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Audit & Accounting Update

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Insero & Company's annual Audit & Accounting Update as presented by Timothy McLaughlin, CPA, CGMA and Jennifer Martlew, CPA, CFE

Insero & Company's annual Audit & Accounting Update as presented by Timothy McLaughlin, CPA, CGMA and Jennifer Martlew, CPA, CFE

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  • 1. Audit & Accounting Update presented by Timothy McLaughlin, CPA, CGMA, Partner Jennifer Martlew, CPA, CFE, Director Insero & Company CPAs, P.C. September 25, 2013 Insero & Company presents
  • 2. Agenda • Speakers/Intro/Timeline • Session #1 • Standards Updates • Session #2 • 401(k) Plan Trends • Session #3 • Reporting Updates • Other
  • 3. Timothy McLaughlin, CPA Tim has 28 years of audit experience and is the head of our Audit and Accounting Services Group. Tim is the primary lead partner on a wide variety of engagements. Tim also has significant experience with benefit plan audits and provides consulting services to manufacturing, real estate, service and high tech clients. Tim also serves as our Quality Control/Auditing and Accounting Director and consults with our partners and managers as well as the senior management of our clients regarding technical audit and accounting issues.
  • 4. Jennifer Martlew, CPA, CFE Jennifer is a Director in the Audit & Accounting Department and has been with Insero & Company since 2000. She leads the planning and execution of Audits for large multi-national clients as well as many closely held middle market corporations. She has also helped to grow the company's benefit plan audit practice into one of the 25 largest benefit plan audit practices in the United States.
  • 5. FASB Updates
  • 6. FASB Updates • FASB Codification • Accounting Standards Update • 11 New ASUs in 2013 (So Far) • 7 New ASUs in 2012 • 10 New ASUs in 2011
  • 7. Summary of NewAccounting Standards Updates Since September 2012
  • 8. ASU 2012 – 04 Technical Corrections and Improvements This Update contains amendments that affect a wide variety of Topics in the Codification. The Status tables in the ASU list all Topics affected by this Update. The amendments in this Update apply to all reporting entities within the scope of the affected accounting guidance. • Mostly technical corrections and definitions • Expanded Fair Value Guidance
  • 9. ASU 2012 – 05 Statement of Cash Flows (Topic 230) Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows The objective of this Update is to address the diversity in practice about how to classify cash receipts arising from the sale of donated financial assets, such as securities, in the Statement of Cash Flows of not-for-profit entities (NFPs).
  • 10. ASU 2012 – 05 (continued) Statement of Cash Flows (Topic 230) Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows The Update requires an NFP to classify cash receipts from the sale of donated financial assets consistently with cash donations received in the statement of cash flows if those cash receipts were from the sale of donated financial assets that upon receipt were directed without any NFP-imposed limitations for sale and were converted nearly immediately into cash. Accordingly, the cash receipts from the sale of those financial assets should be classified as cash inflows from operating activities, unless the donor restricted the use of the contributed resources to long-term purposes, in which case those cash receipts should be classified as cash flows from financing activities. Otherwise, cash receipts from the sale of donated financial assets should be classified as cash flows from investing activities.
  • 11. ASU 2012 – 06 Business Combinations (Topic 805) Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution When a reporting entity recognizes an indemnification asset (in accordance with Subtopic 805-20) as a result of a government-assisted acquisition of a financial institution and subsequently a change in the cash flows expected to be collected on the indemnification asset occurs, the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement.
  • 12. ASU 2012 – 07 Entertainment—Films (Topic 926) Accounting for Fair Value Information That Arises after the Measurement Date and Its Inclusion in the Impairment Analysis of Unamortized Film Costs The amendments in this Update eliminate certain requirements related to an impairment assessment of unamortized film costs and clarify when unamortized film costs should be assessed for impairment.
  • 13. ASU 2013 – 01 Balance Sheet (Topic 210) Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities The main objective in this Update is to address implementation issues about the scope of Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments clarify that the scope of Update 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement.
  • 14. ASU 2013 – 02 Comprehensive Income (Topic 220) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income The objective of this Update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments in this Update requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. For nonpublic entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted.
  • 15. ASU 2013 – 03 Financial Instruments (Topic 825) Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities The main objective of this Update is to clarify the scope and applicability of a particular disclosure to nonpublic entities that resulted from the issuance of Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. Contrary to the stated intent of Update 2011-04 to exempt all nonpublic entities for a particular disclosure, that Update’s amendments to Topic 825 suggested that nonpublic entities that have total assets of $100 million or more or that have one or more derivative instruments would not qualify for the intended exemption.
