A&A UPDATE. February 6, 2016 Danielle Supkis Cheek & Sarah Elliott

Transcription

1 A&A UPDATE February 6, 2016 Danielle Supkis Cheek & Sarah Elliott

2 FASB Financial Accounting Standards Board

3 Revenue Recognition Five Steps 1. Identify the contract(s) with the customer Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services 2. Identify performance obligations 3. Determine the transaction price 4. Allocate the transaction price 5. Recognize revenue when performance obligation is satisfied

4 Why do I care now? Delayed effective date: Public companies (+ some non-profits + some benefit plans) Periods beginning after 12/15/17 (so 2018 calendar years) Other entities: +1 year (so 2019 calendar years) Public companies report 3 years of earnings, and if opt retrospective application (NOW!) (see full standard for full transition guidance)

5 ID the contract Determine price Recognize revenue ID the performance obligation Allocate price Contract must meet the following criteria: - Approved by both parties - Each party s rights are identifiable - Payment terms are identifiable - Contract has commercial substance - Collection is probable Two or more contracts should be combined when they are entered into near the same time with the same customer if one or more of the following criteria are met: - Contracts are negotiated as a package - Consideration in one contract depends on price or performance in the other - Goods or services in the contracts are a single performance obligation

6 ID the contract Determine price Recognize revenue ID the performance obligation Allocate price Promise to transfer a distinct good or service criteria Customer can benefit from good or service: On its own OR Together with other readily available goods or services (including goods or services previously acquired from entity) Promise is separately identifiable: Integration Modification or customization Highly dependent or interrelated

7 ID the contract Determine price Recognize revenue ID the performance obligation Allocate price Variable Consideration Significant Financing Non-Cash Consideration Consideration Payable to Customer Estimate using expected value, most likely amount, constraint Adjust consideration if timing provides customer or entity with significant benefit of financing Measure at fair value unless it cannot be reasonably estimated Reduction of the transaction price unless in exchange for a distinct good or service

8 ID the contract Determine price Recognize revenue ID the performance obligation Allocate price Allocate the amount to which the entity expects to be entitled to each performance obligation Relative standalone selling price basis Estimate selling prices if not observable Residual estimation techniques may be appropriate in certain situations Discounts and contingent amounts Allocate entirely to specific performance obligation if specified criteria met

9 ID the contract Determine price Recognize revenue ID the performance obligation Allocate price Recognize revenue as/when satisfy performance obligation by transferring good/service Over Time: A performance obligation is satisfied over time if one of the following criteria is met: The customer simultaneously receives and consumes the benefits as the entity performs The entity s performance creates or enhances an asset that the customer controls The asset does not have an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date Point in Time: All others Recognized at point in which customer obtains control. Indicators are: Present right to payment Legal title Physical possession Risk and reward of ownership Customer acceptance

10 Industry Specific Issues and TRG Status

11 Industry Specific Issues and TRG Status Identifying the Unit of Account (including combining contracts, loss of segmentation guidance, options, separate performance obligations)

12 Narrow Scope Improvements & Practical Expedients Exposure Draft Comment Period Just Closed Collectability concerns in step 1 (makes it easier to meet collectability criteria to ability and intention to pay) Presentation of sales taxes collected (permit an accounting election to exclude amounts collected from sales taxes for all sales from transaction price) Non-cash consideration (fair value at contract inception) Contracts already completed or modified before transaction dates (various practical expedients) Transition disclosure technical correction (don t have to disclose the impact to the current period of adoption, only prior periods)

13 Principal vs. Agent (gross vs. net) Reporting Exposure Draft Comment period closed An entity determines whether it is a principal or an agent for each specified good or service promised to the customer. An entity determines the nature of each specified good or service (e.g., whether it is a good, a service, or a right to a good or service). When another party is involved in providing goods or services to a customer, an entity that is a principal obtains control of: (a) a good or another asset from the other party that it then transfers to the customer; (b) a right to a service that will be performed by another party, which gives the entity the ability to direct that party to provide the service to the customer on the entity s behalf; or (c) a good or service from the other party that it combines with other goods or services to provide the specified good or service to the customer.

