Transcript HFMA_AA_Update_2013_Morning_Slides

CARBIS WALKER LLP &
WPHFMA PRESENT
ACCOUNTING AND
AUDITING STANDARDS
UPDATE
JANUARY 25, 2013
PRESENTERS
• Michael F. Garczynski, CPA, Partner - Health Care Services
• Kelly S. Nord, CPA, Senior Manager - Health Care Services
• Brandon W. Harlan, CPA, Senior Manager - Health Care Services
• James A. Raley, CPA, Manager - Health Care Services
• Jack H. Lynn, Supervisor - Health Care Services
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AGENDA
 Welcome
 IFRS
 Background: Public and private company standard setting
 FASB Not-for-Profit Advisory Committee (NAC) and projects central to improving NFP
GAAP:
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- NFP Financial Reporting (two projects)
- Disclosure Framework
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- Nonpublic Entity Definition
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Three EITF issues of note for NFPs
Update on major convergence projects:
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- Leases
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- Revenue Recognition
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- Financial Instruments
Recent ASUs and other FASB projects of note for NFPs
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AGENDA
 Accounting Standards Update
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Goodwill and Indefinite – Lived Intangible Assets
 Health Care Topics
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Charity Care
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Bad Debts
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Malpractice Insurance
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Meaningful Use
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RAC Audits
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ICD – 10 Costs
 HUD and Governmental Reporting Update
 Special Considerations of Not-For-Profit Fraud
 Auditing Standards Board – Clarity Project
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IFRS FOR THE U.S.?
THE LATEST FROM THE SEC
 On July 13, 2012, the SEC’s Office of the Chief Accountant published its final
staff report, “Work Plan for the Consideration of Incorporating International
Financial Reporting Standards into the Financial Reporting System for U.S.
Issuers.”
•
“…the Work Plan did not set out to answer the fundamental question of whether
transitioning to IFRS is in the best interests of the U.S. securities markets generally and
U.S. investors specifically.”
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Summarizes the observations and analyses in six key areas identified for study.
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GAPS IN IFRS
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SEC DECISION AND NFPS
 Even if the SEC decides to adopt IFRS, FASB would likely need to retain
specialized industry guidance
 This would include NFP guidance
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FINANCIAL REPORTING FOR PRIVATE
ENTITIES
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PRIVATE COMPANY COUNCIL
 Blue-Ribbon Panel Recommendation
 FAF Trustee Proposal
 FAF Creates PCC
 AICPA Reaction
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PRIVATE COMPANY COUNCIL
Established May 2012
Purpose is to improve the process of setting
accounting standards for private companies
Two principal responsibilities
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Determine whether exceptions or modifications to existing GAAP are needed
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Advise FASB on private-company accounting matters during the standard setting
process
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TWO PARALLEL NONPUBLIC ENTITY
PROJECTS
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Definition: Nonpublic Business Entity (Private Company)
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PRIVATE CO. DECISION-MAKING
FRAMEWORK
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PRIVATE COMPANY COUNCIL
 Exceptions or modifications to U.S. GAAP advanced by
the PCC and endorsed by a simple majority of FASB
members will be exposed for public comment.
Following the comment process, the PCC will redeliberate the proposed exceptions or modifications
and send final decisions to FASB.
 Upon FASB endorsement, exceptions or modifications
will be incorporated into U.S. GAAP.
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PRIVATE COMPANY COUNCIL
 FASB already is developing a private entity Decision-Making
Framework.
 Will be a set of criteria for decisions about whether and when
to adjust requirements for recognition, measurement,
presentation, disclosure, effective dates, and transition
methods for private entity standards.
 FASB will not complete the framework until the PCC provides
input.
 FASB also has a project to provide a consistent, clear
definition of a nonpublic entity.
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PRIVATE COMPANY COUNCIL
Inaugural meeting held on December 6, 2012
Identified four areas to research for agenda
consideration:
• Consolidation of VIEs
• Accounting for “plain vanilla” interest rate swaps
• Accounting for uncertain tax positions
• Recognizing and measuring various intangible assets
(other than goodwill) acquired in a business combination
at fair value
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PRIVATE COMPANY FRAMEWORK
In conjunction with the private company
framework project, part of the project was to
define a nonpublic entity
FASB has tentatively decided that an entity is not
private if:
• Files or furnishes F/Ss with a regulatory agency for purposes of
issuing securities
• Is a for-profit conduit bond obligor
• Is an employee benefit plan
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PRIVATE COMPANY FRAMEWORK
Certain entities are not excluded from the
definition of a private company unless they meet
the previous definition
• Financial institution
• A consolidated subsidiary of an entity that is a public company
• An entity that has a controlled and consolidated subsidiary that is a
public company
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DEFINITION OF A PRIVATE COMPANY
FASB has tentatively defined a private
company as an entity that:
• Does not file or furnish F/Ss with a regulatory agency for
purposes of issuing securities in a public market or
issuing securities that trade in a public market; and/or
• Is not a for-profit conduit bond obligor for conduit debt
securities that are traded in a public market
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PRIVATE COMPANY FRAMEWORK
 The Private Company Framework and Definition of
Nonpublic Company will be addressed by the Private
Company Council in future sessions
 No expected standard issuance date yet announced
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RELATIONSHIP TO AICPA SPECIAL PURPOSE
FRAMEWORK FOR SMES PROJECT
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FROM FASB TO AICPA WE GO!
 AICPA will develop an OCBOA framework that it said will
provide a less comprehensive and less costly alternative to
U.S. GAAP for entities that do not need to comply with U.S.
GAAP.
 AICPA will also use its resources and expertise to develop
an enhanced OCBOA financial reporting framework that is
objective, relevant, and responsive to the concerns of
preparers and users of small and medium private company
financial statements where GAAP financial statements are
not required.
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AICPA FINANCIAL REPORTING
FRAMEWORK
 Terry Polly of the FAF stated: “We also believe that
the AICPA’s plan to develop a financial
reporting framework for smaller private
entities, which would be used as a form of
OCBOA reporting where appropriate, is an
important and complementary undertaking,”
she said. “Taken together, these actions
demonstrate the commitment of both
organizations to the private company financial
reporting constituency.”
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AICPA – QUOTES FROM MELANCON
 “For owner-managed, small- and medium-sized, for-profit
entities that do not use GAAP, the AICPA is working on a
self-contained financial reporting framework for release
in the first half of 2013”
 “While its use will be completely voluntary, it promises
to be less complex and less costly than following GAAP.
FAF publicly supported this project, calling it “important
and complementary.” It is a top priority for us. Watch for
an exposure draft this fall.”
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AICPA – FINANCIAL REPORTING
FRAMEWORK (FRF) DETAILS
 Will be a standalone, self-contained other comprehensive basis of
accounting intended for use by privately held small to medium
sized entities (SMEs) in preparing their financials.
 The FRF for SMEs will be a less complicated and less costly
system of accounting for SMEs that do not need U.S. GAAP F/Ss.
 Will be a cost-beneficial solution for SMEs and others who need
F/Ss that are prepared in a consistent and reliable manner in
accordance with a framework that has undergone public
comment and professional scrutiny.
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AICPA – FINANCIAL REPORTING
FRAMEWORK (FRF) DETAILS (CONT.)
 The accounting principles comprising the FRF are intended to
be the most appropriate for the preparation of SME F/Ss based
on the needs of the F/S users and cost-benefit considerations.
 Accounting principles in the FRF for SMEs will be responsive to
the well documented issues and concerns stakeholders
currently encounter when preparing F/Ss for SMEs.
 FRF for SMEs may be used by every industry group and
business structure.
 AICPA has no authority to require the use of FRF for SMEs.
The use will be up to the users.
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AICPA –FRF FRAMEWORK
 Not like OCBOA as you have come to know it
 There will be a separate implementation volume with a full set of illustrative
F/Ss
 No comprehensive income
 It will have the following sections:
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Financial Statement Concepts
General Standards of F/S Presentation
Disclosure of Accounting Policies (and Changes)
Current Assets and Current Liabilities
Statement of Income, Financial Position, and SCF
Business Combinations – pre FIN 46R (no VIEs!!!)
Goodwill Amortization to Match Federal Tax Purposes
Leases – like FASB 13, but match federal tax purposes
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AICPA – FRF FRAMEWORK
 Revenue – will not follow FASB ED
 Income Taxes – allowed to use current taxes or can opt to
include deferred taxes, no FIN 48
 Risks and Uncertainties – use SOP 94-6
 Financial Instruments: use cost and not marked to market,
unless held for sale, under 20% = cost, no hedge accounting,
consolidation = more than 50% owned
 No guidance on: Earnings per share, interim reporting,
personal financials, segment reporting
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AICPA – FRF TIMELINE
 Meeting currently and working on the FRF
 Expect exposure draft for comment by this fall
 Will gather responses and issue an updated draft early in
2013
 Will issue final document in 2013
 AICPA and CPAs will need to tell their clients, bankers,
sureties about this FRF in order to get acceptance instead
of GAAP financials
 Will take time for agreements to change for SMEs to be
able to use this new framework
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AICPA – FRF EXPOSURE DRAFT
 Released on November 1, 2012
 Comments requested by January 30, 2013
 FRF for SMEs is not proposed as an authoritative document
 Will have no effective date
 Management can decide to use it once it is released
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AICPA – FRF EXPOSURE DRAFT
 Highly useful and responsive to the financial reporting
needs of lenders and other F/S users:
• Built upon a foundation of reliable and comprehensive
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accounting principles
Historical cost is primary measurement basis
Reduced, yet relevant, disclosures
Book to tax adjustments/reconciliations reduced
Principles-based framework across all industries
Will not undergo frequent changes
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AICPA – FRF EXPOSURE DRAFT
 Implementation guidance will be provided:
• Application examples
• Illustrative financial statements
• Disclosure checklists
• Other tools
 Stay tuned for further details as it gets released!
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FASB NOT-FOR-PROFIT ADVISORY
COMMITTEE (NAC)
 Established in October 2009 to serve as a standing resource for the
FASB in obtaining input from the NFP sector on existing guidance,
current and proposed technical agenda projects, and longer-term issues
affecting those organizations
 17 members, plus 4 participating observers
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NFP financial officers, auditors, foundation and other donors, creditor, watchdog
agency, charities regulator, attorney, and academic
 Also, NFP Resource Group (a standing group of 225+ members)
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NAC DISCUSSIONS ON ISSUES WITH GAAP:
PRIMARY AREAS IN NEED OF ATTENTION
 The NFP financial reporting model (“FAS 117”) is in need of “refreshing”
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Key vehicle: Two new NFP Financial Reporting projects
 Unlike private companies, no “hue and cry” for different underlying accounting in
certain areas, but a more liberal use of practical expedients may be warranted
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Area most frequently cited: Fair value measurements
 Primary general GAAP issue: “Disclosure Overload” (and effectiveness)
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Key vehicles: Disclosure Framework project and NFP Financial Reporting projects
 Important NAC role: advise FASB staff and Board on potential piggybacking
opportunities for NFPs with regard to projects of the new Private Company
Council
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Key project: Nonpublic Entity Definition
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FASB NFP FINANCIAL REPORTING
PROJECTS
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NET ASSET CLASSES
Might the current three classes of net assets based
on donor-imposed restrictions be improved?
• Are they still relevant and most useful?
• Can they be improved to better convey information about liquidity
and financial performance? For example:
o Should donor-restricted classes be expanded to include restrictions
imposed by other sources (for example, limits imposed by statutes,
debt covenants, and other contracts)?
o Should net asset classes be narrowed to just two (e.g., donor-restricted
and other) with use of subclasses and/or notes?
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LIQUIDITY AND FINANCIAL HEALTH
 How can we best improve information about an entity’s financial health,
particularly the liquidity of its resources and its financial flexibility?
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Limits on assets
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Demands on assets (e.g., maturity of liabilities and other commitments)
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Classifications of net assets, including added emphasis on ability to spend, for example:
Unrestricted
Restricted
Spendable
Spendable
Designated
Limited
Nonspendable (e.g., PP&E)
Nonspendable
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FINANCIAL PERFORMANCE
 How might the statements of activities and cash flows be improved to
better convey financial performance?
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Should we have one model or two?
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Should an operating measure be required?
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If yes, should there be a single defined measure or some latitude to select from
among a few different measures?
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Should there be one statement or two statements (e.g., statement of operations,
statement of other changes in net assets)?
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Should functional expense reporting still be required for all and a statement of
functional expenses for voluntary health & welfare organizations?
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How about a spectrum, ranging from functional expense reporting to a functional/
natural expense matrix to functional P&L reporting to “segment-like” reporting?