  • 16. ASU 2013 – 03 (continued) Financial Instruments (Topic 825) Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities The amendments clarify that the requirement to disclose “the level of the fair value hierarchy within which the fair value measurements are categorized in their entirety (Level 1, 2, or 3)” does not apply to nonpublic entities for items that are not measured at fair value in the statement of financial position but for which fair value is disclosed.
  • 17. ASU 2013 – 04 Liabilities (Topic 405) Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date The objective of the amendments in this Update is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. Examples of obligations within the scope of this Update include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. U.S. GAAP does not include specific guidance on accounting for such obligations, which has resulted in diversity in practice. Some entities record the entire amount under the joint and several liability. Other entities record less than the total amount of the obligation, such as an amount allocated, an amount corresponding to the proceeds received, or the portion of the amount the entity agreed to pay.
  • 18. ASU 2013 – 04 (continued) Liabilities (Topic 405) Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date The guidance in this Update requires an entity to measure obligations resulting from joint and several liability arrangements as the sum of the following: 1. The amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors 2. Any additional amount the reporting entity expects to pay on behalf of its co-obligors
  • 19. ASU 2013 – 05 Foreign Currency Matters (Topic 830) 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 The objective of the amendments in this Update is to resolve the diversity in practice about whether Subtopic 810-10, Consolidation, or Subtopic 830-30, Foreign Currency Matters, applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity.
  • 20. ASU 2013 – 05 (continued)
  • 21. ASU 2013 – 06 Not-for-Profit Entities (Topic 958) Services Received from Personnel of an Affiliate The revenue recognition guidance for not-for-profit entities requires that contributed services be recognized at fair value if employees of separately governed affiliated entities regularly perform services for and under the direction of the donee. The objective of the amendments in this Update is to specify the guidance that not-for-profit entities apply for recognizing and measuring services received from personnel of an affiliate.
  • 22. ASU 2013 – 07 Presentation of Financial Statements (Topic 205) Liquidation Basis of Accounting There is minimal guidance in current U.S. GAAP that addresses the application of the liquidation basis of accounting. The amendments require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Liquidation is imminent when the likelihood is remote that the entity will return from liquidation and either (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective or (b) a plan for liquidation is being imposed by other forces (for example, involuntary bankruptcy).
  • 23. ASU 2013 – 08 Financial Services—Investment Companies (Topic 946) Amendments to the Scope, Measurement, and Disclosure Requirements Under U.S. GAAP, investment companies generally measure their investments at fair value, including controlling financial interests in investees that are not investment companies. In contrast, before the issuance of guidance in Investment Entities (Amendments to IFRS 10, IFRS 12, and IAS 27), IFRS did not include the concept of an investment company and required reporting entities to consolidate controlled investees. As part of the joint project on consolidation, the FASB and the IASB agreed that they would look to develop a consistent approach for determining whether an entity is an investment company. The amendments in this Update modify the guidance in Topic 946 for determining whether an entity is an investment company.
  • 24. 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 Stakeholders raised concerns that certain disclosure requirements in ASC paragraph 820-10-50-2, which was effective for nonpublic entities for annual periods beginning after December 15, 2011, potentially provide proprietary information about nonpublic entities through the dissemination of their employee benefit plans’ financial statements on the regulator’s website. The amendments in this Update address those concerns. The amendments in this Update defer indefinitely the effective date of certain required disclosures in Update 2011-04 (Topic 820) of information about the significant unobservable inputs used in Level 3 fair value measurements for investments held by a nonpublic employee benefit plan in its plan sponsor’s own nonpublic entity equity securities.
  • 25. ASU 2013 – 10 Derivatives and Hedging (Topic 815) Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes Topic 815, Derivatives and Hedging, provides guidance on the risks that are permitted to be hedged in a fair value or cash flow hedge. Among those risks for financial assets and financial liabilities is the risk of changes in a hedged item’s fair value or a hedged transaction’s cash flows attributable to changes in the designated benchmark interest rate (referred to as interest rate risk). In the United States, currently only the interest rates on direct Treasury obligations and, the London Interbank Offered Rate (LIBOR) swap rate are considered benchmark interest rates. The amendments in this Update also permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815.
  • 26. ASU 2013 – 11 Income Taxes (Topic 740) Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists Topic 740, Income Taxes, does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. There is diversity in practice in the presentation of unrecognized tax benefits in those instances.
  • 27. ASU 2013 – 11 (continued) Income Taxes (Topic 740) Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists An unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.
