accounting & auditing update 2016 ky hfma winter...
TRANSCRIPT
Accounting & Auditing Update2016 KY HFMA Winter Institute
January 21, 2016
Bill Kohm, CPA, MBA, CGMADirector of Assurance Services
deandorton.com
Agenda
Audit Update
Highlight Accounting Standards From 2013 – 2016
Emerging Issues
Other Matters
deandorton.com
Accounting and Audit Goals
1. Awareness of
key changes in accounting and audit standards that impact your job
potential changes to accounting and audit standards that may impact your job
2. Strengthen Internal Controls
3. Aid in educating your stakeholders on A&A changes
deandorton.com
# Trending
# Acquisition Accounting
# Selective International Convergence
# Lease Accounting Standard Final ???
# Simplification
# Not For Profit Update
# Audit Committee Engagement
deandorton.com
Audit Update
deandorton.com
Audit Update
Audit Initiatives Fraud Oversight
deandorton.com
Audit Initiatives
AICPA issues audit standards for private company auditors
Public Company Accounting Oversight Board (PCAOB) governs public company auditors
PCAOB initiatives may impact AICPA
deandorton.com
PCAOB Initiatives
Work of Specialist – investigating the need to require more rigorous audit procedures surrounding reliance on third party specialists like valuation specialists and actuaries
Auditing accounting estimates including FV Measurements and related disclosures
Going Concern – align audit standard with the new accounting standard
deandorton.com
PCAOB Initiatives
Audit Team Transparency Supervision of other auditors and
multilocation Audit Report model Audit quality initiatives (28 points of
focus)
deandorton.com
Fraud Cases by Industry
deandorton.com
Fraud Median Loss by Industry
deandorton.com
Anti-Fraud Controls
deandorton.com
Why Use Data Analytics to Prevent Fraud?
Proactive instead of reactive Strong preventative measure if employees
know every transaction is being monitored and analyzed
Enhances the risk assessment process
deandorton.com
Data Analytics Examples
Payroll Compare vendor and employee contact info Compare bank account numbers of employees
Expense Reimbursements Amounts over allowed thresholds for certain
expense types Reimbursements for the same expense on
multiple reports or multiple payment methods Average expenses by employee Unusual merchant classification codes on credit
card transactions
deandorton.com
Data Analytic Tools
Microsoft Excel Microsoft Access ACL, IDEA Microsoft SQL Server Text analytic tools or keyword searching SAP, Oracle SAS, Stata Hadoop, Map Reduce
deandorton.com
1. Economic and political uncertainty and volatility
2. Regulation and the impact of public policy initiatives
3. Operational risk4. Cybersecurity
Source: KPMG Global Audit Committee Survey, 2015
Audit Committee Biggest Concerns in 2015
deandorton.com
Government Accounting Standards Board
deandorton.com
GASB Effective Dates – June 30
2015 Statement 68 – pension accounting for employers and
nonemployer contributing entities Statement 69 – government combinations Statement 71 – pension transition
2016 Statement 72 – fair value measurement and application Statement 76 – GAAP hierarchy
2017 Statement 73 – pensions not within the scope of Statement 68 and
amendments to Statements 67 and 68 Statement 74 – financial reporting by OPEB plans Statement 77 – tax abatement disclosures
2018 Statement 75 – OPEB accounting for employers and
nonemployer contributing entities
deandorton.com
GASB Effective Dates – Dec. 31
2015 Statement 68 – pension accounting for employer and
nonemployer contributing entities Statement 71 – pension transition
2016 Statement 72 – fair value measurement and application Statement 76 – GAAP hierarchy Statement 77 – tax abatement disclosures
2017 Statement 73 – pensions not within the scope of Statement 68 and
amendments to Statements 67 and 68 Statement 74 – financial reporting by OPEB plans
2018 Statement 75 – OPEB accounting for employers and
nonemployer contributing entities
deandorton.com
Accounting Standards Update
deandorton.com
ASU 2016-1
Purpose: Improve measurement and valuation of financial instruments
Effective Date: FY beginning after December 15, 2017 (2018 for private)
deandorton.com
ASU 2016-1 Requirements
Fair value measurement of equity investments (does not apply to equity method accounting) Can rely on cost if valuation is not readily available
Qualitative impairment assessment for investments valued at cost
No need to disclose fair value for those investments measured at amortized cost (private company)
Separate presentation of financial assets and liabilities on face or in disclosures based on form
deandorton.com
ASU 2015-17
Purpose: Simplify deferred tax balance sheet presentation. All netted and shown as either LT Asset or LT Liability.
