Tax Practitioner s Guide to Accounting and Reporting Issues (TPG) Rebecca Lee, CPA (Licensed in Alabama and South Carolina) and Kenneth Heaslip, CPA (Licensed in New Jersey)
TAX PRACTITIONER S GUIDE TO ACCOUNTING AND REPORTING ISSUES 2018 Kaplan, Inc. Published in 2018 by Kaplan Financial Education. Printed in the United States of America. All rights reserved. The text of this publication, or any part thereof, may not be translated, reprinted or reproduced in any manner whatsoever, including photocopying and recording, or in any information storage and retrieval system without written permission from the publisher.
TAX PRACTITIONER S GUIDE TO ACCOUNTING AND REPORTING ISSUES TABLE OF CONTENTS Guide to the Program... iii Page SECTION ONE: OVERVIEW... 1-1 Introduction... 1-1 ARSC Clarity Project... 1-2 AR-C Section 60, General Principles for Engagements Performed in Accordance with Statements on Standards for Accounting and Review Services... 1-3 AR-C Section 70, Preparation of Financial Statements... 1-4 AR-C Section 80, Compilation Engagements... 1-10 AR-C Section 90, Review of Financial Statements... 1-16 Identifying the Applicable Standards... 1-20 SECTION TWO: FASB UPDATE... 2-1 Introduction... 2-1 Private Company Initiatives... 2-2 Accounting Standards Updates Resulting from PCC Projects... 2-4 ASU 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation... 2-14 ASU 2014-15, Presentation of Financial Statements (Topic 205): Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern... 2-17 ASU 2015-01, Income Statement Extraordinary and Unusual Items (Subtopic 225-20) Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items... 2-20 ASU 2015-03, Interest Imputed Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs... 2-22 ASU 2015-11, Simplifying the Measurement of Inventory (ASC 330 Inventory)... 2-24 ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (ASC 835-20, Imputation of Interest)... 2-26 ASU 2015-17, Balance Sheet Classification of Deferred Taxes (ASC 740, Income Taxes)... 2-28 ASU 2016-02, Leases (Topic 842)... 2-29 ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities (ASC 958, Not-for-Profit Entities)... 2-31 ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (ASC 230, Statement of Cash Flows)... 2-33 i
ASU 2016-18, Restricted Cash (ASC 230, Statement of Cash Flows)... 2-36 ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASC 715, Compensation Retirement Benefits)... 2-37 SECTION THREE: SPECIAL PURPOSE FRAMEWORK MEASUREMENT AND REPORTING ISSUES... 3-1 Introduction... 3-1 Tax Basis... 3-2 SPF General Disclosure Rules... 3-3 The Effect of Permanent Differences... 3-19 Reporting Issues Audits, Reviews and Compilations... 3-31 SECTION FOUR: PREPARATION ENGAGEMENTS... 4-1 Introduction... 4-1 AR-C Section 70, The Preparation of Financial Statements... 4-2 General Issues SSARS 21... 4-10 Preparation Service Issues... 4-11 SECTION FIVE: COMPILATION ENGAGEMENTS... 5-1 Introduction... 5-1 Compilation Engagements AR-C Section 80... 5-2 Compilation of Pro Forma Information (AR-C Section 120)... 5-21 SECTION SIX: REVIEW ENGAGEMENTS... 6-1 Introduction... 6-1 Review of Financial Statements AR-C Section 90... 6-2 Common Concerns on Independence... 6-41 APPENDIX A: SELECTED LITIGATION ISSUES AND CASES... A-1 Introduction... A-1 CASE 1... A-5 CASE 2... A-6 CASE 3... A-7 CASE 4... A-8 CASE 5... A-9 CASE 6... A-10 CASE 7... A-11 CASE 8... A-12 CASE 9... A-13 APPENDIX B: STANDARDS FOR TAX SERVICES... B-1 Standards For Tax Services... B-1 ii
GUIDE TO THE PROGRAM OBJECTIVE OF THE PROGRAM Participants will be able to: Identify differences between GAAP requirements and the tax return Recognize problems in performance and documenting of preparations, compilations, and reviews Apply accounting standard and appropriate disclosure PRESENTATION METHOD Group-live LEVEL OF KNOWLEDGE Basic PREREQUISITES None ADVANCE PREPARATION None CPE CREDITS Accounting 5 hrs. Auditing 3 hrs. PROGRAM EVALUATION At the end of the session, you should evaluate the program using the appropriate program evaluation form. iii
COURSE AUTHOR Rebecca Lee, CPA, CGMA, licensed as a CPA in Alabama and South Carolina, is a Group Practice Leader for Loscalzo Institute, a Kaplan company, and a founding Principal with Brooke, Freeman & Lee, having offices in Anniston and Birmingham, Alabama. She serves as the assurance, quality control, and compliance principal with responsibilities for the audit practice. She has served on numerous AICPA and state society committees, including the AICPA Management Consulting Service Professional Practice Subcommittee, Small Business Consulting Practices Subcommittee, Council of the AICPA and is a past member of the Institute s MAS Executive Committee and Personal Financial Planning Executive Committee. She has chaired both the Management Advisory Committee and the Personal Financial Planning Committee of the Alabama Society of CPAs. She has served on the South Carolina Association of CPAs Peer Review Committee and has chaired the South Carolina Continuing Professional Education Committee. In 2015, Rebecca was included in the South Carolina Association of CPA s Centennial 100 Influential People in Accounting. Rebecca currently serves on the Illinois Society of CPAs Peer Review Committee which serves multiple state societies of CPAs. Rebecca is a group practice leader for all staff level audit training programs, as well as other accounting and auditing technical courses. She is a frequent speaker at CPA conferences and has lectured extensively in the area of management advisory services and technical accounting and auditing at professional meetings and seminars for state societies and the American Institute of CPAs. With more than 30 years of experience in the audit and accounting field, Rebecca has served as a discussion leader, technical reviewer, and author of courses for several audit and accounting technical courses. She has served as professor of management accounting in the graduate studies (Master in Public and Private Management) program at Birmingham-Southern College in Birmingham, Alabama. Rebecca holds a BS degree in accounting from Jacksonville State University, Jacksonville, Alabama, along with a Master s degree in Accounting from Birmingham Southern College, Birmingham, Alabama. She is a member of the Alabama Society of CPAs, the South Carolina Association of CPAs, and the AICPA. iv