  • 28. FASB Pipeline
  • 29. FASB Pipeline • Definition of a Nonpublic Entity – ED Issued 8/2013 • Going Concern – Comment Period • Reporting Discontinued Operations – In process • Consolidation: Policy and Procedures – In process • Transfers and Servicing: Repurchase Agreements and Similar Transactions – Final Standard Q4 • Not-for-Profit Financial Reporting: Financial Statements – ED Q4 2013 • Clarifying the Definition of a Business (formerly Application of Asset – or Entity-Based Guidance to Nonfinancial Assets Held in an Entity) – In process • Disclosure Framework – In process • Investment Companies: Disclosures about Investments in Another Investment Company – In process • Development Stage Entities – ED Q4 2013 • Accounting for Government Assistance – In process • Pensions and Other Postretirement Benefits – In process
  • 30. FASB/IASB Convergence Projects
  • 31. FASB/IASB Joint Projects: • These projects are part of the overall Convergence Project • Goal of the convergence project is to converge US GAAP and IFRS into one common world-wide set of GAAP • Started in 2002 Convergence Project Status
  • 32. FASB/IASB Key Joint Projects That Are In Process: • Lease Accounting • Accounting for Financial Instruments • Revenue Recognition • Consolidation • Insurance Contracts No implementation anticipated until January 1, 2015 Convergence Project Status
  • 33. Current Status of the Key Projects:: Leases Q3 2013 – Current Comment Period Ends Financial instruments Exposure Draft Issued Final Standard Expected 2014 Revenue Recognition Q4 2013 – Projected Completion Expected Final Standard to be issued Consolidation November 2011 – Exposure draft issued Ongoing deliberations Insurance Contracts Comment period closes Q4 2013 Convergence Project Status
  • 34. Summary of the Key Projects Leases Eye Opener: Off-balance-sheet accounting for most leases greater than 12 months would no longer be allowed. Convergence Project Status
  • 35. Summary of the Key Projects (continued) Financial Instruments Eye Opener: The requirement to measure at fair value would be expanded to additional financial instruments (FI). Convergence Project Status
  • 36. Summary of the Key Projects (continued) Revenue Recognition Eye Opener: Most industry-specific revenue recognition guidance would be replaced. Why are they doing this? To clarify the principles for recognizing revenue and develop a common revenue standard that would replace almost all existing revenue recognition guidance. Convergence Project Status
  • 37. Summary of the Key Projects (continued) Consolidation Eye Opener: The consolidation models for variable interest and voting interest entities would be more closely aligned. Why are they doing this? To consider comprehensive guidance for consolidation of all entities, including entities controlled by voting or similar interests, as well as to provide comprehensive guidance that would be used to: (a) assess whether an entity is an investment company and (b) measure an investment company’s investments. To facilitate achievement of these objectives, this project has been separated into two projects covering consolidation policy and procedures and investment companies. Convergence Project Status
  • 38. Update on International Financial Reporting Standards (IFRS)
  • 39. • International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) that are becoming a global standard for the preparation of public company financial statements. • In the US, the Securities and Exchange Commission (SEC) has expressed support for a core set of accounting standards that could serve as a framework for cross-border offerings. • Process started in 2001/2002 FASB/IASB Norwalk Agreement • Convergence Projects begin – FASB/IASB join forces on new/revised standards • 2008 – 2012 SEC is slow to “get on board” • SEC July 2012 Staff Report A Background of IFRS
  • 40. • The SEC July 2012 staff report reiterates US commitment to global standards however no timetable is set • SEC Concerns: o There is not sufficient support among constituents at this time for designating IFRS as the authoritative standards in the U.S. without an endorsement mechanism. (US Based Approval) o There is substantial support among constituents to continue exploring the incorporation of IFRS into the financial reporting system for U.S. issuers using a method other than designating IFRS as the authoritative standards in the U.S. One such method might involve an endorsement mechanism whereby the FASB has to endorse an IFRS standard before it becomes part of U.S. GAAP. IFRS “Trouble In Paradise”
  • 41. • SEC Staff: o Does Not provide a final recommendation to SEC o Does Not set any IFRS timeline o Current Status is unknown o IFRS now in state of Limbo • Since July 2012 there has been no movement • IFRS for SMEs is still allowed by AICPA IFRS “Trouble In Paradise”
  • 42. • Differences of opinion on following areas: • Lease Accounting • LIFO • Loan Loss Impairment Accounting IFRS Major Open Issues
  • 43. Lease Accounting
  • 44. LeaseAccounting Update • First Exposure Draft Issued August, 2010 (Joint FASB/IASB) • Obtained User Input • Revised Exposure Draft Issued May, 2013 (4 to 3 Vote) • The FASB has a new chair, former chair supported the ED • The FASB’s own Investor Advisory Committee (IAC) opposes the proposal
  • 45. LeaseAccounting Update May 2013 ED Provisions: • Lessees would be required to recognize assets and liabilities related to their leases (other than certain short-term leases) on their balance sheets. • The accounting model applied by lessees and lessors to a particular lease would depend on how much of the underlying leased asset's economic benefits the lessee is expected to consume over the lease term. • The determination of the lease term would include periods covered by renewal options when the lessee has a significant economic incentive to extend or not terminate the lease.
