Accounting and Auditing Update

1. Accounting and Auditing Update Presented by Joanna G. Brumsey, CPA

2. Objective To enable participants to apply selected newly issued and effective technical accounting and auditing pronouncements To educate participants regarding upcoming changes

3. Outline • Section I: Hot topics for our profession • Section II: Recent accounting and auditing standards • Section III: Proposed updates • Section IV: Miscellaneous

4. Hot Topics for our ProfessionSection I

5. Hot Topics for our Profession COSO Framework Private Company Financial Reporting Third party verification letters

6. New & Improved COSO Framework • Retained • Definition of internal control • Five components of internal control • Criteria to assess effectiveness • Apply with judgment • Improvements • Codify criteria based on 17 principles that have universal application • More advice and implementation guidance regarding internal and nonfinancial reporting • Updated for today’s business and risk environment

7. Significant Changes • 17 Principles, and related attributes, are explicitly linked with the components • Reflects increased relevance of technology • Enhanced governance concepts • Expanded reporting objectives (external, internal, financial and non-financial) • Enhanced consideration of anti-fraud expectations • Expanded business models and organizational structures • Additional guidance for business conducted on a multi-locational or global basis • Special considerations for smaller entities (seg. Of duties, management override, etc.)

8. Effective Date • Transition as soon as possible; original framework superseded as of December 15, 2014 • Guidance on Internal Control Over External Financial Reporting (ICEFR) • Developed to assist users in applying the Framework to external financial reporting objectives • Issued May 2013

9. Private Company financial reporting

10. Blue Ribbon Panel Established in December, 2009, by the AICPA, FAF and NASBA Mission is to address how U.S. accounting standards can best meet the needs of users of private company financial statements

11. FAF Establishes Private Company Council Established May 2012 Private Company Council (PCC) will identify, propose, deliberate, and formally vote on specific exceptions or modifications to U.S. GAAP for private companies Approve decisions subject to FASB due process

12. Private Company Council FASB issued 3 PCC exposure drafts: • Business Combination – would permit private companies to recognize separately from goodwill only certain intangibles • Intangibles – would allow amortization of goodwill; test for impairment only upon triggering event; test impairment at entity-wide level • Derivatives and hedging – would allow simpler approach for interest rate swaps

13. FRF for SMEs Released by AICPA Financial Reporting Framework (FRF) for small and medium sized entities released June 2013 The framework has not been approved or disapproved by any technical body; no authoritative status Optional implementation, thus no “effective date” AICPA website has toolkits and FAQs

14. FRF for SMEs • Highlights: • Not based on GAAP; “Other Comprehensive Bases of Accounting (OCBOA)” • Defined set of criteria to determine measurement, recognition, presentation and disclosure of material items • No standard definition of an SME; characteristics generally defined for guidance • No industry specific guidance • Non-CPAs may prepare

15. FRF for SMEs • Who can use?: • Smaller – to – medium sized companies • Owner-managed • For profit entities • Internal or external users have direct access to the owner-manager • GAAP financial statements not required • No plans to become a public company

16. FRF for SMEs • Key provisions: • Based on a foundation of reliable and comprehensive accounting principles • Historical cost is primary measurement • Uses familiar and traditional accounting methods • Reduced disclosures from GAAP • Financial reporting is less complicated and leaner • Fewer adjustments to reconcile income tax return income with book income • Retains a traditional approach to lease accounting

17. FRF for SMEs • Key provisions, continued: • Guidance on matters typically encountered by SMEs • Asset and liability matters • Accounting changes • Business combinations • Nonmonetary transactions • Leases • Subsequent events • Contingencies • Related party transactions

18. FRF for SMEs • Differences from GAAP: • Income taxes – no provision for uncertain tax position • VIE – no consolidation • Goodwill – amortized over tax life • Investments – at cost; no recognition of FV changes in OCI • Income – no OCI or extraordinary income • Reversal of losses – allow on (1) inventory write downs, (2) impairment of equity, (3) long-lived asset impairment

19. PCC vs. FRF for SMEs • PCC focuses on modifications to US GAAP for private companies in need of statements prepared in accordance with GAAP • FRF for SMEs is a relevant framework for SMEs where US GAAP statements are not required

20. Third party verification letters

21. Third Party Verification Letters • Often referred to as “comfort” letters – however, this has a specific meaning in connection with a securities offering (AU-C section 920) • Request is actually for a “verification” letter; requests from lenders, brokers, insurance agents increasing • Often asked to provide letter with specific language, verification statement or certification

22. Third Party Verification Letters • CPAs may supply verification letters on matters except solvency – • Is not insolvent at the time the debt is incurred or would not be rendered insolvent as a result; • Does not have unreasonably small capital; • Has the ability to pay debts as they mature • Declining to offer assurance on solvency is not a RISK decision, it’s an ethical violation • Also remember client confidentiality when supplying information

