Transcript Slide 1

Accounting and Auditing Update
Presented by
Joanna G. Brumsey, CPA
Objective
• To enable participants to apply
selected newly issued and effective
technical accounting and auditing
pronouncements
• To educate participants regarding
upcoming changes
Outline
• Section I: Hot topics for our profession
• Section II: Recent accounting and auditing
standards
• Section III: Proposed updates
• Section IV: Miscellaneous
Hot Topics for our Profession
Section I
Hot Topics for our Profession
• COSO Framework
• Private Company Financial Reporting
• Third party verification letters
New & Improved COSO Framework
• Retained
• Definition of internal control
• Five components of internal control
• Criteria to assess effectiveness
• Apply with judgment
• Improvements
• Codify criteria based on 17 principles that have
universal application
• More advice and implementation guidance
regarding internal and nonfinancial reporting
• Updated for today’s business and risk
environment
Significant Changes
• 17 Principles, and related attributes, are explicitly
linked with the components
• Reflects increased relevance of technology
• Enhanced governance concepts
• Expanded reporting objectives (external, internal,
financial and non-financial)
• Enhanced consideration of anti-fraud expectations
• Expanded business models and organizational
structures
• Additional guidance for business conducted on a
multi-locational or global basis
• Special considerations for smaller entities (seg. Of
duties, management override, etc.)
Effective Date
• Transition as soon as possible; original
framework superseded as of
December 15, 2014
• Guidance on Internal Control Over
External Financial Reporting (ICEFR)
• Developed to assist users in applying the
Framework to external financial reporting
objectives
• Issued May 2013
PRIVATE COMPANY FINANCIAL REPORTING
Blue Ribbon Panel
• Established in December, 2009, by the AICPA,
FAF and NASBA
• Mission is to address how U.S. accounting
standards can best meet the needs of users of
private company financial statements
FAF Establishes Private Company
Council
• Established May 2012
• Private Company Council (PCC) will identify,
propose, deliberate, and formally vote on
specific exceptions or modifications to U.S.
GAAP for private companies
• Approve decisions subject to FASB due
process
Private Company Council
FASB issued 3 PCC exposure drafts:
• Business Combination – would permit private
companies to recognize separately from goodwill
only certain intangibles
• Intangibles – would allow amortization of goodwill;
test for impairment only upon triggering event; test
impairment at entity-wide level
• Derivatives and hedging – would allow simpler
approach for interest rate swaps
FRF for SMEs
• Released by AICPA
• Financial Reporting Framework (FRF) for small
and medium sized entities released June 2013
• The framework has not been approved or
disapproved by any technical body; no
authoritative status
• Optional implementation, thus no “effective
date”
• AICPA website has toolkits and FAQs
FRF for SMEs
Highlights:
• Not based on GAAP; “Other Comprehensive
Bases of Accounting (OCBOA)”
• Defined set of criteria to determine
measurement, recognition, presentation and
disclosure of material items
• No standard definition of an SME;
characteristics generally defined for guidance
• No industry specific guidance
• Non-CPAs may prepare
FRF for SMEs
Who can use?:
• Smaller – to – medium sized companies
• Owner-managed
• For profit entities
• Internal or external users have direct access to
the owner-manager
• GAAP financial statements not required
• No plans to become a public company
FRF for SMEs
Key provisions:
• Based on a foundation of reliable and comprehensive
accounting principles
• Historical cost is primary measurement
• Uses familiar and traditional accounting methods
• Reduced disclosures from GAAP
• Financial reporting is less complicated and leaner
• Fewer adjustments to reconcile income tax return
income with book income
• Retains a traditional approach to lease accounting
FRF for SMEs
Key provisions, continued:
• Guidance on matters typically encountered by SMEs
• Asset and liability matters
• Accounting changes
• Business combinations
• Nonmonetary transactions
• Leases
• Subsequent events
• Contingencies
• Related party transactions
FRF for SMEs
Differences from GAAP:
