Deloitte template

Transcript Deloitte template

Financial Reporting Seminar – Accounting and Audit Update

Agenda:

• Introduction • What’s new?

–Auditing Standards –Accounting Standards –International Financial Reporting Standards (IFRS) • Wrap –up and Questions 2 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

Introduction

Our Firm Experience

• Largest professional services firm providing a full range of professional services.

• Over 6,600 highly qualified professionals serve clients from offices in 46 Canadian cities • Deloitte is a leader in serving Higher Education institutions across North America. • Our Public Sector Group include research institutions, colleges, multi campus systems, private and public universities, and a broad range of professional and other schools. 4 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 University of Ottawa Carleton University St-Paul University University of Guelph McMaster University Queen University Ryerson University University of Toronto University of Calgary University du Québec en Outaouais University du Québec à Montréal St. Francis Xavier University University of New Brunswick Memorial University of Newfondland University du Québec à Rimouski University of Waterloo University du Québec à Trois Rivières University of Western Ontario École des Hautes Études Commerciales University of Windsor Université de Sherbrooke McGill University Université Laval Concordia University ©2006 Deloitte & Touche LLP and related entities.

Speakers

• Christopher Wiegand – Christopher is an audit partner in the Montreal office. He is the engagement partner on the audit of McGill University, and has quality assurance roles on audits of three other universities. He also has extensive experience with not-for-profit organizations.

• Eric Girard – Eric is a senior manager specializing in the public sector. He is the engagement senior manager on the audit of University of Ottawa and has extensive experience with not-for-profit organizations.

• Eric Graham - Eric Graham is the Ottawa leader of our Complex Accounting & Transaction Expertise group. In his role, Eric helps organizations understand complex financial accounting and disclosure issues. 5 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

What’s New in Auditing Standards

New Standards of Behaviour

•The assurance practice now lives strictly according to rules •Compliance with those rules is the major challenge of auditing – and of those who associate with auditors in a multi-disciplinary firm •Day-to-day behaviour is driven by the objective of compliance – and the consequences of non compliance 7 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

New Auditing Standards

•Previously: – the auditor is permitted to rely upon the assumption of management’s good faith and integrity: •Now… 8 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

Fraud and Error

• Error: an unintentional misstatement in financial statements, including the omission of an amount or a disclosure, such as: –A mistake in gathering or processing data from which financial statements are prepared; –An incorrect accounting estimate arising from oversight or misinterpretation of facts; and –A mistake in application of accounting principles relating to measurement, recognition, classification, presentation, or disclosure. • Fraud: an intentional act by one or more individuals among management, other employees, those charged with governance or third parties, involving the use of deception to obtain an unjust or illegal advantage.

–Misstatements resulting from fraudulent financial reporting –Misstatements arising from misappropriation of assets [CICA Handbook] 9 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

Fraud and Error – Impact on the Universities

• The primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and with management… • It is the responsibility of those charged with governance of the entity to ensure, through oversight of management, ….that the entity establishes and maintains internal control to provide reasonable assurance with regard to the reliability of financial reporting…and compliance with laws and regulations… • In exercising oversight responsibility, the audit committee or equivalent considers the potential for management override of internal controls or other inappropriate influence over the financial reporting process, such as efforts by management to manage earnings in order to influence the perceptions of analysts as to the entity’s performance and profitability.

Changes in Handbook Auditing Standards

• Fraud and Error: –An auditor conducting an audit in accordance with GAAS obtains reasonable assurance that the financial statements taken as a whole are free from material misstatement,

whether caused by fraud or error…

–An auditor considers the potential for management override of controls and recognizes the fact that audit procedures that are effective for detecting error may not be appropriate in the context of an identified risk of material misstatement due to fraud… –Members of the engagement team should discuss the susceptibility of the entity’s financial statements to material misstatement due to fraud… –That discussion occurs with a questioning mind, setting aside

any beliefs that the engagement team members may have that management and the audit committee are honest and have integrity…

Changes in Handbook Auditing Standards

•Specific risk areas: –Management override of internal controls –Journal entries and other “consolidating adjustments” to the statements –Complex transactions with no business rational –Biased accounting estimates –Material misstatements of revenue 12 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

Assurance Developments

• A number of new assurance standards were issued or modified during 2005 in connection with an international audit risk project which has been in progress since 2001.

