ACCOUNTING AND AUDIT UPDATE...Objectives –Accounting and Auditing Update By the end of this...

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ACCOUNTING AND AUDIT UPDATEHFMA FL Regional Education Session - Hollywood

January 19, 2017


Presenter

[email protected]

Carlos Hernandez

Southeast Assurance Leader

2


Agenda – Accounting and Auditing Update

Topic Field of study Minutes

Accounting Update- Recent Accounting Standards Updates

- Emerging Issues

Accounting

Governmental

50

Auditing Update- Proposed/Recent Standards

- Investments Auditing Update

Auditing

Governmental

10


Objectives – Accounting and Auditing Update

By the end of this section, you will be able to:

• Identify recent accounting pronouncements and

reporting topics that directly affect the health care

industry

• Be aware of emerging issues in accounting and

auditing health care clients

• Apply the knowledge gained to your upcoming

engagements


ACCOUNTING UPDATE

ACCOUNTING AND AUDITING UPDATE >


FASB UPDATERECENT ASU’S


ACCOUNTING UPDATE >


Final standards recently issued - Revenue

ASU 2014-09, Revenue from Contracts with Customers (Topic

606)


606): Principal versus Agent Considerations (Reporting Revenue

Gross versus Net)


606): Identifying Performance Obligations and Licensing


606): Narrow-Scope Improvements and Practical Expedients

ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives

and Hedging (Topic 815): Rescission of SEC Guidance Because

of Accounting Standards Updates 2014-09 and 2014-16 Pursuant

to Staff Announcements at the March 3, 2016 EITF Meeting (SEC

Update)


ASU 2014-09: Revenue from contracts with customers

• Issued in May 2014 with intent of providing a principles-based framework for

addressing revenue recognition

− Core principle

• Recognize revenue to depict the transfer of promised goods or services to

customers in an amount that reflects the consideration to which the entity

expects to be entitled in exchange for those goods or services

− Five-step model

Identify the

contract with

a customer

(Step 1)

Identify the

separate

performance

obligations in

the contract

(Step 2)

Determine

the

transaction

price

(Step 3)

Allocate the

transaction

price to the

separate

performance

obligations

(Step 4)

Recognize

revenue when

(or as) each

performance

obligation is

satisfied

(Step 5)


ASU 2014-09: New effective dates

Permitted

2018

Effective date for calendar year-ends

Required

(Public companies

and certain NFP)

Required

(Private

companies)

20192017


ASU 2014-09: Revenue from Contracts with Customers

• FASB and IASB established Joint Transition Resource

Group (TRG) to address implementation issues identified

and determine if additional standard setting is required

• AICPA has formed sixteen revenue recognition industry

task forces (RRTFs) (including health care) to develop

non-authoritative industry-specific implementation

guidance

− Guidance developed will be incorporated in an Accounting Guide

on Revenue Recognition, with a chapter for each industry

• Issues identified by the RRTFs are reviewed by AICPA’s

Revenue Recognition Working Group (RRWG) and

Financial Reporting Executive Committee (FinREC)


Revenue Recognition Issue Review Process

1. Identified by industry RRTF

2. Submitted to AICPA RRWG

3. Submitted to FinREC

4. Submitted to FASB TRG (if

applicable)

5. Technical corrections

submitted to FASB by TRG

6. Exposed on AICPA website

7. Resubmitted to RRWG

8. Resubmitted to FinREC

9. Finalized for Accounting Guide

on Revenue Recognition


Revenue Recognition Health Care Implementation Issues

# Type Implementation Issue

1 General Application of step 1 (determine if there is a contract) and step 3 (determine the

transaction price) for healthcare services provided to self-pay patients, including

uninsured patient balances and self-pay patient balances arising from co-

payments and deductibles

1A General Consideration of implicit price concessions to uninsured patients

2 General Application of the portfolio approach to contracts with patients

3 CCRC Identifying and satisfying the performance obligation(s) and recognizing the

monthly/periodic fees and nonrefundable entrance fees under Type A or “life care”

contracts for continuing care retirement communities

4 CCRC Recognizing a CCRC’s performance obligation(s) to provide future services and

use of facilities to residents

5 General Significant financing component – CCRC contracts, and patient and third-party

payor amounts in arrears

6 General Disclosure requirements

7 General Accounting for contract costs

8 General Consideration of FASB ASC 606, Revenue from Contracts with Customers, for

third party settlement estimates



Implementation Issue Considerations

1 - Application to self-

pay patient accounts

Step 1 of the five-step model:

• Does an enforceable contract exist?