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FINANCIAL PERFORMANCE
How might the statements of activities and cash
flows be improved to better convey financial
performance? (cont’d.)
• How can we better link the statements of activities and cash flows?
At the very least, can we better align “operating”?
• Should we require the direct method for reporting operating cash
flows?
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“TELLING THE STORY”
OTHER FINANCIAL COMMUNICATIONS
 NAC View—Financial Reporting can be enhanced through
other narrative communications, such as:
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Management commentary that explains financial information provided in
financial statements, including trends over time
 Issues include:
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Are standards needed? If not, would they be helpful?
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Should such information be required or encouraged? If required, for all
NFPs or only certain types?
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If standards are to be developed, should a reporting framework require
certain components?
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FASB NFP FINANCIAL REPORTING
PROJECTS
 Have formed project resource groups and completed other detail
project planning
 Deliberations on standards project expected to begin in early 1Q 2013.
Current estimated completion date is 2H 2014
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NAC discussion on net asset classes in March 2012
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NAC discussion on liquidity and the proposed ASU on Liquidity Risk Disclosures in
September 2012
 Work on research project has already begun. Current estimated date
for decision on adding standards project: mid-2013
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Progress report at September 2012 NAC meeting
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DISCLOSURE FRAMEWORK PROJECT
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FASB DISCLOSURE FRAMEWORK PROJECT
 Goal: disclosure standard or conceptual framework guidance that helps
reduce disclosure overload while making disclosures more comparable
and effective
 Two approaches within project:
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“Top down” (development of principles)
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“Bottom up” (looking at actual current disclosure requirements)
 Many view this as a critical project in addressing GAAP complexity for
all entities (public companies, private companies, NFPs)
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DISCLOSURE FRAMEWORK PROJECT
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FASB DISCLOSURE FRAMEWORK PROJECT
 Invitation to Comment (ITC) issued in July. Comment
period ended November 30
 ITC focuses on investors and creditors, but asked for input
to help in also focusing on donors and other unique users
of NFP financial statements
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Discussed by NAC at September 2012 meeting
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WHAT IS THE DISCLOSURE
FRAMEWORK PROJECT?
 Project began as a response to a December 11, 2007, letter from
the Investors Technical Advisory Committee to the FASB
 FASB issued an “Invitation to Comment” on July 12, 2012 –
comment period extended through November 30, 2012
 Goal of project is to improve disclosure effectiveness
 Complaints of cost effectiveness and relevance of disclosures for
smaller entities
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ADDRESSING DISCLOSURE
EFFECTIVENESS
 Notes will address only information that is relevant to
primary users of financial statements
 Relevant information: useful info for investing and credit
decisions, which are based upon implicit or explicit
assessments of prospects for cash flows to investors or
creditors
 Flexible disclosure requirements that could be adapted by
each entity to focus on relevant information to its specific
circumstances
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ADDRESSING DISCLOSURE
EFFECTIVENESS (CONT.)
 FASB also addressed format and organization of notes
 Disclosures should be entity specific and should identify
judgments and assumptions made by management
 Most relevant info should be given more recognition
• Reorder notes by relevance
• Use different text fonts or styles to draw attention to most
relevant info
 Potential to group related notes together
 Not stated goal, but would likely lead to reduced disclosures,
which would enhance effectiveness
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CHANGES TO CODIFICATION?
 Invitation to Comment does not propose any specific changes,
but rather suggests a number of possibilities that could lead to
more effective disclosures
 FASB states that establishing a framework for disclosure is an
important first step before any specific changes to existing
disclosure requirements are considered
 FASB plans to apply framework to existing standards by either
modifying existing standards or establishing new standards
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ACHIEVING DISCLOSURE
SELECTIVITY
 Two extremes – 1) FASB takes most responsibility for judgments, or 2)
reporting entities take most responsibility for judgments
 Several alternatives:
1.
FASB change wording re: disclosures to be less prescriptive and allow for flexibility.
2.
FASB identify one set of potential disclosures for each Topic and require reporting
entities to make their own decisions about relevance of each item.
3.
FASB set minimum disclosure requirements or set of disclosures and an expanded set of
disclosures. Reporting entities use judgment to provide minimum disclosures or some
or all of the expanded disclosures.
4.
FASB establish tiers of info items or a graduated scale of info requirements for each
Topic. Reporting entities use judgment to determine which level applies to them.
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CONSEQUENCES
 Convergence with International Standards – currently, IASB
is NOT working on a similar project; although the European
Financial Reporting Advisory Group is
 Comparability of financial statements to other entities
 Depending upon approach selected for achieving disclosure
selectivity, increased judgment from reporting entities re:
disclosures
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NFPS AS PUBLIC VS. NONPUBLIC ENTITIES
 Current FASB project reexamining what is a Nonpublic Entity for
standard setting
 Impacts on accounting and financial reporting
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Current disclosures, effective date, transition
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Future: potentially greater impact
 Phase I: Business Entities
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Tentative conclusions contained in Appendix to Private Company Framework ITC
 Phase II, on NFPs, now underway
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Current dividing line within NFPs: conduit debt
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What should the dividing line(s) be?
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NAC DISCUSSIONS OF
PUBLIC VERSUS NONPUBLIC
 NAC members have agreed that NFPs share some attributes of
nonpublic entities
 However, they are generally more similar to public entities
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Generally, broader user base with less access to management
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Public accountability created via donations and tax exemptions
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Generally, governing boards are considered part of management, but nonprofit
boards have a special role in ensuring public accountability and should be considered
as users of financial statements
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NAC DISCUSSIONS OF
PUBLIC VERSUS NONPUBLIC
 This does not mean that NFPs should be treated like public companies
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NFPs have limited resources like private companies
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Some information that is important to public company investors is irrelevant to
users of NFP financial statements
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NFP stakeholders are interested in the entity’s fiscal sustainability and its ability to
repay debts, not the value of the entity for the purpose of trading shares
•
There may be a subset of NFPs that are more like private companies (e.g., local
membership clubs)
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ASU 2012-05
 Statement of Cash Flows (Topic 230)
 Not-for-Profit Entities: Classification of the Sale Proceeds of
Donated Financial Assets on the Statement of Cash Flows – a
consensus of the FASB Emerging Issues Task Force
 Issued October 2012
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ASU 2012-05
Why issue this ASU?
• To address the diversity in practice about how to classify cash
receipts arising from the sale of certain donated financial assets on
the statement of cash flows of not-for-profit entities.
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ASU 2012-05
What entities are affected by this?
• Any entity within the scope of Topic 958, Not-for-Profit Entities, that
accepts donated financial assets.
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ASU 2012-05
What are the main provisions?
• Not-for-profit entities must classify cash receipts from the sale of
donated financial assets consistently with cash donations received
on the statement of cash flows if there are no spending limitations
and the donated financial assets were converted nearly immediately
into cash.
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ASU 2012-05
What are the main provisions? (continued)
• No limitations and nearly immediate cash conversion = operating
activities
• Time limitations (donor intended long-term purposes) and nearly
immediate cash conversion = financing activities
• No nearly immediate cash conversion = investing
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ASU 2012-05
Practical Example:
• Rupert Player makes the following donation to his favorite charity,
Sizzler Village:
o $ 1,000 worth of shares of IBM for any purpose.
o $ 1,000 worth of shares of Facebook for the purchase of a new van
expected to be made five years from now.
o $ 1,000 worth of shares of Alcoa for any purpose.
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ASU 2012-05
Practical Example (continued):
• Sizzler Village has the following policy regarding donated securities:
o All donated securities less than $ 1,000 are immediately liquidated.
o All donated securities $ 1,000 or greater are reviewed by the board
and held or liquidated at their discretion.
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ASU 2012-05
Practical Example (continued):
• Sizzler Village decides the do the following with Mr. Player’s donated
stocks:
o $ 1,000 worth of shares of IBM – convert to cash.
o $ 1,000 worth of shares of Facebook – convert to cash.
o $ 1,000 worth of shares of Alcoa – hold indefinitely.
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ASU 2012-05
Practical Example (continued):
• Proper statement of cash flows presentation:
o $ 1,000 worth of shares of IBM – convert to cash = operating.
o $ 1,000 worth of shares of Facebook – convert to cash = financing
(restricted for long-term purposes)
o $ 1,000 worth of shares of Alcoa – hold indefinitely = investing (upon
liquidation)
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ASU 2012-05
Effective Date:
• Effective prospectively for fiscal years, and interim periods within
those years, beginning after June 15, 2013.
• Retrospective application to all prior periods presented upon the
date of adoption is permitted.
• Early adoption is permitted with exception.
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ASU 2012-05
Effective Date (continued):
• Exception to early adoption – for fiscal years beginning before
October 22, 2012, early adoption is permitted only if the entity’s
financial statements for those fiscal years, and interim periods within
those years, have not yet been made available for issuance.
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DONATED SERVICES RECEIVED FROM
EMPLOYEES OF AN AFFILIATE (ISSUE 12-B)
 General Rule: An NFP recognizes “donated services" provided to it at
no cost by an independent third-party only if those services "enhance a
long-lived asset" or would otherwise need to be paid for by the NFP in
the normal course of business
 Recognized
 Pro bono audit services provided by a CPA firm (debit accounting fees,
credit contribution revenue; measured at fair value based on billing rotes)
 Not recognized
 Services of volunteers staffing a call center during a pledge drive
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DONATED SERVICES RECEIVED FROM
EMPLOYEES OF AN AFFILIATE (ISSUE 12-B)
 Issue
 Should NFPs apply contributed services guidance for recognizing personnel costs incurred
on its behalf by an entity under common control?
 If not, what recognition and measurement guidance should apply?
 Views Proposed
 A - Recipient NFP should not apply contributed services guidance in ASC 958 but
recognize personnel services that are regularly performed for recipient NFP on Its behalf
by an affiliate at actual cost
 B - same as view A except measure personnel services that meet contributed services
recognition criteria at fair value, otherwise measure at cost
 C - amend recognition criteria to remove ‘for and under direction of the donee' - then
recognize personnel services that meet this amended definition at fair value
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DONATED SERVICES RECEIVED FROM
EMPLOYEES OF AN AFFILIATE (ISSUE 12-B)
 EITF reached a consensus that the expenses related to all personnel
services that are regularly performed for the recipient NFP should be
recognized in the NFP’s stand-alone financial statements and should be
measured at the actual costs incurred by the affiliate under common control
•
Contributed services criteria would no longer be applied when reimbursement is not
sought
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Entities under Topic 954 (health care) would report as equity transfer
 60-day comment period for ED ended September 20th; EITF to discuss on
January 17, 2013 (November 1 meeting was canceled because of
“Superstorm Sandy”)
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OBLIGATIONS RESULTING FROM
JOINT AND SEVERAL LIABILITY
ARRANGEMENTS (ISSUE 12-D)
 Background
 Under joint and several liability, the total amount of an obligation is enforceable
against any of the parties to the arrangement and the obligors cannot refuse to
perform on the basis that other parties also are obligated to perform.
 Joint and several liability may exist for entities under common control or between
unrelated parties.
 Currently there is diversity in practice in how entities recognize and measure
obligations with joint and several liability.
 Issue
 How should a reporting entity that is jointly and severally liable account for an
obligation whose total amount is fixed at the reporting date?
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OBLIGATIONS RESULTING FROM
JOINT AND SEVERAL LIABILITY
ARRANGEMENTS (ISSUE 12-D)
 ABC Health System
 Hospital A - $200 million
 Hospital B - $175 million
 Hospital C - $75 million
 Fact Pattern
 Obligated group issued debt totaling $450 million
 Hospitals are joint and severally liable for repayment of the debt
 In addition to consolidated financial statements, each subsidiary issues standalone
statements
 Each hospital's standalone statements display its share of the obligation, with note
disclosure of the amount contingently owed (e.g., Hospital A's statements show $200
million liability and disclose $250 million contingent obligation)
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OBLIGATIONS RESULTING FROM
JOINT AND SEVERAL LIABILITY
ARRANGEMENTS (ISSUE 12-D)
 Issue
 Should each hospital reflect the entire $450 million obligation, with a receivable from
other parties for their respective “shares”?
 e.g., should Hospital A record $450 liability and $250 million receivable from
Hospitals B and C?