14 Center For Plain English Accounting Fortune Favors the Prepared Series on Revenue Recognition Industry specific articles Non profits Real estate More coming

15 Leases As of Nov 2015, Expecting Final Standard in Q and looking at effective dates of: A lease is a contract, or part of a contract, that conveys the right to control the use an identified asset (the underlying asset) for a period of time in exchange for consideration - Public companies years beginning after 12/15/18 (so 2019 calendar year) - Other entities: +1 year

16 Key Areas More changes in November 2015 made from the 2 nd ED Dual approach for lessee accounting (differs from IFRS) Type A Lease (today s capital lease) Record right to use asset and separate lease liability With amortization and interest expense separate New: Exception for leases that commence at or near end of underlying asset s economic life (last 25%) Type B Lease (today s operating lease) Record right to use asset and separate lease liability But get single lease expense on income statement (straight line) Exception for short term (<12 month leases) Can apply to leases at portfolio level Non-public entities can use risk free rate rather than incremental borrowing rate as the discount rate (only relief for non-publics)

17 Why do I care now? Lease agreement contract modification maybe required Debt covenants and other key ratios

18 PCC Preferability Removes effective date for all PCC Accounting Standards Updates (ASUs)! Therefore, not required to assess preferability to switch to a PCC alternative after the effective date for a 1 st time adoption (& transition guidance for goodwill and swaps extended) PCC Alternatives Goodwill amortization (ASU ) Interest rate swap simplifications (ASU ) Common control leasing arrangements (ASU ) Don t have to consider as VIEs Identifiable intangibles (ASU ) Do not have to separately recognize non-competes & customer related intangibles (unless than can be independently sold) Would still require preferability to switch back and forth

19 Other Simplifications All allow for early adoption! Extraordinary Items gone! (ASU ) Inventory Measurement LCM (but market was replacement cost; net realizable value; NRC less normal profit margin) (ASU ) Now lower of cost or NRV Deferred taxes all DTAs & DTLs are non-current (ASU ) Debt issuance cost direct deduction to liability (ASU )

20 Going Concern Substantial doubt on ability to continue as going concern = probable that entity will be unable to meet its obligations as they come due. Management responsibility to assess ability to continue as a going concern from 1 year from date financial statements issued or available to be issued (NOT from the balance sheet date) based on information known or knowable at that time. Auditing issues But evaluate ability to continue as going concern of a reasonable period of time NOT to exceed one year beyond balance sheet date & other definition differences See ASB interpretations: ards/auditattest/pages/recentaainter pretations.aspx No more holding financials for a year Don t forget emphasis of matter paragraphs as needed

21 Debt Classification Simplicaition Exposure Draft Expected Q Got a debt covenant waiver exception but only on 4-3 vote. No wavier for after yearend debt refinances or certain acceleration clauses. The Board decided that an entity should classify a debt as noncurrent if one or both of the following criteria are met as of the balance sheet date: The liability is contractually due to be settled more than 12 months (or operating cycle, if longer) after the balance sheet date The entity has a contractual right to defer settlement of the liability for at least 12 months (or operating cycle, if longer) after the balance sheet date. The Board decided that decisions about the classification of debt should be made based on facts and circumstances that exist as of the reporting date (that is, as of the balance sheet date).

22 Non-Profit Presentation - 2 net assets classes (with and with out donor restrictions) - Operating vs. non-operating activities based on mission with transfers - Direct method cash flow REQUIRED (with changes to groupings) - Placed into service for release from restriction (rather than option for upon expenditure) - Disclosure changes (including require statement of functional expenses & liquidity disclosures) - Investment income net of expenses But excepting that it will be probably re- Source: KPMG Issues In Depth, May 2015, FASB s Proposed Changes to Not For Profits Financials

