Second Quarter 2013 Accounting, Reporting and Auditing Developments. A&A Update

Second Quarter 2013 Accounting, Reporting and Auditing Developments A&A Update July 16, 2013

Contents Accounting and Financial Reporting Matters... 1 FASB... 1 Accounting Standards Updates...1 Leases...2 Revenue Recognition...3 Accounting for Financial Instruments...4 Other Exposure Drafts...5 Private Company Council...6 GASB... 6 AICPA... 7 Non-GAAP Framework for SMEs...7 Updated Audit and Accounting Guides and Alerts...7 SEC... 8 Dodd-Frank Act Rulemaking Activity...8 Other...8 Effective Dates Highlights... 9 Assurance Matters... 12 PCAOB... 12 Auditing Standards... 12 Other... 12 AICPA... 12 Technical Q&A (Auditing)... 12 Center for Audit Quality... 13 COSO... 14 Appendix A Matters discussed in previous Quarterly Updates... 15 FASB - Accounting Standards Updates... 15 FASB Other... 21 i

Contents SEC Final Rules... 21 SEC Other... 21 AICPA Auditing Standards... 22 Technical Q&A (Accounting)... 23 Technical Q&A (Auditing)... 23 PCAOB... 24 Center for Audit Quality... 24 ii

Contents SECOND QUARTER 2013 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 A&A updates that may be of interest can be found in Appendix A. This discussion is not intended to be all-inclusive. 1.866.625.0017 dhgllp.com 2013 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. iii

Accounting and Financial Reporting ACCOUNTING AND FINANCIAL REPORTING MATTERS FASB Accounting Standards Updates ASU 2013-06: 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. 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 2013-07: 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 1940. 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 1

Accounting and Financial Reporting is imminent and be used prospectively from the day that liquidation becomes imminent. Early adoption is permitted. ASU 2013-08: 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 using the guidance in Topic 946 as a result of the 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 if certain criteria are met (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, 2013. 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 2013-09: Fair Value Measurement (Topic 820): Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04 This Update was issued to indefinitely defer quantitative information about significant unobservable inputs used in Level 3 fair value measurements for investments held by nonpublic employee benefit plans in their plan sponsor s own nonpublic equity securities. The deferral provisions are focused narrowly on the quantitative disclosures for Level 3 measurements by the plan of the plan s investments in the plan sponsor s nonpublic equity securities (including equity securities of nonpublic affiliates of the sponsor), and do not defer the requirements of quantitative disclosures for other Level 3 investments held by the plan. This deferral is effective immediately for all financial statements that have not been issued. Leases In May 2013, the FASB and IASB issued their revised joint exposure drafts (EDs) on lease accounting for a 120-day comment period. Some of the more significant changes to existing practice in the EDs include: All leases, except certain short-term leases, will be capitalized on the lessee s balance sheet. This may include certain agreements with embedded leases that have not been considered lease agreements in the past. The income statement impact will depend upon the lease term and the nature of the leased asset. 2

Accounting and Financial Reporting For lessees, most equipment and some property leases will be expensed in an accelerated manner, reflecting depreciation of the right-of-use asset and interest expense on the lease obligation, while for most property leases and some equipment leases the lessee will recognize the non-contingent portion of lease expense generally on a straight-line basis. These changes affect the entire organization and reach beyond the finance function. Companies should consider the potential areas of impact. Comments for this revised exposure draft are due by September 13, 2013. A final standard is not expected until 2014, with an effective date before 2017 unlikely. We will be releasing an A&A Update summarizing key provisions of the current FASB exposure draft in the near future. Revenue Recognition The Boards have substantively completed their redeliberations for the revenue recognition project and are expected to issue a final standard this summer. No significant developments in the revenue recognition project have transpired in the second quarter of 2013. The Boards met in the second quarter of this year and decided: To clarify the existence of a customer loyalty program and the promise to transfer award credits does not automatically give rise to a performance obligation. The guidance related to recognition, measurement and existence of a contract would apply to sales or transfers to noncustomers of nonfinancial assets, including in substance nonfinancial assets that do not constitute a business. The revenue standard is expected to permit either full retrospective application or a modified retrospective approach using practical expedients to simplify transition that would require an entity to: Apply the new revenue standard only to new contracts and contracts that are not completed under legacy IFRSs/US GAAP at the date of initial application (for example, January 1, 2017, for an entity with a December 31 year-end, based on the effective date); Recognize the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings in the year of initial application (that is, comparative years would not be restated); and In the year of initial application, provide the following additional disclosures: o o The amount by which each financial statement line item is affected in the current year as a result of the entity applying the new revenue standard; and An explanation of the significant changes between the reported results under the new revenue standard and legacy IFRSs/US GAAP. The Boards tentatively decided the standard will likely be effective for annual periods beginning on or after December 15, 2016 (IASB January 1, 2017) for public entities with a one year deferral for nonpublic entities. 3