  • 46. LeaseAccounting Update May 2013 ED Provisions: • In certain situations, variable lease payments would be included in the lessee's and lessor's initial accounting for a lease. • Numerous new requirements would apply with respect to financial statement presentation and disclosure. • No effective dates set • Comments due 9/13/2013 (received 212 negative letters and 25 supporting letters) • Final decision expected Q1 2014
  • 47. LeaseAccounting Update • What to do now: • Gain an understanding of the leasing activity, including where and how leases are originated, administered, and accounted for. • Evaluate the broad potential impacts of the proposed standard, including systems and processes, and other business implications. • Compile a complete inventory of leases. • Evaluate the ability of existing leasing systems to meet the reporting and remeasurement requirements of the proposed new standard. • Identify additional lease terms and accounting assumptions that will be required. • Will it become effective??? • Huge backlash • Expected effective date, if approved, is January 1, 2017
  • 48. 401(k) Plan Trends
  • 49. 401(k) Plan Trends • IRS Compliance Issues • Plan Design Trends • Lawsuits
  • 50. The IRS maintains the Employee Plans Compliance Resolution System (EPCRS) to allow qualified retirement plans and certain other types of retirement vehicles to correct errors and other problems. On December 31, 2012 the IRS released an updated set of rules and procedures that went into effect April 1, 2013. The EPCRS consists of two IRS correction programs.
  • 51. IRS Compliance Issues • The Self Correction Program (SCP) – Used for “insignificant” operational errors for any type of plan. The plan sponsor can correct these errors without contacting the IRS or paying a fee. Generally these corrections need to be within two years following the close of the plan year in which the error occurred. • The Voluntary Correction Program (VCP) – Used for plan sponsors that can’t or don’t want to use the SCP program, and it allows them to voluntarily correct errors before an audit, pay a fee and receive IRS approval of the correction.
  • 52. IRS Compliance Issues If a plan does not use the SCP or VCP program to correct and error and the IRS finds the mistake due to a plan audit, the plan will be subject to the audit closing agreement program (Audit CAP). The IRS can impose significant fees in this stage of the program.
  • 53. 401(k) Plan Checklist 1. Have you updated your plan to reflect recent law changes? 2. Is the plan operating according to the plan document’s terms? 3. Is the plan’s definition of compensation for deferrals and allocations used correctly?
  • 54. 401(k) Plan Checklist 4. Were employer-matching contributions made to appropriate employees under the plan’s terms? 5. Has the plan satisfied the 401(k) plan nondiscrimination tests (ADP and ACP)? 6. Were all eligible employees identified and given the opportunity to make an elective deferral?
  • 55. 401(k) Plan Checklist 7. Do elective deferrals meet the IRS limit for the calendar year, and did the plan distribute excess deferrals? 8. Did the employer timely deposit employee elective deferrals? 9. Do participant loans follow plan document requirements? 10. Did the plan administrator follow hardship distribution rules?
  • 56. Consequences of a Disqualified Plan • When a plan is disqualified the ramification affects not only the plan trust and the employer sponsoring the plan but the employees as well. • Employees must include contributions in gross income • Rollovers are not allowed from a disqualified plan into a qualified plan • Employer deductions are limited • Income tax owed on the trust earnings • Contributions are subject to Social Security, Medicare and Federal Unemployment Taxes
  • 57. Plan Trends • Roth Options • Self Directed Brokerage Link Accounts • Auto Enrollment • Auto Escalation of Participant Deferrals • Use of Forfeitures
  • 58. Plan Trends • Uncashed Checks • Uncashed checks often are material and go undetected until there is a significant plan change, such as a change in service provider or plan termination. • Your plan document will define how these funds should be handled. • Controls typically include periodically obtaining an uncashed check detail report form the financial institution and monitoring compliance with established administrative procedures to locate missing participants.