• Is patient committed to perform?

• Is collection probable?

1A - Consideration of

implicit price

concessions

Step 3 of the five-step model:

• Do uncollectible amounts (including copays

and deductibles for insured patients)

constitute implicit price concessions?

• How to account for subsequent changes in

estimate of transaction price?

• What constitutes an impairment loss/bad

debt?




2 - Application of

portfolio approach

• How could a portfolio approach be applied

(e.g., type of service, payor, patient

responsibility)?

• Implications of not using portfolio approach

• Use of historical experience to estimate

contractual adjustments, self-pay discounts

and implicit price concessions

3 - Performance

obligations and

revenue recognition

under Type A or “life

care” contracts

• How could performance obligations under

life care contracts be identified and

satisfied?

• How could monthly/period fees and

nonrefundable entrance fees be considered

in establishing transaction price?

• How could transaction price be allocated to

performance obligations?




4 - Performance

obligations for future

services / use of

facilities

• How could the calculation of the obligation

to provide future services / use of facilities

be affected by the new revenue recognition

model?

5 - Consideration of

significant financing

component

• How do health care organizations assess

whether a significant financing component

exists in determining transaction price?

6 - Disclosure

requirements

• What disclosures would be required for

revenue for health care entities?

• Determination of whether there are one or

multiple categories of revenue to report and

if there are operating segments or service

lines

• Recommended additional disclosures

relating to third-party settlement balances

and activity




7 - Accounting for

contract costs

• How could health care entities account for

costs of acquiring and fulfilling contracts?

8 - Estimation of

variable consideration

for third-party

reimbursement

• How could variable consideration be

estimated using either the expected value

or most likely methods described in the

ASU?

• How to apply constraint on variable

consideration to third-party reimbursement?


Revenue Recognition Health Care Issue Status (as of 11/18/16)

Implementation Issue Step

Application to self-pay patient accounts 9 – Final

Consideration of implicit price concessions 9 – Final

Application of the portfolio approach to contracts with

patients 9 – Final

Performance obligations and revenue recognition under

Type A or “life care” contracts for CCRCs 2 – RRWG

Performance obligations for future services and use of

facilities (CCRCs)

2 – RRWG

Significant financing component – CCRC contracts, and

patient and third-party payor amounts in arrears

2 – RRWG

Disclosure requirements 2 – RRWG

Accounting for contract costs 3 – FinREC

Consideration of ASC 606 for third-party settlement

estimates 2 – RRWG


ASU 2014-09: Transition options

Transition Approach Implications

Full retrospective Restate all contracts; cumulative effect

presented as of beginning of earliest

period presented

Retrospective with one or more

practical expedients:• Completed contracts

• Completed contracts with variable

consideration

• Omit disclosure of transaction price

allocated to remaining performance

obligations

Restate contracts, except:• Don’t restate completed contracts

beginning and ending in same reporting

period

• Use transaction price at contract

completion date rather then estimating

variable consideration in prior periods

• For periods prior to date of adoption, omit

disclosure

Retrospective with cumulative effect

recognized as of date of adoption

Do not restate contracts; cumulative

effect presented as of date of initial

application; disclosure of effects on

current reporting period required


Implementation Paper – Issue 8 – 1: Application of Step 1 and Step 3 to Self-Pay Patients

• Implementation topics addressed:

− Determining if an enforceable contract between a health care

entity and a patient exists

− Determining if a patient is committed to perform his or her

obligations and if it is probable that the entity will collect

substantially all of the consideration to which it expects to be

entitled

− Determining if amounts that are not probable of collection from

patients with self-pay balances constitute implicit price

concessions

− Determining how to account for subsequent changes in the

estimate of the transaction price

− Determining what constitutes an impairment loss or bad debt



• Key take-aways:

− Medicaid pending accounts – health care provider may use its

historical experience to estimate which pending accounts will

ultimately become Medicaid, charity and bad debt

− Health care provider may consider the following to determine if it

intends to provide an implicit price concession

• Entity has a customary business practice of not performing a credit

assessment prior to providing services

• Entity continues to provide services to a patient (or patient class) even when

historical experience indicates collection of substantially all of the billed

amount is not probable

− Changes in estimate of transaction price – account for as

adjustments to revenue, unless there is a patient-specific event

known to the entity that suggests that patient no longer has intent

and ability to pay



Example 2 – Implicit price concession – Uninsured patient with

uninsured discount

• Self-pay patient charges: $40,000

• Provider has a self-pay discount policy that provides a 75% discount

off charges to uninsured patients

• Expected collections based on historical experience: 10% ($1,000)