• Income taxes – no provision for uncertain tax position
• VIE – no consolidation
• Goodwill – amortized over tax life
• Investments – at cost; no recognition of FV changes in
OCI
• Income – no OCI or extraordinary income
• Reversal of losses – allow on (1) inventory write downs,
(2) impairment of equity, (3) long-lived asset
impairment
PCC vs. FRF for SMEs
• PCC focuses on modifications to US GAAP for
private companies in need of statements
prepared in accordance with GAAP
• FRF for SMEs is a relevant framework for SMEs
where US GAAP statements are not required
THIRD PARTY VERIFICATION LETTERS
Third Party Verification Letters
• Often referred to as “comfort” letters –
however, this has a specific meaning in
connection with a securities offering (AU-C
section 920)
• Request is actually for a “verification” letter;
requests from lenders, brokers, insurance
agents increasing
• Often asked to provide letter with specific
language, verification statement or
certification
Third Party Verification Letters
• CPAs may supply verification letters on matters
except solvency –
– Is not insolvent at the time the debt is
incurred or would not be rendered insolvent
as a result;
– Does not have unreasonably small capital;
– Has the ability to pay debts as they mature
• Declining to offer assurance on solvency is not
a RISK decision, it’s an ethical violation
• Also remember client confidentiality when
supplying information
Third Party Verification Letters
• Reasons to give lenders and others –
– “lender comfort letters” – AICPA technical practice
aid (non-authoritative guidance) TIS Section 9110
• Refers you to AT Section 101
• Suggests other services that may be performed, such as
audits/reviews/compilations, AUP, reports on prospective
information, reports on pro forma personal financial
information
• Offer copy of tax return (with client’s consent)
– Interpretation No. 2 of AT Section 101 – “responding
to requests for reports on matters relating to solvency”
• Most banks have no such requirement; Freddie
Mac and Fannie Mae have already rescinded
such requests yet the practice remains
Recent Accounting and
Auditing Standards
Section II
FASB Accounting Standards
Recent FASB Accounting
Standards
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
ASU 2011-10 Property, Plant and Equipment
ASU 2011-11 Offsetting Assets and Liabilities
ASU 2012-01 Health Care Entities
ASU 2012-04 Technical Corrections and Improvements
ASU 2012-05 State of Cash Flows NFP
ASU 2012-06 Business Combinations
ASU 2012-07 Entertainment – Films
ASU 2013-01 Balance Sheet – Clarifying 2011-11
ASU 2013-02 Comprehensive Income
ASU 2013-03 Financial Instruments
ASU 2013-04 Liabilities
ASU 2013-05 Foreign Currency Matters
ASU 2013-06 NFP: Services Rec’d from Personnel of affiliate
ASU 2013-07 Liquidation Basis of Accounting
ASU 2013-08 Financial Services – Investment Companies
ASU 2013-09 FV Measurement
ASU 2013-10 Derivatives and Hedging
ASU 2013-11 Income Taxes
ASU 2011-10
PPE: Derecognition of in Substance Real
Estate – Scope Clarification
(Topic 360)
Effective Date
Public Entity
Fiscal periods beginning
June 15, 2012, and all
interim periods within those
years
Adoption: Prospectively
Nonpublic Entity
Fiscal years ending after
December 15, 2013
ASU 2011-10
• When a parent (reporting entity) ceases to have a
controlling financial interest (per ASC 810-10) in a
subsidiary that is in substance real estate as a result
of default on the subsidiary’s nonrecourse debt, this
ASU requires reporting entity to apply ASC 360-20 to
determine whether it should derecognize the in
substance real estate
• ASC 360-20 establishes standards for recognition of
profit on all real estate sales transactions, other than
retail land sales
ASU 2011-11
Disclosures about Offsetting Assets and
Liabilities
(Topic 210)
Effective Date
Public Entity
Annual periods beginning
January 1, 2013, and
interim periods within those
years
Nonpublic Entity
Same
Adoption: Retrospective for all prior periods presented
ASU 2011-11
Scope
• All entities that have financial
instruments and derivative
instruments that are either (1) offset
per section 210-20-45 or 815-10-45,
or (2) subject to netting
arrangement or similar agreement
Objective
• Develop common requirements for
offsetting assets and liabilities and
for disclosing information about
netting in the presentation of FS in
accordance with GAAP or IFRS
Why this ASU?
