The initial determination of qualification should be re-evaluated only when there is a change in the nature of the investment or a change in the relationship with the limited liability entity that could result in the required criteria no longer being met. The amendments must be retrospectively applied for all periods presented. For public business entities this Update is effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, For all other entities the Update is effective for annual periods beginning after December 15, 2014, and interim periods within annual reporting periods beginning after December 15, Early adoption is permitted. ASU : Intangibles Goodwill and Other (Topic 350): Accounting for Goodwill (a consensus of the Private Company Council) This is the first of three updates for private companies issued by the Financial Accounting Standards Board (FASB) during the first quarter of This Update provides an alternative accounting method for goodwill. If elected, private companies amortize goodwill over ten years (or less if a shorter useful life is more appropriate). An accounting policy election is made to evaluate impairment at either the entity level or the reporting unit level. This Update should be applied prospectively to the beginning of the period of adoption and is effective for the first annual period beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, Early adoption is permitted. See the Dixon Hughes Goodman A&A Update The FASB Issues Two Private Company Accounting Alternatives. ASU : Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay- Fixed Interest Rate Swaps Simplified Hedge Accounting Approach (a consensus of the Private Company Council) This is the second accounting alternative for private companies (excludes financial institutions) issued by the FASB and provides an alternative accounting method for certain qualifying interest rate swaps. If elected, the alternative provides a practical expedient for interest-rate swaps meeting certain criteria to assume no ineffectiveness in the hedge in order to qualify for cash flow hedge accounting under Topic 815, Derivatives and Hedging. When adopting the alternative a full retrospective or modified retrospective approach is permitted. This Update is effective for the first annual period beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, Early adoption is 3

5 Accounting and Financial Reporting permitted. See the Dixon Hughes Goodman A&A Update The FASB Issues Two Private Company Accounting Alternatives. ASU : Receivables Troubled Debt Restructurings by Creditors (Subtopic ): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force) This Update provides guidance on when an in-substance repossession or foreclosure occurs, which requires the mortgage loan to be derecognized and the related real estate be recognized. The amendments clarify that an in-substance repossession or foreclosure occurs upon either (a) a creditor obtaining legal title to the residential real estate or (b) the borrower conveying all interest in the residential real estate through a deed in lieu of foreclosure (or a similar legal agreement). Creditors must disclose the amount of foreclosed residential real estate held as well as the amount of collateralized loans for which foreclosure is in process. The amendments are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, For entities other than public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, The amendments can be adopted on either a modified retrospective or a prospective method. Early adoption is permitted. ASU : Service Concession Arrangements (Topic 853) (a consensus of the FASB Emerging Issues Task Force) The amendments in this Update clarify that an operating entity should not account for a service concession arrangement within the scope of the Update as a lease in accordance with Topic 840, Leases. The amendments also specify that the infrastructure used in a service concession arrangement should not be recognized as property, plant and equipment of the operating entity. A service concession arrangement is an arrangement between a public-sector entity grantor and an operating entity under which the operating entity operates the grantor s infrastructure. Service concession arrangements are in the scope of the Update if they meet both of the following conditions: 1. The public-sector entity (a governmental body or another entity for which the public service has been delegated to) grantor controls or has the ability to modify or approve the services the operating entity must provide with the infrastructure, to whom it must provide them, and at what price. 2. The public-sector entity grantor controls any residual interest in the infrastructure at the end of the arrangement. This control can be through ownership, beneficial entitlement, or by other means. The amendments should be applied to service concession arrangements that exist at the beginning of an entity s fiscal year of adoption on a modified retrospective basis. This Update is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, For other than public business entities, the Update is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, Early adoption is permitted. ASU : Technical Corrections and Improvements Related to Glossary Terms This Update contains incremental improvements such as clarifications, technical corrections, and amendments to the Master Glossary. The amendments are effective upon issuance for both public and nonpublic entities, and are not expected to have a significant effect on current accounting practice. ASU : Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (a consensus of the Private Company Council) This is the third accounting alternative for private companies issued by the FASB and permits the reporting entity to elect an alternative not to apply variable interest entity (VIE) guidance to common control leasing arrangements meeting certain criteria. Entities must apply the alternative retrospectively to the earliest period presented. This Update is effective for the first annual period beginning after December 4