COURSE AUTHOR Kenneth Heaslip, MS, MBA, CPA, CGMA, a New Jersey CPA, is a discussion leader and Content Specialist Instructor for Loscalzo Institute, a Kaplan company. Kenn has extensive experience teaching all levels of accounting, auditing, and other practicerelated areas. He has served the New Jersey Society of CPAs as Vice President, Trustee, Secretary of their Scholarship Fund, President of the Essex Chapter, and chaired several task forces. He is also an active member of committees in accounting and auditing, taxation, and student programs as well as past chair of the Educators Committee. Kenn currently serves on the NJCPA Professional Conduct Committee. He is a Director at Cullari Carrico, LLP, a New Jersey regional CPA firm. Kenn has been a Professor of Accounting at Bloomfield College and Kean University as well as an Executive in Residence at Seton Hall University where he was the students choice as Educator of the Year two years in a row. He taught in the Executive MBA program at Rutgers University and has been with Becker CPA Review since 1983, serving as National Director for several years. As National Director, he was lead editor of course content and oversaw the hiring and training of 350 instructors on staff. Kenn has lectured extensively throughout the United States, Canada, and Asia. Kenn earned his BA from Rutgers University and has an MS in taxation and MBA in finance from Seton Hall University. v
TECHNICAL REVIEWER Stacey Painter, CPA, licensed as a CPA in Wisconsin, is the CFO/COO of North American Filtration, Inc. Stacey was formerly the Director of Loscalzo Institute, a Kaplan company. Stacey has over 20 years of experience in both the public and private industry. Before joining Loscalzo Institute, Stacey spent 13 years with Resources Global Professionals, most recently as the Managing Director of Accounting and Finance Services. In this capacity, Stacey worked with the firm s U.S. offices in developing go-to market strategies around accounting initiatives, as well as providing technical training on site to firm clients. Prior to joining Resources, Stacey was the Corporate Controller of Square Two Golf, a publicly-traded manufacturer of golf equipment. Here, she was responsible for all aspects of accounting, financial reporting (SEC), planning and budgeting, Human Resources, and Internal Control. At the start of her career, Stacey spent six years at Deloitte & Touche, auditing clients ranging from $10 million to over $1 billion in revenue. Stacey received her bachelor s degree in accounting from Pace University in New York. She is a member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants. vi
SECTION ONE OVERVIEW INTRODUCTION A Tax Practitioner s Guide to Accounting and Reporting Issues is designed to provide tax practitioners or practitioners with significant tax practices, information summaries and updates related to accounting and assurance services, with specific emphasis on special purpose framework (SPF) financial statements and compilations and reviews. During the past couple of years, our profession has experienced significant changes resulting from the Financial Accounting Standards Board s projects, the creation of the Private Company Council (PCC), the AICPA s various Clarity Projects, increased use of technology, and changing expectations from clients, Congress, and the public. Many of the accounting and assurance standards issued in the past few years reflect these changes. This program will focus on the following: Section Two discusses recent changes to GAAP based financial statements that could affect financial statements of small closely held entities Section Three discusses special purpose frameworks with an emphasis on tax basis financial statements, measurement and reporting issues Section Four discusses preparation engagements, performance and documentation requirements Section Five discusses compilation engagements, performance and documentation requirements Section Six discusses review engagements, performance and documentation requirements Appendix A includes selected litigation issues and cases Appendix B describes standards for tax and consulting services 1-1
ARSC CLARITY PROJECT After the issuance of SSARS 19 in 2009, the Auditing Standards Board and the Professional Ethics Executive Committee issued clarified auditing and ethics standards. The ARSC decided that a similar clarity project for compilation and review engagements was needed. Such a project would serve the public interest by improving the readability of compilation and review standards with the goal of these standards to be easier to read, understand, and apply. The drafting conventions used in the ARSC Clarity Project were: Establishing objectives Including a definition of terms section Including a requirements section Including an application (A-prefix) and explanatory material section Using formatting techniques, such as bulleted lists to improve readability SSARS 21 was issued in 2014 to become effective for reporting periods ending on or after December 15, 2015, with early implementation permitted. The most extensive change is the addition of AR-C Section 70 which provides a new level of service Preparation of Financial Statements. The related sections are now: 1. AR-C Section 60 General Principles for Engagements Performed in Accordance with Statements on Standards for Accounting and Review Services 2. AR-C Section 70 Preparation of Financial Statements 3. AR-C Section 80 Compilation Engagements 4. AR-C Section 90 Review of Financial Statements 5. AR-C Section 120 Compilation of Pro Forma Financial Information In 2016, SSARS 22 and SSARS 23 were issued. SSARS 22, Compilation of Pro Forma Financial Information, completed the clarity project by clarifying AR-C Section 120, Compilation of Pro Forma Financial Information. SSARS 23, Omnibus Statement on Standards for Accounting and Review Services 2016, made revisions to standards related to prospective financial statements and the review report on supplementary information. 1-2