• FASB and IASB agreed to disagree on when to
offset
• ASU seeks to obtain convergence and
comparability through disclosure
• Disclosures
– Required irrespective of whether instruments are
offset or not
– Require net and gross information
– Assets and liabilities separately
– Description of the rights of set off
ASU 2012 - 04
Technical Corrections and Improvements
Effective Date
Public Entity
Majority upon issuance on
October 1, 2012; more
substantive fiscal periods
beginning after December
15, 2012
Nonpublic Entity
Majority upon issuance on
October 1, 2012; more
substantive fiscal periods
beginning after December
15, 2013
ASU 2012-04
• Not expected to have significant
impact on current practice
• Clarifies or corrects unintended
application of guidance
• Some terminology changes –
– Market value/current value to “fair value”
– Mark to market to “subsequently measure
at fair value”
ASU 2012 - 05
Statement of Cash Flows: NFP Entities – Classification
of Sales Proceeds of Donated Financial Assets
(Topic 230)
Effective Date
Public Entity
Nonpublic Entity
Fiscal years beginning after
June 15, 2013, and interim
periods within those years;
early adoption from beg. of
fiscal year permitted
Adoption: Prospectively; Retrospective application to
prior periods presented is permitted
ASU 2012-05
Scope
Objective
• NFP entities that accept
donated securities
• Standardize classification of
cash receipts arising from the
sales of donated securities in
the statement of CF
ASU 2012-05
• Operating CF – IF upon receipt of donated assets,
they are directed for sale without any limitations
and are converted nearly immediately into cash (to
avoid significant investment risks and rewards)
• Financing CF – IF the donor has restricted the use of
securities to a long-term purpose
• Investing CF – All other cash receipts resulting from
the sale of debt and equity securities not meeting
other conditions above
ASU 2013 - 01
Balance Sheet – Clarifying the Scope of Disclosures about
Offsetting Assets and Liabilities
(Topic 210)
Effective Date
Public Entity
Fiscal years beginning
January 1, 2013, and
interim periods within
those years
Nonpublic Entity
Same
Adoption: Retrospective for all prior periods presented
ASU 2013 - 01
Scope
Objective
• Entities that hold
derivatives
• Clarify scope of the
disclosures required by the
offsetting requirements of
Topic 210
ASU 2013-01
• Derivatives accounted for under topic 815
– Bifurcated embedded derivatives
– Repurchase agreements
– Reverse repurchase agreements
– Securities borrowing
– Securities lending
• Financial assets and liabilities offset in accordance
with –
– Section 210
– Section 815
– Master netting arrangement
ASU 2013 - 02
Comprehensive Income – Reporting of Amounts Reclassified Out
of Accumulated Other Comprehensive Income
(Topic 220)
Effective Date
Public Entity
Fiscal years beginning after
December 15, 2012
Adoption: Prospectively
Nonpublic Entity
Fiscal years beginning after
December 15, 2013
ASU 2013 - 02
Scope
• All entities that report
items of comprehensive
income
Objective
• Improve the reporting
of reclassifications out
of accumulated
comprehensive income
ASU 2013-02
Disclosure Requirements
• Information about amounts reclassified
out of AOCI by component
• Components = DBP, CF Hedge, FX, AFS
• Net of tax by component
• Presented on face or footnote by line
item of net income
• Cross reference to other disclosures
Sample Disclosures
Notes to FS
Reclassifications Out of AOCI
Unrealized
gains/losses on
Available for Sale
Securities
$2,300 Realized G/L on sale
Impairment exp.