6 Accounting and Financial Reporting 15, 2014, and interim periods within annual periods beginning after December 15, Early adoption is permitted. See the Dixon Hughes Goodman A&A Update The FASB Issues Private Company VIE Accounting Alternative. Revenue Recognition The FASB and the IASB (the Boards) have completed their redeliberations for the revenue recognition project and are expected to issue a final standard in In November 2013 the FASB directed the staff to draft a final ASU for vote by the FASB. The Boards plan to create a joint transition revenue recognition resource group, comprised of preparers, auditors, regulators, users, and other stakeholders. The group will convene following the issuance of the final revenue recognition standard and will inform the Boards about various interpretative issues that arise in practice, but the group will not issue any guidance of its own. Most of the group s activities will be completed by 2017, when the standard is expected to take effect. Leases In March 2014 the Boards held a joint meeting to deliberate aspects of the leasing project. The Boards agreed on some aspects, such as the need to present most leases on the balance sheet, while disagreeing on others, primarily the income statement impact for lessees of lease expense. While the FASB favors a dual model (similar to current leasing guidance under IFRS) the IASB supports primarily a financing approach. It is unclear how or if the Boards will reach convergence or the timing of the final standard. They plan to continue redeliberations in the coming months. Accounting for Financial Instruments The accounting for financial instruments projects of the FASB and IASB include three main components: 1. Classification and measurement, 2. Credit Impairment, and 3. Hedge accounting (FASB redeliberations have not started) Classification and Measurement In an unexpected turn, the FASB decided at the December 2013 and January 2014 meetings to no longer pursue a converged approach with the IASB on classification and measurement, but has decided to pursue targeted improvements to current GAAP. The FASB expressed concern with the approach the Boards were taking, noting the proposed test would be trading known complexity in the current bifurcation guidance for unknown complexity in the solely payment of principal and interest model. A final standard is expected in the second half of Credit Impairment The FASB has been refining an Exposure Draft (ED) they issued in December 2012 on accounting for credit losses. Prior to the FASB s December 2012 ED the boards were largely converged on the impairment project; however, while the IASB decided to retain the initial three-bucket approach from the original ED, the FASB abandoned this approach in favor of using a simpler current expected credit loss (CECL) model (one-bucket model). In this approach, when estimating the loss, the allowance would reflect at inception, a current estimate of contractual cash flows not expected to be collected throughout the life of the financial asset. The FASB decided the CECL should apply to financial assets measured at amortized cost. A final standard is expected in the second half of Insurance Contracts The FASB s June 2013 ED (as part of a joint project with the IASB) on insurance contracts also has received mixed feedback. Existing guidance for insurance contacts has evolved over the years leading to 5

7 Accounting and Financial Reporting some inconsistencies in U.S. GAAP. Furthermore, the current guidance only applies to insurance entities, rather than to those entities that issue insurance-like contracts. Under the proposed ED the guidance would apply to all insurance contracts, as defined in the ED, rather than exclusively to insurance entities. This has resulted in comment letters from non-insurance entities stating they believe the ED is too costly and complex for preparers as well as too broad of a scope. Several insurance entities expressed concerns such as potential increased volatility in the income statement. As a result, the FASB decided to limit the project to targeted improvements to current GAAP, which is only applicable to insurance entities U.S. GAAP Financial Reporting Taxonomy The 2014 U.S. GAAP Financial Reporting Taxonomy is now available pending final acceptance by the SEC for public comment at the FASB s website. The Taxonomy contains updates for accounting standards and other improvements that have been implemented since the 2013 Taxonomy. SEC Dodd-Frank Rulemaking Activity The Volcker Rule On January 17, 2014 the SEC issued