AR-C SECTION 60, GENERAL PRINCIPLES FOR ENGAGEMENTS PERFORMED IN ACCORDANCE WITH STATEMENTS ON STANDARDS FOR ACCOUNTING AND REVIEW SERVICES AR-C Section 60 reorganized the existing material using the drafting conventions and provides guidance and requirements related to: Ethics Client acceptance and continuance Professional judgment Procedures Documentation 1-3
AR-C SECTION 70, PREPARATION OF FINANCIAL STATEMENTS Pre-SSARS 21 Prior to SSARS 21, the preparation of financial statements was an addition to the SSARS Codification. Guidance related to the preparation of financial statements was found in AR-C Section 80. Many private companies, due to their small size, limited thirdparties, or limited accounting expertise, are unable or unwilling to invest in experienced accounting personnel for their businesses. As a result, many of these companies engage accountants to both assist with preparing financial accounting information and preparing financial statements. When an accountant is associated with the submission of financial statements to a client, the accountant must at least compile and report on these financial statements. SSARS 19 (AR-C Section 60) defined submission as presenting to management, financial statements that an accountant has prepared. Based on this definition, compilations would be required under the following two circumstances: 1. Client engages the accountant to perform a compilation 2. Accountant submits compiled financial statements to a client The audit literature and the AICPA s Code of Professional Conduct, define the preparation of financial statements as a nonattest service falling under the guidance of Independence Subtopic 1.295, Nonattest Services. Subtopic 1.295 requires that in order for a CPA to perform nonattest services for a client, the CPA must adhere to the general requirements for performing nonattest services. Under the general requirements, the CPA must not assume management responsibilities when performing nonattest services. The Code of Professional Conduct gives guidance on the following nonattest services: Advisory services Appraisal, valuation, and actuarial services Benefit plan administration Bookkeeping, payroll, and other disbursements Business risk consulting Corporate finance consulting Executive or employee recruiting 1-4
Forensic accounting Information systems design, implementation, or integration Internal audit Preparation of financial statements Investment advisory or management Tax services The Code of Professional Conduct states (ET 1.295.010.06) activities such as financial statement preparation, cash-to-accrual conversions, and reconciliations are considered outside the scope of the attest engagement and therefore constitute a nonattest service. SSARS 21 The primary purpose of this addition is to create consistency within the performance standards for the definition of the preparation of financial statements. This SSARS provides requirements and guidance when an accountant is engaged to prepare financial statements for an entity but has not been engaged to perform a compilation, review, or audit on those financial statements. This would require that when the accountant is engaged to perform a preparation service, the accountant would follow the requirements and guidance in SSARS Section 70, Preparation of Financial Statements. When the accountant is engaged to perform a compilation of financial statements, the accountant would follow the requirements and guidance in the SSARS Section 80, Compilation Engagements. A preparation service may consist of the following: Preparation of financial statements Preparation of specified elements, accounts, or items of a financial statement Supplementary information (required and not required) Pro forma financial information Prospective financial information 1-5
Examples of Services for Which This Section Applies Preparation of financial statements prior to audit or review by another accountant Preparation of financial statements for an entity to be presented alongside the entity s tax return Preparation of personal financial statements for presentation alongside a financial plan Preparation of single financial statements, such as a balance sheet or income statement or financial statements with substantially all disclosures omitted Using the information in a general ledger to prepare financial statements outside of an accounting software system Examples of Accountant Services for Which This Section Does Not Apply Preparation of financial statements when the accountant is engaged to perform an audit, review, or compilation of such financial statements Preparation of financial statements with a tax return solely for submission to taxing authorities Personal financial statements that are prepared for inclusion in written personal financial plans prepared by the accountant Financial statements prepared in conjunction with litigation services that involve pending or potential legal or regulatory proceedings Financial statements prepared in conjunction with business valuation services Maintaining depreciation schedules Preparing or proposing certain adjustments, such as those applicable to deferred income taxes, depreciation, or leases Drafting financial statement notes Entering general ledger transactions or processing payments (general bookkeeping) in an accounting software system This SSARS does not require an accountant s report nor does the accountant have to be independent when an accountant is engaged to prepare financial statements, even if the financial statements are expected to be used or provided to a third party. In addition, the accountant would not be required to verify the accuracy or completeness of the information provided by management nor would the accountant be required to gather evidence to express an opinion or a conclusion on the financial statements. The accountant s objective when engaged to prepare financial statements is to prepare these financial statements based on the financial reporting framework adopted by management. 1-6