 View Proposed
 A ~ Net approach under FAS 5 (treat obligation as contingent liability)
 B ~ Net approach under FIN 45/FAS 5 (treat obligation as a guarantee)
 C ~ Gross approach (record the total amount of the obligation)
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OBLIGATIONS RESULTING FROM
JOINT AND SEVERAL LIABILITY
ARRANGEMENTS (ISSUE 12-D)
 EITF reached a consensus that an entity should measure obligations
resulting from joint and several liability arrangements for which the total
amount under the arrangement is fixed at the reporting date using Loss
Contingencies guidance (unless primary role is as guarantor)
•
Certain disclosures would also be required
 60-day comment period for ED ended September 20th; EITF to discuss
on January 17, 2013
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LEASES PROJECT – TIMETABLE
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LEASES PROJECT: LESSEES
 Proposed right-of-use model for lessees
 Feedback: general agreement for on-balance-sheet
treatment but concerns about complexity:
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Measurement (renewal options, contingent rents, short-term leases)
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Expense pattern / categorization (front-loading, cost recovery, allowability)
 Redeliberations:
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Measurement simplifications; short-term lease exception
•
Reconsidered subsequent expense categorization and expense pattern on
income statement (statement of operations): Next slide
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REDELIBERATIONS – LESSEE MODEL
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REDELIBERATIONS – LESSOR MODEL
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RECEIVABLE & RESIDUAL APPROACH
Balance Sheet
Income Statement
Right to receive lease
payments1
X Profit on transfer of
right-of-use (gross or
net based on business
model)
X
Residual asset2
X Interest income – on
receivable & residual3
X
1 Present
value of lease payments, plus initial direct costs
2 Measured at an allocation of carrying amount of leased
asset
3 Interest on residual based on estimated residual value –
any profit on the residual asset is not recognized until
asset sold or re-leased at end of lease term
77
LEASES PROJECT: TIMEFRAME
 Redeliberations still ongoing
 Revised ED now expected in 1H 2013
 Likely 120-day comment period
 Final standard now expected to be issued in late 2013 or early 2014
 Effective date for public entities likely 2016 or later
 Likely incremental deferral for nonpublic entities for one or two years
beyond the public entity effective date
78
PREPARING FOR THE (EVENTUAL) NEW
LEASES STANDARD
 Inventory all leases
 Assess capitalization threshold
 Monitor the continued developments in the project at fasb.org
 Depending on final decisions:
•
Understand any potential impact on debt financial covenants (debt/equity ratios) and
any other key financial metrics by which the organization is measured
•
Understand any potential impact on cost recovery agreements (primarily equipment
leases). The FASB is very aware of these issues for NFPs, as well as other
government contractors, etc.
79
REVENUE RECOGNITION PROJECT:
OVERVIEW OF MODEL
80
REVENUE RECOGNITION PROJECT
 Contracts with customers
 Excluded:
•
Donations
•
Collaborative arrangements
 May significantly change recognition pattern for some industries, but
probably not for most NFPs
 New disclosures (next slide)
•
Exemptions for nonpublic entities
81
REVENUE RECOGNITION: DISCLOSURES
Objective: To enable users of financial statements to understand the nature, amount, timing,
and uncertainty of revenue and cash flows arising from contracts with customers
• Redeliberations (in December) to consider costs and benefits of annual and
interim disclosures
• Users – level of disclosure is appropriate (or more is required)
• Preparers and others – disclosure proposals are excessive, overly
prescriptive and require information not used by management
82
REVENUE RECOGNITION PROJECT:
TIMEFRAME
 Other issues being redeliberated
•
Onerous performance test has now been removed
•
Bad debts now back in expenses (original ED: contrarevenue)
•
Distinction from collaborative arrangement expected to be clarified further
 Standard expected to be issued in 1H 2013
 Effective date for public entities TBD (no earlier than 2015, perhaps
later)
 Likely incremental deferral for nonpublic entities for one or two years
beyond that
83
FINANCIAL INSTRUMENTS PROJECT
 Classification and Measurement:
•
For the most part, changes no longer significant for NFPs
•
Loans receivable and liabilities remain at cost
•
NFPs already at FV for debt securities (these will generally now be at FV
for business entities too)
•
Practical expedient to FV for nonmarketable equity securities
•
Nonpublic entities: Not required to present parenthetically or disclose fair
value amounts for financial assets and financial liabilities measured at
amortized cost. (i.e., “FAS 107” disclosures would no longer be required)
84
FINANCIAL INSTRUMENTS PROJECT
 Impairment:
•
FASB now proposing a Current Expected Credit Loss model, which would apply
to loans receivable, as well as trade and lease receivables
•
Differs somewhat from the IASB’s current proposed model
 Hedge Accounting:
•
FASB and IASB are currently in very different places here
 Revised ED for Impairment to be issued later this month.
Revised ED for Classification & Measurement to be issued in
1H 2013. Final standard(s) on these areas expected be issued
in late 2013 or early 2014. Effective date TBD.
85
LIQUIDITY RISK DISCLOSURES PROJECT
 Spin-off from Accounting for Financial Instruments project
 Developed in part in response to concerns about
irrelevance/non-cost-effectiveness of FV information for
certain financial assets and liabilities
 Key proposed disclosures: (1) obligations, by expected
maturity; (2) available funds
•
Financial institutions: different liquidity risk disclosures, plus interest rate
risk disclosures
 Comment period ended September 25th
86
LIQUIDITY RISK DISCLOSURES PROJECT
 NAC discussed these at its September 2012 meeting, focusing on both
(1) appropriateness/ cost-effectiveness and (2) sufficiency (given the
NFP Financial Reporting Project objective of improving information
about liquidity in NFP financial statements)
 Many constituents have been highly critical of the proposal
 FASB is reassessing the objectives and scope of project and nature of
disclosures
87
GOING CONCERN PROJECT
88
GOING CONCERN
Price pressures
General lack of work and backlog
Increased competition for fewer jobs
Will companies be able to keep revenue at a
sufficient level?
•
Profitable jobs?
•
Cover overhead?
•
Anything left?
89
GOING CONCERN
Banks hesitant with financing
• Bankruptcies
• Loan defaults
• Busted loan covenants
90
GOING CONCERN
AICPA – AU-C Section 570, The Auditor's Consideration of an
Entity's Ability to Continue as a Going Concern
 Effective for audits of financial statements for periods
ending on or after December 15, 2012
91
GOING CONCERN
AICPA – AU-C Section 570, The Auditor's Consideration of an
Entity's Ability to Continue as a Going Concern
 Continuation of an entity as a going concern is assumed in financial
reporting in the absence of significant information to the contrary.
 Auditor has a responsibility to evaluate whether there is substantial doubt
about the entity’s ability to continue as a going concern for a reasonable
period of time.
 This evaluation is based on knowledge of relevant conditions and events
obtained from the auditing procedures performed during a FS audit.
 The absence of any reference to substantial doubt in an auditor’s report
cannot be viewed as a guarantee to the entity’s ability to continue as a going
concern.
92
GOING CONCERN
AICPA - AU-C Section 570 (Continued)
 Consider conditions and events such as:
•
•
Negative trends
o
Recurring operating losses
o
Working capital deficiencies
o
Negative cash flows from operating activities
o
Adverse key financial ratios
Other indications of financial difficulties
o
Default on loan or similar agreements
o
Denial of usual trade credit from suppliers
o
Restructuring of debt
o
Need to seek new sources or methods of financing or to dispose of substantial assets
93
GOING CONCERN
AICPA - AU-C Section 570 (Continued)
 Consider conditions and events such as:
•
•
Internal matters
o
Work stoppages and/or labor difficulties
o
Substantial dependence on success of particular project
o
Need to significantly revise operations
External matters
o
Legal proceedings, legislation, or similar matters that might jeopardize an entity's ability to
operate
o
Loss of principal customer or supplier
o
Uninsured or underinsured catastrophe (earthquake, flood, etc.)
94
GOING CONCERN
AICPA - AU-C Section 570 (Continued)
 Consider management’s plans
•
Plans to dispose of assets
•
Plans to borrow money or restructure debt
•
Plans to reduce or delay expenditures
•
Plans to increase ownership equity
•
Plan and perform auditing procedures to obtain audit evidence on those elements
that are particularly significant to overcoming the adverse conditions
95
GOING CONCERN
AICPA - AU-C Section 570 (Continued)
 Disclosure and/or Explanatory Paragraph?
•
If the auditor's conclusion is that substantial doubt about the entity's ability to
continue as a going concern for a reasonable period of time is alleviated, the auditor
should consider the need for disclosure of the principal conditions and events that
initially caused the belief that there was substantial doubt. The auditor's
consideration of disclosure should include the possible effects of such conditions and
events, and any mitigating factors, including management's plans.
96
GOING CONCERN
AICPA - AU-C Section 570 (Continued)
 Disclosure and/or Explanatory Paragraph?
•
If auditor’s conclusion is that substantial doubt about the entity's ability to continue
as a going concern for a reasonable period of time remains, the audit report should
include an explanatory paragraph.
•
If auditor concludes that the entity's disclosures with respect to the entity's ability to
continue as a going concern for a reasonable period of time are inadequate, a
departure from GAAP exists. This may result in either a qualified (except for) or an
adverse opinion.
97
GOING CONCERN
 The FASB decided that guidance related to the going concern assumption




should reside in the accounting literature established by the FASB and
decided to undertake this project (2007).
Because this project may overlap with rules and standards of other agencies,
the FASB directed its staff to obtain input from the staffs at the SEC, AICPA,
and PCAOB on the revised draft and any conflict with existing and/or
pending guidance related to this topic.
Focused on disclosures aimed at earlier identification of circumstances that
might lead to going concern issues
Should there be some sort of explicit positive or negative assertion? If so,
who should be making it (management vs. auditor)?
The FASB is expecting to issue an exposure draft on going concern during
the first half of 2013.
98
RISKS AND UNCERTAINTIES (GOING
CONCERN) PROJECT
99
GOODWILL AND INDEFINITE-LIVED
INTANGIBLE ASSETS
100
ASU 2011-08 AND ASU 2012-02
 Relates to impairment testing of goodwill and
indefinite-lived intangible assets
 ASU 2011-08 relates to goodwill – issued in September
2011
 ASU 2012-02 relates to indefinite-lived intangible
assets
 Main provision of both – allows entities to first assess
potential for impairment using qualitative factors
101
ASU 2011-08: GOODWILL
 Issued in September 2011
 Issued due to complaints that performing the two-step
impairment test was too costly for many entities
 Allows for entities to first assess qualitative factors to determine
whether it is more-likely-than-not that the fair value of a
reporting unit is less than its carrying amount as a basis for
determining whether it is necessary to perform the two-step
goodwill impairment test
 Effective for annual and interim periods beginning after
December 15, 2011. Early adoption is permitted.
102
ASU 2011-08: GOODWILL
(CONTINUED)
 Qualitative factors that may indicate potential impairment:
1.
Macroeconomic conditions (e.g., deterioration in general economic
conditions, limitations on accessing capital, fluctuations in foreign exchange
rates, etc.)
2.
Industry and market conditions (e.g., deterioration in the environment in
which an entity operates, increased competitive environment, change in the
market for an entity’s products or services, etc.)
3.
Cost factors (e.g., increases in raw materials, labor, or other costs that have a
negative effect on earnings and/or cash flows, etc.)
4.
Overall financial performance (e.g., negative or declining cash flows or a
decline in actual or planned revenue or earnings compared with actual or
projected results of relevant prior periods, etc.)
103
ASU 2011-08: GOODWILL
(CONTINUED)
 Qualitative factors that may indicate potential impairment
(cont):
5.
Other relevant entity-specific events (e.g., change in management, key
personnel, strategy, or customers; contemplation of bankruptcy; or litigation)
6.
Events affecting a reporting unit (e.g., change in the composition or carrying
amount of its net assets, a more-likely-than-not expectation of selling or
disposing all, or a portion, of a reporting unit, etc.)
7.
If applicable, a sustained decrease in share price (consider in both absolute
terms and relative to peers)
104
ASU 2011-08: GOODWILL
(CONTINUED)
 FASB does NOT intend for the identification of one factor to
automatically trigger the two-step impairment test
 Entity should consider the extent to which each of the adverse events
and circumstances identified could affect the comparison of a reporting
unit’s fair value with its carrying amount and place more weight on the
events or circumstances that most affect the reporting unit’s fair value
or carrying amount of its net assets
 Additionally, an entity shall evaluate the existence of any positive or
mitigating events and circumstances
 If entity determines that it is more-likely-than-not that an impairment
may exist, entity should perform the first step and, if necessary, the
second step of the two-step impairment test
105
ASU 2012-02: INDEFINITE-LIVED
INTANGIBLE ASSETS
Provisions similar to those of ASU 2011-08
Effective for annual and interim impairment
tests performed for fiscal years beginning
after September 15, 2012. Early adoption is
permitted.
106
ASU 2012-02: INDEFINITE-LIVED
INTANGIBLE ASSETS (CONTINUED)
 Events or circumstances to consider qualitatively that may
indicate impairment of indefinite-lived intangible assets:
1.