Charges $ 40,000

Discount (30,000)

NPSR before

bad debt 10,000

Bad debt (9,000)

NPSR $ 1,000

Current Accounting Accounting Under Issue 8-1

No change in reporting of charity care – Does not qualify as revenue

Gross Patient Revenue 40,000$

Discount (30,000)

NPR Before Bad Debt 10,000

Bad Debt (9,000)

Net Patient Revenue 1,000$

Gross Patient Revenue 40,000$

Explicit Price Concession (30,000)

Implicit Price Concession (9,000)

Net Patient Revenue 1,000$

Bad Debt Expense $0


Implementation paper – Issue 8 – 2: Application of the Portfolio Approach to Contracts with Patients

• Implementation topics addressed:

− Application of the portfolio approach to contracts with

patients

− Impact of electing not to apply the portfolio approach

− Use of historical experience to estimate contractual

adjustments from third-party payors, governmental

programs, self-pay discounts and implicit price

concessions


Implementation paper – Issue 8 – 2: Application of the Portfolio Approach to Contracts with Patients

• Key take-aways:

− Contracts must have “similar characteristics” in order to be

grouped together. Potential considerations in grouping contracts

include:

• Type of service (inpatient, outpatient, skilled nursing, elective, non-elective,

etc.)

• Type of payor (insurance/managed care, governmental payors, uninsured

• Type of patient responsibility (uninsured self-pay, co-pay/deductible after

insurance, high deductible/coinsurance

• Whether contracts are entered into at or near the same time

− Portfolio data must be sufficient and homogeneous

• Portfolio approach may be appropriate for some, but not all, of a health care

provider’s patient population

− If portfolio approach is not applied, new revenue model would be

applied on a contract-by-contract basis


Revenue Recognition Task Force

https://www.aicpa.org/InterestAreas/FR

C/AccountingFinancialReporting/Reven

ueRecognition/Pages/RRTF-

HealthCare.aspx


Revenue Recognition Task Force


ASU 2015-03: Simplifying Presentation of Debt Issuance Costs

• Requires that debt issuance costs be presented in the balance sheet

as a direct deduction from the carrying amount of the related debt

liability (consistent with debt discounts)

• Amortization of debt issuance costs to be reported as interest

expense

• Recognition and measurement guidance for debt issuance costs are

not affected

• Effective for fiscal years beginning after

− Public business entities: fiscal years beginning after 12/15/15 and

interim periods within those years

− Other than public business entities: fiscal years beginning after 12/15/15

and interim periods in fiscal years beginning after 12/15/16

• Applied retrospectively; change in accounting principle

• Early adoption is permitted


ASU 2015-15: Debt Issuance Costs Associated with Line-of-Credit Arrangements

• ASU 2015-03 requires entities to present debt

issuance costs as a direct deduction from the

carrying amount of the related debt

• How should debt issuance costs for line-of-credit

arrangements be treated?

• ASU 2015-05 issued to codify in the ASC an

SEC staff announcement

− No objection if an entity defers and presents these

debt issuance costs as an asset (regardless of

whether a balance is outstanding) and subsequently

amortizes these costs over the line-of-credit

arrangement’s term


ASU 2015-05: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement

• Provides guidance to customers about whether a

cloud computing arrangement includes a

software license

Account for the software license element

of the arrangement consistent with the

acquisition of other software licenses (ASC

350-40)

Account for the arrangement as a

service contract (other GAAP)

Includes

software

license?

No

Yes


ASU 2015-07: Fair Value Hierarchy Disclosures for Investments Measured at NAV

• ASC 820 provides a practical expedient to measure the

fair value of certain investments using net asset value

(NAV) per share

• Under existing guidance:

− Investments are either categorized as Level 2 or Level 3

− All entities eligible to elect the practical expedient are required to

provide certain disclosures (regardless of whether they actually

make the election)

