Audit & Accounting Update

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

Agenda
• Speakers/Intro/Timeline
• Session #1
• Standards Updates
• Session #2
• 401(k) Plan Trends
• Session #3
• Reporting Updates
• Other

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.

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.

FASB Updates
• FASB Codification
• Accounting Standards Update
• 11 New ASUs in 2013 (So Far)
• 7 New ASUs in 2012
• 10 New ASUs in 2011

Summary of NewAccounting Standards Updates
Since September 2012

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

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).

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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).

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.

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.

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.

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.

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.

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

FASB/IASB
Convergence Projects

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

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

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

Summary of the Key Projects
Leases
Eye Opener:
Off-balance-sheet accounting for most leases greater than 12 months would no longer
be allowed.

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).

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.

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.

Update on International
Financial Reporting Standards
(IFRS)

• 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

• 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”

• 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”

• Differences of opinion on following areas:
• Lease Accounting
• LIFO
• Loan Loss Impairment Accounting
IFRS Major Open Issues

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

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.

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

• 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

401(k) Plan Trends
• IRS Compliance Issues
• Plan Design Trends
• Lawsuits

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.

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.

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.

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?

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?

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?

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

Plan Trends
• Roth Options
• Self Directed Brokerage Link Accounts
• Auto Enrollment
• Auto Escalation of Participant Deferrals
• Use of Forfeitures

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.

Other
• Penalty Letters May Have Been Sent
In Error
• Participant Fee Disclosure Relief

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

• 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)

• 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.

PCAOB Reporting
Model Proposal

PCAOB Reporting Model
• Proposal released August, 2013
• Comment period ends December 11, 2013

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

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

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

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

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.

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

Private Company
Financial Reporting

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

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

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

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

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)

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.

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

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

AICPA Response:
• Creates its own accounting “framework”
(revealed June 2013)
• Financial Reporting Framework for Small
and Medium Sized Businesses - “FRF for
SMEs”

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

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.”

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??

Accounting Changes
and Error Correction
ASC 250

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

ASC 250 Topics:
• Accounting Changes:
• Change in accounting principle
• Change in accounting estimate
• Change in reporting entity
• Correction of Errors

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

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.

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.
Treatment:

• 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
Treatment:

• 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
Treatment:

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.

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

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.

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

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

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:

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

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

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.

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.

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.

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.

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.

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

CGMA
New Professional Designation Promoted by the
AICPA (USA) & CIMA (UK)
• Chartered
• Global
• Management
• Accountant
Alternative to Certified Management Accountant (CMA)

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.

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.

CGMABenefits
• CGMA Magazine
• Web based weekly newsletter
• Global peer network
• Access to web content:
• Tools
• Surveys
• Products
• CPE
www.CGMA.org

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
www.inserocpa.com

Certified Public Accountants
Business & Financial Advisors
Rochester >> 585.454.6996
Corning >> 607.973.2075
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