Scoped out of this SSARS are: The preparation of financial statements when the accountant is engaged to perform an audit, review, or compilation of financial statements The preparation of tax returns or other data prepared solely for submission to taxing authorities Personal financial statements that are prepared for inclusion in personal financial plans prepared by the accountant Financial statements prepared in conjunction with litigation services that involve pending or potential legal or regulatory proceedings Financial statements prepared in conjunction with business valuation services Requirements of Preparation of Financial Statements Engagement Acceptance Agreement of preparation terms with management must be recorded in an engagement letter signed by both the accountant and the client s management. The engagement letter should include the following: 1. Identification of the financial reporting framework adopted by management 2. Statement as to whether the financial statements will be full disclosure or omit substantially all disclosures required by the applicable financial reporting framework 3. The objective, scope, and limitations of the engagement 4. Identify the ethical and SSARS responsibilities of the accountant 5. Identify the responsibilities of management 6. An agreement that an adequate statement will be included on each page of the financial statements indicating that no CPA provides any assurance on the financial statements The Accountant s Knowledge and Understanding of the Entity s Financial Reporting Framework The accountant should obtain an understanding of the financial reporting framework adopted by management that is intended to be used in the preparation of financial statements, as well as the significant accounting policies adopted by management. 1-7
Preparing the Financial Statements The financial statements should be based on management s records, documents, explanations, and other information. If management fails to provide complete and accurate information and this comes to the attention of the accountant, the accountant should request correct information or if not provided, withdraw from the engagement. Practice Point: When the accountant prepares financial statements based on a special purpose framework, the accountant should include a description of the financial reporting framework on the face of the financial statements. The accountant should also include an adequate statement on each page of the financial statements. The standard suggests the following options for this statement: No assurance is provided on these financial statements, or These financial statements have not been subjected to an audit or review or compilation engagement, and no assurance is provided on them. Practice Point: Many accountants believe that the above statement should also refer to a compilation not being prepared. Use professional judgment in this line of service. Financial Statements That Omit Substantially All the Disclosures Required by the Financial Reporting Framework Adopted by Management Practice Point: If the accountant believes that the lack of these disclosures are intended to mislead the financial statements users, the accountant should not accept an engagement to prepare financial statements that omit substantially all disclosures required by the financial reporting framework adopted by management,. Documentation in the Preparation Engagement Documentation should reflect the work performed by the accountant in sufficient detail to provide a clear understanding of the work performed including, at a minimum, an engagement letter and a copy of the financial statements prepared by the accountant. If an accountant departs from a presumptively mandatory requirement, this must also be documented and a description of how the alternative procedure(s) performed was sufficient to achieve the intent of the mandatory requirement. 1-8
Disclaimer EXAMPLE OF DISCLAIMER The accompanying financial statements of ABC Company as of and for the year ended December 31, 20xx, were not subjected to an audit, review or compilation engagement by us and accordingly, we do not express an opinion, a conclusion nor provide any assurance on them Signature of Firm City and State Date Can be with or without disclosures Disclose the omission Known departures from the reporting framework disclosed Disclose a special purpose framework Independence is not required to be considered Requires an engagement letter that must be signed by both parties No report attached Each page must have a no assurance is provided legend ****** 1-9
AR-C SECTION 80, COMPILATION ENGAGEMENTS Compilations should only be performed by the accountant when the accountant is engaged to do so. As discussed above in the Preparation of Financial Statements topic, old ARSC guidance required that a compilation be performed when an accountant is engaged to perform a compilation or when the accountant submits (prepares and presents) financial statements to a client or a third party. This is a significant change to the compilation guidance. When engaged to perform a compilation, an accountant s report would always be required. Practice Point: Due to the elimination of the submission requirement and the Preparation of Financial Statements addition to the SSARS Codification, the ARSC eliminates the existing guidance on management-use-only financial statements. SSARS 21 defines a compilation as: An engagement in which the accountant has been engaged to perform a compilation is to apply accounting and financial reporting expertise to assist management in the presentation of financial statements and report in accordance with the standards without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements in order for them to be in accordance with the applicable financial reporting framework. Compilation Requirements Engagement Acceptance or Continuation Agreement of engagement terms with management must be recorded in an engagement letter signed by both the accountant and the client s management. The engagement letter should include the following: 1. Identification of the financial reporting framework adopted by management 2. Statement as to whether the financial statements will be full disclosure or omit substantially all disclosures required by the applicable financial reporting framework 3. The objective, scope, and limitations of the engagement 4. Identify the ethical and SSARS responsibilities of the accountant 5. Identify the responsibilities of management 1-10