  • 59. Lawsuits
  • 60. Other • Penalty Letters May Have Been Sent In Error • Participant Fee Disclosure Relief
  • 61. How Does Your Plan Measure Up? The following is based on 2011 plan-year experience of 840 plans with 10.3 million participants and $753 billion in plan assets: • 49.0% of plans allow for Roth contributions (and is more common in small plans) • On average 79.5% of eligible employees made contributions into the plans • On average 19.7% of accounts are related to participants who are no longer actively employed • Non HCE’s contributed 5.2% of pre-tax pay on average
  • 62. How Does Your Plan Measure Up? • Average Employer Contributions were 5.0% of pay • 38.9% of plans provide for immediate vesting for matching contributions • Plans offer an average of 19 funds • 29.8% of plans are restricted to investment options managed by their record keepers • 67.2% monitor investments on a quarterly basis • 68.2% of companies retain an independent investment advisor to assist with fiduciary responsibility (60.8% are fixed fee)
  • 63. How Does Your Plan Measure Up? • 45.9% of plans have automatic enrollment (55.2% of these increase default percentage over time) • The majority of plan expenses are paid for by the company rather than the plan. Compensation of internal staff (90.3%), legal fees (76.6%), and audit fees (71.0%) are most commonly paid by the company, whereas investment management fees (69.8%) and plan recordkeeping fees (48.7%) are most commonly paid by the plan.
  • 64. PCAOB Reporting Model Proposal
  • 65. PCAOB Reporting Model • Proposal released August, 2013 • Comment period ends December 11, 2013
  • 66. PCAOB Reporting Model The proposed standard would retain the pass/fail model (unqualified/qualified) and the basic elements of the current auditor's report, but would require the auditor to communicate a wider range of information. The proposed standard would require: • the communication of critical audit matters as determined by the auditor • enhancements to existing language in the auditor's report related to the auditor's responsibilities for fraud and notes to the financial statements • the addition of new elements to the auditor's report related to: • auditor independence • auditor tenure • the auditor's responsibilities for, and the results of, the auditor's evaluation of other information outside the financial statements
  • 67. PCAOB Reporting Model Critical Audit Matters Critical audit matters are those matters the auditor addressed during the audit of the financial statements that: • Involved the most difficult, subjective, or complex auditor judgments • Posed the most difficulty to the auditor in obtaining sufficient appropriate evidence • Posed the most difficulty to the auditor in forming an opinion on the financial statements Critical audit matters ordinarily are matters of such importance that they are: • Included in engagement completion documents • Reviewed by the engagement quality reviewer • Communicated to the audit committee
  • 68. PCAOB Reporting Model Critical Audit Matters (continued) Factors that the auditor should take into account in determining critical audit matters: • The degree of subjectivity involved in determining or applying audit procedures to address the matter or in evaluating the results of those procedures • The nature and extent of audit effort required to address the matter • The nature and amount of available relevant and reliable evidence regarding the matter or the degree of difficulty in obtaining such evidence • The severity of control deficiencies identified relevant to the matter • The degree to which the results of audit procedures to address the matter resulted in changes in the auditor's risk assessments, including risks that were not identified previously, or required changes to planned audit procedures • The nature and significance, quantitatively or qualitatively, of corrected and accumulated uncorrected misstatements related to the matter • The extent of specialized skill or knowledge needed to apply audit procedures to address the matter or evaluate the results of those procedures • The nature of consultations outside the engagement team regarding the matter
  • 69. PCAOB Reporting Model Critical Audit Matters (continued) The description for each critical audit matter in the auditor's report would: • Identify the critical audit matter • Describe the considerations that led the auditor to determine that the matter is a critical audit matter • Refer to the relevant financial statement accounts and disclosures that relate to the critical audit matter
  • 70. PCAOB Reporting Model Proposed Other Information Standard Under existing PCAOB standards, the auditor has a responsibility to "read and consider" other information with no related reporting requirements. The proposed standard would: • Apply the auditor's responsibility for other information specifically to a company's annual report filed with the SEC that contains the company's audited financial statements and the related auditor's report • Enhance the auditor's responsibility with respect to other information by adding procedures for the auditor to perform in evaluating the other information based on relevant audit evidence obtained and conclusions reached during the audit • Require the auditor to evaluate the other information for a material misstatement of fact as well as for a material inconsistency with amounts or information, or the manner of their presentation, in the audited financial statements • Require communication in the auditor's report regarding the auditor's responsibilities for, and the results of, the auditor's evaluation of the other information.