Cost factors that have a negative effect on future expected earnings
and cash flows that could affect significant inputs used to determine
the fair value of the indefinite-lived intangible asset
2.
Financial performance
3.
Legal, regulatory, contractual, political, business, or other facts,
including asset-specific factors that could affect significant inputs used
to determine the fair value of the indefinite-lived intangible asset
107
ASU 2012-02: INDEFINITE-LIVED
INTANGIBLE ASSETS (CONTINUED)
 Events or circumstances to consider qualitatively that may
indicate impairment of indefinite-lived intangible assets (cont.):
4.
5.
6.
Other relevant entity-specific events
Industry and market considerations
Macroeconomic conditions
Similar to goodwill, no one specific event or circumstance
should automatically trigger the two-step impairment test
 Weight should be placed on most significant events and
circumstances

108
ASU 2010-24
 Health Care Entities (Topic 954)
 Presentation of Insurance Claims and Related Insurance Recoveries
– a consensus of the FASB Emerging Issues Task Force
 Issued August 2010
109
ASU 2010-24
Why issue this ASU?
• To address current diversity in practice related to the accounting by
health care entities for medical malpractice claims and similar
liabilities and their related anticipated insurance recoveries.
• Most health care entities present at net although some have
presented at gross.
110
ASU 2010-24
Why issue this ASU? (cont.)
• It better reflects that health care entities generally remain liable for
payment of, and retain risk associated with, such claims.
• It better reflects that the health care entity is exposed to credit risk
from the insurer.
111
ASU 2010-24
What entities are impacted by this?
• Entities within the scope of Topic 954
• Consistent with the guidance on netting receivables and payables,
Subtopic 210-20, Balance Sheet – Offsetting, that are more broadly
applicable for entities in other industries.
112
ASU 2010-24
 Entities affected are required to present insurance claim
liabilities at a gross amount, excluding any expected
insurance recoveries.
 Claim liability amount should be determined without
consideration of insurance recoveries.
113
ASU 2010-24
 Amounts subject to deductibles should also be considered.
 Insurance receivable should be measured on the same basis
as liability .
 Allowance for uncollectable amounts should be considered.
114
ASU 2010-24
Items to consider
• Method of calculating liability
• Insurance layers
• Deductibles by claim and in aggregate
• Collectability of receivable
115
ASU 2010-24
 Understand the elements of the actuary’s calculations
• Consideration and assumptions of insurance recoveries by
actuary, if any
• Test understanding
• Evaluate assumptions for reasonableness and consistency
• Actuary should not assume claims made policy renews every
year
116
ASU 2010-24
 Practical Example:
• Hospital X currently has three layers of insurance:
o Self insured up to $500K
o MCARE insurance from $500k - $1 million
o Commercial insurance policy from $1 million to
$3 million
•
Hospital X has an outstanding claim expected to settle for
$2 million.
117
ASU 2010-24
Before:
Cash
Accounts receivable
Inventory
Prepaid expenses
After:
1,000,000
5,000,000
500,000
500,000
Cash
Accounts receivable
Inventory
Prepaid expenses
1,000,000
5,000,000
500,000
500,000
Property and equipment
Other assets
15,000,000
2,000,000
Property and equipment
Other assets
Insurance receivable
15,000,000
2,000,000
1,500,000
Total assets
24,000,000
Total assets
25,500,000
Current maturities of debt
Accounts payable
Accrued expenses
500,000
500,000
500,000
Current maturities of debt
Accounts payable
Accrued expenses
500,000
500,000
500,000
Long-term debt
Medical malpractice liability
Other liabilities
10,000,000
500,000
1,000,000
Long-term debt
Medical malpractice liability
Other liabilities
10,000,000
2,000,000
1,000,000
Net assets
11,000,000
Net assets
11,000,000
Total liabilities and net assets
24,000,000
Total liabilities and net assets
25,500,000
118
ASU 2010-24
Effective Date:
• Public entity - Fiscal years and interim periods beginning after
December 15, 2010
• Nonpublic - Fiscal years beginning after December 15, 2010
• Retrospective application is permitted for all prior periods
presented
• Early adoption is permitted
119
TPAS ISSUED RELATED TO NEW
INSURANCE ASU
 TIS 6400.49 Presentation of Claims Liability and Insurance
Recoveries—Contingencies Similar to Malpractice
- Similar contingent liabilities within the
scope of ASU 2010-24 include liabilities of
a similar nature
•
Workers Compensation
•
Directors and Officers claims
•
Others
120
TPAS ISSUED RELATED TO NEW
INSURANCE ASU
 TIS 6400.50 Accrual of Legal Costs Associated with Contingencies
Other Than Malpractice
- For Malpractice
ASC 954-450 requires health care entities to estimate
and accrue the legal cost expected in connection with
litigating malpractice claims in the period the
malpractice incident arises
- Other than Malpractice
Prior policy election (expense when incurred or accrue
for expected costs) should not be affected by adoption
of ASU 2010-24
121
TPAS ISSUED RELATED TO NEW
INSURANCE ASU
 TIS 6400.51 Presentation of Insurance Recoveries When
Insurer Pays Claims Directly
(Insurer handles all aspects of claims handling and settlement for
covered claims; provider neither pays claims or receives recoveries)
- Unless health care org. has a valid right of offset (not
common), the org. should report gross amount of claims
liability (incl. legal cost) and record a receivable as if it were
entitled to receive insurance recoveries to offset obligations
• In most cases, the receivable will mirror estimated losses in
these contracts
122
TPAS ISSUED RELATED TO NEW
INSURANCE ASU
 TIS 6400.52 Insurance Recoveries From Certain
Retrospectively-Rated Insurance Policies
- Such policies may not transfer risk
 Is a deposit (financing) arrangement
 Follow ASC 720-20 Expenses-Insurance, and ASC 340-30 Insurance
Contracts That Do Not Transfer Insurance Risk
- Policies may be more complex (e.g., maximum premium
provisions)
 Considerations are discussed more fully
123
ASU 2011-07
Health Care Entities (Topic 954)
Presentation and Disclosure of Patient Service Revenue,
Provision for Bad Debts, and Allowance for Doubtful
Accounts for Certain Health Care Entities – a
consensus of the FASB Emerging Issues Task Force
Issued July 2011
124
ASU 2011-07
Why issue this ASU?
• Some Health Care entities recognize patient service revenue at the
time the services are rendered regardless of whether the entity
expects to collect that amount.
• Concerns over “grossed-up” F/S presentation.
• Need for greater transparency in a health care entity’s F/S about net
patient service revenue and the allowance for doubtful accounts.
125
ASU 2011-07
What entities are impacted by this?
• Entities within the scope of Topic 954
• Entities that recognize significant amounts of patient service
revenue at the time the services are rendered even though they
don’t assess collectability at that time
• No impact for other entities
126
ASU 2011-07
 Entities affected are required to reclassify bad debt expense from operating
expenses to a deduction from net patient service revenue (net of contractual
allowances and discounts).
 Bad debt expense continuing to be reported as operating expense:
- Relating to revenue that is not patient service revenue (e.g., Foundation)
- Receivables from patient service revenue if the entity only recognized
revenue to the extent it expects to collect that amount (e.g., physician
practice)
127
ASU 2011-07
New disclosure requirements:
• Enhanced disclosures about policies for recognizing revenue and
assessing bad debts:
o Disclosure by major payor types
o Consistent with how entity manages its business (e.g., by credit risk)
o How does accounting system track receivables and revenue?
128
ASU 2011-07
 New disclosure requirements:
•
Qualitative and quantitative information about changes in the allowance for
doubtful accounts:
o Changes in estimates and underlying assumptions
o Amount of self-pay write-offs
o Amount of third-party payor write-offs
o Any other unusual transactions impacting the allowance for doubtful
accounts
o Major payor sources identified
o Illustrations are provided in the ASU (Codification 954-310-55-1 through 3)
129
ASU 2011-07
BEFORE:
AFTER:
Revenues, Gains, and Other Support:
Net patient service revenue
Other revenue
50,000,000
2,000,000
Total
52,000,000
Expenses:
Salaries and wages
Supplies and expenses
Employee benefits
Depreciation and amortization
Provision for bad debts
Professional fees
Insurance
Contracted services
Interest
21,000,000
15,000,000
5,000,000
3,000,000
3,000,000
2,000,000
1,000,000
500,000
500,000
Total
51,000,000
Revenues in excess of expenses
Revenues, Gains, and Other Support:
Net patient service revenue
Provision for bad debts
Net patient service revenue less
provision for bad debts
Other revenue
50,000,000
(3,000,000)
47,000,000
2,000,000
Total
49,000,000
Expenses:
Salaries and wages
Supplies and expenses
Employee benefits
Depreciation and amortization
Provision for bad debts
Professional fees
Insurance
Contracted services
Interest
21,000,000
15,000,000
5,000,000
3,000,000
2,000,000
1,000,000
500,000
500,000
Total
48,000,000
1,000,000
Revenues in excess of expenses
1,000,000
130
ASU 2011-07
Entity A recognizes patient service revenue associated with services provided to patients who have thirdparty payor coverage on the basis of contractual rates for the services rendered. For uninsured patients
that do not qualify for charity care, Entity A recognizes revenue on the basis of its standard rates for
services provided (or on the basis of discounted rates, if negotiated or provided by policy). On the basis of
historical experience, a significant portion of Entity A’s uninsured patients will be unable or unwilling to pay
for the services provided. Thus, Entity A records a significant provision for bad debts related to uninsured
patients in the period the services are provided. Patient service revenue, net of contractual allowances and
discounts (but before the provision for bad debts), recognized in the period from these major payor
sources, is as follows.
Third-Party
Payors
Patient service
revenue (Net of
contractual
allowances and
discounts)
$
50,000
Total
All Payors
Self-Pay
$
10,000
$
60,000
131
ASU 2011-07
Effective Date:
• Public entity - Fiscal years and interim periods beginning after
December 15, 2011
• Nonpublic - Fiscal years ending after December 15, 2012
• Presentation should be retrospective for all prior periods presented,
disclosures for the period of adoption, and subsequent periods
• Early adoption is permitted
132
TIS 6400.47
 Application of ASU 2011-07 in Consolidated Financial Statements
 In determining how to present bad debts in Health System’s consolidated
statement of operations, should the assessment of significance be
made at the consolidated reporting entity level (regardless of the
presentation in the separate subsidiary financial statements), or should the
determinations made at the separate subsidiary reporting level
be retained in consolidation?
A. Application should be made as a policy decision with
disclosure of the policy election.
133
TIS 6400.48 ACCOUNTING FOR ICD-10
IMPLEMENTATION COSTS
 Expected to require changes to both business processes and information
systems
 Follow guidance in FASB-ASC 720-45
- Segregate project costs among—
• Process reengineering activities
o
•
Activities that develop or modify software
o
•
Expensed as incurred
Capitalized or expensed based on FASB internal-use software
guidance
Costs associated with acquisition of fixed assets
o
Accounted for in accordance with policy for capitalizing longlived productive assets
134
TIS 6400.48 ACCOUNTING FOR ICD-10
IMPLEMENTATION COSTS (CONT.)
 All training costs should be expensed as incurred
 Costs related to acquisition of new ICD-10 compliant systems or
modification of existing software to become ICD-10 compliant—follow
ASC 350-40
- Do modifications result in “additional functionality”? (enable
software to perform tasks that it was previously incapable of
performing)
TPA presents factor to be considered in this assessment.
 Modifications that do not result in additional functionality - expensed as
maintenance costs
 Modifications that result in additional functionality - expensed or
capitalized in accordance with parag. 1-6 of ASC 350-40-25
135
TIS 6400.48 ACCOUNTING FOR ICD-10
IMPLEMENTATION COSTS (CONT.)
ASC 350-40-25, parag. 1-6
Preliminary Project Stage
25-1 Internal and external costs incurred during the preliminary project stage shall
be expensed as they are incurred.
Application Development Stage
25-2 Internal and external costs incurred to develop internal-use computer software
during the application development stage shall be capitalized.
25-3 Costs to develop or obtain software that allows for access to or conversion of old
data by new systems shall also be capitalized.
136
TIS 6400.48 ACCOUNTING FOR ICD-10
IMPLEMENTATION COSTS (CONT.)
25-4 Training costs are not internal-use software development costs and, if
incurred during this stage, shall be expensed as incurred.
25-5 Data conversion costs, except as noted in paragraph 350-40-25-3, shall be
expensed as incurred.
Postimplementation-Operation Stage
25-6 Internal and external training costs and maintenance costs during the
postimplementation-operation stage shall be expensed as incurred.