The Accountant s Knowledge and Understanding of the Entity s Financial Reporting Framework The accountant should obtain an understanding of the financial reporting framework adopted by management that is intended to be used in the preparation of financial statements, as well as the significant accounting policies adopted by management. Compilation Procedures The primary procedure required by an accountant when performing a compilation is to read the financial statements and consider whether the financial statements appear to be appropriate in form and free from obvious material misstatements, based on the accountant s understanding of the financial reporting framework adopted by management and management s related accounting policies. A misstatement is defined as a difference between the amount, classification, presentation or disclosure of a reported financial item in the financial statements and the amount, classification, presentation, or disclosure that is required for the item to be presented in accordance with the applicable financial reporting framework. Misstatements can arise from fraud or error. The compiled financial statements should be based on management s records, documents, explanations, and other information. If management fails to provide complete and accurate information and this comes to the attention of the accountant, the accountant should request correct information or, if not provided, withdraw from the engagement. The Accountant s Compilation Report The accountant s compilation report should include the following: 1. Identification of the entity whose financial statements were compiled 2. Identification of the financial statements that are subject to the report 3. The date/period covered by the financial statements 4. A statement that management (owners) are responsible for the financial statements 5. A statement that the compilation engagement was performed in accordance with SSARS 6. A statement that the accountant did not audit or review the financial statements and provides no assurance on them 7. The signature of the accountant or the accountant s firm 8. The city and state where the accountant practices 9. The date of the report the date the accountant completed the required SSARS procedures 1-11
EXAMPLE ACCOUNTANT S COMPILATION REPORT Management is responsible for the accompanying financial statements of ABC Company, which comprise the balance sheet as of December 31, 2014 and the related statements of income, changes in stockholder's equity, and cash flows for the years then ended, and the related notes to the financial statements in accordance with accounting principles generally accepts in the United States of America. We have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the American Institute of CPAs. We did not audit or review the financial statements nor were we required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, we do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements. (Signature of the accounting firm or accountant, as appropriate) (Accountant s city and state) (Date of the accountant s compilation report) Note: A header such as Accountant s Compilation Report or Independent Accountant s Compilation Report is no longer required. While inclusion of a header technically is not wrong, many peer reviews have been noting that the header should not be included. ****** Accountant s Compilation Report on Financial Statements Prepared in Accordance with a Special Purpose Framework (SPF) In full disclosure compilations, the financial statements and notes should include the following: 1. A description of the special purpose framework 2. A summary of the significant accounting policies 3. A description of how the SPF differs from GAAP 4. Informative disclosures that are similar to those required by GAAP to ensure the financial statements are not misleading 5. For contractual basis, a description of any significant interpretations of the contract 1-12
The compilation report on financial statements based on a special purpose framework should indicate: 1. Management s responsibility for determining that the applicable financial reporting framework is acceptable in the circumstances 2. Purpose of preparing the financial statements when they are based on a contract or regulation 3. Separate paragraph that indicates the financial statements are prepared in accordance with the applicable special purpose framework; paragraph should refer to the related note disclosure, and state that the special purpose framework is a basis of accounting other than GAAP Reporting When the Accountant is Not Independent The accountant should indicate the accountant s lack of independence in the compilation report. Disclosure of the reason for the lack of independence is optional. A statement should be added to the basic compilation report. EXAMPLE We are not independent with respect to ABC Company. or We are not independent with respect to ABC Company during the period covered as a member of the engagement team had a direct financial interest in the company. ****** Reporting on Financial Statements That Omit Substantially All the Disclosures Required by the Applicable Financial Reporting Framework When management elects this presentation option (assuming the presentation is not meant to mislead users), an additional paragraph must be added to the standard compilation report indicating that the disclosures have been omitted, that the omitted disclosures may influence the user s conclusions concerning the financial statements and, as a result of the disclosures being omitted, the financial statements are not designed for those who are not informed about such matters. 1-13