  • 71. PCAOB Reporting Model Disclosing Tenure One item in the proposal that has generated significant disagreement is a requirement for an audit firm to disclose the year it began serving as a company’s auditor. Timing Comment period ends December 11, 2013
  • 72. Private Company Financial Reporting
  • 73. Private Company Financial Reporting Separate Private Company Standards Origins: • Standards Overload • Fin 46 – Variable Interest Entities • Fin 48 – Accounting for Uncertain Tax Positions • Fair Value Measurements • Business Combinations • Looming IFRS Changes • Noted increase by users in: • GAAP Exception/Departures and • OCBOA/Tax Reporting • Ongoing debate for 30+ years
  • 74. Private Company Financial Reporting Brief History: • 1972 – Wheat Report • 2004 – FASB Small Business Advisory Committee • 2006 – FASB Forms Private Company Financial Reporting Committee (PCFRC) • 2009 – PCFRC Suggests formation of Blue Ribbon Panel (BRP) • 2010 – BRP Meets • 2011 – BRP Issues Report July 2011
  • 75. Private Company Financial Reporting BRP: • AICPA/FAF/NASBA jointly form Blue Ribbon Panel on Standards Setting for Private Companies (BRP) • Formed in December, 2009 • Comprised of CPAs, Bankers, Educators, Standards Setters and Private Company Reps
  • 76. Private Company Financial Reporting BRP Recommendations: • Private companies should use a standard setting model based on GAAP – with exceptions • Did not recommend separate, free standing GAAP • A separate private company standards board to be formed by Financial Accounting Foundation • New board to determine the exceptions and modifications to current GAAP for Private Companies • Some dissent on BRP – mainly NASBA and FASB
  • 77. Private Company Financial Reporting Current Status: • FAF reviews BRP report 2/2011 • FAF forms Trustees Working Group • Working Group to develop framework and plan • FAF Establishes Private Company Council (PCC)
  • 78. Private Company Financial Reporting Private Company Council (PCC) has 2 responsibilities: • In conjunction with FASB it will determine whether exceptions or modifications to existing GAAP are necessary to address the needs of private company users. • PCC will serve as primary advisory body to FASB related to Private Company issues.
  • 79. Private Company Financial Reporting PCC Problems: • Not a stand alone entity (subject to approval by FASB) as suggested by the original BRP • Controlled by FASB (FASB to make all appointments) • Unhappy AICPA
  • 80. Private Company Financial Reporting PCC has issued 3 proposals which are all approved by FASB (June 2013) • Return to pre SFAS 141 Business Combination rules • Allow amortization of goodwill (pre SFAS 142 rules) • Simplified accounting for interest rate swaps
  • 81. Private Company Financial Reporting AICPA Response: • Creates its own accounting “framework” (revealed June 2013) • Financial Reporting Framework for Small and Medium Sized Businesses - “FRF for SMEs”
  • 82. Private Company Financial Reporting
  • 83. Private Company Financial Reporting AICPA Framework: • Non GAAP • Special purpose framework – such as tax basis, other comprehensive basis of accounting (OCBOA) • Major GAAP differences: • No changes to lease accounting • Capitalized R&D and Startup Costs • Amortization of goodwill • No concept of OCI • Pension Accounting
  • 84. Private Company Financial Reporting NASBA Response: In June, Gaylen R. Hansen, the current NASBA board chairman stated: “At a time when accountability and transparency of those in authority is scrutinized, it is troubling that a nonauthoritative proposal to significantly weaken the financial reporting of private companies and public protection is even being suggested.”
  • 85. Private Company Financial Reporting Current Options: • GAAP • GAAP with PCC revisions (“Little GAAP”) • IFRS • IFRS for SMEs • AICPA FRF for SMEs • OCBOA (tax basis, etc.) From standards overload to accounting framework overload??
  • 86. Accounting Changes and Error Correction ASC 250
  • 87. Scope • ASC 250 applies to all entities, including for- profit and not-for-profit entities, whether publicly or privately held • ASC 250 is codification of SFAS 154
  • 88. ASC 250 Topics: • Accounting Changes: • Change in accounting principle • Change in accounting estimate • Change in reporting entity • Correction of Errors
  • 89. Change inAccounting Principle A change from one generally accepted accounting principle to another generally accepted accounting principle when there are two or more generally accepted accounting principles that apply or when the accounting principle formerly used is no longer generally accepted. A change in the method of applying an accounting principle also is considered a change in accounting principle. ASC 250-10-20
  • 90. Change inAccounting Principle – Treatment: In order to provide useful financial information, once an accounting principle has been adopted, it should not be changed unless the change is considered by both the entity and its auditor to improve the financial reporting. This enables users to better evaluate a company’s financial information on a consistent basis.
  • 91. Under ASC 250, the accounting and reporting treatment of any change in accounting principle does not depend on the classification or type of change in accounting principle. A change in accounting principle is reported retrospectively unless it is impractical to do so. Change inAccounting Principle – Treatment:
  • 92. • Retrospective application requires the following: • The cumulative effect of the change to the new accounting principle on periods prior to those presented shall be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented • An offsetting adjustment, if any, shall be made to the opening balance of retained earnings for that period • Financial statements for each individual prior period presented shall be adjusted to reflect the period- specific effects of applying the new accounting principle • ASC 250-10-45-5 Change inAccounting Principle – Treatment:
  • 93. • Neither of the following is considered to be a change in accounting principle: • Initial adoption of an accounting principle in recognition of events or transactions occurring for the first time or that previously were immaterial • Adoption or modification of an accounting principle necessitated by transactions or events that are clearly different in substance from those previous occurring ASC 250-10-45-1 Change inAccounting Principle – Treatment:
  • 94. Change inAccounting Estimate A change that has the effect of adjusting the carrying amount of an existing asset or liability or altering the subsequent accounting for existing or future assets or liabilities. A change in accounting estimate is a necessary consequence of the assessment of the present status and expected future benefits and obligations associated with assets and liabilities. Changes in accounting estimates result from new information.