Accounting and Financial Reporting 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 The FASB issued an exposure draft in February 2013 on the recognition, classification, measurement, and presentation of financial instruments. This exposure draft is significantly changed from the original 2010 exposure draft. The FASB is proposing a measurement approach for financial assets based on the cash flow characteristics and business model resulting in three possible scenarios: If the financial asset passes the contractual cash flows characteristics criterion and the asset is managed along with other financial assets within a business model designed to hold assets for the collection of the contractual cash flows the asset would be measured at amortized cost If the financial asset passes the contractual cash flows characteristics criterion and the asset is managed along with other financial assets within a business model designed to either hold assets for the collection of the contractual cash flows or sell assets, the asset would be measured at fair value with changes recognized in other comprehensive income (FV-OCI) Measurement at fair value with changes recognized in net income (FV-NI) is the residual category for debt-instrument financial assets that are not held in a business model consistent with amortized cost or FV-OCI Equity investments (not accounted for under the equity method) would be measured at FV-NI. There is a practicability exception for investments that do not have a readily determinable fair value (provided they do not qualify for the practical expedient in ASC 820-10-35-59 of measurement at the NAV), which is similar to the cost method of accounting. The exposure draft eliminated several previously utilized concepts including the fair value option for equity method investments and hybrid nonfinancial instruments. Also the bifurcation requirements of embedded derivatives for hybrid financial assets are eliminated. If an entity reclassifies a financial instrument (which is expected to occur infrequently) the entity would account for it prospectively. Public companies would be required to parenthetically disclose the fair value of financial assets measured at amortized cost. Financial liabilities will largely be accounted for at amortized cost, unless the entity s business strategy when the liability is incurred is to subsequently transact at fair value or the liability results from a short sale in which case the liability would be recorded at fair value. In circumstances in which financial assets would be used to settle nonrecourse financial liabilities, an entity would measure its financial liabilities on the same measurement basis as the related financial assets. On April 12, 2013, the FASB released a companion document to the February 2013 ED which included consequential amendments to various topics in the Accounting Standards Codification affected by the ED. The comment period ended May 15, 2013. The FASB and the IASB will begin joint deliberations in July 2013. Credit Impairment On December 20, 2012, the FASB issued an ED on accounting for credit losses. The FASB and IASB initially developed and agreed on a three-bucket approach to impairment; however, while the IASB decided to retain this approach, the FASB recently abandoned this approach in favor of using a simpler current expected credit loss model (one-bucket model). In this approach, when estimating the loss, the allowance would reflect the current estimate of contractual cash flows not expected to be collected on 4