• ASU 2015-07 removes requirement to categorize within

the fair value hierarchy all investments for which fair

value is measured using the net asset value per share

practical expedient



• ASU 2015-07 also removes requirement to make certain disclosures

for all investments that are eligible to be measured at fair value using

the net asset value per share practical expedient

− Required disclosures are limited to investments for which the entity has

elected to measure the fair value using that practical expedient

• Requires disclosure of amounts of excluded investments so that

financial statement user can reconcile amounts in the fair value table

to the balance sheet

• Effective retrospectively for fiscal years beginning after




and interim periods within those years

• Early adoption is permitted



Description Level 1 Level 2 Level 3 Total

Money market fund 7,135,423 $ -$ -$ 7,135,423 $

Fixed income securities

U.S. Treasuries 29,387,239 - - 29,387,239

Corporate bonds 13,164,205 - - 13,164,205

Developing markets 13,220,167 - - 13,220,167

Equities

U.S. large cap 74,011,034 - - 74,011,034

U.S. small cap 13,094,930 - - 13,094,930

International 72,285,211 - - 72,285,211

Emerging markets 52,407,323 - - 52,407,323

Energy - 29,984,285 - 29,984,285

Global REIT 17,761,881 - - 17,761,881

Alternative investments

Private (Opportunistic) - - 17,542,917 17,542,917

Absolute return - 2,766,399 49,618,087 52,384,486

Long short - - 34,141,225 34,141,225

Commodities - - 18,203,124 18,203,124

292,467,413 $ 32,750,684 $ 119,505,353 $ 444,723,450 $

2014

Before After

Description Level 1 Level 2 Level 3 Total

Money market fund 7,135,423 $ -$ -$ 7,135,423 $

Fixed income securities

U.S. Treasuries 29,387,239 - - 29,387,239

Corporate bonds 13,164,205 - - 13,164,205

Developing markets 13,220,167 - - 13,220,167

Equities

U.S. large cap 74,011,034 - - 74,011,034

U.S. small cap 6,369,670 - - 6,369,670

International 62,285,211 - - 62,285,211

Emerging markets 43,838,384 - - 43,838,384

249,411,333 $ -$ -$ 249,411,333

Investments measured at NAV:

Equity funds:

U.S. small cap 6,725,260

International 10,000,000

Emerging markets 8,568,939

Energy 29,984,285

Global REIT 17,761,881

Alternative investments:

Private (Opportunistic) 17,542,917

Absolute return 52,384,486

Long short 34,141,225

Commodities 18,203,124

195,312,117

Total Investments 444,723,450 $

2014


ASU 2015-11: Inventory

• Intended to simplify the measurement of inventory

• Currently, under FIFO and Average Cost methods, valued at the lower of

cost or market

Problem: Market could be replacement cost, net realizable value, or net

realizable value less an approximately normal profit margin

• Entity should measure inventory at the lower of cost or net realizable value

• Net realizable value is the estimated selling price in the ordinary course of

business, less reasonably predictable costs of completion, disposal, and

transportation

• Does not apply to inventory that is measured at last-in, first-out (LIFO) or the

retail inventory method

• In reality, this conforms GAAP to actual practice

• Effective for periods beginning after 12/15/16

• Applied prospectively


ASU 2016-01: Recognition and Measurement of Financial Assets and Financial Liabilities

• Under current investment accounting guidance, investments may be

classified as:

− For-profit: held-to-maturity, available-for-sale, or trading

− Not-for-profit: other-than-trading or trading

• For investments classified as something other than trading,

unrealized gains and losses are excluded from the performance

indicator of a health care entity, unless an unrealized loss is

considered other-than-temporary (OTT)

• ASU 2016-01 requires all investments in equity securities (other than

those that qualify for equity method accounting or that are

consolidated), to be reported at fair value, with changes in fair value

reported through income

− Concept of OTT impairment goes away for equity securities


ASU 2016-01: Recognition and Measurement of Financial Assets and Financial Liabilities

• ASU 2016-01 also removes, for entities other than public business

entities, required disclosures of fair value of financial instruments

measured at amortized cost (e.g., debt)





and interim periods within fiscal years beginning after 12/15/19

• Early adoption is not permitted, except for:

− Elimination of disclosure requirement of fair value of financial

instruments measured at amortized cost

− Certain changes in presentation within OCI the change in the fair value

of certain liabilities resulting from a change in credit risk


ASU 2016-02: Leases

• Effective date:

• Fiscal years beginning after 12/15/2018

− Public business entity

− Not-for-profit entities with conduit bonds that are traded

− An employee benefit plan that files financial statements with the

SEC

• Fiscal years beginning after 12/15/2019 for all other organizations

• A lease contract conveys the right to use an asset (the underlying

asset) for a period of time in exchange for consideration

• Short-term leases with a term of less than 12 months are exempt and

no longer based on maximum possible term, now aligned with

definition of lease term


ASU 2016-02: Leases

Current* U.S. GAAP (IFRS) IASB FASB

Capital (Finance)

LeasesType A Type A

Operating Leases Type A Type B

All leases are the

same.

