May 29, 2014
To our peer review clients:
Annually we make an effort to highlight recent changes in professional standards for our peer review clients. We hope what follows is helpful to you in your accounting and auditing practice.
New Compilation and Review Standards
A major new standard for compilation and financial statement preparation services is in exposure draft stage with the commentary period ended May 2, 2014. This is a controversial revision to the standards with two previous exposure drafts receiving substantial negative feedback. The proposed standard would allow CPAs to prepare financial statements for clients without issuing a report on them, including both full disclosure and nondisclosure presentations. An engagement letter signed by both the CPA firm and the client will be required, however, and each page (including related notes) of the financial statements will have to include a statement indicating the CPA is providing no assurance on them. Also, when preparing financial statements in accordance with a special purpose framework, a description of the framework must be included on the face of the financial statements (usually as part of the title) or in a note. Unlike the current standard on management use only financial statements (“SSARS No. 8”), the financial statements may go to users outside of management. A CPA engaged solely to prepare financial statements will be performing a nonattest engagement. The compilation standards will apply only when a CPA is hired to perform a compilation engagement.
Under this new standard on compilation and financial statement preparation there is a distinction drawn not only between compilation and financial statement preparation but also between an engagement to prepare financial statements and an engagement to assist in preparing financial statements. The levels of service possible are as follows:
- Compilation (meets AICPA definition of attest service)
- Financial statement preparation (nonattest service)
- Assistance provided client in financial statement preparation (SSARS do not apply, a bookkeeping service)
Examples of assistance provided to the client in financial statement preparation (the bookkeeping service) include:
- Maintain depreciation schedules
- Prepare certain adjustments, such as those applicable to deferred income taxes, depreciation or leases
Under this guidance, treatment of many of the QuickBooks engagements CPA firms perform, currently classified as bookkeeping engagements, may not change.
When a CPA is engaged to perform a compilation, the procedures applied will be similar to those required under current standards. The report language will be significantly revised, however, with fewer words required, although the requirement to disclose lack of independence and departures from professional standards are retained. Engagement letter language also changes and for most traditional compilation engagements you will have a dual engagement letter, covering both the financial statement preparation service and the compilation service.
These changes to the compilation standards are part of the SSARS Clarity Project, which will also involve changes to the review standards, including a new format for the review report that will make it look more like an audit report. Both the changes to compilation and to review standards will appear in SSARS No. 21 expected to be issued in the second half of 2014 effective for years ending after December 15, 2015.
Whether the financial statement preparation service will be subject to peer review is yet to be determined.
New Accounting Standards
Under the standards for variable interest entities (VIEs) the primary beneficiary must consolidate VIEs in which the primary beneficiary has a variable interest. In March 2014 FASB issued ASU No. 2014-07 providing an exemption to the consolidation requirement for private companies when “common-control leasing arrangements” are involved. This means, for example, when the stockholders in the primary beneficiary also have ownership in the entity that owns and leases back the building to the operating company, the leasing company will not have to be consolidated with the operating company.
In January 2014 FASB approved two other exemptions for private companies. Private companies are no longer required to annually perform impairment testing for goodwill when circumstances have not changed. Under this exemption, new goodwill is amortized over a ten year period, with goodwill existing at the time the standard is adopted also amortized prospectively over ten years unless a shorter period is supportable. Also private companies will be allowed to follow a simplified approach when engaged in interest rate swaps to convert variable interest rates to a fixed rate. The standards are effective for periods beginning after December 15, 2014, with early adoption permitted.
These exemptions were first proposed by the new Private Company Council (PCC) and are referred to as “PCC Accounting Alternatives.” In response to these accounting alternatives, the AICPA issued technical guidance interpreting what the effect will be on the accountant’s and auditor’s reports in the year an alternative approach is implemented. This would represent a change in accounting principles and requires an emphasis-of-matter (EOM) paragraph in the auditor’s report if material. There is no impact on a review or compilation report unless the change in accounting principles is not disclosed in the financial statements.
The controversial proposed standard on accounting for leases has hit another roadblock. A compromise, which allowed a straight line expense method for many building leases, is receiving negative feedback during the exposure draft stage and may have to be withdrawn.
The new FASB standard on revenue recognition was issued May 28, 2014. Fortunately, for nonpublic companies there is an unusually long period of time between the issue date and the effective date. The effective date is for periods beginning after December 15, 2017.
ASU 2014-08 changes the criteria for reporting discontinued operations, raising the threshold for reporting disposals as discontinued operations. With this standard FASB is responding to concerns that the previous rules for discontinued operations applied in too many circumstances. For example, a fast food franchisee accounting separately for each restaurant location would be subject to the current standard if one of the restaurant locations closed. Under ASU 2014-08 a disposal of a component of an entity will be required to be reported in discontinued operations only if it represents a “strategic shift” that has a “major effect” on the entity’s operations. The new standard will however require certain footnote disclosures on the disposal of an “individually significant” component of an entity even when it does not qualify as discontinued operations. ASU 2014-08 is effective for annual periods beginning on or after December 15, 2014.