(285)
(15)
2,000
(500)
$1,500
Insignificant item
Total before tax
Tax expense
Net of tax
Sample Disclosures
Notes to FS
Reclassifications Out of AOCI
Gains/losses on Cash
Flow Hedges:
Interest rate
contracts
Credit derivatives
FX contracts
$1,000
Interest income
3,000
Total before tax
(500) Other income (exp)
Sales/revenue
2,500
(250)
$2,750
Tax expense
Net of tax
ASU 2013-03
Financial Instruments – Clarifying Scope and Applicability of
Particular Disclosure to Non-Public Entity
(Topic 825)
Effective Date
Public Entity
N/A
Adoption: Prospectively
Nonpublic Entity
Upon Issuance
ASU 2013-03
Scope
• Non-public entities that
have total assets of $100m
or more or that have one or
more derivative instruments
Objective
• Clarify scope and
applicability of ASU 201104, Fair Value Measurement
ASU 2013-03
Clarifies disclosure exception for nonpublic entities –
– All nonpublic entities that meet the criteria would
NOT BE required to provide the level of the FV
hierarchy within which FV measurements are
categorized in the entirety (level 1, 2, 3) for such
measurements that are only disclosed (i.e., they
are not measured at FV in the balance sheet)
ASU 2013-04
Obligations resulting from Joint and Several Liability Arrangements for
Which the Total Amount of Obligation is Fixed at the Reporting Date
(Topic 405)
Effective Date
Public Entity
Nonpublic Entity
Fiscal years beginning after
December 15, 2013
Fiscal years beginning after
December 15, 2014
Adoption: Retrospective for all prior periods presented
ASU 2013-04
• Joint and several liability arrangements
for which the total amount of the
obligation is fixed at the reporting date
– Debt arrangements
– Other contractual obligations
– Settled litigation and judicial rulings
ASU 2013-04
Why this standard?
Variance in practice
• Record entire amount under the joint and several
liability arrangement
• Record less than the amount to the total obligation:
– Allocated amount
– Proceeds received
– Portion of amount agreed to pay to co-obligors
ASU 2013-04 measurement
Amount
agreed to pay
on basis of
arrangement
with co-obligors
Any additional
amount
expected to
be paid on
behalf of coobligors
Total fixed
obligation at
the reporting
date
ASU 2013-04
Disclosure requirements
• Nature of arrangement
• Total outstanding amount
• Carrying amount
• Nature of recourse provisions
• Corresponding entries
ASU 2013-06
NFP Entities – Services Related from Personnel of an Affiliate
(Topic 958)
Effective Date
Public Entity
Nonpublic Entity
Fiscal years beginning after
June 15, 2014
Adoption: Prospectively
ASU 2013-06
Scope
Objective
• All NFP entities that receive
personnel services from an
affiliate for which the affiliate
does not seek compensation
from the recipient NFP
• Standardize accounting for
personnel services received
from affiliates
ASU 2013-06
NFP entity
Direct or
Common
control
Control
Intermediate
Control
ASU 2013-06
• Statement of activities
– Measurement at cost of services recorded
by affiliate (payroll + fringe)
– Included in change in net assets in equity
transfer for business-type entity
– Health care entities use guidance ASC
954
– All others as expenses
ASU 2013-07
The Liquidation Basis of Accounting
Effective Date
Public Entity
Annual reporting periods
beginning after December
15, 2013, and interim
periods therein.
Nonpublic Entity
Same
Adoption: Prospectively; early adoption permitted
ASU 2013-07
Required when liquidation is imminent
– Plan is approved and likelihood is remote
that the plan will be blocked by other
parties
– Plan is imposed by other forces (e.g.,
involuntary bankruptcy) and likelihood is
remote that entity will return from
liquidation
– Liquidation plan differs from liquidation
plan in governing documents
ASU 2013-07
Measurement
– Assets and liabilities – amount of cash or
other consideration expected to receive
or pay
– Expected aggregate liquidation and
disposal costs associated with settlement
of those assets/liabilities
– Expected future costs/income during
course of liquidation (e.g., payroll and
interest income)
ASU 2013-07
Presentation and Disclosure
– Description of liquidation plan, including
manner of disposal and duration of
liquidation
– Methods and significant assumptions used
to measure assets/liabilities and any
changes in method
– Type and amount of costs and income
accrued
Auditing Update
Peer Review Under AU-C (Clarity)
• Peer review team captains now must consider the
results of regulatory and/or governmental oversights
– Selection of engagements to review
– Risk assessment (nature, cause, pattern,
pervasiveness of oversight results)
– Evaluate the firm’s response to the results
– Examine the remediation efforts by the firm
• If similar issues are raised in both the regulatory
and/or governmental oversight and in the peer
review, the review should consider whether there is
a systemic problem with the design of the system of
QC or compliance with it
Peer Review Under AU-C (clarity)
• Review teams will document –
– Firm’s knowledge of the clarified audit standards
– Review the quality control document for modifications
related to the clarified audit standards
• Major focus for peer review
– Changes to auditor’s reports
– Updated engagement letter wording
– Inspecting correspondence with relevant licensing and
regulatory authorities to identify instances of noncompliance with laws and regulations
– Changes to internal control communications
– Changes to requirements regarding RP when reporting on
FS prepared in accordance with special purpose
framework
– Compliance with the requirements for group audits
Noncompliance = modified peer review report
Latest issues with Audit
Productivity
Determining
testing scope
• How to link to
PM and what %
range to use?