an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities (TruPS CDOs) from the investment prohibitions of the Volcker Rule. This rule was effective on April 1, This was the result of a December 2013 final rule which the SEC, along with the Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation and Commodity Futures Trading Commission (the Agencies ) issued to implement Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act ), commonly referred to as the Volcker Rule. In connection with the Final Rule, the Federal Reserve granted a blanket one-year extension of the Volcker Rule conformance period for all banking organizations, allowing banks until July 21, 2015 to comply fully with most requirements of the Final Rule. Banking organizations with significant trading activities will be required to report quantitative metrics on their trading activities beginning in July The extension also requires banking organizations to use good faith efforts during the conformance period to conform to the Final Rule and promptly cease any stand-alone proprietary trading. On April 7, 2014, the Federal Reserve released a statement announcing its intention to grant two additional one-year extensions of the conformance period for collateralized loan obligations (CLOs), which, when enacted, would extend the conformance period for CLOs to July 21, 2017, the maximum extension provided for in the Dodd-Frank Act. CLOs in place as of December 31, 2013 that do not qualify for exclusion in the Final Rule will be covered by the extension. Release , Temporary Stay on Final Rule on Registration of Municipal Advisors This final rule delays required compliance with certain rules from Release until July 1, 2014 and makes certain conforming amendments to Rule 15Bal-8. Effective Date: January 13, 2014, 17 CFR Ba1-1 through 15Ba1-8 and Bc4-1 and 17 CFR , , , and are stayed until July 1,

8 Accounting and Financial Reporting Adoption of Updated EDGAR Filer Manual Several revisions were made to the EDGAR Filer Manual in the first quarter of The Filer Manual is available on the SEC s website. Proposed Crowdfunding Rules In October 2013 the SEC proposed new rules related to crowdfunding, which is a method of raising funds by pursuing small individual contributions from a large number of people. These proposed rules are part of implementing the Jumpstart Our Business Startups Act (JOBS Act) and allow private companies to raise up to $1 million in any twelve month period. However, individuals would be limited as to the amount they could invest and companies would be required to provide certain disclosures as well as conduct the transactions through certain intermediaries registered as broker-dealers or a funding portal. The disclosure requirements are scaled, and include, for example, audited financial statements for raises over $500,000, as well as annual reporting requirements. Comments for the proposed rule are due February 3, Also, as mandated by the JOBS Act, the SEC proposed amendments to Regulation A which would exempt offerings up to $50 million annually from the registration requirements of the Securities Act. The proposal would create two tiers of Regulation A offerings, Tier 1, offerings up to $5 million in a twelvemonth period, and Tier 2, offerings up to $50 million in a twelve-month period. Additional requirements for Tier 2 offering include audited financial statements in the offering document and on-going reporting. Comments for the proposed rule will be due 60 days after publication in the Federal Register. Other The most recent Financial Reporting Manual can be found on the SEC s website. At the time this document was prepared, the most recent version was updated February 6, The most recent version updated guidance related to critical accounting estimate disclosures for share-based compensation in initial public offerings. The SEC announced their 2014 examination priorities on January 9, The purpose of the document is to increase transparency, strengthen compliance, and inform the public and the financial services industry about key risks that [the SEC is] monitoring and examining. For more information see the Examination Priorities for 2014 posted on the SEC s website. In the first quarter the SEC updated certain Compliance and Disclosure Interpretations (CDIs) relating to Securities Act Rules, Exchange Act Rules, Exchange Act Sections 13(d) and 13(g) and Regulation 13D-G Beneficial Ownership Reporting, Proxy Rules and Schedule 14A, and Division Statement on Well-Known Seasoned Issuer Waivers. For more information on this, see the CDI s page of the SEC s website. 7