Accounting and Financial Reporting financial assets. The threshold for recognizing losses has been removed, which is in contrast to current guidance (where the threshold of probable is required before a loss is recognized); as the FASB believes the threshold may have interfered with the timely recognition of credit losses (which would overstate assets) during the recent global economic crisis. As shown in the following table, the primary difference between the FASB and the IASB s credit impairment recognition approaches result from the threshold used to measure expected losses. IASB FASB Approach Credit Deterioration Current Expected Credit Loss Expected Losses Threshold Significant deterioration (Buckets 2 & 3): lifetime of expected losses All others (Bucket 1): next 12 months of expected losses Estimate of contractual cash flows not expected to be collected (i.e. lifetime) On March 25, 2013, the FASB issued a staff document responding to frequently asked questions to clarify their exposure draft and facilitate constituent understanding in the following areas: project objectives, measuring expected credit losses and other alternatives considered. The comment period ended on May 31, 2013. The IASB comment period ends on July 5, 2013. Other Exposure Drafts The FASB has been very active lately in issuing exposure drafts. Though there have only been three Accounting Standards Updates issued this quarter, several exposure drafts are outstanding on a variety of issues. The table below summarizes the outstanding exposure drafts that are open for comment and when comments are due for each. A full listing of all exposure drafts, including those for which the comment period has ended can be accessed via the Project Page on the FASB s website. Exposure Draft Description Due Date of Comments Insurance Contracts (Topic 834) Going Concern (Topic 205) Sets forth a comprehensive approach to accounting for insurance contracts. The accounting models will be based on the nature of the contracts, not the type of insurer, which will also impact noninsurance companies if they issue insurance contracts. Requires entities to determine when and how to disclose going-concern uncertainties. Annual and interim goingconcern assessments would be required by management for a period of 24 months after the financial statement date. Additional disclosures would be required if it is more likely than not the entity will not be able to meet its obligations within 12 months or probable it will not be able to meet its obligations within 24 months. October 25, 2013 September 24, 2013 5

Accounting and Financial Reporting Exposure Draft Description Due Date of Comments Leases (Topic 842) Discontinued Operations (Topic 205) Interest rate swaps, Goodwill and intangible assets Technical Corrections and Improvements Related to Glossary Terms This exposure draft puts forth a new model for lease accounting (both lessee and lessor). Most leases will be capitalized on the balance sheet. The income statement impact will depend on the nature of the asset and the term of the lease. The definition of a discontinued operation would be converged with IFRS 5 and additional disclosures would be required for disposals of both discontinued operations and significant components that are not classified as discontinued operations. These are the three EDs noted below as proposals of the Private Company Council. All EDs would impact private companies; see below for additional information on each exposure draft. Various corrections including deletions, additional links and removal of duplicate terms which will affect several Codification topics. September 13, 2013 August 30, 2013 August 23, 2013 August 5, 2013 Private Company Council In June the FASB unanimously endorsed the three Private Company Council s (PCC) proposals for less complex accounting alternatives for private companies. On July 1, 2013 the FASB released the exposure drafts for public comment. The proposals involve accounting for: Business combinations modifies the criteria for separately recognizing intangible assets to require recognition of those arising only from noncancelable contracts or other legal rights. The new criteria could result in fewer separately recognized intangible assets. Goodwill would create an accounting alternative to amortize goodwill over a period that would not exceed ten years, as well as a simplified goodwill impairment model, requiring impairment testing only when a triggering event occurs and on an entity-wide basis. Interest rate swaps creates an accounting alternative for certain entities to use two simplified approaches to accounting for certain plain vanilla interest rate swaps that are entered into for the purpose of economically converting variable-rate borrowing to a fixed-rate borrowing. The comment period ends August 23, 2013. The effective dates will be determined after feedback is received. These topics will be discussed at the September PCC meeting. GASB On June 27, 2013, the GASB published an Implementation Guide to assist preparers and auditors of state and local government pension plan financial reports with the adoption of GASB 67. The guide includes topics such as: The scope and applicability of GASB Statement No. 67, Financial Reporting for Pension Plans 6

