Accounting and Auditing Supplement No. 3 2017 · 2020-04-26 · FASB Accounting Standards Updates...

Accounting and Auditing Supplement No. 3–2017

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Chapter 1

ACCOUNTING AND AUDITING

SUPPLEMENT NO. 3 2017

INTRODUCTION

This update includes the more significant accounting and auditing developments from July 1, 2017, through September 30, 2017. Included in this update are standard-setting and project activities of the Auditing Standards Board (ASB), Accounting and Review Services Committee (ARSC), Professional Ethics Executive Committee (PEEC), FASB, PCAOB, and the SEC.

These developments, although believed to be complete at the date at which they were prepared for this course material, may not cover all areas within accounting and auditing relevant to all users of this

g Center for additional -setting activity in the

areas of accounting and financial reporting, audit and attest, and compilation, review, and preparation.

This update may refer you to other sources of information, in which case you are strongly encouraged to review that information if relevant to your needs.

After completing this course, you should be able to identify some of the more significant accounting and auditing developments from July 1, 2017, through September 30, 2017.

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Audit and Accounting Final and Proposed Standards

FINAL STANDARDS, INTERPRETATIONS, AND REGULATIONS

AICPA

Auditing Standards Board

Auditing, Attestation, and Quality Control Standards and Interpretations

Statement on Auditing Standards No 133, Auditor Involvement With Exempt Offering Documents

Issue Date

July 2017

Background

The Auditing Standards Board (ASB) released a new standard that addresses the responsibilities of auditors when financial statements the firm audited (or interim financial information the firm reviewed) are included or incorporated by reference in an offering document related to securities that are exempt from registration under the Securities Act of 1933 (for example, private placement or crowdfunding offering) or franchise offerings regulated by the Federal Trade Commission (FTC) or state franchise laws

SEC oversees a significant regulatory framework for publicly traded offerings, setting rules on what types of information and documents must be filed and when, and on auditor involvement. Some offerings, such as municipal securities, franchise offerings, crowdfunding, Regulation A offerings, and short-term commercial paper with a maturity of nine months or less are exempt from SEC registration rules. An exhibit in the new standard includes a list of exempt offerings. The explosive growth in these types of exempts offerings led the ASB to undertake standard-setting for these situations to promote consistency in practice and protect the public interest.

The auditor must apply the new Statement on Auditing Standards (SAS) when he/she/the firm is Thus, the SAS clarifies what it means to be involved and if the auditor

Currently, the AICPA State and Local Governments, Not-for-Profit Entities, and Health Care Entities audit and accounting guides set forth best practices, but the guides lack the authority as an auditing standard. The new SAS is based on many of the practices cited in the audit guides, thus auditors involved with municipal securities offerings may not have to significantly change their practices. However, auditors involved with other types of exempt offerings (such as, franchise agreements) will likely experience a change in practice due to the expanded scope of the SAS.

Main Provisions Under the standard, the auditor is involved if both criteria below are met.

1. The report on financial statements is included in an exempt offering document. 2. The auditor performs any of the activities defined in paragraph 8(b) of the SAS with respect to an

exempt offering document, for example, reads or assists the entity in preparing information included in the exempt offering document.


If the auditor is involved in the offering, that is, meets both criteria, the auditor should read other information related to the offering and perform certain subsequent event procedures. The objectives of doing so are to respond appropriately if (i) information in the exempt offering document could undermine the credibility of the becomes aware of previously unknown facts that may have caused the auditor to revise the financial statements. The auditor should perform these procedures at or shortly before the date of distribution, circulation, or submission of the exempt offering document.

The auditor may be unaware of an offering, which is not uncommon (typically, no laws or regulations require auditors to undertake procedures related to an exempt offering document or prohibit the issuer from including

he auditor. Therefore, the SAS describes triggering activities that must be met for the SAS to apply, that is, the auditor should take an action related to the offering to be involved (see paragraph 8(b) of the SAS). If a client issues an exempt security uany of the triggering activities, and therefore would not be considered involved.

Practice Note Some firms include a requirement in the terms of their engagement letter for clients to alert them when they are going to market. This engagement clause would not in and of itself constitute involvement. However, if a client alerts the auditor about including their report in the offering and, for example, asks the auditor to read the offering document, issue a comfort letter or take part in any of the other stated triggering activities, the auditor should comply with the SAS.