Consistent with IFRSRetroactive or prospective application
Effective Date: FY beginning after December 15, 2016 (2017 for private)
deandorton.com
ASU 2015-16
Purpose: Simplify accounting for measurement-period adjustments. Removes requirement to retrospectively account for those adjustments.
Effective Date: FY beginning after December 15, 2015 (2016 for private)
deandorton.com
ASU 2015-16 Requirements
Applies to situations where acquisition is incomplete at end of reporting period
Impacts provisional assets/liabilities Go back to acquisition date Quantify impact to previously reported
items Current period earnings by line item
Face of income statement or Disclosure
deandorton.com
ASU 2015-16 Example
Appraisal incomplete at reporting date At 12/31/15 value fixed asset at $30,000
(preliminary) During 2016 receive appraisal after
issuance Value appraised at $40,000 Go back and restate 2015 or correct in
2016?
deandorton.com
2016 Correction!
If Goodwill- Fixed Assets $10,000Goodwill $10,000
Depreciation Expense XXAccumulated Depreciation XX
No Goodwill- Fixed Assets $10,000Income * $10,000
Depreciation Expense XXAccumulated Depreciation XX
*Bargain Purchase – will be scrutinized
deandorton.com
Disclosure Reminders
If acquisition accounting incomplete reasons why*
Specific identification of assets and liabilities subject to change
Nature and amount of Measurement Period Adjustments
Amounts recorded in current period (retrospective)
* Practice Reminder –BIG difference error vs. incomplete
deandorton.com
ASU 2015-15
Purpose: Address debt issuance cost presentation associated with line of credit arrangements. ASU 2015-03 does not address.
Conclusion: Can present costs separate as an asset from debt and amortize over life of arrangement
Effective Date: Immediate
deandorton.com
ASU 2015-14
Purpose: Defer effective date of ASU 2014-09 – Revenue from Contracts
Effective Date: FYs beginning after December 15, 2017 (2018 for private); All can early adopt FYs beginning after December 15, 2016
deandorton.com
ASU 2015-12
Purpose: Remove contract value to fair value reconciliation for
fully benefit responsive investment contracts. Remove disclosure requirement that individual
investments that >5% of net assets available for benefits and remove net appreciation/depreciation by investment type.
Measure investments as of month end date that is closest to FY end when fiscal period does not match month end.
Effective Date: FYs beginning after December 15, 2015
deandorton.com
ASU 2015-11
Purpose: Clarify “market” definition in inventory valuation. Does not apply to inventory valued by: Retail method LIFO
Consistent with IFRSEffective Date: FYs beginning after December 15, 2016
deandorton.com
Inventory
LCM – Lower of Cost or Market Market = Net Realizable Value Net Realizable Value = Estimated sales
price less cost of completion, disposal and transportation
Removes use of replacement cost or net realizable value less profit margin
deandorton.com
Inventory Example
Cost = $4.50/unit Sales price based on agreements in place
$7.00/unit Costs to get product to customer ($1.50)
Transportation/Loading $1.00/unit Commissions $0.50/unit
NRV = $7.00-$1.50 = $5.50 LCM = $4.50 < $5.50
deandorton.com
ASU 2015-08
Purpose: Amends various SEC paragraphs of FASB Codification pursuant to SAB No. 115 (conform to ASU 2014-17)
Effective Date: Immediate
deandorton.com
ASU 2015-07
Purpose: Removes need to categorize investments measured using net asset value per share practical expedient into the FV hierarchy disclosure
Effective Date: FYs beginning after December 15, 2015 (2016 for private)
deandorton.com
Practical Expedient
Applicable to investments No readily determinable fair value AND Located in an investment company or Real estate fund
Group investments into similar nature with detailed descriptions. Common types: Equity long/short hedge funds Event driven hedge funds Real estate funds
deandorton.com
ASU 2015-05
Purpose: Accounting for fees paid in a cloud computing arrangement
Effective Date: FYs beginning after December 15, 2015 (2016 for private)
Prospective or retrospective application
deandorton.com
Examples
Software as a service Platform as a service Infrastructure as a service Other similar hosting arrangements
End user of the software does not take possession
deandorton.com
Criteria
Customer has contractual right to take possession of software
AND
Feasible for customer to run the software or contract with another party to host
deandorton.com
Conclusion
If Yes = software license (capitalize fees –350 Intangibles – 40 Internal Use Software)
If No = service contract (expense fees)
deandorton.com
ASU 2015-04
Purpose: Practical expedient for the measurement date of any employer’s defined benefit obligation and plan assets. Use of month end closest to FY end when FY end does not fall at end of a month.