• • The changes in the assurance standards relate to the auditor's understanding of the entity and its internal control and are intended to achieve the following objectives:  Improve risk assessments and better link assessed risks of material misstatement to the auditor's evidence gathering procedures.  Ensure that Canadian standards are harmonized with the equivalent US and international standards.

The most significant changes include the performance of control testing on the design and implementation of controls each year on all significant business cycles and entity level controls. Additionally, changes have been made to audit planning standards, documentation standards and levels of substantive testing.

Assurance Developments

CICA Handbook Section Withdrawn Added Modified

5130 Materiality and Audit Risk in Conducting an Audit  5140 5200 Knowledge of the Entity’s Business Internal Control in the Context of an Audit   5205 Understanding Internal Control for Audit Planning Purposes  5210 Assessing Control Risk  AuG-31 5095 Applying Materiality and Audit Risk Concepts in Conducting an Audit Reasonable Assurance and Audit Risk 5141 Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement 5142 Materiality 5143 The Auditor’s Procedures in Response to Assessed Risks AuG-41 Applying the Concept of Materiality 5145 Documentation 5300 Audit Evidence 14 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006         ©2006 Deloitte & Touche LLP and related entities.

Changes to Auditing Standards

•Previous standards required a basic understanding of the control environment sufficient to assess whether or not a control reliance audit approach would be employed.

•New standards require an auditor to evaluate the design of internal controls over financial reporting and to determine if key controls have been implemented. •These new standards require the auditor to spend time evaluating key internal controls over financial reporting even when no reliance is contemplated.

Changes to Auditing Standards - Auditor Responsibilities

• Auditors are now required to undertake an assessment of the design of key controls for the company including – entity wide processes; – business cycle processes; and – information technology processes • Requirements are regardless of whether we intend to rely on such controls in conducting our audit, as well as determine if the controls identified exist and are implemented.

• The primary objective of these procedures is to identify any areas of risk that may be inherent in these processes so that we can appropriately plan the nature and extent of our audit tests.

Changes to Auditing Standards – Impact on the Universities

•Management is responsible for preparing the financial statements in accordance with GAAP •In this regard, Management is also responsible for establishing and documenting internal controls to provide reasonable assurance around the reliability of – the financial reporting process; – the effectiveness and efficiency of operations; and – compliance with applicable laws and regulations. 17 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

Changes to Auditing Standards – Impact on the Universities

How to efficiently prepare for those changes: •Meet with your auditors to determine the level of required documentation •Start early preparing the missing documentation •Ask your internal auditors to support you •Ask your external auditors for guidance 18 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

What’s New in Accounting Standards

Non-Monetary Transactions

Section 3831

What has changed?

•No culmination of the earnings process test –

more need to evaluate whether productive assets are “similar” no

•Definition of non-monetary transaction

reference to 10% maximum monetary consideration excludes

Overview

•Record non-monetary transactions at fair value unless: –Transaction has

no commercial substance

–Fair values

not reliably measurable

–Transaction is

exchange of inventory

–Transaction is

non-monetary, non-reciprocal transfer to owners

Commercial Substance

Transactions have commercial substance if there is a: • Significant

change in the configuration

cash flows

OR

of • The

entity-specific value

of the asset received differs from the entity-specific value of the asset given up and the difference is significant relative to the fair values of the items.

Configuration of Cash Flows

•Consider changes in

timing, amount,

cash flows or

risk

Entity-Specific Value

•The

present value of expected future cash flows

from the continuing use of an asset and its ultimate disposal, or from settling a liability.