Not all leases are the

same. Classification is

based on existing U.S.

GAAP/IFRS.

All leases (more than 12 months) are recognized on the lessee’s

balance sheet

Lessee Model Approaches

* Current is prior to adoption of ASU 2016-02


ASU 2016-02: Leases

• Impacts to Health Care Entities:

− Debt covenants (debt to equity covenant ratios)

− Bonus calculations

− Perception by potential lenders, partners, or others

• Start thinking about

− Inventory of leases

− Pro-forma effects of adoption of ASU 2016-02

− Conversations with lenders to negotiate covenants

− Discussions with your board and other key

stakeholders


NFP Financials – Comment Letters on ED

• Mixed feedback received

• General support for:

− Simplified presentation of net

assets, underwater endowments,

investment return

− Concept of an operating measure

(but no consensus on how to

define it)

− Flexibility in reporting between

different types of NFPs

• Mixed or limited support for:

− Eliminating requirement for

performance indicator for health

care NFPs

− Proposed changes to statement of

cash flows, including realignment

of certain items within statement


NFP Financials

Net asset classification

Liquidity: improving

disclosuresReporting of expenses / Investment

return

Operating measure: improving

disclosures when

reported

Cash flow statement: methods of presenting operating cash flow

Phase I – ASU 2016-14 Phase II

Cash flow statement:

realignment of certain

items

Operating measure: all

other elements, including

intermediate measures

Pending decision whether to wait to

deliberate at same time as Financial

Performance Reporting project for

business entities


ASU 2016-14: NFP Financials

Key areas impacted by the ASU

Net asset classification

LiquidityDisclosures on

Measure of Operations

Reporting of expenses/ investment

return

Cash flow statement

Footnote disclosures


ASU 2016-14: NFP Financials – Net Assets

Current

GAAP Unrestricted

Amount, purpose,

and type of board

designations (new)

Without Donor

Restrictions

Temp.

Restricted

Perm.

Restricted

With Donor Restrictions

Nature and amount

of donor restrictions

Revised

GAAP

Disclosures


ASU 2016-14: NFP Financials – Expenses

Reporting of expenses

• By natural classification either on the face of the

statements or in the notes

• Retain requirement to report by functional classification

on the face of the statements or in the notes

• Require all expenses be reported by function and nature

in one location (face, separate statement, or notes)

• Enhanced disclosures about method(s) used to allocate

costs among program and support functions


ASU 2016-14: NFP Financials – Investment Returns

Investment Returns

• Presented net of external and direct internal investment expenses

• Permitted but not required to disclose investment expenses that are

netted against returns

• Permitted to present net investment return managed differently or

from different services on multiple line items

• No longer required to display the investment return components in

the endowment net asset rollforward

• Precluded from including investment expenses that have been netted

against returns in the functional expenses

• FASB staff is working on implementation guidance for the reporting of

net investment return for entities that present a performance indicator


ASU 2016-14 NFP Financials – Liquidity

Information Useful in Assessing Liquidity

• Qualitative information (in the notes) on how the entity

manages its liquid resources to meet cash needs for

general expenditures within one year of the balance

sheet date

• Quantitative information that communicates the

availability of current financial assets at the balance sheet

date to meet cash needs

• Availability affected by:

− Nature of financial asset

− External limits imposed (donors, laws, contracts)

− Internal limits imposed by governing board

• Example illustrations are included in the ASU


ASU 2016-14: NFP Financials – Cash Flows

Cash Flow Statement

• Allowed to use either the direct or indirect

method of presenting operating cash flows

• If using the direct method, no longer required to

provide the indirect reconciliation of operating

cash flows


ASU 2016-14: NFP Financials – Operating Measure Disclosures

• If not apparent from details on face of the

statements, footnote to describe nature of

reported measure, or items excluded from

operations (No change)

• Examples of classifications within the statement:

− Operating and non-operating

− Expendable and nonexpendable

− Recognized and unrecognized

− Recurring and nonrecurring

− In other ways


ASU 2016-14: NFP Financials

• Effective date: Years beginning after 12/15/2017

• Early adoption: Permitted, but subject to

transition provisions

• Transition:

• For year of adoption, apply all provisions

• For comparative years, apply all provisions on a

retrospective basis, except:

− Analysis of expenses by nature and function

− Disclosures around liquidity and availability of

resources


ASU 2016-15: Statement of Cash Flows

• Classification of Certain Cash Receipts and Cash

Payments

• Effective date:

− Public entities – Years beginning after 12/15/17

− All other entities – Years beginning after 12/15/18 (no

carve out for conduit bond obligors to be early

adopters)

• Early adoption:

− Permitted

− Must then adopt all amendments in same period

• Retrospective transition method


ASU 2016-15: Statement of cash flows

Cash Flow Issue Summary of Amendments

Debt Prepayment or Debt

Extinguishment Costs

Cash payments for debt prepayment or debt

extinguishment costs should be classified as

cash outflows for financing activities

Settlement of Zero-Coupon

Debt Instruments or Other

Debt Instruments with

Coupon Interest Rates That

Are Insignificant in Relation

to the Effective Interest Rate

of the Borrowing

The issuer should classify the portion of the

cash payment attributable to the accreted

interest related to the debt discount as cash

outflows for operating activities, and the portion

of the cash payment attributable to the

principal as cash outflows for financing

activities




Contingent Consideration

Payments Made after a

Business Combination

Cash payments not made soon after the acquisition

date of a business combination by an acquirer to settle

a contingent consideration liability should be separated

and classified as cash outflows for financing activities

and operating activities.

Cash payments up to the amount of the contingent

consideration liability recognized at the acquisition date

(including measurement-period adjustments) should

be classified as financing activities; any excess should

be classified as operating activities.

Cash payments made soon after the acquisition date

of a business combination by an acquirer to settle a

contingent consideration liability should be classified

as cash outflows for investing activities.




Proceeds from the

Settlement of Insurance

Claims

Cash proceeds received from the settlement of

insurance claims should be classified on the basis of

the related insurance coverage (that is, the nature of

the loss). For insurance proceeds that are received in

a lump sum settlement, an entity should determine the

classification on the basis of the nature of each loss

included in the settlement.

Proceeds from the

Settlement of Corporate-

Owned Life Insurance

Policies, including Bank-

Owned Life Insurance

Policies

Cash proceeds received from the settlement of

corporate-owned life insurance policies should be

classified as cash inflows from investing

activities

The cash payments for premiums on corporate-owned

policies may be classified as cash outflows for

investing activities, operating activities, or a

combination of investing and operating activities




Distributions Received from

Equity Method Investees

When a reporting entity applies the equity method, it should

make an accounting policy election to classify distributions

received from equity method investees using either of the

following approaches:

Cumulative earnings approach: Distributions received are

considered returns on investment and classified as cash

inflows from operating activities, unless the investor’s

cumulative distributions received less distributions received in

prior periods that were determined to be returns of investment

exceed cumulative equity in earnings recognized by the

investor. When such an excess occurs, the current-period

distribution up to this excess should be considered a return of

investment and classified as cash inflows from investing

activities.

Nature of the distribution approach: Distributions received

should be classified on the basis of the nature of the activity or

activities of the investee that generated the distribution as

either a return on investment (classified as cash inflows from

operating activities) or a return of investment (classified as

cash inflows from investing activities) when such information is

available to the investor.




Beneficial Interests in

Securitization Transactions

A transferor’s beneficial interest obtained in a

securitization of financial assets should be disclosed

as a noncash activity, and cash receipts from

payments on a transferor’s beneficial interests in

securitized trade receivables should be classified as

cash inflows from investing activities.

Separately Identifiable Cash

Flows and Application of the

Predominance Principle

The classification of cash receipts and payments that

have aspects of more than one class of cash flows

should be determined first by applying specific

guidance in GAAP. In the absence of specific

guidance, an entity should determine each separately

identifiable source or use within the cash receipts and

cash payments on the basis of the nature of the

underlying cash flows. An entity should then classify

each separately identifiable source or use within the

cash receipts and payments on the basis of their

nature in financing, investing, or operating activities.