Effective Date: FYs beginning after December 15, 2015 (2016 for private)
deandorton.com
ASU 2015-03
Purpose: Change presentation of debt costs from assets to contra liability (offset associated debt). Consistent with IFRS.
Effective Date: FYs beginning after December 15, 2015 (2016 for private)
Retrospective
deandorton.com
ASU 2015-02
Purpose: Focus on consolidation evaluation
Effective Date: FYs beginning after December 15, 2015 (2016 for private)
deandorton.com
Consolidation Items
More emphasis on risk of loss and less on fee arrangements
Reduce frequency of application of related party guidance
deandorton.com
ASU 2015-01
Purpose: Remove extraordinary items presentation from the income statement.Consistent with IFRS.
Effective Date: FYs beginning after December 15, 2015
deandorton.com
ASU 2014-18
Purpose: Simplify acquisition accounting and identification of intangible assets for Private Companies (DOES NOT APPLY NFP)
Effective Date: FYs beginning after December 15, 2015
deandorton.com
Intangibles
Election If Elected must adopt PC goodwill policy No need to recognize separately
Customer related intangibles that can’t be sold or licensed separately
Noncompetition agreements
deandorton.com
ASU 2014-17
Purpose: Guidance for pushdown of acquisition accounting adjustments to subsidiary level.
Effective Date: Immediate
deandorton.com
Push-Down Accounting
Entity OPTION for each change in control event
Example- Entity A acquires 51% of Entity B and acquisition leads to $2 million of Goodwill Push Goodwill and other acquisition
adjustments down to sub or leave at parent level?
Need to select a policy in preparing sub’s stand- alone financials
deandorton.com
Push-Down Accounting
If choose to push down Disclose impact of the acquisition accounting
adjustments to the financial statements (similar to business combination disclosure)
Bargain purchase income not able to be reflected in sub’s income statement (shown as increase in paid in capital)
If choose not to push down Disclose policy to use historical accounting
despite change in control If in future years change application deemed
change in accounting principle
deandorton.com
ASU 2014-15
Purpose: Guidance for Management to address going concern of entity
Effective Date: FYs ending after December 15, 2016
deandorton.com
Going Concern
Requires management’s assessment
Footnote disclosure required under following:
(Substantial Doubt Exists) Probably not able to meet obligations within 1 year of financial statements’ ISSUANCE date w/out taking actions outside ordinary course
(Substantial Doubt Alleviated) Still disclose circumstances and how management’s plan alleviated the concerns
deandorton.com
ASU 2014-02
Purpose: Goodwill relief for private companies (DOES NOT APPLY NFP)
Effective Date: Prospective FYs December 15, 2014 (private)
Early adoption
deandorton.com
ASU 2014-02
Policy option Amortize Goodwill over 10 years or less Simplified impairment model
Triggering event Company level or Reporting unit level
deandorton.com
ASU 2013-06
Purpose: Recognize uncompensated services provided by NFP affiliate at the cost of the affiliate and increase to net assets.
Effective Date: Prospective FYs begin post June 15, 2014
Early Adoption: permitted
Modified retrospective approach: allowed
deandorton.com
ASU 2013-06 Journal Entry
FACTS: NFP A provides IT services to NFP B at no cost. Cost to NFP A is $1,000
NFP B J/EIT consulting expense $1,000Net Assets $1,000To record uncompensated IT services from NFP A
deandorton.com
ASU 2013-04
Purpose: Clarifies accounting and reporting requirements for Joint and Several Arrangements with fixed amounts.
Effective Date: Prospective FYs begin post Dec. 15, 2013 (public) post Dec. 15, 2014 (private)
Early Adoption: Allowed and retrospective treatment required for obligations that exist at year of adoption
deandorton.com
ASU 2013-04 Example
RP A and RP B enter into a $3 million loan agreement with a bank. Both related parties have joint and several responsibility to service the loan. All proceeds go to RP A. Note amortizes over 5 years.
What does RP B record (if anything)?
deandorton.com
ASU 2013-04 Example
Initial Year – records nothing based on review of RP A’s financial condition and ability to service loan.
Year 3 ($1.4 million remains unpaid) RP A is not in compliance with loan
covenants and has missed payments. RP B records remaining balance due
to uncertainties surrounding RP A.
deandorton.com
ASU 2013-04 Example
What is the Entry on RP B books?Equity $1,400,000
Debt $1,400,000Due to common control treated as equity transaction.