Accounting and Financial Reporting The classification of pensions as defined benefit or defined contribution The determination of the number of pension plans that should be reported The recognition of certain transactions and other events in defined benefit pension plan financial statements Note disclosures and required supplementary information The calculation of the net pension liability For information, see the Implementation Guide and related press release on the GASB s web site. AICPA Non-GAAP Framework for SMEs On June 10, 2013 the AICPA released its Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs). The FRF for SMEs is a non-gaap financial reporting option for entities not required to report under U.S. GAAP. The National Association of State Boards of Accountancy (NASBA), the Institute of Management Accountants (IMA) and the Financial Accounting Foundation (FAF) have all issued releases critical of the FRF for SMEs. Among other reasons, these organizations point to the progress the PCC is making in addressing the needs of private companies from a U.S. GAAP reporting standpoint, and raise questions regarding the difficulty in regulating or enforcing such non-authoritative guidance and the potential confusion that could be created for preparers and users of financial statements under such a framework. NASBA said in its June 13, 2013 statement that private companies should not consider adopting the [FRF for SMEs] Updated Audit and Accounting Guides and Alerts The AICPA has updated many of their Audit and Accounting Guides in the second quarter including the following: Government Auditing Standards and Circular A-133 Audits Airlines Construction Contractors Employee Benefit Plans Investment Companies Property and Liability Insurance Entities Not-for-Profit Entities State and Local Governments Compilation and Review Engagements Service Organizations: Reporting on Controls at a Service Organization Relevant to User Entities Internal Control Over Financial Reporting (SOC 1) Valuation of Privately-Held-Company Equity Securities Issued as Compensation They have also updated previously issued Audit Risk Alerts including: Understanding the Responsibilities of Auditors for Audits of Group Financial Statements Government Auditing Standards and Circular A-133 Developments Service Organization Control Reports: Considerations for User and Service Auditor Not-for-Profit Entities Employee Benefit Plans Industry Developments State and Local Governmental Developments 7

Accounting and Financial Reporting SEC Dodd-Frank Act Rulemaking Activity Release 34-69284, Amendment to Rule Filing Requirements for Dually-Registered Clearing Agencies The amendments to Rule 19b-4 and the instructions to Form 19b-4 are intended to streamline the rule filing process in areas involving certain activities concerning non-security products that may be subject to duplicative or inconsistent regulation as a result of, in part, certain provisions under Section 763(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ( Dodd-Frank Act ). Effective Date: June 10, 2013. Release 34-69359, Identity Theft Red Flags Rules This amendment is jointly issued by the Commodity Futures Trading Commission ( CFTC ) and the Securities and Exchange Commission ( SEC ) (together, the Commissions ) to require certain regulated entities to establish programs to address risks of identity theft. These rules and guidelines implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which amended section 615(e) of the Fair Credit Reporting Act and directed the Commissions to adopt rules requiring entities that are subject to the Commissions respective enforcement authorities to address identity theft. First, the rules require financial institutions and creditors to develop and implement a written identity theft prevention program designed to detect, prevent, and mitigate identity theft in connection with certain existing accounts or the opening of new accounts. The rules include guidelines to assist entities in the formulation and maintenance of programs that would satisfy the requirements of the rules. Second, the rules establish special requirements for any credit and debit card issuers that are subject to the Commissions respective enforcement authorities, to assess the validity of notifications of changes of address under certain circumstances. Effective date: May 20, 2013. Compliance Date: November 20, 2013. Conflict Minerals and Resource Extraction On May 30, 2013, the Division of Corporation Finance published Frequently Asked Questions for Conflict Minerals and Disclosures of Payments by Resource Extraction Issuers which are available at the SEC website. Other On July 2, 2013 the SEC announced three new initiatives to focus on high-risk areas of the market and provide technological and analytical resources to the Division of Enforcement s investigations. The initiatives include: A Financial Reporting and Audit Task Force that will be focused on fraudulent or improper financial reporting The Microcap Fraud Task Force that will be focused on fraud and abusive trading of securities issued by microcap companies The Center for Risk and Quantitative Analytics that will be focused on analysis to assist the Division of Enforcement in profiling high-risk behaviors and transactions. In the second quarter the SEC updated certain Compliance and Disclosure Interpretations (CDIs) relating to Securities and Exchange Act Sections, Rules and Forms as well as Oil and Gas Rules. The most recent Financial Reporting Manual can be found on the SEC s website. At the time this document was prepared, the most recent was updated April 4, 2013 effective December 31, 2012. The next quarterly update is expected to be available in July. 8