Effective Date

The new SAS will be effective for exempt offering documents where the auditor is involved, that are initially distributed, circulated, or submitted on or after June 15, 2018. Early application is permitted.

Accounting and Review Services Committee The Accounting and Review Services Committee did not issue any new or revised standards or interpretations during this period.

Professional Ethics Executive Committee The Professional Ethics Executive Committee did not issue any new or revised standards or interpretations during this period.

FASB

Accounting Standards Updates

Accounting Standards Update No. 2017-11 Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception


Issue Date

July 2017

Background

The board undertook this project to address narrow issues identified as overly complex in applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity.

Part I - addresses the complexity and cost of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced based on the pricing of future equity offerings. Current accounting guidance creates cost and complexity for certain entities issuing financial instruments with down round features that require fair value measurement of the entire instrument or conversion option. Stakeholders report these actions creating significant reporting burdens and income statement

ing that this approach does not reflect the economics of the down round feature, which exists to protect certain investors from decli

Part II - addresses the difficulty of navigating FASB ASC 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification®.

Main Provisions/Significant Changes Under current GAAP, if an equity-linked financial instrument with a down round feature meets the definition of a derivative under FASB ASC 815, Derivatives and Hedging, the instrument (or embedded feature) is whether it qualifies for a scope exception from derivative accounting. Generally, for warrants and conversion options embedded in financial instruments that are deemed to have a debt host, a down

reporting entity is required to classify the freestanding financial instrument or the bifurcated conversion option as a liability, which the entity must measure at fair value initially and at each subsequent reporting date.

This ASU revises the guidance for instruments with down round features in FASB ASC 815-40, Derivatives and Hedging , under which an entity still is required to determine whether instruments would be classified in equity in determining whether they qualify for the scope exception. If they do qualify:

Freestanding instruments with down round features are no longer classified as liabilities and Embedded conversion options with down round features are no longer bifurcated.

In addition:

For entities that present EPS in accordance with FASB ASC 260, and when the down round feature is included in an equity-classified freestanding financial instrument, the value of the effect of the down round feature is treated as a dividend when it is triggered and as a numerator adjustment in the basic EPS calculation.

Convertible instruments are unaffected by the FASB ASC 260 amendments in this update.

The amendments in Part II of this ASU replace the indefinite deferral of certain guidance in FASB ASC 480 with a scope exception. This improves the readability of the codification and reduces complexity associated with navigating the guidance in FASB ASC 480.


Effective Date

Public business entities the amendments in Part I of this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

All other entities the amendments in Part I of this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.

Accounting Standards Update No. 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities

Issue Date

August 2017

Background

Hedge accounting requirements in current GAAP sometimes do not permit an entity to properly recognize the economic results of its hedging strategies in its financial statements. Stakeholders maintained that improvements to the hedge accounting model are needed to facilitate financial reporting

ed results often is difficult to understand and interpret. The board issued this ASU with the objective of improving the financial reporting of hedging relationships to better portray the

nancial statements. This ASU makes certain other targeted improvements to simplify the application of the hedge accounting guidance in current GAAP based on the feedback received from preparers, auditors, users, and other stakeholders.

Main Provisions/Significant Changes The amendments in this ASU

better through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. For example, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged

item in the financial statements. permit hedge accounting for risk components in hedging relationships involving nonfinancial risk

and interest rate risk. change the guidance for designating fair value hedges of interest rate risk and for measuring the

change in fair value of the hedged item in fair value hedges of interest rate risk. align the recognition and presentation of the effects of the hedging instrument and the hedged item

hedging strategies. require an entity to present the earnings effect of the hedging instrument in the same income

statement line item in which the earnings effect of the hedged item is reported. require the entity to apply certain recognition and presentation guidance for qualifying hedges.


Effective Dates

Public business entities the amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.

All other entities the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted in any interim period after issuance of the ASU.

All transition requirements and elections should be applied to hedging relationships existing (that is, hedging relationships in which the hedging instrument has not expired, been sold, terminated, or exercised or the entity has not removed the designation of the hedging relationship) on the date of adoption. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption (that is, the initial application date).

KNOWLEDGE CHECK

1. D Company under SEC Regulation A.

SAS No. 133?

a. b. Rose CPA has no knowledge that D Company has included its report in the offering. c. Rose CPA helps D Company prepare the information included in the offering. d. D Company asks Rose CPA to read the offering document.