Peer Review Process
Starting last year, the AICPA began converting the peer review program to a paperless system. Electronic Matters for Further Consideration (MFC) forms were required on peer reviews commencing July 1, 2013. The MFC forms are created and stored on the AICPA web site on the Peer Review Information System Manager (PRISM). You log onto the AICPA site to enter your responses to the MFC forms. AICPA members must complete the MFC forms electronically. Nonmember firms still follow the old approach.
There are a number of administrative changes to peer review this year and new checklists that will result in new inquiries from your peer reviewer.
The AICPA has agreed to cooperate with the Department of Labor to identify firms that perform ERISA audits without obtaining a system review that includes ERISA in its scope. This means peer reviewers will be exercising more care to identify discrepancies between the peer review scheduling form and the listing of clients you provide the reviewer. In other words, if you tell the state society on the peer review scheduling form that your firm performs ERISA audits, or other specialized industry audits, but the engagement listing you provide the peer review team captain omits this industry, expect follow up from the team captain, who will likely ask for a written explanation for the inconsistency.
Also in response to the Department of Labor’s concerns, the firm representation letter language has been expanded to emphasize the importance of full disclosure to the team captain of all industries in which your firm practices, and all levels of service your firm performs, stating that failure to do so may be deemed “failure to cooperate” resulting in termination from the peer review program and referral to the AICPA Professional Ethics Division.
If you are responding to Finding For Further Consideration (FFC) forms during the peer review, and most peer reviews generate at least one FFC form, your response has to include certain elements or it will be rejected by the state society that administers the peer review program. You might find your peer reviewer coming back to you several weeks or months later asking you to revise your response when these elements are absent. You can avoid this scenario by ensuring your response includes the date by which you will take the corrective action and the job title (not the name) of the individual within the firm responsible for implementing the action.
Private Company Standards
To provide an alternative to FASB standards, the AICPA has developed and issued the “Financial Reporting Framework for SMEs” (where SMEs stands for small to medium sized entities). A “Little GAAP” for privately held companies to follow in place of FASB standards, the FRF for SMEs uses historical cost as its measurement basis, reversing the trend for fair value accounting in the FASB standards. Among many changes tailored for smaller CPA firms, it eliminates the specialized accounting for uncertain tax positions and variable interest entities, includes an option to record only the current income taxes payable without a provision for deferred income taxes, and allows a straightforward approach to lease accounting. The AICPA has a toolkit, including illustrated financial statements prepared under the new standard, at: http://www.aicpa.org/INTERESTAREAS/FRC/ACCOUNTINGFINANCIALREPORTING/PCFR/Pages/Financial-Reporting-Framework.aspx
Ethics Codification
Another codification project, this one on ethics, is effective December 15, 2014. The familiar ET Sections 100 to 500 are gone. There are separate parts for CPAs in public practice verses those in business. It follows a threats and safeguards model, more principles than rules based. Engagement documentation requirements are unchanged.
Firms with Audit Clients
In May 2013 COSO issued its updated “Internal Control – Integrated Framework” and although it retains the basic definition of internal control and the five components contained in the 1992 version, you will want to revise some of your planning documentation to comply with the new framework. The 2013 COSO Framework supersedes the 1992 version effective December 14, 2014. The COSO Framework potentially applies to all audit engagements, not only to governmental or nonprofit organizations. If your firm uses PPC, you will find revisions on the CX-4.1 “Understanding the Design and Implementation of Internal Control” (a mandatory form) and on the CX-5 series (optional forms). Although the terminology used by the PPC authors on the forms has changed, your existing responses may not require much revision.
The clarity standards were effective for periods ending on or after December 15, 2012. Most firms have updated their reports and other client communications with the new language, but remember there is more to do during the planning phase of the audit under the clarity standards. You need to perform a retrospective review of accounting estimates during planning. For example, ask your clients to provide a report on accounts receivable written off during the year to compare to the prior year allowance. You need to discuss related party transactions during the engagement team’s brainstorming session and therefore you may want to request a report from the client on related party transactions up front. You are now required to review the client’s correspondence with regulators and the best time to obtain this from the client may be during planning. Also, additional procedures are required on opening balances in an initial audit engagement.
Yellow Book
The final version of the 2011 Yellow Book was issued in December 2011 and was effective for periods ending after December 15, 2012. The most significant changes in the 2011 Yellow Book are in the area of auditor independence and related documentation. The GAQC has a practice aid helpful for creating the independence documentation available on the AICPA web site, and the PPC authors have developed a six part form for documenting the independence evaluation. Preparing the financial statements is a nonaudit service that will require you document your considerations, which can be accomplished most efficiently using either the AICPA or PPC format. On May 14, 2013, the AICPA issued guidance to peer reviewers, in Alert #13-02, stating that if a firm does not have this independence documentation, the engagements will be deemed substandard, with the likely outcome a pass with deficiency peer review report. Peer reviewers will be looking for this documentation.