ASU 2016-18: Restricted Cash

• ASU 2016-18 eliminates diversity in practice in classification and

presentation of restricted cash in statement of cash flows

• Requires amounts generally described as restricted cash and cash

equivalents to be included with cash and cash equivalents when

reconciling beginning and ending cash and cash equivalents in the

statement of cash flows

• Requires disclosure of information about nature of restrictions on

cash, cash equivalents and amounts generally described as

restricted cash and cash equivalents

• When cash, cash equivalents and amounts generally described as

restricted cash and cash equivalents are presented in more than one

line in the statement of financial position, requires presentation on

face of statement of cash flows (or footnote disclosure) where such

amounts are reported in the statement of financial position


ASU 2016-18: Restricted Cash


− Public business entities: fiscal years beginning after

12/15/17 and interim periods within those years

− Other than public business entities: fiscal years

beginning after 12/15/18 and interim periods within

fiscal years beginning after 12/15/19

• Retrospective application required

• Early adoption is permitted. If early adopted in an

interim period, adjustments should be reflected

as of the beginning of the fiscal year that

includes the interim period


GASB UPDATE


ACCOUNTING UPDATE >


GASB Statement 72 – Fair Value Measurement and Application

Effective: December 31, 2016

Key Definitions/Terms

• Unit of account

− Stand-alone asset or liability or a group of assets or

liabilities

− Determined by the particular standards that require

fair value measurement

• Price

− Not adjusted for transaction costs



Key Definitions/Terms

Investment

• A security or other asset that a government holds primarily for the

purpose of income or profit and with a present service capacity that is

based solely on its ability to generate cash or to be sold to generate

cash

− Held primarily for income or profit—acquired first and foremost

for future income and profit

− Service capacity refers to a government’s mission to provide

services

• When market information is not available

− Estimate the price at which an orderly transaction would take

place between market participants at that date (for example, a

valuation technique)



• Apply valuation technique(s) that best represents fair

value in the circumstances—market approach, cost

approach, and income approach

• Inputs:

− Level 1: quoted prices (unadjusted) in active markets

for identical assets or liabilities, most reliable

− Level 2: quoted prices for similar assets or liabilities,

quoted prices for identical or similar assets or

liabilities in markets that are not active, or other than

quoted prices that are observable

− Level 3: unobservable inputs, least reliable



12/31/2016 1 2 3

Investments

Domestic equity securities 12,000$ 12,000$ -$ -$

Internation equity securities 14,000 14,000 - -

U.S Treasury and Agency Obligations 7,000 7,000 - -

U.S. Corporate Bonds 7,900 4,500 3,400 -

Asset Backed Securities 11,000 - 11,000 -

International REITs 9,000 - - 9,000

Total 60,900$ 37,500$ 14,400$ 9,000$

Level

Example of fair value classification table:


GASB Statement 79 – Certain External Investment Pools and Pool Participants

• Effective December 31, 2016

• This Statement addresses accounting and financial

reporting for certain external investment pools and pool

participants.

• Specifically, it establishes criteria for an external

investment pool to qualify for making the election to

measure all of its investments at amortized cost for

financial reporting purposes.

• An external investment pool qualifies for that reporting if it

meets all of the applicable criteria established in this

Statement



• An external investment pool may elect to

measure all its investments at amortized cost for

financial reporting purposes if it meets all of the

following criteria :

− Transacts with participants at stable net asset value

per share –$1.00 per share

− Meets certain portfolio maturity requirements

− Meets certain portfolio quality requirements

− Meets certain portfolio diversification requirements

− Meets certain pool liquidity requirements

− Meets shadow pricing requirements



• If a pool meets the criteria in this Statement and

measures its investments at amortized cost, its

participants also should measure their positions in the

pool at amortized cost

• If a pool does not meet the criteria or elects to measure

its investments at fair value, its participants also should

measure their positions in the pool at fair value

• DISCLOSE: Fair value measurement

• DISCLOSE: The presence of any limitations or

restrictions on participant withdrawals, such as

redemption notice periods, maximum transaction

amounts, and the pools’ authority to impose liquidity fees

or redemption gates


GASB Statement 83 – Certain Asset Retirement Obligations

• Effective December 31, 2019

• Addresses accounting and financial reporting for certain

asset retirement obligations (AROs).

• An ARO is a legally enforceable liability associated with

the retirement of a tangible capital asset.

• A government that has legal obligations to perform future

asset retirement activities related to its tangible capital

assets should recognize a liability based on the guidance

in this Statement.

• Establishes criteria for determining the timing and pattern

of recognition of a liability and a corresponding deferred

outflow of resources for AROs.