Accounting Standards Update No. 2017-13 Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)

Issue Date

September 2017

Background

Under FASB ASC 606 and FASB ASC 842, there is one adoption date for public interest entities (PBEs) and another (later) adoption date for non-PBEs.

The ASC master glossary defines a PBEor furnish financial statements, or [that] does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing) definition of a public business entity solely because its financial statements or financial information is

purposes of financial statements that are filed or furnish

In response to concerns raised by accountants, registrants, and others, the SEC staff provided relief to registrants that are required to include financial statements or financial information of other reporting entities in their SEC filinEmerging Issues Task Force, the use of the PBE definition in the adoption-date criteria would have required certain nonpublic companies to apply the public-company adoption dates under ASC 606 and ASC 842.


While the staff announcement is written in the context of specified PBEs, SEC filers that include financial statements or financial information prepared by specified PBEs in their own filings will be the principal beneficiaries of the relief.

Main Provisions/Significant Changes Specifically, the SEC staff announced that it would not object to elections by certain PBEs to use the non- SC 606) and leases (FASB ASC 842).

The ability to use non-PBE effective dates for adopting the new revenue and leases standards is limited to the subset of PBEs that would otherwise not meet the definition of a PBE except for a requirement to include its f

SEC

The SEC did not release any new or revised regulations in this period.

PCAOB

The PCAOB did not release any new or revised standards or guidance in this period.

PROPOSED STANDARDS, INTERPRETATIONS, AND REGULATIONS

AICPA

Proposed Auditing, Attestation, or Quality Control Standards

Auditing Standards Board

The Auditing Standards Board did not propose any new or revised standards or interpretations during this period.

Accounting and Review Services Committee

Proposed Statement on Standards for Attestation Engagements Selected Procedures (Prepared by the AICPA Accounting and Review Services Committee for comment from persons interested in attestation and reporting issues)

Issue Date

September 1, 2017

Comment Deadline/Effective Date

Comments on the proposed auditing standard are due December 1, 2017.

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The proposed SSAE would be effective for selected procedure reports dated on or after May 1, 2019. This effective date is provisional but will not be earlier than May 1, 2019. Early implementation will be permitted.

Background The Accounting and Review Services Committee (ARSC) and the Auditing Standards Board (ASB) (collectively the “committees”) determined there are opportunities in practice to expand the practitioner’s ability to perform procedures and report in a procedures and findings format beyond that currently provided by AT-C section 215, Agreed-Upon Procedures Engagements. The committee collaborated to issue this proposed new standard.

Main Provisions/Significant Changes

Concepts From AT-C section 105, Concepts Common to All Attestation Engagements

The ARSC drafted the proposal so that respondents would be able to see all requirements that are proposed to apply to a selected procedures engagement (including AT-C section 105) in one place. If later, the proposed standard is issued as final, the AT-C section 105 elements incorporated in this exposure draft would be removed and conforming changes made so that AT-C section 105 applies to selected procedures engagements (in addition to examinations, reviews, and agreed-upon procedures engagements). Conforming changes to this section would include:

Eliminating the prerequisite that an attestation engagement is based on a party other than the practitioner making an assertion about whether the subject matter is measured or evaluated in accordance with suitable criteria (the proposed standard for selected procedures engagements would not include a requirement for the practitioner to request an assertion from any party).

The AT-C section 105 elements incorporated in the proposed standard that include certain revisions in the context of a selected procedures engagement, including the following: – Definitions – Compliance With This Proposed Standard – Relationship of This Proposed Standard to Quality Control Standards – Acceptance and Continuance – Preconditions for a Selected Procedures Engagement – Acceptance of a Change in the Terms of the Engagement – Professional Skepticism and Professional Judgment – Using the Work of an Other Practitioner – Documentation – Engagement Quality Control Review

Nature of Service and Development of Procedures

The proposed standard would provide greater flexibility than AT-C section 215 allowing practitioners, the engaging party, another party, or a combination of these parties (including during the engagement), to develop the procedures. The proposed standard would also require the engaging party to determine the intended purpose of the report and the engaging party would acknowledge in writing their awareness of the actual procedures performed. A significant departure from current practice under AT-C section 215, the users of the selected procedures report would make their own determinations about whether the procedures performed were sufficient for their purposes.