9 Effective Dates Highlights EFFECTIVE DATES HIGHLIGHTS Accounting Standards Update ASU : Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (a consensus of the Private Company Council) ASU : Service Concession Arrangements (Topic 853) (a consensus of the FASB Emerging Issues Task Force) ASU : Receivables Troubled Debt Restructurings by Creditors (Subtopic ): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force) ASU : Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps Simplified Hedge Accounting Approach (a consensus of the Private Company Council) ASU : Intangibles Goodwill and Other (Topic 350): Accounting for Goodwill (a consensus of the Private Company Council) ASU : Investments Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force) ASU : Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ASU :Fair Value Measurement: Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No Public Entities Only applicable to nonpublic entities Annual periods, and interim periods within those annual periods, beginning after December 15, 2014 Annual periods, and interim periods within those annual periods, beginning after December 15, 2014 Only applicable to nonpublic entities Only applicable to nonpublic entities Annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014 Fiscal years, and interim periods within those years, beginning after December 15, 2013 Only applicable to nonpublic entities Effective Date Nonpublic Entities Annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015 Annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015 Annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015 Annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015 Annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015 Annual periods beginning after December 15, 2014, and interim periods within annual reporting periods beginning after December 15, 2015 Fiscal years, and interim periods within those years, beginning after December 15, 2014 Early Adopt? Transition Retrospective Modified Retrospective Modified Retrospective or Prospective Modified or Full Retrospective Prospective Retrospective Prospective or Retrospective (1) Upon issuance Prospective 8

10 Effective Dates Highlights Accounting Standards Update ASU : Financial Services Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements ASU : Liquidation Basis of Accounting ASU : Not-for-Profit Entities (Topic 958): Services Received from Personnel of an Affiliate ASU , Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity ASU , Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date ASU , Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ASU No , Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows ASU , Continuing Care Retirement Communities Refundable Advance Fees ASU No , Derecognition of in Substance Real Estate ASU No , Fees Paid to the Federal Government by Health Insurers Public Entities Effective Date Nonpublic Entities Early Adopt? Transition Interim and annual reporting periods in fiscal years beginning after December 15, 2013 Prospective Annual reporting periods beginning after December 15, 2013 and interim reporting periods therein. Prospective Fiscal years beginning after June 15, 2014, and interim and annual periods thereafter. Fiscal years, and interim periods within those years, beginning after December 15, 2013 Fiscal years, and interim periods within those years, beginning after December 15, 2013 Reporting periods beginning after December 15, 2012 The first annual period beginning after December 15, 2014, and interim and annual periods thereafter Fiscal years ending after December 15, 2014, and interim and annual periods thereafter Reporting periods beginning after December 15, 2013 Fiscal years, and interim periods within those years, beginning after June 15, 2013 (5) Annual periods beginning after December 15, 2012 Fiscal years, and interim periods within those years, beginning on or after June 15, 2012 Annual periods beginning after December 15, 2013 Annual periods ending after December 15, 2013 and interim and annual periods thereafter Prospective (2) Prospective (3) Retrospective (4) Prospective Retrospective or Prospective Retrospective Prospective Calendar years beginning after December 31, 2013 Prospective (1) Prospective application should be applied to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. (2) A recipient not-for-profit may apply the amendments using a modified retrospective approach under which all prior periods presented upon the date of the adoption should be adjusted, but no adjustment should be made to the beginning balance of net assets of the earliest period presented. (3) If an entity elects to early adopt the amendments, it should apply them as of the beginning of the entity s fiscal year of adoption. (4) The amendments in this Update should be applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability arrangements within the Update's scope that exist at the beginning of an entity's fiscal 9

11 Effective Dates Highlights year of adoption. An entity may elect to use hindsight for the comparative periods (if it changed its accounting as a result of adopting the amendments in this Update) and should disclose that fact. Early adoption is permitted. (5) Early adoption from the beginning of the fiscal year of adoption is permitted. For fiscal years beginning before October 22, 2012, early adoption is permitted only if an NFP s financial statements for those fiscal years and interim periods within those years have not been made available for issuance. 10