137
MEDICARE INCENTIVE PAYMENTS FOR
MEANINGFUL USE OF ELECTRONIC HEALTH
RECORDS
 The American Recovery and Reinvestment Act of 2009 (ARRA)
established incentive payments under the Medicare and Medicaid
programs for certain professionals and hospitals that “meaningfully
use” certified electronic health record (EHR) technology.
 Final rule issued in the July 28, 2010, Federal Register starting on
page 44314.
 Provisions of the ARRA together with certain other provisions are
referred to as the Health Information Technology for Economic and
Clinical Health (HITECH) Act.
138
MEDICARE INCENTIVE PAYMENTS FOR
MEANINGFUL USE OF ELECTRONIC HEALTH
RECORDS
 Goal – Promote effective (quality) and efficient health care
delivery reducing overall cost of health care.
 $19 billion has been set aside to be allocated over a four
year period to hospitals implementing the technology by
2014 who are considered “meaningful users.”
 Hospitals must attest that they have met the criteria.
 Meaningful use has been defined by CMS in three stages.
139
MEDICARE INCENTIVE PAYMENTS FOR
MEANINGFUL USE OF ELECTRONIC HEALTH
RECORDS
 Stage 1
• Electronically capture health information in coded format
• Use technology to meet 14 required core objectives
• Meet 5 objectives from a menu of 10
 Stage 2
• Focus on continuous quality improvement at point of care, greater use of
physician order entry, and more exchange of information
 Stage 3
• Focus on promoting improvements in quality, safety, and efficiency with an
emphasis on decisions support, patient access to self-management tools,
access to comprehensive patient data, and improving population health
140
MEDICARE INCENTIVE PAYMENTS FOR
MEANINGFUL USE OF ELECTRONIC HEALTH
RECORDS
 Hospitals could first qualify for meaningful use for 2011
through 2013 and still received four years of incentive
payments. After federal fiscal year 2013, smaller incentive
payments will be received.
 Failure to demonstrate meaningful use in a later payment
year will be treated as a skipped year and amounts cannot
be recaptured.
 There will be lower future reimbursement for those who
do not meet criteria by fiscal year 2015.
141
MEDICARE INCENTIVE PAYMENTS FOR
MEANINGFUL USE OF ELECTRONIC HEALTH
RECORDS
 Calculation: Initial Amount X Medicare Share X Transition
Factor
• Initial Amount
o 2 million + 200 for discharges 1,150 - 23,000
o Discharges < 1,150 and > than 23,000 are excluded
• Medicare Share
o (Part A IP + Part C IP days) / Total IP Days X ((Total Charges – Charity
Care)/Total Charges)
• Transition Factor
o See next slide
142
MEDICARE INCENTIVE PAYMENTS FOR
MEANINGFUL USE OF ELECTRONIC HEALTH
RECORDS
 The transition factors for obtaining meaningful use are as follows for the outlined years.
•
Fiscal Years 2011, 2012, or 2013:
o
o
o
o
•
Fiscal Year 2014:
o
o
o
o
•
Transition factor for year 1 - 0.75
Transition factor for year 2 - 0.50
Transition factor for year 3 - 0.25
Transition factor for year 4 - 0.00
Fiscal Year 2015 :
o
o
o

Transition factor for year 1 - 1.00
Transition factor for year 2 - 0.75
Transition factor for year 3 - 0.50
Transition factor for year 4 - 0.25
Transition factor for year 1 - 0.50
Transition factor for year 2 - 0.25
Transition factor for year 3 - 0.00
Provisions of the program are applied differently to Critical Access Hospitals and eligible professionals.
143
MEDICARE INCENTIVE PAYMENTS FOR
MEANINGFUL USE OF ELECTRONIC HEALTH
RECORDS
 CMS will employ discharge and other data from the Hospital’s most recently
filed 12 month cost report as the basis for determining the Hospital’s
preliminary incentive payment once they have attested as a meaningful user.
•
Medicare Cost Report (CMS - 2552-10) Worksheet S-2, Part I, Question 167 asks, “Is the
provider a meaningful user under Section 1886(n)?”
 CMS will determine the final incentive payment at the time of settling the 12
month cost report for the Hospital’s fiscal year that begins after the
beginning of the payment year, and to be settled on the basis of the
Hospital’s discharge and other data in that cost reporting period.
144
MEDICARE INCENTIVE PAYMENTS FOR
MEANINGFUL USE OF ELECTRONIC HEALTH
RECORDS – CASE STUDY
 Organization attested on 9/15/12
 Organization’s cost report year end is 6/30
 What cost report did they use to estimate the payment received?
 What cost report should they indicate that they have attested on?
 What cost report will be used to calculate the actual settlement?
145
MEDICARE INCENTIVE PAYMENTS FOR
MEANINGFUL USE OF ELECTRONIC HEALTH
RECORDS
 Contingency Model
• Identify the contingencies to be satisfied
o Did the Organization meet the meaningful use criteria during the EHR reporting period

90 consecutive days in the first payment year and 365 during the remaining 3 years
o What impact will discharges, total charges, charity care charges, and patient days have upon
the final incentive payment?
o What impact will the timing of these items have since the Organization’s fiscal year is most
likely June 30th and the EHR reporting period is based on the federal fiscal year which runs
from October 1st through September 30th?

(i.e., a portion of the discharges used in the payment calculation may occur after the reporting period ends)
• The contingency model would not permit income from the incentive
payments to be recognized until the criteria has been met by the
Organization.
146
MEDICARE INCENTIVE PAYMENTS FOR
MEANINGFUL USE OF ELECTRONIC HEALTH
RECORDS
 Grant Accounting Model
• Follows International Accounting Standard 20, Accounting for Government
Grants and Disclosures of Government Assistance (IAS 20)
• Not authoritative guidance under GAAP
• Has been used for situations where government provides resources to a
business entity in return for past or future compliance with specified
conditions relating to the operating activities of the entity, including situations
where the purpose of the assistance is to encourage a course of action by
the entity which it would not have taken otherwise.
• EHR purpose is to encourage an accelerated pace of adopting EHR
technology.
147
MEDICARE INCENTIVE PAYMENTS FOR
MEANINGFUL USE OF ELECTRONIC HEALTH
RECORDS
 IAS 20 defines two types of grants:
• Grants related to assets (primary condition that an entity qualifying for grant
should purchase, construct, or acquire long-term assets)
• Grants related to income (grants other than those related to assets)
 EHR incentive payments would be considered an income grant
since the compliance objective is “meaningful use” rather than to
make the purchase of the long-term assets.
148
MEDICARE INCENTIVE PAYMENTS FOR
MEANINGFUL USE OF ELECTRONIC HEALTH
RECORDS
 When should the income be recognized?
• When there is reasonable assurance that (1) the entity will comply with the
conditions set forth; and (2) the grants will be received.
Reasonable assurance may exist at the beginning of the reporting period and could be
recognized ratably over the EHR reporting period.
o Reasonable assurance may exist at mid-term date and a catch-up adjustment could be
recorded.
o Reasonable assurance may not be known until after the EHR reporting period with all
income recognized at once.
o
• If a previously recognized payment will be recouped, a provision for
repayment should be recorded and accounted for as a change in accounting
estimate.
• In the event that it is determined that meaningful use objectives will not be
met, previously recognized income should be reversed and accounted for as
a change in accounting estimate.
149
MEDICARE INCENTIVE PAYMENTS FOR
MEANINGFUL USE OF ELECTRONIC HEALTH
RECORDS
 Considerations for reasonable assurance
• How long has the EHR system been operating?
• How long has the Hospital been working to meet criteria?
• How far along is the Hospital with implementing computerized physician
order entry (CPOE)?
• How reliable are the processes and controls around data entry?
• How comfortable is the Hospital that the processes and controls are
working properly?
• Is the hospital going above and beyond to qualify for meaningful use?
 Estimates and revisions of estimates will have to be considered (i.e.,
discharges, charity care)
150
MEDICARE INCENTIVE PAYMENTS FOR
MEANINGFUL USE OF ELECTRONIC HEALTH
RECORDS
 Statement of Operations considerations
• Hospitals should evaluate the presentation that best fits their facts and
circumstances within the parameters of existing GAAP.
o Privately-held-investor owned entities
o Not-for-profit entities
o Government entities
• Look to AICPA Health Care Organization guidance
o Patient service revenue, other revenue, and non-operating income
• Would not be appropriate to report grant income from incentive payments
as an offset of expense since the payments are not earned to reimburse
specific expenses.
151
MEDICARE INCENTIVE PAYMENTS FOR
MEANINGFUL USE OF ELECTRONIC HEALTH
RECORDS
 IAS 20 requires the following disclosures:
• The accounting policy adopted for the grant, including methods of
presentation adopted in the financial statements
• The nature and extent of grants recognized in the financial
statements and an indication of other forms of government
assistance from which the entity has directly benefited
• Unfulfilled conditions and other contingencies attaching to
government assistance that has been recognized
152
MEDICARE INCENTIVE PAYMENTS FOR
MEANINGFUL USE OF ELECTRONIC HEALTH
RECORDS
 It would be appropriate for all hospitals to disclose the following:
•
•
•
•
•
The recognition policy applied to the grant income, including the method of
recognition of income related to the incentive payments and the location of the
income on the statement of operations, if not apparent from details disclosed on the
face of the statement.
A general description of the incentive program, including the nature of the incentive
payments, how the incentive payments are calculated, and the attestation process.
A discussion of the fact that the amount of the grant income is recognized based on
management’s best estimate and that amounts recognized are subject to change, with
such changes impacting operations in the period in which they occur.
The nature and amounts of material changes in accounting estimates related to grant
income.
The fact that its attestation is subject to audit by the federal government or its
designee.
153
ACCOUNTING FOR HITEC EHR INCENTIVES
Where are we now?
 Task force recommends grant accounting model
- For general hospitals:
•
Medicare revenue would be recognized ratably over the demonstration
period beginning with initial compliance with Meaningful Use criteria
•
Amounts should be estimated based on expected payments to be
received
•
Concept to be applied each year based on achieving Meaningful Use
criteria for that year
154
ACCOUNTING FOR HITEC EHR INCENTIVES
 SEC rejects grant model
•
Under the contingency model, revenue would not be recognized until
both of the following criteria are met:
o
In compliance for the required period
o
Discharges for the funding reporting period have been incurred
155
ACCOUNTING FOR HITEC EHR INCENTIVES
Application to providers:
 SEC registrants must follow gain contingency model
 Others have a policy election to choose
- Grant model
- Gain contingency model
 See HFMA Issues Analysis
MEDICARE INCENTIVE PAYMENTS FOR MEANINGFUL USE OF
ELECTRONIC HEALTH RECORDS: Accounting and Reporting
Developments
www.hfma.org under the HFMA Initiatives tab, Principles & Practices Board
156
ACCOUNTING FOR HITEC EHR INCENTIVES
 Other EHR Funds:
- Medicaid
 Specific to each state
 May or may not follow Medicare program
 Accounting methodology should be consistent with the Medicare method
elected
 Provisions of the incentive program are applied differently for the following:
- Community access hospitals
- Physician practices
157
MEDICARE INCENTIVE PAYMENTS FOR
MEANINGFUL USE OF ELECTRONIC HEALTH
RECORDS
 Please consult your independent auditors to discuss the desired
accounting treatment for the incentive payments
158
HFMA ISSUE ANALYSIS
ACCOUNTING FOR RAC AUDIT
ADJUSTMENTS AND EXPOSURES
SUMMARY
Provides accounting guidelines for responding to
RAC audits and adjustments in the following
situations:
• Entity receives notification of RAC audit adjustments
• Entity suspects it may be billed or been paid for services that are
potentially non-reimbursable
• Entity is concerned about potential RAC adjustments for issues that
have not yet been identified
• Entity receives notification of an RAC audit adjustment recovery
160
NOTIFICATION OF RAC ADJUSTMENTS
 Receipt of notification is persuasive evidence the criteria for
revenue recognition has not been met
 Entity must evaluate whether findings represent:
•
Change prior period estimate
o If so, entity should accrue for amount of take-back
o Should be recorded as a Medicare contractual adjustment
o Record upon receipt of RAC adjustment notification
•
Correction of period error
 Should consider RAC adjustment that will be successfully
appealed
161
BILLED OR PAID FOR NON-REIMBURSABLE
SERVICES
 Implement changes to clinical operations and billing
practices to address issues identified
 Seek assistance from legal and/or compliance experts to
determine obligation to self-report and re-bill claims or
refund overpayments
 Evaluate whether revenue recognition criteria have been
met and whether findings constitute changes to prior
period estimates or a correction of prior period error
162
RAC ADJUSTMENTS FOR ISSUES NOT YET
IDENTIFIED
 General reserves should not be recorded
Should not extrapolate another hospital’s RAC experience when
determining reserves unless it can be demonstrated that operating
procedures and billing practices are essentially identical
• There may be circumstances for a hospital to support specific RAC
reserves (for specific issues such as 3-day window, coding error, etc.)