23. Third Party Verification Letters • Reasons to give lenders and others – • “lender comfort letters” – AICPA technical practice aid (non-authoritative guidance) TIS Section 9110 • Refers you to AT Section 101 • Suggests other services that may be performed, such as audits/reviews/compilations, AUP, reports on prospective information, reports on pro forma personal financial information • Offer copy of tax return (with client’s consent) • Interpretation No. 2 of AT Section 101 – “responding to requests for reports on matters relating to solvency” • Most banks have no such requirement; Freddie Mac and Fannie Mae have already rescinded such requests yet the practice remains

24. Recent Accounting and Auditing StandardsSection II

25. FASB Accounting Standards

26. Recent FASB Accounting Standards • ASU 2011-10 Property, Plant and Equipment • ASU 2011-11 Offsetting Assets and Liabilities • ASU 2012-01 Health Care Entities • ASU 2012-04 Technical Corrections and Improvements • ASU 2012-05 State of Cash Flows NFP • ASU 2012-06 Business Combinations • ASU 2012-07 Entertainment – Films • ASU 2013-01 Balance Sheet – Clarifying 2011-11 • ASU 2013-02 Comprehensive Income • ASU 2013-03 Financial Instruments • ASU 2013-04 Liabilities • ASU 2013-05 Foreign Currency Matters • ASU 2013-06 NFP: Services Rec’d from Personnel of affiliate • ASU 2013-07 Liquidation Basis of Accounting • ASU 2013-08 Financial Services – Investment Companies • ASU 2013-09 FV Measurement • ASU 2013-10 Derivatives and Hedging • ASU 2013-11 Income Taxes

27. ASU 2011-10 Adoption: Prospectively PPE: Derecognition of in Substance Real Estate – Scope Clarification (Topic 360)

28. ASU 2011-10 • When a parent (reporting entity) ceases to have a controlling financial interest (per ASC 810-10) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, this ASU requires reporting entity to apply ASC 360-20 to determine whether it should derecognize the in substance real estate • ASC 360-20 establishes standards for recognition of profit on all real estate sales transactions, other than retail land sales

29. ASU 2011-11 Adoption: Retrospective for all prior periods presented Disclosures about Offsetting Assets and Liabilities (Topic 210)

30. ASU 2011-11

31. Why this ASU? • FASB and IASB agreed to disagree on when to offset • ASU seeks to obtain convergence and comparability through disclosure • Disclosures • Required irrespective of whether instruments are offset or not • Require net and gross information • Assets and liabilities separately • Description of the rights of set off

32. ASU 2012 - 04 Technical Corrections and Improvements

33. ASU 2012-04 • Not expected to have significant impact on current practice • Clarifies or corrects unintended application of guidance • Some terminology changes – • Market value/current value to “fair value” • Mark to market to “subsequently measure at fair value”

34. ASU 2012 - 05 Adoption: Prospectively; Retrospective application to prior periods presented is permitted Statement of Cash Flows: NFP Entities – Classification of Sales Proceeds of Donated Financial Assets (Topic 230)

35. ASU 2012-05

36. ASU 2012-05 • Operating CF – IF upon receipt of donated assets, they are directed for sale without any limitations and are converted nearly immediately into cash (to avoid significant investment risks and rewards) • Financing CF – IF the donor has restricted the use of securities to a long-term purpose • Investing CF – All other cash receipts resulting from the sale of debt and equity securities not meeting other conditions above

37. ASU 2013 - 01 Adoption: Retrospective for all prior periods presented Balance Sheet – Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (Topic 210)

38. ASU 2013 - 01

39. ASU 2013-01 • Derivatives accounted for under topic 815 • Bifurcated embedded derivatives • Repurchase agreements • Reverse repurchase agreements • Securities borrowing • Securities lending • Financial assets and liabilities offset in accordance with – • Section 210 • Section 815 • Master netting arrangement

40. ASU 2013 - 02 Adoption: Prospectively Comprehensive Income – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (Topic 220)

41. ASU 2013 - 02

42. ASU 2013-02 Disclosure Requirements • Information about amounts reclassified out of AOCI by component • Components = DBP, CF Hedge, FX, AFS • Net of tax by component • Presented on face or footnote by line item of net income • Cross reference to other disclosures

43. Sample Disclosures

44. Sample Disclosures

45. ASU 2013-03 Adoption: Prospectively Financial Instruments – Clarifying Scope and Applicability of Particular Disclosure to Non-Public Entity (Topic 825)

46. ASU 2013-03

47. ASU 2013-03 Clarifies disclosure exception for nonpublic entities – • All nonpublic entities that meet the criteria would NOT BE required to provide the level of the FV hierarchy within which FV measurements are categorized in the entirety (level 1, 2, 3) for such measurements that are only disclosed (i.e., they are not measured at FV in the balance sheet)

48. ASU 2013-04 Adoption: Retrospective for all prior periods presented Obligations resulting from Joint and Several Liability Arrangements for Which the Total Amount of Obligation is Fixed at the Reporting Date (Topic 405)

49. ASU 2013-04 • Joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date • Debt arrangements • Other contractual obligations • Settled litigation and judicial rulings

50. ASU 2013-04 Why this standard? Variance in practice • Record entire amount under the joint and several liability arrangement • Record less than the amount to the total obligation: • Allocated amount • Proceeds received • Portion of amount agreed to pay to co-obligors