Reporting Other Known Departures From the Applicable Financial Reporting Framework When uncorrected known departures exist from the applicable financial reporting framework, the accountant is required to modify the compilation report for such departures. If the accountant believes that the report modification is not adequate to indicate the effect of the deficiencies on the financial statements, then the accountant should withdraw from the engagement. Information Presented For Supplementary Analysis Purposes That Accompanies Financial Statements and the Accountant s Compilation Report When this information accompanies the historical financial statements, the accountant should include an additional paragraph in the accountant s compilation report indicating the degree of responsibility, if any, the accountant is taking for the supplementary information. Other Matter EXAMPLES This supplementary information is presented for purposes of additional analysis and is not a required part of the basic financial statements. The information is the representation of management. We have performed a compilation engagement on the supplementary information. We have not audited or reviewed the supplementary information and, accordingly, do not express an opinion, a conclusion, nor provide any assurance on such information. Other Matter The supplementary information is presented for purposes of additional analysis and is not a required part of the basic financial statements. The information is the representation of management. We have not audited or reviewed the supplementary information and, accordingly, we do not express an opinion, a conclusion, nor provide any assurance on it. ****** 1-14
Required Supplementary Information When this information accompanies the historical financial statements, the accountant should include an additional paragraph in the accountant s compilation report. This paragraph should include language describing the following, if applicable: 1. The required supplementary information is included and the accountant performed a compilation engagement on the required supplementary information. 2. The required supplementary information is included and the accountant did not perform a compilation, review, or audit on the required supplementary information. 3. The required supplementary information is omitted. 4. Some of the required supplementary information is missing and some is presented in accordance with the prescribed guidelines. 5. The accountant has identified departures from the prescribed guidelines. 6. The accountant has unresolved doubts about whether the required supplementary information is presented in accordance with the prescribed guidelines. Documentation in a Compilation Engagement Documentation should reflect the work performed by the accountant in sufficient detail to provide a clear understanding of the work performed including (at a minimum) an engagement letter, a copy of the financial statements, and a copy of the accountant s report. If an accountant departs from a presumptively mandatory requirement, this must also be documented and a description of how the alternative procedure(s) performed was sufficient to achieve the intent of the mandatory requirement. 1-15
AR-C SECTION 90, REVIEW OF FINANCIAL STATEMENTS SSARS 21 defines a review as: An engagement of which the objective is to obtain limited assurance as the basis for reporting whether the accountant is aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework, primarily through the performance of inquiry and analytical procedures. Review Requirements Engagement Acceptance establishes the following conditions for accepting a review engagement: 1. The accountant should determine whether preliminary knowledge of the engagement circumstances the accountant has obtained indicate that ethical requirements regarding the accountant's professional competence will be satisfied. 2. The accountant should determine whether the financial reporting framework selected by management is acceptable. 3. The accountant should obtain the agreement of management that it acknowledges and understands its responsibilities. Agreement of the engagement terms with management must be recorded in an engagement letter signed by both the accountant and the client's management. The engagement letter should include the following: 1. The objectives of the engagement 2. The responsibilities of management 3. The responsibilities of the accountant 4. The limitations of a review engagement 5. Identification of the applicable financial reporting framework for the preparation of the financial statements 6. The expected form and content of the accountant s review report 1-16
Professional Judgment Professional judgment needs to be applied and documented throughout the review engagement. Understanding the Industry and Knowledge of the Entity Same as compilation engagements. Designing and Performing Review Procedures Identical to existing review guidance. Analytical Procedures Identical to prior review guidance. Inquiries of Members of Management Who Have Responsibility for Financial and Accounting Matters Identical to prior review guidance. Reading the Financial Statements The accountant should read the financial statements and consider whether any information has come to the accountant's attention to indicate that such financial statements do not conform to the applicable financial reporting framework. This is the same as prior review guidance. Using the Work of Other Accountants If other accountants have issued a report on the financial statements of significant components, such as subsidiaries and investees, the accountant should obtain and read the reports from the other accountants. Reconciling the Financial Statements to the Underlying Accounting Records Identical to prior review guidance. Evaluating Evidence Obtained From the Procedures Performed Identical to prior review guidance. Written Representations Written representations are necessary information that the accountant requires in connection with a review of the entity's financial statements and is therefore review evidence. No change from prior guidance. Review Documentation Review documentation should be sufficient to enable an experienced accountant having no previous connection to the review, to understand: 1. The nature, timing, extent of the review procedures performed to comply with SSARS 2. The results of the review procedures performed and the review evidence obtained (inquiries, analytical procedures, other review procedures) 3. Significant findings or issues arising during the review, the conclusions reached, and significant professional judgments made in reaching those conclusions 1-17