•
o Hospital may be able to consider relevant historical experience related to
specific issue
 Once a hospital has relevant experience with RAC audits,
this experience should be incorporated into monthly AR
reserve process.
163
RECEIPT OF NOTIFICATION OF AN RAC
RECOVERY
 If appeal decision is final:
•
Record receivable and gain (offset to contractual adjustments) upon receipt
of written notification
o Receivable should be recorded in current period
o Will be offset when cash is received from CMS or MAC
 If CMS can contest decision:
•
No receivable should be recorded
 If cash received related to a recovery prior to expiration of
time for CMS to file an appeal:
•
Record as deferred revenue until time expires
164
HUD AND GOVERNMENTAL REPORTING
UPDATE
165
2011 REVISION OF GOVERNMENT
AUDITING STANDARDS
 In December 2011 the Government Accountability Office (GAO)
issued the 2011 revision of Government Auditing Standards –
commonly referred to as the “Yellow Book”
•
•
•
•
Supersedes the 2007 revision
Effective for financial audits and attestation engagements for periods
ended on or after December 15, 2012, which is the same effective date
as the clarified auditing standards recently issued by the AICPA
Effective for performance audits beginning on or after December 15,
2011
Early implementation was not permitted
166
2011 REVISION OF GOVERNMENT
AUDITING STANDARDS
 Summary of major changes:
•
Conceptual framework for independence was added
o
o
•
Assess auditor independence to activities that are not expressly prohibited
Requires auditors to make independence determination based on facts and
circumstances that are often unique to specific audit environments
Specific reference to personal, external, and organizational
impairments, and overarching independence principles have been
removed
o
The underlying concepts related to these categories have been retained in
the new conceptual framework for independence
167
2011 REVISION OF GOVERNMENT
AUDITING STANDARDS
 Summary of major changes (continued):
•
Requirements for auditors performing nonaudit services at
entities they audit
o
Includes a requirement that auditors assess whether management
possesses suitable skill, knowledge, or experience to oversee the
nonaudit service and to document that assessment
o
Revised guidance on nonaudit services that always impair an auditor’s
independence with respect to audited entities and on certain nonaudit
services that may be permitted under appropriate conditions
Summary of requirements on documentation necessary to support
adequate consideration of auditor independence was added
o
168
2011 REVISION OF GOVERNMENT
AUDITING STANDARDS
 Summary of major changes (continued):
•
Certain SAS and SSAE requirements that were repeated have been
removed
•
Three categories of attestation engagements, (1) examination, (2)
review, and (3) agreed-upon procedures engagements are now
separately discussed
o
•
Auditors are not permitted to deviate from the reporting elements
prescribed by the AICPA
The reporting requirement for fraud now includes only those
occurrences that are significant within the context of the audit
objectives for performance audits
169
2011 REVISION OF GOVERNMENT
AUDITING STANDARDS
 Auditor’s Report:
•
Auditor’s reports will be affected by the 2011
revision of the Yellow Book as well as the
clarified auditing standards
o
The GAS/A-133 AICPA Audit Guide has not been updated with illustrative
reports for use in Yellow Book and OMB Circular A-133 audits
o
Illustrative reports are expected to be available by the end of January 2013
170
OVERALL CHANGES FOR FINANCIAL
AUDITS
Considered clarity project/standards
Streamlined language to harmonize with AICPA
No new requirements were added for financial audits and
attestation engagements
171
REQUIREMENTS BEYOND AICPA
Additional GAS requirements relate to
 Auditor communication
 Previous audits and attestation engagements
 Noncompliance with provisions of contracts or grant agreements, or
abuse
 Developing elements of a finding
 Documentation
For attestation engagements, this applies only at the examination level
172
REQUIREMENTS BEYOND AICPA (CONT.)
Additional GAS requirements relate to
 Reporting auditors’ compliance with GAGAS
 Reporting on internal control, compliance with provisions of laws,
regulations, contracts, and grant agreements, and other matters
 Reporting views of responsible officials
 Reporting confidential or sensitive information
 Distributing reports
173
REMOVED DUPLICATIVE REQUIREMENTS
Financial Audits
• Restatements
• Internal control deficiency definitions
• Communication of significant matters
• Consideration of fraud and illegal acts
Attestation Engagements
• Internal control deficiency definitions
174
DELETED REQUIREMENTS
Covered by the Quality Control System
• Develop policies to address requests by outside parties to obtain
access to audit documentation
Covered by AICPA Standards
• Document terminated engagements
o Retained requirement for performance audits
175
ATTESTATION ENGAGEMENTS
 Separated attest requirements
•
Examination
•
Review
•
Agreed-Upon Procedures
 Update considerations
•
Identified practice issue
•
Clarified distinctions between engagement types
•
Emphasized AICPA reporting requirements
176
INDEPENDENCE
177
CHAPTER 3 – GENERAL STANDARDS:
INDEPENDENCE
 Defines independence of mind and in appearance
 Emphasizes the importance of considering individual threats
to independence both individually and in aggregate
178
CHAPTER 3 – GENERAL STANDARDS:
INDEPENDENCE
 Conceptual Framework
•
Allows the auditor to assess unique circumstances
•
Adaptable
•
Consistent with AICPA and IFAC frameworks
 Significant differences from AICPA Int. 101-3
•
Entry point for use of the framework
•
Emphasis on services “in aggregate”
•
Documentation requirement
179
FRAMEWORK
 New approach combines a conceptual framework with
certain rules (prohibitions)
•
Balances principle and rules-based standards
•
Serves as a hybrid framework
 Certain prohibitions remain
•
Generally consistent with Rule 101 AICPA
•
Paragraphs 3.45 through 3.58
 Beyond a prohibition
•
Apply the conceptual framework
•
Will be used more often than AICPA
180
CHAPTER 3 – GENERAL STANDARDS:
INDEPENDENCE
 Threats could impair independence
•
Do not necessarily result in an independence impairment
But…
 Safeguards could mitigate threats
•
Eliminate or reduce to an acceptable level
181
GAGAS CONCEPTUAL FRAMEWORK
FOR INDEPENDENCE
182
INDEPENDENCE
CATEGORIES OF THREATS
1. Management participation threat
2. Self-review threat
3. Bias threat
4. Familiarity threat
5. Undue influence threat
6. Self-interest threat
7. Structural threat
183
ASSESSING SIGNIFICANCE IN THE
CONCEPTUAL FRAMEWORK FOR NONAUDIT SERVICES
 The framework requires the auditor to assess the significance of threats
 Threats related to non-audit services often include
•
Management participation threat
•
Self review threat
 Indicators of a significant threat include:
•
Level of services provided (aggregation assessment)
•
Significance to the audit objective
•
Basic understanding of the service enough to recognize material errors
•
Facts and circumstances that increase the perception that the auditor is working as
part of management
184
DOCUMENTATION REQUIREMENT
CONCEPTUAL REQUIREMENT
New documentation requirement
 Must document when safeguards have been applied
•
Beyond the threat level
•
Only once safeguards are applied
•
Document how safeguards sufficiently mitigate the threats
185
AICPA 101-3 DOCUMENTATION
REQUIREMENTS
 In connection with non-audit services, an auditor should establish and
document in writing their understanding with the audited entity’s
management or those charged with governance, as appropriate, regarding the
following:
•
Objectives of the non-audit service engagement,
•
Services to be performed,
•
Audited entity's acceptance of its responsibilities,
•
The auditor’s responsibilities, and
•
Any limitations of the non-audit service engagement
186
ADDITIONAL YELLOW BOOK
DOCUMENTATION REQUIREMENTS
 New audit documentation requirements include:
•
Documentation of the conceptual framework for issues requiring
application of safeguards
o Under AICPA, documentation required but only applicable when circumstances
not addressed in Code
•
For any non-audit service there is an additional documentation requirement
o Assessing management’s skill, knowledge, or experience
o Note: The assessment is required by the AICPA; GAGAS requires
documentation of that assessment
187
SUITABLE SKILL, KNOWLEDGE, AND/OR
EXPERIENCE
 Individual designated to oversee the nonattest service has the ability to
understand the nature, objective, and scope of the nonattest service
 Does not require the designated individual to supervise the member in
the day-to-day rendering of the services
•
Make all significant judgments,
•
Evaluate the adequacy and results of the service,
•
Accept responsibility for the service results, and
•
Ensure that the resulting work product meets the agreed-upon specifications
188
ASSESSING MANAGEMENT’S SKILL,
KNOWLEDGE, OR EXPERIENCE
 Considerations to include in documentation
•
Understanding of the nature of the service
•
Knowledge of the business
•
Knowledge of the industry
•
General business knowledge
•
Education
•
Position at the client
 Some factors may be given more weight
GAGAS does not require re-performance
189
FAILURE TO DOCUMENT INDEPENDENCE
CONSIDERATIONS
 Insufficient documentation does not automatically impair independence
 Appropriate documentation required by GAGAS and AICPA 101-3
 Lack of documentation would be noncompliance with both standards
ALERT – Internal and Peer reviewers and regulatory reviewers will be explicitly
looking for this documentation. Lack of documentation would result in findings.
190
INDEPENDENCE Q&A GUIDE
Government Auditing Standards: Questions and Answers to Independence
Standard Questions guidance
191
PRECONDITIONS TO PERFORMING
NON-AUDIT SERVICES
 Management should take responsibility for nonaudit services performed
by the auditors
 Auditors should document their understanding with management
regarding the non-audit service
 Auditors should assess (AICPA) and document (GAGAS) whether
management possesses suitable skill, knowledge, or experience (SKE)
to oversee the non-audit service
192
SAFEGUARDS – NON-AUDIT SERVICES
Auditors should document safeguards when significant threats are identified.
 Auditor has responsibility to perform the assessment; this cannot be a management
assertion
 Assessment should be in writing and indicate actions the auditor has taken to mitigate the
threat
 Assessment should include a conclusion
 Auditor should document actions taken to mitigate the threat
•
Examples may include:
1.
2.
Actions taken by the client to gain an understanding of the
non-audit service and detect any errors
Actions taken by the auditor to preserve independence such as
an extra level of review or secondary review
193
SAFEGUARD EXAMPLES
 Safeguards in the work environment
•
Select non-impaired auditor
•
Separate engagement teams
•
Secondary reviews
 Non-audit services
•
Management responsibility
•
Sufficient skills, knowledge, or experience
 Safeguards created by the profession, legislation, or regulation
•
External review by a third party
•
Monitoring and disciplinary procedures
194
SAFEGUARD EXAMPLES
 Preparation by personnel not involved in the audit team
 Emphasis of the risks of self review to the engagement team
 Detailed discussion of the schedule with client personnel
Do not forget documentation of above, as well as SKE and
understanding/arrangements for non-audit service
195
ROUTINE AUDIT SERVICES AND NONAUDIT SERVICES
 Routine audit services pertain directly to the audit and
include:
•
Providing advice related to an accounting matter
•
Researching and responding to an audited entity’s technical questions
•
Providing advice on routine business matters
•
Educating the audited entity on technical matters
 Other services not directly related to the audit are
considered non-audit services
196
ROUTINE AUDIT SERVICES AND NONAUDIT SERVICES
 Services that are considered non-audit services include:
•
Financial statement preparation
•
Bookkeeping services
•
Cash to accrual conversions (a form of bookkeeping)
•
Other services not directly related to the audit
o
Preparation of tax filings
 Unless specifically prohibited, non-audit services MAY be permissible
but should be documented
•
In relation to the conceptual framework
•
In relation to the auditor’s assessment of management’s skill, knowledge, or
experience
197
BOOKKEEPING SERVICES
May be performed provided the auditor does not
 Determine or change journal entries, account codes or classifications
for transactions, or other accounting records without obtaining client
approval
 Authorize or approve transactions
 Prepare source documents
 Make changes to source documents without client approval
Consistent with AICPA Int. 101-3
198
PROHIBITIONS WITHIN INTERNAL AUDIT
Services provided by external auditors
 Setting internal audit policies or the strategic direction
- e.g., Functioning as the internal auditor
 Deciding which recommendations resulting from internal audit activities
to implement
 Taking responsibility for designing, implementing, and maintaining
internal control
199
PROHIBITIONS WITHIN IT SERVICES
External auditors may not
 Design or develop an IT system that would be subject to or part of an
audit
 Make significant modifications to an IT system’s source code
 Operate or supervise an IT system
Installation of packaged system not specifically prohibited
200
PROHIBITIONS RELATED TO INTERNAL
CONTROL MONITORING
Management is responsible for designing, implementing, and
maintaining internal control
External auditors
 May not provide ongoing monitoring services or procedures
 May not design the system of internal controls and then assess its
effectiveness
May evaluate the effectiveness of controls
201
PROHIBITIONS WITHIN VALUATION
SERVICES
External auditors may not provide valuation services that:
 Would have a material effect,
 Involve a significant degree of subjectivity, and
 Are the subject of an audit
202
FINANCIAL STATEMENT PREPARATION
Auditors may prepare financial statements
 Considered by GAGAS a non-audit service
 Must apply the conceptual framework
 Two additional documentation requirements
Document application of safeguards
• Document assessment of management’s skill, knowledge, or experience
•
Consistent with AICPA Int. 101–3
Otherwise no safeguard could reduce the threat to an acceptable
level
203
ASSESSING SIGNIFICANCE FOR BOOKKEEPING
AND FINANCIAL STATEMENT PREPARATION
Relative significance is a continuum
 Indicators of significant threats for bookkeeping and financial statement
preparation may include:
•
Financial statement preparation with other non-audit services such as
bookkeeping or cash to accrual conversions
•
Condition of client prepared books and records
•
Level of anticipated “correction” or adjustments to client prepared schedules
and documents
•
Condition of the general ledger/trial balance
 Less significant may be:
•
Purely mechanical calculations
204
GAO INDEPENDENCE STANDARDS VERSUS
AICPA STANDARDS
What are the major differences?