Use of the Report

The ARSC believe that permitting general-use procedures and findings reports would allow practitioners the flexibility to be responsive to client requests and the neproposed standard does not require that the report include an alert restricting use of the report to specified parties unless:

the practitioner determines that the criteria used to evaluate the subject matter are appropriate only for a limited number of parties who either participated in their establishment or can be presumed to have an adequate understanding of the criteria or available only to the specified parties,

the practitioner decides to restrict use of the report to a specific class of users, or t

Requesting an Assertion from the Responsible Party

The proposed standard does not require the practitioner to request or obtain an assertion from any party, thus permitting the practitioner to perform the initial measurement or evaluation of the subject matter. Currently, under AT-C section 215, when the responsible party does not provide the practitioner with a written assertion, the practitioner is required to disclose that fact in the report. In practice, the practitioner often is unable to obtain the assertion, especially when the engaging party and responsible party are not the same, or where the engaging party is unable to provide an assertion because that party has not performed its own assessment of the subject matter against specified criteria.

Other Changes

The proposed selected procedures standard is based on many market-driven factors, including whether the engaging party is required to or is requested to take responsibility for the measurement or evaluation of the subject matter in accordance with the criteria; the determination of which procedures to perform; agreement on the sufficiency of the procedures; and whether the practitioner wishes to accept such an engagement.

Proposed Statement on Standards for Accounting and Review Engagements Omnibus Statement on Standards for Accounting and Review Services 2018

Issue Date

September 14, 2017


Comments on the proposed auditing standard are due December 14, 2017.

Except for the technical correction to AR-C section 90, which will be effective upon issuance, the proposed SSAE would be effective for compilations and reviews of financial statements for periods ending on or after June 15, 2019 (this date is provisional but is the earliest possible effective date).

Background

The omnibus proposal adds new guidance for international reporting issues, aligns section AR-C section 90 with Statement on Standards No. 132, Going Concern (issued earlier this year), moves, withdraws, and revises certain paragraphs and includes certain technical corrections.



International Reporting Issues

The proposal adds a new section (AR-C section 100) that addresses those circumstances in which an accountant is engaged to perform a compilation or review of financial statements in either of the following circumstances:

The financial statements have been prepared in accordance with a financial reporting framework generally accepted in another country not adopted by a body designated by the Council of the AICPA (Council) to establish GAAP

The compilation or review is to be performed in accordance with both SSARSs and another set of compilation or review standards

The term financial reporting framework generally accepted in another country does not include financial statements prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). (AR-C sections 80 and 90 for compilations and reviews, respectively, apply in those cases.) However, the term does apply to financial statements prepared in accordance with a jurisdictional variation of IFRS.

Consideration of Going Concern in a Review Engagement

The proposed SSARS revises AR-C section 90 to include a specific written representation regarding disclosure of all information relevant to the use of the going concern assumption in the financial statements, which is consistent with ISRE 2400 (Revised), Engagements to Review Historical Financial Statements. The proposed SSARS harmonizes in a SSARSs review with those of AU-C section 930, Interim Financial Information.

Statement on Auditing Standards No. 132, Going Concernreview of interim financial information. In summary, in an interim review performed in accordance with AU-C section 930, when the financial statements are prepared in accordance with GAAP, the auditor must keeping with the current standards, in a SSARSs review, the accountant only would be required to perform procedures if, due to the performance of review procedures, evidence, indicating that there may be a going concern issue. The auditing standard also requires an emphasis-of-mat interim review report in certain circumstances. However, in line with extant standards, the accountant is not required to include an emphasis-of-matter paragraph with respect to a going concern uncertainty in a SSARSs review report.

Amendment to Requirements When Referencing the Work of Other Accountants in Review Report

-C section 90 that will:

Preclude the accountant from referencing in the review report, the review or audit report of other

Provide guidance when the accountant refers in the review report to the review or audit report of

review or audit is performed in accordance with standards other than SSARSs or auditing standards generally accepted in the United States (GAAS)


Require that the accountant of the reporting entity communicate with the other accountants and ascertain that the other accountants understand the ethical requirements that are relevant to the engagement and are independent

Provide review reporting requirements and guidance when the accountant refers to the review or audit of other accountants who review or audit the financial statements of a significant component that are prepared using a different financial reporting framework from that used for the financial statements of the reporting entity

Professional Ethics Executive Committee

Proposed New Interpretation of the Independence Rule Long Association of Senior Personnel with an Attest Client

Issue Date

July 14, 2017

Effective Date

The effective date of the new interpretation, if adopted, would be the last day of the month in which the new standard is published in the Journal of Accountancy.