•Value dependent on

specific use

to the reporting entity, not on how it could be used by others •When

transaction has commercial substance

, measure it at

fair value

Reliably Measurable Fair Values

•When comparable market transactions do not exist, fair value is reliably measurable if: –Variability in

range of estimates not significant

OR

–Probabilities can be assigned to each estimate and used in estimating fair value 26 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

Scope Exclusions

•Business combinations •Employee future benefits •Transactions between related parties •Stock-based compensation payments •Contributions received by not-for-profit organizations 27 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

Disclosure - Non-Monetary Transactions

•Nature of transaction •Basis of measurement and amount •Related gains and losses 28 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

Transitional Provisions

•Transactions initiated in

periods beginning on or after January 1, 2006

•Early adoption permitted for transactions initiated in periods beginning on or after

July 1, 2005

•A transaction is initiated on earlier of: –Date a binding contract is executed, and –Date of the exchange •No retroactive application and no restatements 29 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

The New Financial Instruments Standards for NPOs

Section 3855, 3865, 4410

Overview of New Financial Instruments Standards for NPOs

• Financial instrument framework has a broad scope that will affect virtually all entities.

• Increased use of fair value measurement – potential impact is more volatility in the statement of operations. Now is the time to assess the potential impact. • Framework consists primarily of 3 new Handbook Sections, as follows: – S.1530, “Comprehensive Income” – S.3855, “Financial Instruments – Recognition and Measurement” – S.3865, “Hedges” • S.1530 will not apply to NPOs; instead S.4400 has been amended – Revenue, expenses, gains and losses recorded in statement of operations unless GAAP states otherwise.

– Separate disclosure of items recorded directly to the statement of changes in net assets.

Effective date

• Effective for financial statements relating to fiscal years beginning on or after October 1, 2006.

– Deferral to fiscal years beginning on or after October 1, 2007 does not apply to not-for-profit organizations. • Earlier adoption is permitted, but only as of the beginning of a fiscal year and it requires adoption of all 3 components • There are decisions that need to be made as a result of this standard and possible documentation. Therefore, assessing the impact prior to the implementation date is recommended.

Transition

With respect to transition to Sections 3855, 3865 and 4400: • Restatement of prior period financial statements is not permitted • All financial assets and liabilities at the date of adopting the new standards are classified and measured in accordance with the new standards • Qualifying hedging relationships at the date of adopting the new standards are accounted for in accordance with the new standards • Subject to the requirements of Section 4410 “Contributions – Revenue Recognition”, any adjustments to the previous carrying values of financial assets and liabilities at the date of adopting the new standards are included in the appropriate components of net assets at that date 33 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

What is a Financial Instrument?

Under Section 3855: • A Financial instrument is “any contract that gives rise to a financial asset of one party and a financial liability or equity instrument of another party” • Some examples: Cash, A/R, portfolio investments, loans payable and receivable, capital leases, A/P, bank indebtedness, derivatives…etc.

• Some examples of assets that are not financial instruments: inventory and prepaids

Financial asset

• Cash • Contractual right – to receive cash or another financial asset – to exchange financial instruments under potentially favorable conditions • Equity instrument in another entity

Financial liability

• A contractual obligation to: – Deliver cash or another financial instrument – Exchange financial instruments with another party under potentially unfavorable conditions 34 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

Sample Statement of Net Assets

Current Assets

Cash and term deposits Accounts receivable Grants receivable Prepaid expenses  Investments (market value $260,000) Capital assets (net)

20X2

$ 122,000 182,000 240,000 617,000

20X1

$ 160,000 10,000 25,000 10,000 205,000 100,000 125,000 $ 430,000

Current liabilities

 Accounts payable and accrued liabilities  Mortgage payable - current  Mortgage payable - long term Deferred contributions Deferred contributions related to capital assets Deferred building campaign contributions and related investment income 6,000 441,000 118,000 Net assets (summarized) 35 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 $ 20,000 20,000 105,000 70,000 265,000 302,000 175,000 235,000 $ 430,000 ©2006 Deloitte & Touche LLP and related entities.