205
YELLOW BOOK VS. AICPA - SIMILARITIES
 Specific threats & safeguards
•
Except GAO “structural threat” is unique to governments
 Prohibitions on non-audit services
 AICPA Int. 101-3 general requirements
•
Audited entity must:
o
o
o
o
Assume all management responsibilities
Designate an individual to oversee the services who has suitable skill, knowledge, or experience
Evaluate adequacy and results of services performed
Accept responsibility for the results of the services
 Documentation of –
•
•
Understanding with the audited entity
Significant threats to independence that require the application of safeguards
206
YELLOW BOOK VS. AICPA - DIFFERENCES
 Conceptual framework approach
•
Yellow Book requires all circumstances/relationships that may result in threats to
undergo threats/safeguards analysis
•
AICPA only requires threats/safeguards analysis if circumstance/relationship not
specifically addressed in Code
 Permitted Non-audit services
•
Yellow Book requires all permitted non-audit services to undergo threats/safeguards
analysis which may result in need for safeguards
•
If non-audit service is permitted under AICPA Int. 101-3, additional safeguards are
generally not required
 Documentation of management’s skills, knowledge, or experience
207
LOOKING FORWARD
208
AICPA PRACTICE AID
 AICPA, 2011 Yellow Book Independence – Non-audit Services
Documentation Practice Aid
•
Significant threats to independence
•
Application of safeguards
•
Evaluation of the skills, knowledge, or experience
•
Management responsibilities
209
AICPA PRACTICE AID
 Appendices provide detailed guidance and examples, including:
•
Evaluation of significance of threats
•
Determination of applicable and appropriate safeguards
•
Evaluation of skills, knowledge, or experience
•
Completed example practice aid
 Available free through the AICPA Governmental Audit Quality Center
(GAQC) to AICPA members. Unlocked version available for purchase.
210
WHERE TO FIND THE YELLOW BOOK
 The Yellow Book is available on GAO’s website at:
www.gao.gov/yellowbook
 For technical assistance, contact the GAO at:
[email protected]
211
QUESTIONS????
212
SPECIAL CONSIDERATIONS OF
NOT-FOR-PROFIT FRAUD
AGENDA
• Statistics on fraud
• Why the risk for fraud in not-for-profit organizations is often greater
than in other types of organizations
• Common not-for-profit fraud schemes
• Special considerations in not-for-profit fraud investigations
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LEARNING OBJECTIVES
• Identify key areas that may leave a NFP vulnerable to fraud
• Understand common NFP fraud schemes
• Understand how to respond to a fraud issue
• Help prevent fraud at NFPs
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PRESENTATION RESOURCE
• Association of Certified Fraud Examiners Report to the Nations on
Occupational Fraud and Abuse 2012 Global Study
• Report is available at acfe.com under “Fraud Resources”
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2012 REPORT TO THE NATIONS
• Introduction
 Based on data compiled from a study of 1,388 cases of occupational fraud that occurred
worldwide between January 2010 and December 2011.
 All information was provided by the Certified Fraud Examiners (CFEs) who investigated the
cases.
 Case studies came from 94 nations.
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FRAUD TRIANGLE
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STATISTICS ON FRAUD
• An annual 2012 ACFE survey estimated, on average, organizations lose 5%
•
•
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of revenues to fraud annually
The median loss was $140K, with 20% of fraud incidents being in excess of
$1 million
Most occupational fraudsters are first time offenders with clean
employment histories
The majority of fraud is discovered by a tip from an employee, or by chance
The median loss at not-for-profits in 2012 was $100K
Not-for-profits represented approximately 10% of fraud victims
Source: Association of Certified Fraud Examiners 2012 Global Fraud Study
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STATISTICS ON FRAUD (CONT.)
• Financial statement fraud schemes made up just 8% of the cases studied, but
caused the greatest median loss at $1 million.
• The primary reasons why fraud took place was: lack of internal controls, the
ability to override existing internal controls, and lack of management review
•
Perpetrators with higher levels of authority tend to cause much larger losses.
The median loss among frauds committed by owner/executives was $573,000;
the median loss caused by managers was $180,000; and the median loss caused
by employees was $60,000.
•
The longer a perpetrator has worked for an organization, the higher fraud losses
tend to be. Perpetrators with more than ten years of experience at the victim
organization caused a median loss of $229,000. By comparison, the median loss
caused by perpetrators who committed fraud in their first year on the job was
only $25,000.
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STATISTICS ON FRAUD (CONT.)
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•
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Most occupational fraudsters are first-time offenders with clean employment
histories. Approximately 87% of occupational fraudsters had never been
charged or convicted of a fraud-related offense, and 84% had never been
punished or terminated by an employer for fraud-related conduct.
In 81% of cases, the fraudster displayed one or more behavioral red flags that
are often associated with fraudulent conduct. Living beyond means (36% of
cases), financial difficulties (27%), unusually close association with vendors or
customers (19%), and excessive control issues (18%) were the most commonly
observed behavioral warning signs.
Nearly half of victim organizations do not recover any losses that they suffer
due to fraud. As of the time of our survey, 49% of victims had not recovered
any of the perpetrator’s takings; this finding is consistent with our previous
research, which indicates that 40–50% of victim organizations do not recover
any of their fraud-related losses.
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CURRENT STATE OF OCCUPATIONAL
FRAUD – FRAUD TYPE IN NOT-FOR-PROFIT
ORGANIZATIONS
Percentage of Type of Fraud in Not-For-Profits
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CURRENT STATE OF OCCUPATIONAL
FRAUD – BEHAVIORAL INDICATORS
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CURRENT STATE OF OCCUPATIONAL FRAUD –
HOW FRAUD IS DETECTED
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TYPES OF FRAUD
• Three categories of frauds at not-for-profits: internal, external, and
fraud committed by the organization
 Internal frauds are committed by persons inside, such as employees, officers, and
directors.
 External frauds are committed by persons outside, such as vendors, grant applicants,
and program participants.
 Frauds committed by the organization typically involve multiple individuals; fraudulent
fund-raising by not-for-profits is one example.
• Internal, external, and fraud by the organization can be subdivided into
two categories:
 Asset misappropriations
 Fraudulent financial reporting
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INTERNAL FRAUD: ASSET
MISAPPROPRIATIONS
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INTERNAL FRAUD CATEGORIES
 Revenue and cash receipts
 Skimming: theft of cash before the funds have been recorded in the books.
Usually committed by one who opens mail, handles donations, or prepares the bank
deposits.
 Theft of donated merchandise: theft of non-cash merchandise. Internal controls
are often poorly designed at not-for-profits regarding protection of donated
merchandise.
 Purchasing and cash disbursement
 Credit card abuse: improper use of organization issued credit card, or theft of
numbers from donors.
 Fake vendor: submitting fraudulent invoices for payment on services or items that
were not received.
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INTERNAL FRAUD CATEGORIES (CONT.)
 Payroll and employee expense reporting
 Ghost employees: either terminated employees or fake employees remain on the
payroll
 Overstated hours: getting paid for hours not worked
 Fraudulent expenses: submission of fraudulent invoices for expenses that did not
take place
 Most of these frauds can be corrected at not-for profits by having adequate internal
controls, as well as having accounting and process flow procedures in place – that are
enforced. (more on this later)
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EXTERNAL FRAUD: FRAUDS AGAINST THE
NOT-FOR-PROFIT
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EXTERNAL FRAUD CATEGORIES
 Fraudulent billings by the vendor: charging for goods or services
not delivered
 Fraud by service organizations: involve false transactions and
receiving kick-backs
 Fraud by recipients: reporting fraudulent data to the not-for-profit
that made the grant or award
 Financial assistance fraud: individuals who falsely receive financial aid
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FRAUDS COMMITTED BY NOT-FOR-PROFITS
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FRAUDS COMMITTED BY NOT-FORPROFITS: ASSET MISAPPROPRIATIONS
• Fraudulent fund raising
 Improper expense ratios communicated to donors
 Failure to comply with IRS requirements related to housing allowances or
compensation reporting
 Misclassifying employees, for example classifying employees as volunteers
• Failure to comply with donor-imposed restrictions
 Misrepresenting portion of donations that will be used for stated cause
 Selling donor data to market research companies
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FRAUDS COMMITTED BY NOT-FORPROFITS: FRAUDULENT FINANCIAL
REPORTING
• Fraudulent financial reporting
 Failure to disclose significant related party transactions
 Failure to disclose non-compliance with debt requirements
 Misclassifying restricted donations
 Holding records open beyond the period end to inflate revenues
 Misclassifying expenses to mislead donors
 Failure to report trade payables
 Failing to correctly report debt obligations
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CONSIDERATIONS WHEN A FRAUD IS
SUSPECTED
• The organization should have a fraud response plan already in place
 Who will lead the investigation
 Who will be on the team
• Assessing whistleblower complaints and tips
• When do you contact inside or outside counsel?
• Consider that a case may eventually end up in court
 Civil
 Criminal
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CONSIDERATIONS WHEN A FRAUD IS
SUSPECTED (CONT.)
• Secure documents in a controlled, static environment:
 Paper files
 Computer files
 Hard drives
 Backups
 Emails
 Chain of custody must be maintained
 Document hold is communicated early and enforced
• What to do with the accused?
 Poorly handled investigations can cause employment issues or litigation
 Allow to work, put on leave, or terminate relationship
235
CONSIDERATIONS WHEN A FRAUD IS
SUSPECTED (CONT.)
• Notification of law enforcement
• Notification of insurance carrier
• Does the organization have individuals capable of performing the
investigation?
• Characteristics of the internal investigative team - do they have the
specialized knowledge required to conduct an effective investigation?
 Experience in investigating accounting irregularities
 Computer forensics skills
 Interview skills
 Data analysis techniques and abilities
236
CONSIDERATIONS WHEN A FRAUD IS
SUSPECTED (CONT.)
• Consideration for not-for-profit organizations - impact
on public relations
• Can the organization afford to hire an external
forensic team of accountants/investigators?
• Consideration of partnering with internal and external
resources
• What is the relevant scope of the investigation?
237
CONDUCTING THE FRAUD
INVESTIGATION
• Consider that every suspected fraud may end up in the courts
• Key preliminary work should be to narrow the focus of the investigation as
•
•
•
•
•
much as possible
Determine the work areas involved, key employees, and systems used
Consider who you will interview and in what sequence
Consider a preliminary interview with non-suspects to narrow the focus of
the investigation
Perform a thorough analysis of the processes and work flows potentially
impacted by the fraud
Consider how data collection and analysis can be used to look for unusual
transactions
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CONDUCTING THE FRAUD
INVESTIGATION (CONT.)
• Perform financial analysis, if applicable
• Prepare a detailed work plan involving each step in the fraud investigation
• The work plan
 Lays out areas of investigation
 Determines necessary analysis
 Flows naturally from the allegations
 Refine the work plan, hypothesis, and testing steps as necessary as the investigation
continues
 Changes areas of emphasis depending on the results
 Considers accounting entries that may point to an issue
• Perpetrators are often adept at hiding their schemes
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CONDUCTING THE FRAUD
INVESTIGATION (CONT.)