  • 95. Change inAccounting Estimate Examples of items for which estimates are necessary are uncollectible receivables (bad debt reserve), inventory obsolescence, service lives and salvage values of depreciable assets, and warranty obligations. ASC 250-10-20
  • 96. Change inAccounting Estimate – Treatment: A change in accounting estimate is reported in the period of change if the change affects that period only or in the period of change and future periods if the change affects both. An example of a change in accounting estimate is a change in the life of a depreciable asset or a chance in the percentage of uncollectible accounts receivable. A change in accounting estimate is not reported by restating or retrospectively adjusting amounts reported in financial statements of prior periods or by reporting pro forma statements for prior periods.
  • 97. Change inAccounting Estimate Effected by a Change inAccounting Principle An example of a change in estimate effected by a change in principle is a change in the method of depreciation, amortization, or depletion for long-lived, nonfinancial assets. These are considered changes in estimates. ASC 250-10-20
  • 98. Change in Reporting Entity • A change that results in financial statements that, in effect, are those of a different reporting entity. A change in the reporting entity is limited mainly to • Presenting consolidated or combined financial statements in place of financial statements of individual entities, • Changing specific subsidiaries that make up the group of entities for which consolidated financial statements are presented, and • Changing the entities included in combined financial statements • Neither a business combination accounted for by the purchase method, as per ASC Topic 805, nor the consolidation of a variable interest entity pursuant to ASC Topic 810 is a change in reporting entity. ASC 250-10-20
  • 99. When an accounting change results in financial statements that are, in effect, the statements of a different reporting entity, the change shall be retrospectively applied to the financial statements of all prior periods presented to show financial information for the new reporting entity for those periods. ASC 250-10-45-21 Change in Reporting Entity – Treatment:
  • 100. Correction of an Error Error in previously issued financial statements – an error in recognition, measurement, presentation, or disclosure in financial statements resulting from mathematical mistakes, mistakes in the application of GAAP, or oversight or misuse of facts that existed at the time the financial statements were prepared. A change from an accounting principle that is not generally accepted to one that is generally accepted is also a correction of an error. ASC 250-10-20
  • 101. Correction of an Error – Treatment: • Any error in the financial statements of a prior period discovered after the financial statements are issued is reported as an error correction by “restating” the prior-period financial statements. Restatement requires all of the following: • The cumulative effect of the error on periods prior to those presented shall be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented. • An offsetting adjustment, if any, shall be made to the opening balance of retained earnings…for that period. • Financial statements for each individual prior period presented shall be adjusted to reflect correction of the period-specific effects of the error ASC 250-10-45-23
  • 102. Treatment ofAccounting Changes and Error Corrections underASC 250 Method of Accounting Type of Change Prospective Retrospective Retroactive Change in principle: General rule Yes Impracticability Maybe Maybe* Change in estimate Yes Change in entity Yes Error correction Yes *If the cumulative effect of applying a change in accounting principle to all prior periods can be determined, but it is impracticable to determine period-specific effects of that change on all prior periods presented, the cumulative effect of the change to the new accounting principle shall be applied to the carrying amounts of assets and liabilities as of the beginning of the earliest period to which the new accounting principle can be applied. If it is impracticable to determine the cumulative effect of applying a change in accounting principle to any prior period, the new accounting principle shall be applied as if the change was made prospectively as of the earliest date practicable.
  • 103. Change inAccounting Principle Disclosure • ASC 250 requires an entity to disclose the following information in the fiscal period in which a change in accounting principle is made: • The nature of and reason for the change in accounting principle, including an explanation of why the newly adopted accounting principle is preferable.
  • 104. Change inAccounting Principle Disclosure (continued) • The method of applying the change including all of the following: • A description of the prior-period information that has been retrospectively adjusted. • The effect of the change on income from continuing operations, net income and any other affected financial statement line item. • The cumulative effect of the change on retained earnings or other components of equity or net assets in the statement of financial position as of the beginning of the earliest period presented. • If retrospective application to all prior periods is impracticable, disclosure of the reasons therefore, and a description of the alternative method used to report the change.