Setting a
significant
difference
threshold for
analytical
procedures
• When am I
done?
Structuring tests
of redundant
controls
• What sample
size to use?
Defining Acceptable Difference
Analytic – example 1
Deposits at 12-31-10
Deposits at 12-31-11
Deposits at 12-31-12
= Expectation (Avg.)
- Actual
= Difference
% Difference
Facts
TM $75,000; RMM – High
Primary Test of Area
$80,000
25,000
120,000
75,000
85,000
$10,000
12%
1. Suitability
2. Reliability of Data
3. Precision of
Expectation
4. Acceptable
Difference
5. Are we done?
Defining Acceptable Difference
Analytic – example 2
Units Shipped
* Average $
= Expectation
- Actual
= Difference
% Difference
Facts
TM $75,000; RMM – Mod
Primary Test of Area
890,000
$11.50
10,235,000
10,375,000
$140,000
1.4%
1. Suitability
2. Reliability of Data
3. Precision of
Expectation
4. Acceptable
Difference
5. Are we done?
Defining Acceptable Difference
Analytic – example 3
Debt
* Average rate
= Expectation
- Actual
= Difference
% Difference
Facts
TM $75,000; RMM – Low
Primary Test of Area
$1,000,000
7.4%
74,000
83,500
$9,500
11.4%
1. Suitability
2. Reliability of Data
3. Precision of
Expectation
4. Acceptable
Difference
5. Are we done?
Defining Acceptable Difference
Analytic – example 4
# of employees
* Average salary
= Expectation
- Actual
= Difference
% Difference
41
$32,800
1,344,800
1,280,000
$64,800
5.1%
Facts
TM $75,000; RMM – High
Combined with balance sheet
test of detail (accrued
payroll)
1. Suitability
2. Reliability of Data
3. Precision of
Expectation
4. Acceptable
Difference
5. Are we done?
Redundant Controls
• Several controls address same risk
• Auditor may –
– Test just one if effective by itself
– Test both controls if both needed to be effective
– Test one control at low risk of overreliance (large
sample size) and one at high risk of overreliance
(small sample size)
– Test both at higher risk of overreliance (two
smaller samples instead of one large)
Electronic Evidence
• What do the standards require?
• What is legally required?
• What maximizes effectiveness and
efficiency?
Electronic Evidence
Professional standards
• Does not restrict form of evidence
– Electronic is permissible
– No requirement for manual signatures
– Confirmation may be scanned
• E-mail correspondence (including confirmation
replies) is OK
AU-C 230.A5 audit documentation may be on electronic or
other media
SQCS No.8 (QC 10.A58) apply procedures to ensure a faithful
copy, both in form and content, when transferring or
copying paper documentation or other media
Electronic Evidence
Legal considerations
• Hard copies of signed documents may be required
in some states (if auditor considered a party to the
contract)
– Rep letters, engagement letters, etc.