Background

In formulating this proposal, the AICPA's Professional Ethics Executive Committee (PEEC) considered Long Association of Senior Personnel (Including Partner Rotation) with an Audit Client, a similar standard that the International Ethics Standards Board for Accountants (IESBA) revised in January 2017. As a matter of its membership in the International Federation of Accountants (IFAC), of which IESBA is the ethics standard-setting arm, the AICPA is obligated to apply ethics and other professional standards that are, at a minimum, as stringent as the IESBA Code. If adopted, the new interpretation would require members to consider possible familiarity threats that may arise when senior members of an audit team who maintain regular contact with attest client management or those charged with governance serve an audit engagement for an extended period. The PEEC's proposal departs in certain ways from the IESBA standard.

Main Provisions/Significant Changes The AICPA proposal takes a purely conceptual framework approach, which requires members to evaluate threats to their independence and if a threat is significant, apply appropriate safeguards to eliminate or reduce the threat to an appropriately low level. The proposed standard provides members various factors to consider the significance of a familiarity threat and sample safeguards, including second review of a partner's work, changing a partner's role on an engagement, and partner rotation. On partner rotation, neither a maximum time frame on the engagement nor a specific "time-out" period is prescribed. The approach is consistent with the IESBA's approach for non-public interest entities. (In the case of the AICPA Code of Professional Conduct, the independence rule requires auditors to follow applicable SEC partner rotation requirements, which prescribe specific limits and time frames that may also apply to banking clients subject to FDICIA and other entities.)

The AICPA proposal cites only the familiarity threat to independence (that is, the threat that, due to a long or close relationship with a client, a member will become too sympathetic to the interests or too accepting of the work or product) while the IESBA standard cites two possible threats that may arise due to long association with an attest client: familiarity and self-interest. As for the latter, it states that, "A self-longstanding client or an interest in maintaining a close personal relationship with a member of senior


judgment the interpretation should also address the potential self-interest threats that may arise when senior audit team members serve over a prolonged period.

Also, while the IESBA's revised interpretation applies to all team members, the AICPA proposed rule applies only to senior audit team members. The PEEC's rationale in narrowing the scope of the team members subject to the rule was that only senior members should be making the significant decisions and judgment calls that impact the audit. And, to the extent non-senior members of the team get involved in decision-making, their work is subject to review by senior team members. Thus, the proposal does not apply to junior members of an attest team.

The conceptual framework approach for evaluating independence has been required for several years, but if this proposed interpretation is adopted, it would for the first time require members to specifically address possible threats to independence resulting from long association with an attest client.

Proposed Interpretation of the Independence Rule and Other Guidance State and Local Government Entities

Issue Date

July 7, 2017


Comments on the proposed interpretation are due October 16, 2017.

The effective date of the new interpretation, if adopted, engagements covering periods beginning on or after June 15, 2019, with earlier application allowed.

Background

In this exposure draft, the PEEC proposed revisions to nce interpretation that determines when a member

needs to be independent of a state or local governmental (SLG) entity that is related to his or her financial statement attest client. Although the c 1.224.010) that is applicable to commercial entities, the PEEC did not believe that the existing interpretation effectively identified relationships requiring independence in the SLG sector because of the fundamental differences between the two sectors. For example:

Financial reporting objectives in the commercial sector use FASB definitions of control and

of financial accountability to identify Although a

primary government may not have control or significant influence (as defined by FASB) over an entity, that entity may still be considered an affiliate in the SLG context.

A fund, which is not a separate legal entity, is a fiscal and accounting entity with a self-balancing set of accounts that are segregated for carrying on specific activities or attaining certain objectives.

Component units are legally separate entities. Primary governments may not have control or significant influence over component units in the same way that a commercial sector entity has control over its subsidiaries. Component units that are included in a governmental financial reporting entity can operate autonomously from each other, for example, by having separate governing boards, accounting systems, financial reporting systems, operations, and even separate strategic directions. Component units may interact with the primary government in an adversarial


fashion that would be quite unusual in a corporate environment. Officials at a component unit may not report up an organizational structure to someone at the primary government as they would in a corporate environment.

Main Provisions/Significant Changes The most significant provision is that funds and component units are required to be included in the financial reporting entity of the financial statement attest client See the discussion that follows.