12 Assurance Matters ASSURANCE MATTERS PCAOB In October 2013 the PCAOB adopted Auditing Standard (AS) No. 17, Auditing Supplemental Information Accompanying Audited Financial Statements, to establish auditor s responsibility when reporting on supplemental information of broker-dealers and others in connection with an audit of the financial statements. AS 17 was approved by the SEC and is effective for reports on supplemental information accompanying financial statements for fiscal years ending on or after June 1, The PCAOB also issued two new attestation standards in October 2013, Examination Engagements Regarding Compliance Reports of Brokers and Dealers and Review Engagements Regarding Exemption Reports of Brokers and Dealers, and related amendments to PCAOB standards. These standards relate to audits of brokers and dealers and are in response to SEC Rules and and set forth responsibilities of the auditor in regards to examining or reviewing statements included in broker-dealer s compliance and exemption reports. They were also approved by the SEC and are effective for examination and review engagements of fiscal years ending on or after June 1, The PCAOB issued a revised Standard-Setting Agenda as of March 31, 2014 which includes plans to: Adopt standards related to Related Parties in 2014, Propose standards and consider comments on recent proposals in 2014 related to: o o o o Identification of the engagement partner and other participants of the audit (proposed standard released in December 2013), A framework for reorganizing PCAOB auditing standards, The auditors responsibility with respect to other accounting firms, specialists and individual accountants, and Going concern (timing dependent upon the FASB s going concern project) Other active projects noted in the Standard-Setting Agenda were standards related to: The auditor s reporting model Quality control standards Auditing accounting estimates, including fair value measurements and related disclosures Auditor independence, objectivity and professional skepticism Confirmations Subsequent events The PCAOB issued Staff Audit Practice Alert No. 11, Considerations for Audits of Internal Control Over Financial Reporting, dated October 24, 2013 in light of significant auditing practice issues observed by the PCAOB staff in the past three years relating to audits of internal control over financial reporting ("ICFR audits"). The practice alert highlights certain requirements of the PCAOB auditing standards in aspects of ICFR audits in which significant auditing deficiencies have been cited frequently in PCAOB inspection reports. The alert discusses various topics including risk assessment, selecting controls to test, testing management review controls, information technology considerations, roll-forward of tests performed at an interim date, and using the work of others. 11

13 Assurance Matters COSO On May 14, 2013 the Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued its updated Internal Control Integrated Framework (2013 Framework). This is an update to the original framework published in 1992 (1992 Framework) which was written to help organizations design and implement internal control. The updates will broaden the application of internal control in addressing operations and reporting objectives as well as clarify requirements for determining effective internal control. COSO also issued a document with illustrations to assist users in assessing whether a system of internal control meets the requirements set forth in the updated framework. Furthermore, the September 25, 2013 meeting minutes of the SEC Regulations Committee state that the SEC Staff indicated that the longer issuers continue to use the 1992 framework, the more likely they are to receive questions from the staff about whether the issuer s use of the 1992 framework satisfies the SEC's requirement to use a suitable, recognized framework (particularly after December 15, 2014 when COSO will consider the 1992 framework to have been superseded by the 2013 framework). See the Dixon Hughes Goodman A&A Update, COSO s Updated Integrated Framework, for more information. AICPA Auditing Standards SAS No. 128, Using the Work of Internal Auditors In February 2014, the AICPA s Auditing Standards Board released Statement on Auditing Standards (SAS) No.128, effective for audits of periods ending on or after December 15, This SAS provides guidance on the responsibility of external auditors when using the work of internal auditors and supersedes SAS 65, The Auditor s Consideration of the Internal Audit Function in an Audit of Financial Statements and amends Statement on Quality Control Standards No. 8 and various sections within SAS 122, Statements on Auditing Standards: Clarification and Recodification. Using the work of internal auditors applies when the external auditor uses the work of the internal auditor to either (a) obtain audit evidence, or (b) provide direct assistance under the direction, supervision, and review of the external auditor. This SAS is not applicable to engagements if the work of internal auditors is not used. Proposed SSARS Preparation of Financial Statements, Compilation Engagements, and Association with Financial Statements In October 2013 the AICPA s Accounting and Review Services Committee (ARSC) released an exposure draft related to three services: Preparation of Financial Statements, Compilation Engagements, and Association With Financial Statements. In order to address inconsistency in the application of AR Section 80, Compilation of Financial Statements, regarding the determination of whether the accountant, management or both prepared the financial statements the ARSC revised the scope of the compilation standards to only apply when the accountant is engaged to perform a compilation engagement. The proposed Statements on Standards for Accounting and Review Services (SSARS), Preparation of Financial Statements, would be applicable when an accountant has been engaged to prepare financial statements for an entity but has not been engaged to perform a compilation, review or audit with respect to those financial statements. Furthermore, under this proposed SSARS the accountant would not need to determine if they are independent nor disclose if they are not. The proposed SSARS, Compilation Engagements, requires a report to be issued for each compilation engagement; as a result, the distinction between financial statements issued for general use and management use only financial statements has been removed. 12