23 2x Materiality EDs #1: Conceptual Framework: Modify definition of materiality to a legal concept. As defined by US Supreme Court: - a substantial likelihood that the... fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available - delicate assessments of the inferences a 'reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him... TSC Industries v. Northway, Inc., 426 U.S. 438, 449 (1976) & Basic, Inc. v. Levinson, 485 U.S. 224 (1988) #2: Notes to the Financial Statements materiality is applied to quantitative and qualitative disclosures individually and in the aggregate in the context of the financial statements taken as a whole; therefore, some, all, or none of the requirements in the disclosure section may be material refers to materiality as a legal concept state specifically that an omission of immaterial information is not an accounting error. Auditing Issues? Aggregate omissions Immaterial uncorrected misstatement Misstatement vs. error Management communications Peer review Issues? Remember uncertain tax provision

24 Other Exposure Drafts & Standards Recognition & Measurement of Financial Assets & Liabilities (final standard just released) Definition of a Business (comment period just closed) Cash Flows (ED just release last week, comment period until 3/29) Common Controlled Entities (ED expected Q1 2016) Share-Based Payments (final standard expected Q1 2016) Equity Method of Accounting (final standard expected Q1 2016) Hedging Simplifications (ED expected Q2 2016) Impairment of Financial Instruments (final standard expected Q2 2016) And More

25 FASB Technical Agenda As of February 3, 2016: Financial performance reporting Pensions & other post retirement employee benefit plans Intangible assets Distinguishing liabilities from equity Consolidations Inventory & costs of sales

26 GAAS & OTHER Generally Accepted Auditing Standards

27 GAAS & Other Uncertain tax provision disclosure changes (removed TPA ) Thank you CPEA! 5/Pages/elimination-of-the-disclosure.aspx Peer Review Board Exposure Draft (comment deadline ended 1/31) ents/improve_transparency_effectiveness_pr_ed.pdf Auditor s Report Dual reporting with IASB or PCAOB DOL reporting Direct Engagements Debate (Task force forming) Attest services without an assertion from management

28 General Overview of SSARS No. 21 Private Companies Practice Section 28

29 SSARS 21 Supersedes all existing AR sections except for AR Section 120, Compilation of Pro Forma Financial Information Prospective financial information is currently codified in Attest Standards The clarified SSARS on compilation of pro forma financial information was exposed for public comment in early December 2015 along with a proposed standard on compilation of prospective financial information. - The comment period ends on May 6, Final standards are expected to be issued in Q Effective for financial statement periods ending on or after December 15, 2015 Private Companies Practice Section 29

30 General Overview of SSARS 21 SSARS No. 21 is formatted into four separate sections: Section 60, General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services Section 70, Preparation of Financial Statements Section 80, Compilation Engagements Section 90, Review of Financial Statements These sections have been codified with the prefix AR- C to denote them from the pre-ssars No. 21 AR sections. Private Companies Practice Section 30

31 Section 70 Financial Statement Preparation Private Companies Practice Section 31

32 Section 70 Overview Non-attest financial statement preparation service Bright line between accounting services (preparation) and reporting services (compilation or review) Financial statements may be provided to third parties Private Companies Practice Section 32

33 Section 70 Overview Applies when engaged to prepare financial statements but not engaged to perform an audit, review, or compilation on those financial statements. Does not apply when engaged to merely assist in preparing financial statements the financial statements are prepared as a by-product of another engagement The understanding with the client as to what the engagement entails is important. Private Companies Practice Section 33

34 Section 70 Overview Examples of when AR-C 70 may apply Preparation of financial statements prior to audit or review by another accountant Preparation of financial statements to be presented alongside the tax return Preparation of personal financial statements for presentation alongside a financial plan Preparation of a single financial statement Using the information in a general ledger to prepare financial statements outside of an accounting software system Private Companies Practice Section 34

35 Section 70 Overview Examples of when AR-C 70 does not apply Preparation of financial statements when the accountant is engaged to perform an audit, review, or compilation of such financial statements Preparation of financial statements with a tax return solely for submission to taxing authorities Personal financial statements that are prepared for inclusion in written personal financial plans prepared by the accountant Financial statements prepared in conjunction with litigation services that involve pending or potential legal or regulatory proceedings Private Companies Practice Section 35

36 Section 70 Planning An engagement letter signed by both the accountant and management or those charged with governance is required No determination about independence is required Identify clients who may be interested in engaging us to perform preparation engagements. SSARS 8 engagements Accounting assistance Private Companies Practice Section 36