  • 105. Change in Reporting Entity Disclosure ASC 250 requires the following information in a change in reporting disclosure: When there has been a change in reporting entity, the financial statements of the period of the changes shall describe the nature of the change and reason for it. In addition, the effect of the change on income before extraordinary items, net income, other comprehensive income, and any related per-share amounts shall be disclosed for all periods presented.
  • 106. Correction of an Error Disclosure ASC 250 requires an entity to disclose the following information when correcting an error in the financial statements: When financial statements are restated to correct an error, the entity shall disclose that its previously issued financial statements have been restated, along with a description of the nature of the error. The entity also shall disclose both of the following: • The effect of the correction on each financial statement line item and any per-share amounts affected for each prior period presented. • The cumulative effect of the change on retained earnings or other appropriate components of equity or net assets in the statement of financial position, as of the beginning of the earliest period presented.
  • 107. Change inAccounting Estimate Disclosure ASC 250 requires the following information in a change in accounting estimate disclosure: The effect of income from continuing operations, net income, and any related per-share amounts of the current period shall be disclosed for a change in estimate that affects several future periods, such as a change in service lives of depreciable assets. Disclosure of those effects is not necessary for estimates made each period in the ordinary course of accounting for items such as uncollectible accounts or inventory obsolescence; however, disclosure is required in the effect of a change in the estimate is material. When an entity effects a change in estimate by changing an accounting principle, the same disclosures are required. If a change in estimate does not have a material effect in the period of change but is reasonably certain to have a material effect in later periods, a description of that change in estimate shall be disclosed. ASC 250-10-50-4
  • 108. CGMA
  • 109. CGMA New Professional Designation Promoted by the AICPA (USA) & CIMA (UK) • Chartered • Global • Management • Accountant Alternative to Certified Management Accountant (CMA)
  • 110. CGMA Annual Requirements Qualifications A minimum of: • Three years of financial (including internal audit) or management accounting experience in business, industry, or government, or • Two years of financial or management accounting experience plus one year in public accounting, or • Three years of financial/management accounting experience on a consulting basis, or • Three years in a management accounting role focused on the management and operation of an accounting firm Beginning January, 2015, a qualifying examination will also be required.
  • 111. CGMA Annual Requirements Designation cost The annual CGMA designation fee for 2013-2014 is $150.00; AICPA members who are also a member of a State CPA Society will receive a $50 annual discount off the designation. Maintaining the CGMA designation To maintain your CGMA designation, you must remain a voting member of the AICPA and pay the annual fee for the designation. CPE is required for CPAs to maintain their professional competence and provide quality professional services. CPAs are responsible for complying with all applicable CPE requirements.
  • 112. CGMABenefits • CGMA Magazine • Web based weekly newsletter • Global peer network • Access to web content: • Tools • Surveys • Products • CPE www.CGMA.org
  • 113. Thank You Thank you for your attendance at today’s program. For more information regarding the topics discussed today, please feel free to contact: Timothy McLaughlin, CPA tim.mclaughlin@inserocpa.com 585.697.9680 Jennifer Martlew, CPA, CFE jennifer.martlew@inserocpa.com 585.697.9624 Insero & Company CPAs, P.C. www.inserocpa.com
  • 114. Insero & Company CPAs, P.C. Certified Public Accountants Business & Financial Advisors Rochester >> 585.454.6996 Corning >> 607.973.2075 Disclaimer These materials were prepared solely for the purpose of continuing professional education. They are distributed with the understanding that Insero & Company CPAs, P.C. and its employees are not engaged in rendering legal, accounting, or other professional service as part of this CPE presentation. If advice or other expert assistance is required, the services of a competent professional person should be sought. Please contact an Insero & Company team member with any questions. The information contained herein is general in nature and based on authorities that are subject to change. Insero & Company CPAs, P.C. guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omission, or for results obtained by others as a result of reliance upon such information. Insero & Company CPAs, P.C. assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situation. Circular 230 Disclosure: Any information contained herein, or on any website or email link associated with this document is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. Insero & Company CPAs, P.C. is an integral part of the McGladrey Alliance, a premiere affiliation of independent accounting and consulting firms in the United States, with more than 90 members in 42 states and Puerto Rico. McGladrey Alliance member firms maintain their name, autonomy and independence and are responsible for their own client fee arrangements, delivery of services and maintenance of client relationships. McGladrey Alliance is a business of McGladrey LLP which operates under the McGladrey brand as the fifth largest U.S. provider of assurance, tax and consulting services. McGladrey, the McGladrey logo and the McGladrey Alliance signatures are used under license by McGladrey LLP. McGladrey, the McGladrey logo, the McGladrey Alliance signatures and The McGladrey Classic logo are used under license by McGladrey LLP. Correspondent of the RSM International network of independent accounting, tax and consulting firms.

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