14 Assurance Matters The guidance on association with financial statements, previously codified in the Auditing Standards (AU section 504, Association With Financial Statements) is being moved to the SSARS with the proposed SSARS, Association With Financial Statements. The proposed SSARS address the circumstances in which the accountant permits the use of the accountant s name in a report, document, or written communication that contains financial statements on which the accountant has not issued a compilation, review, or audit report. Comments on the exposure draft are due May 2, Center for Audit Quality The CAQ s SEC Regulations Committee regularly meets with the staff of the SEC to discuss emerging financial reporting issues related to SEC rules and regulations. Summaries of meetings can be found on the CAQ s Web Site. On February 28, 2014, the Anti-Fraud Collaboration released its second case study to build awareness of financial fraud detection and deterrence. The Anti-Fraud Collaboration is a partnership between the CAQ and various organizations to help audit committees, financial executives, internal auditors and external auditors deter and detect financial reporting fraud. For more information access the site at 13

15 Appendix A Matters discussed in previous Quarterly Updates APPENDIX A MATTERS DISCUSSED IN PREVIOUS QUARTERLY UPDATES FASB - Accounting Standards Updates ASU : Health Care Entities (Topic 954) Continuing Care Retirement Communities Refundable Advance Fees. The amendments in the Update clarify that a health care entity should classify an advance fee as deferred revenue when a continuing care retirement community has a resident contract that provides for payment of the refundable advance fee upon reoccupancy of a unit by a subsequent resident, which is limited to the proceeds of reoccupancy. Refundable advances that are contingent upon reoccupancy by a subsequent resident but are not limited to the proceeds of reoccupancy should be accounted for and reported as a liability. For public entities (including conduit bond obligors), the amendments are effective for fiscal periods beginning after December 15, 2012, with early adoption permitted. For nonpublic entities, the amendments are effective for fiscal periods beginning after December 15, 2013, with early adoption permitted. The amendments should be applied retrospectively by recording a cumulative-effect adjustment to opening retained earnings (or unrestricted net assets) as of the beginning of the earliest period presented. ASU : Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date This Update provides guidance to resolve diversity in practice related to accounting for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. This Update requires an entity to measure the liability as the sum of: a. the amount the reporting entity agreed to pay on the basis of its arrangement among its coobligors and b. any additional amount the reporting entity expects to pay on behalf of its co-obligors. The Update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. Where specific guidance on accounting for obligations is already included in U.S. GAAP, this guidance does not overrule the established standards; rather, it provides guidance where U.S. GAAP does not currently include specific guidance. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2014, and interim periods and annual periods thereafter. This Update should be applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability arrangements within the Update's scope that exist at the beginning of an entity's fiscal year of adoption. An entity may elect to use hindsight for the comparative periods (if it changed its accounting as a result of adopting the amendments in this Update) and should disclose that fact. Early adoption is permitted. ASU : Not-for-Profit Entities (Topic 958): Services Received from Personnel of an Affiliate The objective of this Update is to address the diversity in practice about which guidance not-for-profit entities should apply for recognizing and measuring personnel services received from an affiliate, which is, a party that directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the recipient not-for-profit entity. 14