Single Audits
In December 2013 OMB made a number of changes to the Single Audit requirements in the form of “Uniform Grant Guidance” superseding the various circulars, including Circular A-133. The term “A-133 audit” will be a thing of the past. The Single Audit will be focused more on controls over compliance than in the past. You should start to prepare you clients for this now. Effective for years beginning on or after January 1, 2015, the Single Audit threshold will increase from $500,000 to $750,000. The threshold for Type A programs, currently $300,000, will also increase to $750,000 for entities with less than $25 million in federal financial assistance. Fewer high risk Type B programs will be tested as major. The coverage percentages will decrease from 50% and 25% to 40% and 20%. The questioned cost threshold will increase from $10,000 to $25,000. The OMB decided to keep the number of compliance requirements at 14 however.
Firms with Not-For-Profit Industry Clients
ASU 2013-06 describes a change affecting affiliated nonprofit organizations who share employees, and requires the allocation of payroll costs among the organizations. ASU 2012-05 provides guidance to nonprofits on the presentation in the statement of cash flows of proceeds received on the sale of donated financial instruments. ASU 2012-05 and ASU 2013-06 are effective for periods beginning after June 15, 2013 and 2014, respectively.
Firms with Governmental Clients
GASB Statement No. 65 concerns deferred outflows and inflows. Effective for periods beginning after December 15, 2012, it has a significant impact on financial statement presentation, with certain liabilities moved to a new category on the statement of net position (and, in some instances, the funds balance sheet) called “deferred inflows” and certain assets reclassified to a new category called “deferred outflows.” For example, in the past, for the portion of property taxes not both measurable and available a deferred revenue liability was recorded on the balance sheet, while under GASB No. 65, a “deferred inflow of resources” will be recorded for such property taxes and other nonexchange transactions. Note that the use of the word “deferred” is reserved for describing the new category and should not be used in the caption of any specific account. Therefore the caption for amount previously reported as deferred property taxes might be revised to read “property taxes due after 60 days.” Grants received in advance of time requirements being met will be reported as a deferred inflow as long as all other eligibility requirements have been met, otherwise as a liability. Prepaid insurance remains an asset account. Debt refunding costs are now separately reported as a deferred inflow or outflow. Also, under this standard debt issuance costs, which were previously reported as a deferred charge, will be expensed. GASB No. 65 affects enterprise funds too. Deferred inflows and outflows are part of the major fund determination. GASB No. 65 should not significantly impact your modified cash presentations.
In April 2014, the AICPA issued several auditing interpretations on the topic of multi-employer pension plans in relation to GASB Statement No. 68, which is the statement requiring recognition of the entire net pension liability effective for fiscal years beginning after June 15, 2014. The interpretations clarify that auditors will not have sufficient audit evidence to support their opinions on the pension liabilities of local governments participating in the state multi-employer plan based solely on the audited financial statements of the state plan. Separate opinions on the schedule of employer allocations and on other key elements are necessary. The Oregon legislature passed a bill in early 2014 providing Oregon PERS with the authority to recover costs incurred in obtaining the separate audit opinions on the individualized actuarial data for each of the participating local governments.
PERS will be providing the amounts needed for financial reporting, including net pension liability, pension expense, and pension-related deferred inflows and outflows for the differences between expectations and actual experience. There is one exception. GASB No. 68 requires the employer to recognize a pension liability as of the measurement date, which should be no earlier than the end of its prior fiscal year. Employer contributions to the defined benefit plan between the measurement date and the end of the government’s fiscal year are recorded as a deferred outflow of resources. PERS is issuing its report prior to June 30, 2015. Therefore each local government will have to determine the deferred outflow balance from its own accounting system. Oregon PERS has a help page including sample footnote disclosures at:
http://www.oregon.gov/pers/EMP/Pages/section/er_actuarial_services/GASB-Resource-Page.aspx
Our Peer Review Clients
When scheduling your peer review with the state society, the scheduling form requests information about the firm you have hired to perform the peer review. This is the information you will need if you select our firm to perform your peer review:
Name of Reviewing Firm: Read & Bose, PC
AICPA Firm Number: 10083621
Team Captain's Name: Harry Bose
AICPA Member Number: 01153765
__________________________
This letter will be posted on our home page, along with additional guidance on peer reviews. Our web site address is: www.peer-review.com.
Our email address if your wish to contact us about peer review is: harryb@readandbose.com.
Please do not hesitate to contact us if you have any questions. We appreciate your business.
Very truly yours,
READ & BOSE, PC