37 Section 70 Financial Statements Financial statements can be prepared with or without disclosures Disclose that substantially all disclosures are omitted If using a special purpose framework include a description Financial statements can be prepared with a known departure but must be disclosed Private Companies Practice Section 37

38 Section 70 Legend/Disclaimer No report is required, even if the financial statements are expected to be used by a third party A legend is required on each page of the financial statements indicating, at a minimum, no assurance is provided. Examples: No assurance is provided on these financial statements. These financial statements have not been subjected to an audit, review, or compilation engagement, and no assurance is provided on them. Other statements that convey that no assurance is provided on the financial statements are acceptable. The legend can be shown as headers or footers. Private Companies Practice Section 38

39 Section 80 Compilation Engagements Private Companies Practice Section 39

40 Section 80 Overview of Changes Applies when the accountant is engaged to perform a compilation engagement Some changes to the engagement letter and report A report is always required Engagements in which the accountant prepares financial statements but no report is required are covered by section 70 Accountant is no longer required to be concerned about distribution as they were with management use only financial statements (SSARS 8 engagements) Private Companies Practice Section 40

41 Section 90 Review Engagements Private Companies Practice Section 41

42 Section 90 Overview of Changes Some changes to the engagement letter Some changes to the management representation letter Some changes to fieldwork requirements Review report has been updated Expanded communications with management or those charged with governance Private Companies Practice Section 42

43 Reminders Obtain signed SSARS No. 21 engagement letters on year end 2015 engagements Ensure you re using the SSARS No. 21 reports for compilations and reviews on year end 2015 financial statements Ensure you re using the SSARS No. 21 management letters for reviews Talk to SSARS 8 engagements clients now to determine level of engagement Private Companies Practice Section 43

44 Questions? Private Companies Practice Section 44

45 DANIELLE SUPKIS CHEEK, CPA*, CFE, CVA D. SUPKIS CHEEK, PLLC Danielle Supkis Cheek is the founder D. Supkis Cheek, PLLC, a CPA firm specializing in the accounting, audit, and forensics needs for small and medium sized businesses. Danielle earned her Bachelors from Rice University in Houston, TX, and her Master of Science in Accountancy from the University of Virginia in Charlottesville, VA. She is a Certified Public Account (CPA) in the State of Texas, a Certified Fraud Examiner (CFE), and a Certified Valuation Analyst (CVA). Danielle is a Member of the PCPS Technical Issues Committee with the American Institute for CPAs, runs the National Office for the American Woman s Society of CPAs, was a recipient of the Woman of Excellence Award by the Federation of Houston Professional, was a 2014 Texas Society of CPA s Rising Star, is a 2015 and under 40 by the CPA Practice Advisor and a under 40 by the NACVA. Danielle is also passionate about teaching financial literacy and is VP of Finance for the Woman s Resource Center of Greater Houston (a financial literacy non-profit). In addition, she is an Adjunct Professor at Rice University s Jones School of Business teaching accounting for entrepreneurs. Danielle can be contacted at Danielle@SupkisCheek.com or * Licensed only in Texas

46 SARAH ELLIOTT, CPA ELLIVATE ADVISORS, LLC In her former role as a client service partner and member of leadership of a high-growth, regional accounting firm, Sarah discovered her true passion is building relationships and understanding and developing people. She also gained significant practical experience implementing and maintaining high quality professional development programming. In 2014, Sarah decided to combine her passion for the people side of her business and practical expertise to launch Ellivate Advisors. Ellivate Advisors is dedicated to elevating emerging leaders in the CPA profession to best in class through simple, high impact professional development programming. Ellivate Advisors parters with individuals and firms using two primary service offerings: professional coaching for emerging women leaders and strategic consulting focused on customizing professional development programming within firms. Prior to founding Ellivate Advisors, Sarah practiced public accounting for 14 years, including ten years at PricewaterhouseCoopers, LLP ( PwC ) where she performed a two year rotation in their National Office. While at PwC, Sarah served as a subject matter expert on PCAOB and AICPA standards and firm audit policy and methodology.