4. An engagement letter 5. Communications required by SSARS 6. The representation letter 7. A copy of the reviewed financial statements and the accountant's review report 8. Disclosure checklist if required by the firm Reporting on the Financial Statements 1. Comparative Financial Statements 2. Communicating to Management and Others Regarding Fraud or Non-compliance with Laws and Regulations 3. Emphasis of Matter and Other Matter Paragraphs 4. Known Departures From the Applicable Financial Reporting Framework 5. Alert that Restricts the Use of the Accountant's Review Report 6. The Accountant's Consideration of an Entity's Ability to Continue as a Going Concern 7. Subsequent Events and Subsequently Discovered Facts 8. Reference to the Work of Other Accountants in an Accountant's Review Report 9. Information Presented For Supplementary Analysis Purposes That Accompanies Reviewed Financial Statements 10. Changes in the Engagement from an Audit to a Review Summarize Changes Changes to the review engagement include: Headings added to the report letter Signed engagement letter by both parties 1-18
EXAMPLE INDEPENDENT ACCOUNTANT'S REVIEW REPORT* To the Board of Directors or Stockholders We have reviewed the accompanying balance sheet of Macklain Inc. as of December 31, 20X9, and the related statements of income, retained earnings, and cash flows for the year then ended, and the related notes to the financial statements. A review includes primarily applying analytical procedures to management s financial data and making inquiries of company management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, we do not express such an opinion. Management s Responsibility for the Financial Statements Management (Owners) is (are) responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America. This includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement whether due to fraud or error. Accountant s Responsibility Our responsibility is to conduct the review engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. Those standards require us to perform procedures to obtain limited assurance as a basis for reporting whether we are aware of any material modifications that should be made to the financial statements for them to be in accordance with accounting principles generally accepted in the United States of America. We believe that the results of our procedures provide a reasonable basis for our conclusion. Accountant s Conclusion Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America. (Signature of the accounting firm or accountant, as appropriate) (Accountant s city and state)* (Date of the accountant s review report) * Note: SSARS 21 now requires the use of headings in the report as well as disclosing the city and state of the issuing office. ****** 1-19
IDENTIFYING THE APPLICABLE STANDARDS Most accountants are familiar with SSARS and audit (SAS) standards. They are less familiar with the Statements on Standards for Attestation Engagements (SSAEs). In 2016, The Auditing Standards Board issued SSAE 18 which clarified the standards. In addition to reporting on historical financial statements, accountants are often asked to report on information other than those financial statements. These engagements often fall within the requirements of AT-C 105, Agreed-Upon Procedures, engagements. Agreed-Upon procedures is an attestation engagement defined as: An attestation engagement in which a practitioner performs specific procedures on subject matter or an assertion, and reports the findings without providing an opinion or a conclusion on it. The parties to the engagement (specified party), as defined later in the paragraph, agree upon and are responsible for the sufficiency of the procedures for their purposes. The following table summarizes the applicability of standards to various engagements: Provide Assurance on: SSARS Preparation SSARS Compilation SSARS Review Audit Attestation Review Attestation Examination Agreed Upon Procedures Historical AR-C 70 AR-C 80 AR-C 90 SAS Financial Information Prospective AR-C 70 AR-C 80 AR-C 90 AT-C 305 AT-C 305 Financial Information Pro Forma AR-C 70 AR-C 120 AT-C 310 AT-C 310 Financial Statements Non-Financial AT-C 210 Information Comfort Letters AT-C 210 Compliance AT-C 315 AT-C 315 Controls at a Service Organization Management Discussion and Analysis Other Attestation AT-C 320 AT 395 1-20
SECTION TWO FASB UPDATE INTRODUCTION Tax practitioners often do not keep up with changes to the Accounting Standards Codification (ASC) by the FASB. While many of the changes are technical, they can affect the way financial statements are presented and disclosed. Even when presenting financial statements under special purpose frameworks (SPFs), knowledge of GAAP is required when disclosing how the framework differs from GAAP. This section includes selected FASB changes that tax practitioners should be aware of in preparing financial statements. 2-1