Financial Asset Classification

Held for Trading Financial Assets

• Active and frequent and selling – debentures, shares buying • Short-term profit generation • All derivatives • Record at

fair value

• Can irrevocably decide to designate any financial asset or liability as held for trading • No reclassifications permitted in or out 36 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

Financial Asset Classification

Held For Trading Held To Maturity Financial Assets

37 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 • Assets with fixed and determinable payments – i.e. Bonds, and other debt instruments • Holder must have the

ability and intention

to hold to maturity • Record at

amortized cost

• Reclassifications out are permitted under certain circumstances • If “more than insignificant” sales occur: – The company cannot use the “Held to Maturity” classification for

two years

Financial Asset Classification

Held For Trading Held To Maturity Financial Assets Loans & Notes Receivable

• Example: bank loans, A/R • Excludes debt securities • Record at

amortized cost

Financial Asset Classification

Held For Trading Held To Maturity Loans & Notes Receivable Financial Assets Available for Sale

Reclassifications Between Categories

Held for Trading

• NO reclassifications permitted in or out • Difference with US GAAP – in accordance with IAS

Held to Maturity

• Reclassifications

out

are permitted if they occur: – Within few months of maturity – After 85% of principal is collected – Due to isolated event beyond control of entity • If “more than insignificant” sales/reclassifications occur: – Company cannot use “Held to Maturity” category for

two years

Classification of Financial Liabilities

Financial Liabilities Held for Trading

• Fair value • Short-term profit making • Active and frequent selling buying and • Can irrevocably designate any financial liability as held for trading • E.g. all derivatives 41 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006

Other than Held for Trading

Reclassification of Financial Liabilities

• NO reclassifications into or out of Held for Trading Liabilities • Difference with US GAAP – in accordance with IAS • Reclassifications may occur between Held for Trading financial assets and liabilities 42 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

The New Financial Instruments Standards, Assets and Liabilities, Changes in Value

Under Section 3855, (subject to the requirements of Section 4410 “Contributions – Revenue Recognition”): • Trading assets and liabilities  All gains and losses (realized and unrealized) included in current period net investment income.

• Held-to-maturity assets, loans and receivables and non-trading liabilities  Amortization of premium or discount in current period net investment income; and  losses on impairment of assets in current period net investment income.

• Available-for-sale assets  Amortization of premium or discount in current period net investment income; and  unrealized fair value gains and losses included directly in current period changes in net assets, until the financial asset is derecognized/impaired.

Impacts of New Standard

• Balance sheet and equity volatility as most investments will be at fair value • Significant impact on accounting systems – Fair value calculation – Keep a classification trail for all financials instruments 44 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

Example Financial Statement Implications – Designate Investments as Available-for-sale Current Assets (excerpt only) Pre 3855 20X2 Post 3855 20X2

Cash and term deposits Accounts receivable Grants receivable Prepaid expenses Investments (market value 20X2 - $260,000; 20X1 - $115,000) Capital assets (net)

Statement of Changes in Net Assets (excerpt only) Pre 3855 20X2 Total

Balance, beginning of year Excess (deficiency) of revenues over expenses Endowment contributions Change in fair value of investments classified as available for sale Investment in capital assets Internally imposed restriction Balance, end of year 45 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 17,000 50,000 N/A -

Post 3855 20X2 Total

Definition of a Derivative

• A derivative is a financial instrument or other contract with three characteristics Value changes with underlying variable + Requires little or no initial net investment + Settled at future date Financial Derivative OR Non-Financial Derivative 46 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

Embedded Derivatives

Hybrid Contract Non derivative host contract Embedded derivative • Examples: – Lease – Debt instrument – Insurance contract – Equity instrument – Investment – etc.

• Clause that affects payoff profile: – Inflationary increases – Conversion option – etc.

Non-traditional Derivatives and Embedded Derivatives

• Need to review and inventory contracts • Difficult to identify • Look for unusual features in debt contracts, lease contracts, service contracts and other relationships 48 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

What’s up with IFRS

IFRS

•What is IFRS?

•Why change?

•Why IFRS instead of US GAAP?

•When is this going to happen?

•How does this affect NPOs?

IFRS

• IFRS does not specifically address Not-for-profit organizations –sense that Canadian GAAP will retain NPO accounting –harmonization will therefore relate to sections of Handbook outside 4400 applicable to NPOs • Potential areas of difference –no choice of whether to record non-monetary transactions (e.g. donated services and materials) –challenge in meeting definition of an asset when recording pledges receivable –donated collections must be recorded and capitalized –consolidation is required if criteria are met (no choice) • Handbook includes a CICA Comparison between IFRS and Canadian GAAP as at April 1, 2005 51 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

IFRS

•What does it mean for me?