GASB Statement 83 – Certain Asset Retirement Obligations


Exposure Draft – Leases

• Projected timeline

− Exposure draft approved – January 2016

− Final statement expected – May 2017

• Different approach than FASB ASU

• Single model

− No classification of leases into operating/capital or

other categories

− Underlying assumption that leases are financings

− Exceptions: short-term leases and those that transfer

ownership



How should leases be initially recorded?

Lessee

• ASSET - Intangible asset (right to use)—value of lease liability plus

prepayments and initial direct costs that are ancillary to place asset

in use

• LIABILITY - Present value of future lease payments

• DEFERRED INFLOW - NA

Lessor

• ASSET - Lease receivable (generally including same items as lessee

liability). Continue to report leased asset

• LIABILITY - NA

• DEFERRED INFLOW - Equal to lease receivable plus any cash

received up front that relates to a future period



How should leases be subsequently recorded?

Lessee

• ASSET - Amortize over shorter of useful life or lease term

• LIABILITY - Reduce by lease payments (less amount of interest

expense)

• DEFERRED INFLOW - NA

Lessor

• ASSETS – a) Depreciate leased asset. b) Reduce receivable by

lease payments

• LIABILITY - NA

• DEFERRED INFLOW - Recognize revenue over the lease term on a

systematic and rational basis


AUDITING UPDATE



PROPOSED/RECENT STATEMENTS


AUDITING UPDATE >


Proposed Statement on Auditing Standards

Auditor Involvement With Exempt Offering Documents

• Certain securities are exempt from registration under the 1933 Act,

but remain subject to the antifraud provisions of that act which

prohibit misrepresenting or omitting material facts in an offering or

sale of securities

• SEC cannot directly regulate such offerings, so there is no SEC

requirement for auditor involvement with exempt offerings

• AICPA audit guides provide guidance when an auditor’s report was

included in municipal security offering document

• During the accounting standards codification process, the clarified

auditing standards revised certain wording such that the clarified

standards do not address what actions constitute auditor

“involvement” nor do they define auditor requirements




• Proposed standard includes performance requirements

when the auditor is involved with an exempt offering

document, as defined

• Involvement is determined by a two-benchmark model:

− The auditor’s report on the financial statements or the auditor’s

review report on interim financial information is included or

incorporated by reference

− The auditor performs one or more activities with respect to the

document

• Auditors are not precluded from becoming voluntarily

involved with an offering document in other

circumstances




Specified activities that trigger involvement:

• Assisting with preparing information included in the document

• Reading a draft of the offering document at the entity’s request

• Issuing a comfort or similar letter in accordance with AU-C section

920, Letters for Underwriters and Certain Other Requesting Parties,

or an attestation engagement report in lieu of a comfort or similar

letter on information included in the offering document

• Participating in due diligence discussions with underwriters,

placement agents, broker-dealers, or other financial intermediaries in

connection with an offering document




Specified activities that trigger involvement:

• Issuing an attestation report on information relating to the offering

• Providing written agreement (for example, an inclusion letter) for the

use of the auditor’s report in the offering document

• Signing a copy of the auditor’s report for inclusion in the offering

document




There are three issues in the proposed standard for which

commenters were asked to provide feedback (comment

period ended October 13, 2016):

• Issue 1 – The types of offerings to be included in the scope of the

standard

• Issue 2 – Are the activities listed on the preceding slides activities

that should trigger involvement, or are there additional activities that

should be considered triggers

• Issue 3 – Should the auditor be required to perform subsequent

event procedures when the auditor is involved with an exempt

offering




• If the auditor is deemed involved:

− The auditor should perform the procedures described in AU-C

section 720, Other Information in Documents Containing Audited

Financial Statements, on the offering document

− When performing the procedures the auditor should determine

that the auditor’s name is not being used in a way that indicates

that the auditor’s responsibility is greater than the auditor intends

− The auditor should perform the certain of the procedures

described in AU-C section 560, Subsequent Events and

Subsequently Discovered Facts


Recent Statement on Auditing Standards

SAS 129 – Letter for Underwriters and Certain

Other Requesting Parties

• Clarifies that in addition to having no obligation to accept

a comfort letter engagement, auditor is not required to

provide comfort on every matter requested

• Provides the auditor with more flexibility in the matter in

which the communication can be made

• Group auditor must read comfort letters issued by each

component auditor

• Provides example comfort letter illustrating negative

assurance


QUESTIONSAND ANSWERS


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