Effective Dates Highlights EFFECTIVE DATES HIGHLIGHTS Accounting Standards Update ASU 2013-09:Fair Value Measurement: Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04 ASU 2013-08: Financial Services Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements ASU 2013-07: Liquidation Basis of Accounting ASU 2013-06: Not-for-Profit Entities (Topic 958): Services Received from Personnel of an Affiliate ASU 2013-05, 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 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date ASU 2013-03, Financial Instruments (Topic 825): Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ASU 2012-07, Accounting for Fair Value Information That Arises after the Measurement Date and Its Inclusion in the Impairment Analysis of Unamortized Film Costs ASU No. 2012-06, Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government- Assisted Acquisition of a Financial Institution ASU No. 2012-05, Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows Public Entities Only applicable to nonpublic entities Effective Date Nonpublic Entities Early Adopt? Transition Upon issuance Prospective 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 Impairment assessments performed on or 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 Prospectively (1) Prospective (2) Retrospective (3) Upon issuance Prospective Reporting periods beginning after December 15, 2013 Impairment assessments performed on or after December 15, 2013 (4) Prospective Prospective Fiscal years, and interim periods within those years, beginning after December 15, 2012 Prospective Fiscal years, and interim periods within those years, beginning after June 15, 2013 (5) Retrospective or Prospective 9

Effective Dates Highlights Accounting Standards Update ASU No. 2012-02, Testing Indefinite- Lived Intangible Assets for Impairment ASU 2012-01, Continuing Care Retirement Communities Refundable Advance Fees ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities ASU No. 2011-10, Derecognition of in Substance Real Estate ASU No. 2011-09, Disclosures about an Employer s Participation in a Multiemployer Plan ASU No. 2011-07, Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities ASU No. 2011-06, Fees Paid to the Federal Government by Health Insurers ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 ASU No. 2011-05, Presentation of Comprehensive Income Public Entities Effective Date Nonpublic Entities Early Adopt? Transition Fiscal years beginning after September 15, 2012 Prospective Annual periods beginning after December 15, 2012 Annual periods beginning after December 15, 2013 Retrospective Annual periods beginning on or after January 1, 2013 and interim periods within those annual periods Retrospective Fiscal years, and interim periods within those years, beginning on or after June 15, 2012 Annual periods ending after December 15, 2011 Fiscal years, and interim periods within those years, beginning after December 15, 2011 Annual periods ending after December 15, 2013 and interim and annual periods thereafter Prospective Annual periods ending after December 15, 2012 Retrospective Annual periods ending after December 15, 2012 and interim and annual periods thereafter Retrospective (6) Calendar years beginning after December 31, 2013 Prospective Fiscal years, and interim periods within those years, beginning after December 15, 2011 Fiscal years ending after December 15, 2012 and interim and annual periods thereafter Retrospective ASU No. 2011-02, A Creditor s Determination of Whether a Restructuring Is a Troubled Debt Restructuring Interim or annual periods beginning on or after June 15, 2011 Annual periods ending on or after December 15, 2012, including interim periods within those annual periods Retrospective (7) (1) 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. (2) 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. (3) 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 10

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. (4) Earlier application is permitted, including for impairment assessments performed as of a date before October 24, 2012, if, for SEC filers, the entity s financial statements for the most recent annual or interim period have not yet been issued or, for all other entities, have not yet been made available for issuance. (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. (6) Except for disclosures to be provided prospectively. (7) Retrospective application to the beginning of the annual period of adoption. 11

Assurance Matters ASSURANCE MATTERS PCAOB Auditing Standards Auditing Standard No. 16, Communications with Audit Committees. The SEC approved AS 16 on December 17, 2012. AS 16 establishes requirements that enhance the relevance and timeliness of the communications between the auditor and the audit committee, and is intended to foster constructive dialogue between the two on significant audit and financial statement matters. The standard is effective for public company audits of fiscal periods beginning on or after December 15, 2012. Other On July 3, 2013, the PCAOB issued an updated standard setting agenda. The PCAOB is expecting to propose standards this year related to the auditor s reporting model as well as the auditors responsibilities with respect to other accounting firms, individual accountants, and specialists. They also expect to adopt or re-propose a standard on the identification of the engagement partner. Depending on the timing of the FASB s going concern project the PCAOB may also issue a proposal on going concern this year. Furthermore, the PCAOB may issue or re-propose a standard on audits of broker-dealers this year, depending on the timing of the SEC s adoption or re-proposal of amendments to Rule 17a-5. On May 7, 2013, the PCAOB re-proposed an auditing standard on related parties based on comments received on its 2012 proposal. The re-proposed standard would supersede the Board s existing auditing standard on related parties (AU 334). Comments are due by July 8, 2013. On March 26, 2013, the PCAOB issued a proposed framework for reorganizing the existing interim and PCAOB issued auditing standards into a topical structure with a single integrated numbering system. Included are certain related amendments to the PCAOB auditing standards and as well as the removal of certain interim auditing standards that the PCAOB believes are no longer necessary under the proposed reorganization. In addition, the PCAOB is proposing certain conforming amendments to Rule 3101, Certain Terms Used in Auditing and Related Professional Practice Standards, and Rule 3200T, Interim Auditing Standards. Comments were due by May 28, 2013. AICPA Technical Q&A (Auditing) TIS 8800.01-.43, Audits of Group Financial Statements and Work of Others. These TPAs address numerous questions related to AU-C 600, Special Considerations Audits of Group Financial Statements. In June two additional questions and answers were included (.42 and.43) regarding use of an audit report of a component balance sheet only and using other auditors to perform inventory observations. Topics addressed in this TIS section include: Factors to consider when determining whether to act as the group auditor Factors to consider when determining whether to make reference or assume the responsibility for the work of component auditors Making reference to a component auditor Criteria used to identify components, including significant components Determining component materiality Components that have different year ends Using net asset value to calculate fair value 12