– Consult attorney
Electronic Evidence
Effectiveness and Efficiency
•
•
•
•
Lock down, archive and retention policies
Perm file or not
On-site versus remote auditing
Determining what to retain in audit files (obtain versus retain)
–
–
–
–
–
–
–
–
Bank rec, bank statement agreed to bank rec
Returned bank confirmation
Detail of prepaid expenses less than TM in their entirety
Client calculation of the allowance for bad debts used only to agree to TB; auditor
test-work was to develop independent expectation of the required allowance
through separate procedures
Client provided analysis of inventory reserve with tabs for current year and prior 10
years
Template for analyzing inventory overhead allocation in a year when FG and WIP
balances are below TM
Detail of fixed asset roll-forward when additions and disposals are minimal
Large AP detail used in search for unrecorded but nothing else
Proposed Updates
Section III
Proposed Updates
– Revenue Recognition
– Lease Accounting
Revenue Recognition
Revenue from Contracts with Customers
Issued: November 14, 2011
Release expected Q3 2013
Effective Date - TBD
Public Entity
Tentatively for reporting periods
beginning on or after January 1,
2017
Nonpublic Entity
Tentatively for reporting periods
beginning after December 15,
2017
Adoption: Retrospective for all prior periods presented; no early
adoption permitted except for non-public entities may do for
reporting periods beginning after December 15, 2016
Current Revenue Recognition
Criteria
Earned & realizable
• Arrangement exists
• Delivery occurred or services rendered
• Price is fixed or determinable
• Collectability is reasonable assured
Current rules define the above criteria differently for specific industries (e.g.,
construction vs. manufacturing)and transactions (e.g., tangible vs. software
vs. bundled goods)
Current Revenue Recognition
Criteria
#1
#2
#3
#4
#5
• Identify contract(s)
• Identify performance obligations
• Determine transaction price
• Allocate price
• Recognize revenue when performance
obligations satisfied
Fundamentally changes rules from “industry” based to
“contract” based
Step 1: Identify Contract(s)
• Contract if…
– Commercial substance
– Both parties have approved
– Each party’s rights are identifiable
– Payment terms are identified
• Combine contracts if:
– Negotiated as package with same objective
– Price of one depends on price/performance of other
– Single performance obligation
Step 2: Identify Performance Obligations
Single
Separate
• Bundles goods/services – highly
interrelated with significant
integration and requires significant
modification or customization
• Goods/services transfer at same
time
• Goods/services transfer at different
times, and
• Goods/service has a distinct
function
Distinct function: (1) regularly sold separately, or
(2) can be used separately on its own or
together with other readily available resources
Step 3: Determine Transaction Price
• Variability
– Discounts, rebates, refunds, contingent payments, etc.
• Time value of money
Variability
• Expected value (probability weighted) or most
likely amount (which ever is most predictive)
• Reasonably assured to be entitled
– Has experience (or can access others experience) and
– Experience is predictive
Probability Weighted
Possible
Revenue
Scenarios
$
Expected
Consideration
Probability
50, 000
15%
100,000
25%
25,000
150,000
40%
60,000
200,000
15%
30,000
250,000
5%
12,500
Total Probability Weighted
Average Revenue
$
7,500
$135,000
When Is Experience Not Predictive?
• Amount is highly susceptible to factors outside the
entity’s influence
• Uncertainty is not expected to be resolved for a
long period of time
• Experience is limited
• Large number and broad range of possibilities
Step 3: Determine Transaction Price
• Variability
– Discounts, rebates, refunds, contingent payments, etc.
• Time value of money
– Significant financing component
– Period between payment and transfer > one year
Step 4: Allocating the Contract Price
An entity enters into a contract to deliver and install a
manufacturing system for $100,000. The stand-alone market
value for the installation is $20,000 and the separate selling
price for the equipment is $90,000.
– The price would be allocated as follows:
StandAlone
Price
Allocated
Selling Price
Calculation
Equipment
$90,000
$81,800
81.8% x $100,000
(90,000/110,000 = 81.8%)
Installation
$20,000
$18,200
18.2% x $100,000
(20,000/110,000 = 18.2%
Total
$110,000
$100,000
Step 5: Revenue Recognition
• Performance obligation is satisfied when customer
obtains control.
• “…the ability to direct the use of and obtain
substantially all of the remaining benefits from the
asset. Control includes the ability to prevent other
entities from directing the use of and obtaining the
benefits from an asset.”
Over Time
• Controls or enhance an asset that the customer
controls, or
• Does not create an asset with an alternative use
and at least one of the following is met:
– Customer receives a benefit as each task is performed;
– Another entity would not need to re-perform the tasks
performed to date if they were to take over; or
– Entity has right to payment for performance to date, and
expects to fulfill the contract as promised.