If RP A is able to service loan then debt and equity are reversed by applicable amounts.
deandorton.com
ASU 2013-04 Disclosures
Nature of the arrangement Total outstanding obligation Amount (if any) recorded on the books Recourse provisions Entry to record the obligation and where
amounts reside in the f/s
deandorton.com
Emerging Issues in Accounting
deandorton.com
The Issues
Not For Profit Update Simplification Initiative Disclosure Framework Revenue recognition Leases
deandorton.com
NFP Project Goals
Over 20 year Refresh Improve the current net asset
classification requirements Improve the information presented in
financial statements and notes about a NFPs liquidity, financial performance, and cash flows
deandorton.com
Proposed Amendments Intended to Address
Complexities with the current three classes of net assets
Inconsistencies in reporting of the intermediate measure of operations
Inconsistencies between operations reported in the statement of activities and operating cash flows in the statement of cash flows
Inconsistencies in reporting of expenses Opportunities to enhance the understandability
and utility of the statement of cash flows
deandorton.com
Proposed Amendments
Balance Sheet: Two net asset classes Changes to underwater endowment accounting
and reporting Statement of Activities:
Prescribed operating measure Restriction releases to operations with long-lived
assets transferred from operating to non-operating Statement of Cash Flows:
Direct method cash flows for operating activities Reclassification of certain items
An analysis of natural and functional expenses Disclosure modifications
deandorton.com
Simplification Initiative
Equity method of accounting No need to account for fair value net
asset basis difference at inception Remove retroactive application upon
increase in ownership
Definition of “Business” Reduce number of acquisition
accounting applications
deandorton.com
Simplification Initiative
Debt classification Will be principle based Focus on contractual maturity and borrowers’
right (vs management judgment) Debt covenant violation waived (break out
debt on face and note) Goodwill
Allow private company option for all Other intangibles
Allow private company option to minimize acquisition accounting application
deandorton.com
Disclosure Framework Project
Proposed amendment to Statement of Financial Accounting Concepts No. 8 –Conceptual Framework for Financial Reporting – Chapter 3: Qualitative Characteristics of Useful Financial Information
ASU 2015-310 – Notes to Financial Statements (Topic 235) – Assessing whether disclosures are material
deandorton.com
Revenue Recognition
ASU 2015-320 – Revenue from Contractswith Customers (Topic 606) Focal points:
Collectability Noncash considerations Completed contracts Contract modifications Accounting policy elections
deandorton.com
Revenue (AICPA) What To Do Now?
Develop an implementation plan Training Evaluate accounting changes
May not have big changes but won’t know until implement
Everyone will have additional disclosures Determine retrospective adoption
Interim disclosures before effective Potential IT system changes Tax implications Educate key stakeholders
deandorton.com
AICPA Revenue Recognition Task Forces
1. Aerospace & Defense2. Airlines3. Broker Dealer4. Construction Contractors5. Depository Institutions6. Gaming7. Healthcare8. Hospitality
9. Insurance10.Asset Management11.Not for Profit12.Oil & Gas13.Power & Utilities14.Software15.Telecommunications16.Time Share
deandorton.com
Revenue Recognition Issues
Methods to measure transfer of control Treatment of contract costs Identifying performance obligations Gross vs. net Contract modifications Disclosures Determine transaction price as relates to
third party estimates Individual contract vs. portfolio
deandorton.com
Leases (Topic 842)
FINAL STANDARD stage Estimated completion: Q1 2016 Goal is to increase transparency of leasing
activities across all types of leases Focus on leases > 1 year Balance sheet presentation for BOTH
(Right of Use Asset) A-Finance lease (depreciate/ interest) B-Operating lease (rent expense)
deandorton.com
Other Matters
deandorton.com
Overtime Rules Change
On June 30, 2015, the Department of Labor (DOL) announced a significant proposed change to the overtime rules under the Fair Labor Standards Act (FSLA)
Final version expected by end of 2016 with a first half 2017 effective date
Will the 2016 political season impact final version?
deandorton.com
Overtime Rules Change
DOL has proposed changing the salary level test by increasing the threshold from $23,660 to $50,440 (with provision for future annual adjustments).
Estimated to impact over 20 million workers nationwide1975 – about 62% salaried employees OT eligibleToday – about 8% salaried employees OT eligible
deandorton.com
Overtime Rules Change-What to do?
Identify current employees who this will impact Determine the actual hours they work each week
Consider increasing salary of some positions Financial planning and budgetary
considerations Determine how hours will be captured and
OT controlled Prepare conversation and message to
employees
deandorton.com
2016 Focal Points
1. Overtime Regs Evaluation2. Final Lease Standard3. Continued refinement of revenue standard4. Simplification of disclosures5. Private company differences and possible
trickle down to NFPs6. Not-for-profit financial statement refinement
deandorton.com
Want More?
FASB.org – signup for newsletter and periodical free CPEs