Assurance Matters Disaggregation of account balances VIEs as components Components using different accounting basis than the group Other areas are addressed as well; the entire TIS section can be found at the AICPA s website and Accounting Research Manager. TIS 9100.08, Audit Firm With Multiple Offices on Their Company Letterhead and Effect on Report. This TPA clarifies that when the auditor s letterhead includes multiple office locations the auditor would need to indicate the city and state where the auditor practices in the auditor s report. Center for Audit Quality On May 13, 2013 the CAQ sent a letter to the PCAOB in response to the PCAOB s consideration of audit quality indicators. Topics in the CAQ letter included components of an audit quality definition, beneficiaries of an audit, the role others have in audit quality, and possible criteria for identifying audit quality indicators. When defining audit quality the CAQ suggests it should: Recognize the role that the audit committee plays in providing oversight of the audit services, and how this oversight contributes to enhanced confidence in the financial statements. Incorporate the following key components: o o Compliance with the applicable regulations and professional standards. Consideration of the audit firm s system of quality control, which is designed to consistently deliver quality audits in a dynamic and evolving environment. Provide linkage to the key elements of an audit quality framework as developed based on the PCAOB s quality control standards or other professional standards (e.g., value, ethics, and attitude; knowledge, experience, and time; process and execution; and reporting and communications). The letter can be found on the CAQ s website. 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. The CAQ has posted highlights from the March 19, 2013 meeting; items discussed include: Pro Forma Adjustments - It was noted by the SEC staff that there may be certain situations for which the twelve month rule of thumb used for evaluating the continuing impact criterion under S- X Rule 11-02(b)(6) may not work very well. Consideration by the staff is being given to allowing more than a one-time view of continuing impact. The JOBS Act and questions that continue to arise around the application of the provisions of the Act under specific fact patterns. During 2012 the SEC published several Frequently Asked Questions to provide guidance on implementation. The recommendations of the SEC Advisory Committee on Small and Emerging Businesses. Consideration is being given to simplifying Rule 3-14 of Regulation S-X regarding specialized reporting instructions for acquired real estate operations. The application of Rule 3-10 of Regulation S-X when changes in the guarantor structure occur. A roundtable discussion is being planned to clarify what information should be included in the basic financial statements versus the entire reporting package such as MD&A. The need for the roundtable arose as a result of questions from the FASB s disclosure project. 13

Assurance Matters Compliance with Rule 3-09 of Regulation S-X when the registrant s and the investee s fiscal year ends differ by six months. Application of the grace period of the annual report in Rule 3-09 of Regulation S-X in connection with a registration statement Measuring the significance of a recently acquired subsidiary or issuer guarantor under Rule 3-10(g) of Regulation S-X Application of the updating requirements of Rule 3-05 Financial Statements when Rule 3-06 of Regulation S-X has previously been used to satisfy the audited financial statements requirement in the most recent year The full summary of the meeting has been posted on the CAQ s Web Site. COSO On May 14, 2013 the Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued its updated Internal Control Integrated Framework. This is an update to the original framework published in 1992 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. 14