16 Appendix A Matters discussed in previous Quarterly Updates The Update requires not-for-profit entities to recognize all services received from personnel of an affiliate that directly benefit the recipient not-for-profit entity. Health Care Not-for-Profit entities (within the scope of Topic 954) that provide a performance indicator will report the benefit from services provided for which the affiliate does not charge as an equity transfer. Guidance for the presentation of the increase in net assets associated with the services received is not provided for other not-for-profit entities other than to prohibit reporting as a contra-expense or contra-asset. The use of such services should be reported similar to how other expenses or assets are reported. The value of the services should be measured at the affiliate s cost, unless it would significantly overstate or understate the value of the service, in which case the recipient would then elect to recognize the service based on either the cost or fair value of that service. This Update will be effective prospectively for fiscal years beginning after June 15, 2014, and interim and annual periods thereafter. In addition to prospective adoption, the FASB has provided an option for a modified retrospective application in which all prior periods presented should be adjusted, though no adjustment is required to the adjust beginning balance of net assets of the earliest period presented. Early adoption is permitted. ASU : Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting The amendments in this Update have been provided to improve consistency and give guidance on using the liquidation basis of accounting including when it should be used, as there is currently little codified guidance in this area. It is applicable to all entities except investment companies regulated under the Investment Company Act of Also, entities that are following a plan of liquidation specified in that entity s governing documents at inception are not required to report under liquidation basis accounting. When liquidation is considered imminent (either a plan for liquidation is approved and the likelihood of it being blocked is remote OR a plan for liquidation is being imposed by others) the liquidation basis of accounting should be used. The purpose of the liquidation basis of accounting is to present the financial information such that users can see the resources available to satisfy the outstanding liabilities. Assets will be measured at the expected cash value as they will be used to satisfy the liabilities. Additionally, assets that have previously not been recognized under U.S. GAAP will be recorded if the entity expects to be able to sell them or use them to settle liabilities (e.g. trademarks). Liabilities will continue to be measured as they have previously been under U.S. GAAP. A reduction of a liability should not be recognized even if an entity expects to settle a liability at less than the value recorded (either through a legal judgment or by the creditors). The entity also is required to accrue costs expected to be incurred and income expected to be earned during liquidation. Certain additional disclosures will be required regarding the plan for liquidation, assumptions used to measure assets and liabilities, the expected duration of the liquidation process, and details around costs and income accrued. The amendments will be effective for annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. Entities should apply the requirements when they determine liquidation is imminent and be used prospectively from the day that liquidation becomes imminent. Early adoption is permitted. ASU : Financial Services Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements This Update was issued to change the guidance in determining if an entity is an investment company as well as provide guidance on measurement of ownership interests and disclosures related to the nature of an entity classified as an investment company. One of the more significant changes is in the determination of what an investment company is. A two-tiered approach will be used involving both objective fundamental characteristics as well as subjective characteristics of its purpose and design. The goal is to include only those entities for which fair value of investments is usually considered as the most relevant measurement by the users of the financial statements. This may impact entities previously characterized as an investment entity that will no longer be such under the new guidance. Those entities that discontinue the guidance in Topic 946 as a result of the 15

17 Appendix A Matters discussed in previous Quarterly Updates amendments should do so upon the effective date of this Update. The entity would reflect the change as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Investment company entities will discontinue the use of the equity method to measure noncontrolling interests in other investment companies and record those investments at fair value, which may be measured at the net asset value per share (the practical expedient discussed in Topic 820, Fair Value Measurement). The amendments in this update are not intended to affect real estate entities and their investments; as such, issues related to the applicability of investment company accounting for real estate entities are not addressed. The amendments in this Update are effective for an entity s interim and annual reporting periods in fiscal years that begin after December 15, Earlier application is prohibited. An entity that is an investment company upon the effective date of the amendments in this Update should apply the guidance prospectively. That entity is required to record the effect of applying the amendments as an adjustment to opening net assets for the