PRIVATE COMPANY INITIATIVES Introduction Over the past several years, there has been a lot of focus on providing relief for privately held companies when it comes to some of the more complex areas of current U.S. GAAP. Both the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA) have undertaken projects to provide alternatives to private companies in this regard. Understanding the difference between the two projects has been a source of confusion for some. Private Company Council The Financial Accounting Foundation (FAF), the FASB s parent organization, established the Private Company Council (PCC). The responsibilities of the PCC are: 1. To work jointly with the FASB to mutually agree on a set of criteria to decide whether and when alternatives within U.S. GAAP are warranted for private companies. Based on those criteria, the PCC will review and propose alternatives within U.S. GAAP to address the needs of users of private company financial statements 2. To serve as the primary advisory body to the FASB on the appropriate treatment for private companies for items under active consideration on the FASB s technical agenda In December 2013, FASB and PCC issued the Private Company Decision-Making Framework, A Guide for Evaluating Financial Accounting and Reporting for Private Companies. This document establishes guidelines to identify which GAAP standards should be modified, as well as how they should be modified. The Guide identifies five significant differential factors that distinguish the financial reporting needs and objectives of private companies from those of other entities. Some of these factors could drive certain considerations in the PCC s alternative considerations: 1. The types and number of financial statement users and their access to management Increased access to management may affect information included in the footnotes. Disclosures may only need to provide enough information to allow users to identify issues where follow-up inquiry is desired. 2. Investment strategies of primary users Differences in investment strategies may mean that information about cash, liquidity, and cash flows from operations is more important than assessing changes in fair values of assets and liabilities or the value of the company as a whole. 2-2
3. Ownership and capital structure A substantial portion of private companies are pass-through entities and are tax driven. Transfer of ownership is limited. This results in different priorities in areas such as income taxes, reporting equity, and consolidation. 4. Accounting resources The limited accounting resources of private companies should be considered in setting effective dates and transition guidance in new standards. Standards should be written in plain English and there should be more outreach activities to involve private entities in the standard-setting process and educate them on applying new standards. 5. Learning about new financial reporting guidance Practitioners and preparers access CPE in smaller doses (in contrast to large organizations where current developments are analyzed and communicated regularly). Earlier implementation by public companies is helpful and allows time to learn new requirements. Implementation guidance in the Codification should include more private company examples. These overriding criteria are then incorporated into a discussion of how GAAP may be specifically modified. The Guide includes, by area, a discussion of circumstances that would support modifications, how modifications should be structured, and a flow chart on how the framework would be applied. As of the writing of this program, four new accounting ASUs were issued providing private company alternatives within U.S. GAAP based on recommendations from the PCC. The alternatives are available to entities that do not meet the definition of a public entity. Financial Reporting Framework for Small- and Medium-Sized Entities In 2013, the AICPA created an additional Special Purpose Framework (SPF): Financial Reporting Framework for Small- and Medium-Sized Entities. The framework is intended for small to medium-sized entities that require reliable and comparable financial statements (not required to be in accordance with GAAP) for internal and external use. It is structured as a blend between traditional accounting principles and accrual income tax accounting. While the framework does not definitively measure what constitutes a small/medium sized entity, there are specific characteristics identified that are similar to those identified by the PCC. The overall goal in establishing the framework was to provide financial statements that would support applications for bank financing when the banker does not base lending solely on the financial statements but also on available collateral, guarantees, and/or other evaluative mechanisms not directly related to the financial statements. This framework is available for organizations now and is available on the AICPA web site. It is not covered in this program. 2-3
ACCOUNTING STANDARDS UPDATES RESULTING FROM PCC PROJECTS ASU 2014-02 ACCOUNTING FOR GOODWILL A CONSENSUS OF THE PRIVATE COMPANY COUNCIL (ASC 350, INTANGIBLE GOODWILL AND OTHER) Objective Provide a simplified alternative for private companies accounting for goodwill subsequent to initial recognition. ASU 2014-02 accomplishes this by (a) allowing goodwill to be amortized and (b) simplifying impairment testing. Background This issue was added to a previous PCC project intended to simplify the recognition and measurement of identifiable intangible assets in a business combination. This makes sense because, if the initial measurement and recognition for goodwill is changed, the subsequent measurement should also be re-evaluated. In the end, this ASU was issued before the original project was finalized. Interestingly, the Summary in the ASU refers to findings from the FASB s outreach and research on this issue that reflect exactly the concern that practitioners have expressed for years, namely: The benefits of the current accounting for goodwill do not outweigh the costs. Most users of private company financial statements generally disregard goodwill and goodwill impairment losses in their analysis of a company s profitability and financial position. The current requirements for impairment testing are too costly and complex. Further, the recent ASU permitting an election to perform a qualitative analysis to determine if a goodwill impairment was more-likely-than-not failed to provide significant relief. For these reasons, the PCC concluded that changing the way we account for existing goodwill was warranted regardless of the outcome of the original project dealing with business combinations. 2-4