Appendix A Matters discussed in previous Quarterly Updates APPENDIX A MATTERS DISCUSSED IN PREVIOUS QUARTERLY UPDATES FASB - Accounting Standards Updates ASU 2011-02: Receivables (Topic 310): A Creditor s Determination of Whether a Restructuring Is a Troubled Debt. The Update clarifies which loan modifications constitute troubled debt restructurings. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. Note that this Update also addresses the deferral of the disclosures required by ASU 2010-20 relating to troubled debt restructurings. For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. For nonpublic entities, the amendments to the Codification in the Update are effective for annual periods ending on or after December 15, 2012, including interim periods within those annual periods. Early application is permitted. ASU 2011-05: Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The amendments in this Update allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this Update should be applied retrospectively. ASU 2011-12, discussed below, delayed the effectiveness of the provisions of this ASU requiring the presentation on the face of the income statement of the components of net income that are being reclassified from accumulated other comprehensive income. ASU 2013-02, discussed below, finalized the reporting requirements for reclassifications out of accumulated other comprehensive income (AOCI). The remaining provisions of ASU 2011-05 were not deferred. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. For issuers previously reporting other comprehensive income and total comprehensive income in the shareholders equity statement that file a registration statement after reflecting adoption of the provisions of this Update in their first quarter 10-Q, you are reminded that Regulation S-X requires the annual audited financial statements to be revised to reflect retrospective application of this accounting change (if material). While this is typically done via filing the required revised audited financial statements on a Form 8-K or an amended Form 10-K, the SEC Staff indicated during its September 2011 meeting with the CAQ SEC Regulations Committee that they would not object if the registrant concludes and its auditor agrees that there is no need to retrospectively revise previously issued annual audited financial statements incorporated by reference in the filing, as long as the filing includes prominent transparent disclosure (e.g. in a selected financial data type table) of the primary components of a statement of comprehensive income. See the minutes of the September 27, 2011 meeting at the Center for Audit Quality website for additional information. 15

Appendix A Matters discussed in previous Quarterly Updates ASU 2011-06: Other Expenses (Topic 720): Fees Paid to the Federal Government by Heath Insurers. The amendments in this Update specify that the liability for the fee should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that is payable. Additionally, this Update indicates that the fee would not meet the definition of an acquisition cost, as defined in ASU 2010-26. The amendments in this update are effective for calendar years beginning after December 31, 2013, when the fee initially becomes effective. ASU 2011-07: Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities. The amendments in this Update require certain health care entities to change the presentation of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts), as well as to provide enhanced disclosures about policies for recognizing revenue and assessing bad debts. The amendments also require disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. For public entities, the amendments in this Update are effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011. For nonpublic entities, the amendments are effective for the first annual period ending after December 15, 2012, and interim and annual periods thereafter. Early adoption is permitted. ASU 2011-09: Compensation Retirement Benefits Multiemployer Plans (Subtopic 715-80). For employers that participate in multiemployer pension plans, the amendments in this Update require an employer to provide additional quantitative and qualitative disclosures. The amended disclosures provide users with more detailed information about an employer s involvement in multiemployer pension plans, including the level of the employer s participation in significant multiemployer plans, the financial health of the plans, including an indication of the funded status, and the nature of employer commitments to the plan. For public entities, the amendments are effective for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted. For nonpublic entities, the amendments are effective for annual periods for fiscal years ending after December 15, 2012, with early adoption permitted. The amendments should be applied retrospectively for all prior periods presented. ASU 2011-10: Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate a Scope Clarification. The objective of this Update is to resolve the diversity in practice about whether the guidance in Subtopic 360-20, Property, Plant, and Equipment -- Real Estate Sales, of Topic 360, applies to a parent that ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary s nonrecourse debt. This Update provides that when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary s nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20 to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness. That is, even if the reporting entity ceases to have a controlling financial interest under Subtopic 810-10, the reporting entity would continue to include the real estate, debt, and the results of the subsidiary s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt. The amendments should be applied on a prospective basis to deconsolidation events occurring after the effective date; with prior periods not adjusted even if the reporting entity has continuing 16