Point in Time
• Indicators that control has transferred
– Right to payment
– Customer has legal title
– Physical possession is transferred
– Customer has risk and rewards
– Customer has accepted
Other Issues
• Contract modifications
• Onerous performance obligations
• Contract costs
• Collectability – contra-revenue
• Transfer of a nonfinancial asset
• Disclosures
• Tax implications
Lease Accounting
Exposure Draft: May 16, 2013
Comments Due: September 13, 2013
Effective Date – Unknown; Likely January 1, 2017
Adoption: Retrospective for all prior periods presented
Lease Proposal
• Main Emphasis – to get all obligations on the balance sheet
• Lease placed in one of 2 categories – impacts revenue and
expense recognition (timing and character) and what ends
up on the balance sheet for both lessor and lessee
Right to Control Model
Lease under exposure draft as written would be a
contract that conveys the right to control the use
of a specific identified asset for some form of
consideration
Right of
Use
Concept
to
Right to
Control
Concept
Lessee Model
Type A (financing)
• Lease term is for the major
part of the remaining
economic life of the asset;
• Present value of lease
payments accounts for
substantially all of the FV of
the asset;
• OR the lessee has a
significant economic
incentive to exercise the
purchase option
Type B (straight-line)
• Lease term is for an
insignificant part of the
total economic life of the
asset
• Present value of lease
payments is insignificant
relative to the FV of the
asset
Lessor Model
Type A (receivable &
residual)
• Lease term is for the major
part of the remaining
economic life of the asset;
• Present value of lease
payments accounts for
substantially all of the FV of
the asset;
• OR the lessee has a
significant economic
incentive to exercise the
purchase option
Type B (operating lease)
• Lease term is for an
insignificant part of the total
economic life of the asset
• Present value of lease
payments is insignificant
relative to the FV of the
asset
Type A Lessee vs. Lessor
Lessee
Lessor
• Asset and liability on
the balance sheet
• Asset/liability = PV of
lease payments
• Liability relieved using
effective interest
method; asset
amortized straightline
• Remove asset from
books and recognize
a profit potentially
• Lease receivable
and residual asset on
balance sheet
• Interest income
Type B Lessee vs. Lessor
Lessee
• Asset and liability on the
balance sheet
• Asset/liability = PV of lease
payments
• Liability relieved using
effective interest method
• Asset amortized to
achieve a straight-lining of
total expense (interest plus
amortization)
Lessor
• Retain asset on books
• Lease revenue over term
using straight-line method
(unless another method
better represents revenue
stream)
Miscellaneous
Section IV
2012 Peer Review Report
• Disclosures relative to uncertain tax positions failed to include
open tax years
• Failure to disclose FV of investments by level 1, 2 or 3
• Failure to disclose 5 years debt maturities
• Failure to properly identify operating vs. investment vs.
financing activities
• Failure to properly disclose risks and uncertainties such as
nature of operations, use of estimates and concentrations
• Failure to document communications with those charged with
governance
• Incomplete or undocumented planning procedures related to
risk
• Internal control communication
– Failure to note auditor’s responsibility
– Failure to complete or inaccurate completion of work programs
– Failure to identify matters during planning
2012 Peer Review Report
• Audit documentation not in accordance with standards
• Analytical procedures – failure to document expectations
prior to performing final analytics, and then not comparing
actual to expectations
2012 Peer Review Report
SSARS Issues
• Compilation ITB financial statements – titles generally reflect GAAP
• Compilation reports and review reports did not match minimum
requirements
• Engagement letters for review engagements missing information –
– Engagements cannot be relied upon to disclose errors, fraud, illegal acts
– That accountant would inform the appropriate level of management if
certain matters come to the accountant’s attention unless clearly
inconsequential
• Review engagements –
–
–
–
–
failure to reference both periods covered in review report
failure to reference supplementary information in the review report
failure to document expectations prior to performing final analytics, and then not
comparing actual to expectations
Representation letter failed to cover all periods presented, and did not include
management’s responsibility re: responsibility to detect and prevent fraud