• Consider steps to test the fraud hypothesis
• Determine access to relevant systems and, if possible, when the suspect
made such access
• Perform public records searches to determine assets and affiliations of
suspects
• Consider social media and internet queries to obtain information on
suspect, suspect’s family, affiliations, and friends
• Considerations of when to interview the suspect
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CONDUCTING THE FRAUD
INVESTIGATION (CONT.)
• Consider possible ways the suspect could have
personally benefited from the scheme and test those
areas
• Always consider how the suspect could have
converted the transactions to cash
241
THE DIFFERENCE BETWEEN A “PERFECT”
INVESTIGATION AND A “REAL”
INVESTIGATION
• Interviewing the suspect early in the investigation
• Inability to interview the suspect at all
• The time to review documents and reach conclusions
may be limited
• Dealing with budget limitations
• Dealing with scope considerations
• Working with law enforcement
242
SPECIAL CONSIDERATIONS FOR NOT-FORPROFIT ORGANIZATIONS
• The smaller size of many not-for-profits makes segregation of duties/internal
controls more difficult
• Not-for-profit organizations sometimes place higher trust in their leaders,
founders, and fund raisers
• The finance, bookkeeping, and accounting functions are often concentrated
in a few individuals
• Not-for-profits often have volunteer boards of directors which may not
provide adequate financial oversight
• Many not-for-profits lack an audit committee or a robust internal audit
function
• The nature of charitable contributions makes them easier to steal,
mismanage, or use for non-intended purposes
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PREVENTING FRAUD AT NOT-FOR-PROFITS:
FINANCIAL CONTROLS
• Financial controls
• Reconcile bank accounts
• Reconcile fundraising assets such as raffle tickets and cash receipts
• Review any general ledger or other accounting entry adjustments
• Routinely complete a ratio analysis as it relates to donors vs. donations and
employees vs. payroll. A trend will emerge, and it will be easier to spot
potential fraud.
• Job rotation policy
• Complete surprise, non-routine audits
• Important that a person(s) not directly involved with the above complete
these tasks
244
PREVENTING FRAUD AT NOT-FOR-PROFITS:
NON-FINANCIAL CONTROLS
• Non-Financial Controls
 Implement an accounting policy and procedures manual as it relates to all activities
related to accounting, with specific attention to fundraising, treatment of cash, and the
chain of custody regarding cash and check deposits
 Employees, as well as volunteers, should sign and acknowledge understanding of the
policies in place
 Conduct anti-fraud training for employees and managers
 Pre-screen employees
 Establish an audit committee
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PREVENTING FRAUD AT NOT-FOR-PROFITS:
THE ROLE OF THE AUDIT COMMITTEE
•
Primary role is independent oversight
•
The board should evaluate management’s fraud risks, and how management responds
to those risks
•
Identify and review transactions appearing as an anomaly
•
Review management expenses and unusual financial transactions
•
Identify non-standard journal entries and adjustments to entries
•
Establish a fraud hotline, or other anonymous reporting mechanism
•
Take the lead in investing fraud
•
Purchase insurance to protect against fraud
•
Oversee internal audit functions, or perform internal audit functions
 The 2012 ACFE concluded that approximately 72% of frauds were discovered by tips, management
review, and internal audit.
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REACTING TO FRAUD
• Notify the audit committee; the committee should be responsible
•
•
•
•
•
for conducting the investigation
Preserve documents and evidence
If necessary, engage certified fraud examiners to preserve
evidence and establish a record of what transpired
Consult legal counsel and, if deemed appropriate, notify law
enforcement authorities
Repair the breach, and ensure that it could not repeat itself
If necessary, make appropriate management and employee
changes
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?Questions?
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ASB’S CLARITY PROJECT
249
CLARITY PROJECT
Goals of Auditing Standards Board (ASB)
• Address concerns over length and complexity of existing
audit standards
• Make standards easier to read, understand, and apply
• Will lead to enhancements in audit quality
250
CLARITY PROJECT - IMPACTS
No substantive changes to requirements for:
• Audit Documentation
• Auditor’s Communication With Those Charged With Governance
• Risk Assessment Standards
• External Confirmations
• Analytical Procedures
• Audit Sampling
• Auditing Accounting Estimates
• Written Representations
• Subsequent Events
251
CLARITY PROJECT - IMPACTS
Clarity Project was not intended to create additional
requirements, but…
• Some revisions have resulted in Substantive Changes
• Primarily Clarifying Changes that may require auditors to make
adjustments in their practices
252
CLARITY PROJECT –
SUBSTANTIVE CHANGES
Consideration of Laws and Regulations
Communication of Internal Control Related Matters
Related Parties
Group Audits
Auditor’s Reports
253
CLARITY PROJECT – PRIMARILY
CLARIFYING CHANGES
Intended to explicitly state what may have been implicit
in the previous standards
• Over time, diversity in practice from implicit requirements
• Some requirements may already be performed
• Making requirements explicit may not have substantial effect
but may result in adjustments to the timing and
responsibilities of the auditor
254
CLARITY PROJECT – PRIMARILY
CLARIFYING CHANGES
 Terms of Engagement (Preconditions)
 Quality Control for Audit Engagements
 Use of a Service Organization
 Audit Evidence – Specific Considerations
 External Confirmations
 Opening Balances on Initial and Re-Audit Engagements
 Using the Work of a Specialist
 Consistency of Financial Statements
 Special Purpose Frameworks
255
CLARITY PROJECT – LEGAL &
REGULATORY
Requires performance of procedures to identify
instances of noncompliance with those laws and
regulations that have a direct and material effect on the
FS
• Inquire of management and, when appropriate, those charged
with governance about whether the entity is in compliance
with such laws and regulations
• Inspect correspondence, if any, with the relevant licensing or
regulatory authorities
256
CLARITY PROJECT – LEGAL &
REGULATORY
 Obtain an understanding of the legal and regulatory
framework.
 Obtain an understanding of how the entity is complying
with that framework.
 Determine whether the auditor has a responsibility to
report suspected noncompliance to parties outside the
entity.
 Document identified or suspected noncompliance,
including the results of any discussions about such items.
257
CLARITY PROJECT – CONTROL
MATTERS
 Added 2 new requirements for communicating internal
control related matters
• Now required to include in the written communication an explanation of
the potential effects of identified significant deficiencies and material
weaknesses
 Condition (what is)
 Criteria (what should be)
 Cause
 Potential effects
• Communicate only to management, orally or in writing, deficiencies other
than material weaknesses and significant deficiencies which merit
management’s attention
258
CLARITY PROJECT - PRECONDITIONS
Determine that financial reporting framework is
acceptable
• No abuse of special purpose frameworks
Obtain management’s acknowledgement of its
responsibility for
• Preparing FS
• Designing and implementing internal control
• Providing the auditor access to information and capable staff
259
CLARITY PROJECT – AUDIT EVIDENCE
More principles-based approach to attorney letters
• Attorney letters required if RMM regarding litigation/claims
or if audit procedures indicate material litigation/claims
• Requires auditor to document basis for determination not
to seek direct communication with the entity's legal counsel
260
CLARITY PROJECT - CONFIRMATIONS
 Auditor required to obtain written confirmations
• Oral responses to confirmation requests do not meet
clarified definition of an external confirmation
• Guidance provided on how oral response may be
considered part of alternative procedures
 Definition of external confirmation includes audit evidence
obtained by electronic or other medium
• Auditor must consider the risk that the electronic
confirmation process is not secure or is improperly
controlled
261
CLARITY PROJECT – INITIAL AUDITS
 Requires auditor to obtain sufficient appropriate audit evidence about
whether
•
Opening balances contain misstatements which materially affect current period FS
•
Accounting policies reflected in opening balances have been consistently applied
•
Any changes in accounting policies have been properly accounted for, presented, and
disclosed
262
CLARITY PROJECT – INITIAL AUDITS
Necessary but not sufficient procedures
• Talk with predecessor
• Review workpapers and client documents not in
workpapers
Additional procedures to achieve sufficiency
• Test material carryover opening balances
• Evaluate predecessor’s risk assessment documentation
o
“Where is the material misstatement?”
263
CLARITY PROJECT - MATERIALITY
“Performance Materiality”
• Defined – Amount or amounts set by the auditor at less than materiality
for the FS as a whole to reduce to an appropriately low level the
probability that the aggregate of uncorrected and undetected
misstatements exceeds materiality for the FS as a whole.
• If applicable, performance materiality also refers to the amount or amounts
set by the auditor at less than the materiality level or levels for particular
classes of transactions, account balances, or disclosures.
• Performance materiality is to be distinguished from tolerable
misstatement.
264
CLARITY PROJECT - MATERIALITY
“Performance Materiality”
• The determination of performance materiality is not a simple
mechanical calculation and involves the exercise of professional
judgment.
• It is affected by the auditor's understanding of the entity, updated
during the performance of the risk assessment procedures, and the
nature and extent of misstatements identified in previous audits
and, thereby, the auditor's expectations regarding misstatements in
the current period.
265
CLARITY PROJECT –
SPECIAL CONSIDERATIONS
 Audits of Smaller, Less Complex Entities
• “An Audit is An Audit” (but Scalable)
• No differential audit standards for small entities, but guidance
provided on how to apply on smaller, less complex entities
o Not all smaller entities less complex
o Not all less complex entities small
 Audits of Governmental Entities
 Accounting standards neutrality
• Financial reporting framework not necessarily GAAP
266
CLARITY PROJECT - REPORTING
Independent Auditors’ Report is Changing!
Headings for each paragraph / section of report
• Introductory Paragraph
• Management’s Responsibility for Financial Statements
• Auditors’ Responsibility
• Auditors’ Opinion
• Other Reporting Responsibilities (if applicable)
o Generally titled “Report on Other Legal & Regulatory Matters”
 Yellow Book
• Emphasis-of-Matter Paragraph (if applicable)
• Other-Matter Paragraph (if applicable)
267
CLARITY PROJECT - REPORTING
Management’s Responsibility for FS
• Use standard language to describe management's responsibilities for
o Preparation of FS
o Design, implementation, and maintenance of relevant internal controls
• Prohibits elaboration on management’s responsibilities and/or reference
to any other document that does so
268
CLARITY PROJECT - REPORTING
Auditors’ Responsibility
• Should state that audit was conducted in accordance
with GAAS and should identify United States as origin
of standards
• Additional auditor responsibilities should be discussed
in this section as well
o
Government Auditing Standards
o
OMB Circular A-133
269
CLARITY PROJECT - REPORTING
Modified Opinions
• If modified opinion is required, additional paragraph should
be inserted immediately before “Opinion” paragraph to
provide a description of matter(s) giving rise to the
modification
o “Basis for Qualified Opinion”
o “Basis for Adverse Opinion”
o “Basis for Disclaimer of Opinion,” as appropriate
270
CLARITY PROJECT - REPORTING
Other Reporting Responsibilities
• Title as appropriate for circumstances
o Possibly “Other Auditor Reporting Requirements” in government
entity audits
o Think of…all the things we did that weren’t part of our plain-vanilla audit
but were required for this particular audit
271
CLARITY PROJECT - REPORTING
 The term explanatory paragraph is no longer to be included in
GAAS.
 Instead, additional communications in the auditors’ report are
labeled as either
•
Emphasis-of-matter, or
•
Other-matter paragraphs
272
CLARITY PROJECT - REPORTING
Emphasis-of-matter paragraph
 Any paragraph added to the auditors’ report that relates
to a matter that is appropriately presented or disclosed in
the FS.
 Some of these paragraphs are required by certain
standards, whereas others are added at the discretion of
the auditor, consistent with current practice.
 All such paragraphs are to be considered emphasis-ofmatter paragraphs because they are intended to draw the
FS users' attention to a particular matter.
273
CLARITY PROJECT - REPORTING
Emphasis-of-Matter examples:
• Going concern
• Subsequent events
• Litigation uncertainty
• Significant related party transactions
• Contractual or regulatory reporting frameworks
• Consistency (or lack thereof)
• Major catastrophe
274
CLARITY PROJECT - REPORTING
Other-matter paragraph
 Refers to a matter other than those presented or
disclosed in the FS that, in the auditor's judgment, is
relevant to the FS users' understanding of the audit, the
auditor's responsibilities, or the auditor's report
Emphasis-of-matter or other-matter paragraph
required to always follow the opinion paragraph and
to be included in a separate section of the auditor's
report
275
CLARITY PROJECT - REPORTING
Other-Matter examples:
• Supplementary Information
• Required Supplementary Information
• Audit reports of prior periods presented
o Change in opinion
o Prior period not audited
• Thought…probably rarely used when not required
276
?Questions?
277