–Harmonization is coming –S.1100 – increases relevance of IFRS as secondary source of GAAP when Cdn GAAP not clear •Timing & education 52 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

A Little Nomenclature….…………

• • • IFRS – “International Financial

Reporting Standards”

Comprised of: – – – IFRS’s (1-7) – International Financial Reporting Standards IAS’s (1-41) – International Accounting Standards SICs – Standing Interpretation Committee – IFRICs – International Financial Reporting Interpretations Committee In addition, ISA’s (International Standards on Auditing) exist and will affect Canada 53 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

Questions

Any further questions please contact us

• • Eric Girard Eric Graham [email protected]

[email protected]

(613) 751-5344 (613) 751-5416 • Christopher Wiegand [email protected] (514) 393-7343 55 CAUBO Financial Reporting Seminar – Audit and Accounting Update - 2006 ©2006 Deloitte & Touche LLP and related entities.

Deloitte, Canada's leading professional services firm, provides audit, tax, financial advisory services and consulting through more than 6,100 people in more than 47 offices. Deloitte & Touche LLP, operates in Québec as Samson Bélair/Deloitte & Touche s.e.n.c.r.l. The firm is dedicated to helping its clients and its people excel. Deloitte is the only professional services firm to be named to the Globe and Mail's Report on Business magazine annual ranking of Canada's top employers for two consecutive years: 35 Best Companies to Work for in Canada in 2001 and 50 Best Companies to Work for in Canada in 2002. "Deloitte" refers to Deloitte & Touche LLP and affiliated entities. Deloitte is the Canadian member firm of Deloitte Touche Tohmatsu. Deloitte Touche Tohmatsu is a Swiss Verein (association), and, as such, neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other's acts or omissions. Each of the member firms is a separate and independent legal entity operating under the name "Deloitte", "Deloitte & Touche", "Deloitte Touche Tohmatsu" or other related names. The services described herein are provided by the Canadian member firm and not by the Deloitte Touche Tohmatsu Verein.

Deloitte template

Transcript Deloitte template

Financial Reporting Seminar – Accounting and Audit Update

Agenda:

Introduction

Our Firm Experience

Speakers

What’s New in Auditing Standards

New Standards of Behaviour

New Auditing Standards

Fraud and Error

Fraud and Error – Impact on the Universities

Changes in Handbook Auditing Standards

Changes in Handbook Auditing Standards

Assurance Developments

Assurance Developments

Changes to Auditing Standards

Changes to Auditing Standards - Auditor Responsibilities

Changes to Auditing Standards – Impact on the Universities

Changes to Auditing Standards – Impact on the Universities

What’s New in Accounting Standards

Non-Monetary Transactions

What has changed?

more need to evaluate whether productive assets are “similar” no

reference to 10% maximum monetary consideration excludes

Overview

no commercial substance

not reliably measurable

exchange of inventory

non-monetary, non-reciprocal transfer to owners

Commercial Substance

change in the configuration

OR

entity-specific value

Configuration of Cash Flows

timing, amount,

Entity-Specific Value

present value of expected future cash flows

specific use

transaction has commercial substance

fair value

Reliably Measurable Fair Values

OR

Scope Exclusions

Disclosure - Non-Monetary Transactions

Transitional Provisions

The New Financial Instruments Standards for NPOs

Overview of New Financial Instruments Standards for NPOs

Effective date

Transition

What is a Financial Instrument?

Sample Statement of Net Assets

Financial Asset Classification

Financial Asset Classification

Financial Asset Classification

Financial Asset Classification

Reclassifications Between Categories

Classification of Financial Liabilities

Reclassification of Financial Liabilities

Impacts of New Standard

Definition of a Derivative

Embedded Derivatives

Non-traditional Derivatives and Embedded Derivatives

What’s up with IFRS

IFRS

IFRS

IFRS

A Little Nomenclature….…………

Questions

Any further questions please contact us

Directory