period of adoption. ASU : Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force) The objective of this Update is to reduce the diversity in practice by providing guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward exists. The main provision of the Update provides that unrecognized tax benefits (or the portion of the benefit) should be presented as a reduction to a deferred tax asset for a NOL carryforward, a similar tax loss, or a tax credit carryforward; unless one of the following criteria are met: the NOL carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to be used to settle additional income taxes that would result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use and the entity does not intend to use the deferred tax asset for such purpose If one of the previous conditions is met the unrecognized tax benefit, or portion thereof that meets the criteria, should be presented as a liability, rather than netted against the deferred tax asset. The assessment should be performed based on the unrecognized tax benefit and deferred tax asset existing as of the reporting date. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. ASU : Definition of a Public Business Entity An addition to the Master Glossary This Update amends the Master Glossary of the FASB Accounting Standards Codification to include the term public business entity. There are currently several definitions of a nonpublic entity and public entity within U.S. GAAP. While this Update will not change any existing guidance, it will provide a consistent definition for determining which entities are permitted to adopt the PCC s accounting alternatives, as well as provide a single definition to be used within U.S. GAAP by future Accounting Standards Updates (ASUs). As a result, there is no effective date; however, the term public business entity will be used in the two soon to be issued ASUs providing accounting alternatives for private companies (expected issuance is January 2014, see Dixon Hughes Goodman s A&A Update A Private Company Council Update). 16

18 Appendix A Matters discussed in previous Quarterly Updates GASB The Governmental Accounting Standards Board (GASB) released GASB 71, Pension Transition for Contributions Made Subsequent to the Measurement Date an amendment of GASB Statement No. 68. GASB 71 amends GASB 68 by requiring the recognition of a beginning deferred outflow of resources for pension contributions made during the time between the measurement date of the beginning net pension liability and the beginning of the initial fiscal year of implementation. This is in an effort to address a potential understatement of the restated beginning net position and expense when implementing GASB 68 in the first year. The provisions are effective concurrently with GASB 68 (effective for fiscal years beginning after June 15, 2014). To assist preparers and auditors with GASB 67 an online toolkit was released on November 11, For more information see the press release on the GASB s website. SEC Final Rules Release , Removal of Certain References to Credit Ratings under the Investment Company Act This final rule replaces the reference to credit ratings in rule 5b-3 under the Investment Company Act with an alternative standard in determining when an investment company may treat a repurchase agreement as an acquisition of securities collateralizing the repurchase agreement and removes the requirement of using NRSRO credit ratings when presenting a portfolio s holdings by credit quality in Forms N-1A, N-2 and N-3. Effective Date: February 7, Release , Removal of Certain References to Credit Ratings under the Securities Exchange Act of 1934 This final rule eliminates certain references to credit ratings related to broker-dealer financial responsibility and confirmations of securities transactions under the Securities Exchange Act of Effective Date: July 7, Release , Registration of Municipal Advisors Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act municipal advisors must register with the SEC. This final rule extends registration under a temporary rule through December 31, 2014 until a permanent registration process is established by the SEC. Furthermore, the new forms and rules included in this amendment require the SEC to establish a registration process and maintain certain record-keeping requirements on such advisors. Effective Date: Various dates depending on advisor s previous status, see section V. Implementation and Compliance Dates of the final rule. Release , Broker-Dealer Reports This amendment modifies certain broker-dealer annual reporting, audit, and notification requirements. Broker-dealers must obtain audits performed in accordance with standards of the PCAOB. Furthermore, for broker-dealers that carry customer accounts or clear transactions the broker-dealer must agree to allow either the SEC or the designated examining authority to review and discuss the audit and related documentation with the independent public accountant during a regulatory examination. A new form will be required for broker-dealers to provide information regarding the custody of securities and funds of customers and non-customers to their designated examining authority. In addition to the release, the staff of the SEC published a Small Entity Compliance Guide summarizing and explaining the rules. 17