As in the current interpretation, members must be independent of funds and component units that are

rules, members do not need to be independent of funds and component units that are included in the financial reporting entity of the financial statement attest client when the member explicitly states reliance

not always reduce threats to an acceptable level when the:

fund or component unit is material to the financial reporting entity, and primary government has more than minimal influence over the accounting or financial reporting

process of the fund or component unit.

Funds and Component Units Excluded From the Financial Reporting Entity

The extant interpretation does not provide any independence guidance related to funds and component units that are excluded from the financial reporting entity but are required to be included under the applicable framework (for example, GAAP, regulatory, or cash basis).

The PEEC proposes incorporating guidance when a material fund or component unit is excluded from

framework to be included in that financial reporting entity. In this situation, PEEC believes members

component unit if the primary government has more than minimal influence over its accounting or financial reporting process.

Not Subject to Attest Procedures Exception The a member may apply to all affiliates (other than those defined as type a and b in the proposal), which permits firm to provide nonattest services that would impair independence. The condition for applying the exception is that financial statement attest procedures (that is, nonattest services do not create a self-review threat with respect to the financial statement attest client).

Financial Statement Attest Client Is Required to Be Included in Another Financial Reporting Entity as a Fund or Component Unit and the Primary Government of That Financial Reporting Entity Is Not a Financial Statement Attest Client


Financial Statement Attest Client Is a Material Fund or Component Unit

Under the current interpretation, when the member does not audit the primary government, independence is not required of entities included in the financial reporting entity that the member does not audit. However, covered members and their family members are prohibited from having a key position within the primary government. The PEEC believes there could be circumstances in which a member has a close personal relationship that creates threats that are not at an acceptable level but that these situations are more likely to occur in circumstances described in the proposal. The PEEC proposes members evaluate these matters

KNOWLEDGE CHECK

2. s proposed independence standard entitled, Long Association of Senior Personnel with an Attest Client, which action would be required of Kim or other members of his firm?

a. Kim would need to consider whether threats to his independence caused by long association with G Company were significant.

b. Kim would be required to rotate off the G Company engagement after five years. c. A quality review partner should review any significant judgments Kim made during the

engagement. d. A senior member of management should review the entire engagement team for conflicts of

interests.

FASB

Proposed ASU

Proposed Accounting Standards Update 2017-270 Not-for-Profit Entities (Topic 958)Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made

Issue Date

August 3, 2017

Comment Deadline

November 1, 2017

Background

This proposed update seeks to clarify and improve the scope and the accounting guidance for contributions received and made and would assist entities in

evaluating whether transactions should be accounted for as contributions (nonreciprocal transactions) within the scope of FASB ASC 958, Not-for-Profit Entities, or as exchange (reciprocal) transactions subject to other guidance and

distinguishing between conditional and unconditional contributions.


Stakeholders have found applying the current guidance to be challenging, leading to diverse practice depending on the guidance applied. The amendments in FASB ASU. 2014-09, Revenue from Contracts with Customers (Topic 606) highlight and intensify these issues with additional disclosure requirements and the elimination of certain limited exchange transaction guidance. Diversity in practice occurs for grants and other similar contracts from various types of resource providers, but it is most prevalent for government grants and contracts as the guidance does not address the question of whether the government is considered a customer.

Another issue is that once a transaction is deemed to be a contribution, stakeholders have noted that it can be difficult to distinguish conditional from unconditional contributions, particularly when an entity receives assets with certain stipulations but no specified return policy for when the stipulations are not met. These assessments lead to diversity in practice and different conclusions can affect the timing of revenue recognized.

Note: Although these matters are most significant to not-for-profit entities, this update would apply to all entities.

Main Provisions

Exchange Transaction or Contribution?

To clarify and improve current guidance about whether a transfer of assets is an exchange transaction or a contribution, this update would clarify how an entity determines whether a resource provider is participating in an exchange transaction. In doing so, the entity would evaluate whether the resource provider is receiving commensurate value in return for the resources transferred by considering the following:

A resource provider (including a private foundation, a government agency, or other) is not synonymous with the general public (in other words, benefit received by the public from the transfer of assets is not equivalent to commensurate value received by the resource provider).

n or the positive sentiment from acting as a donor does not constitute commensurate value received by a resource provider.

This update would clarify that, consistent with current GAAP, if a resource provider (for example, a government agency) is not receiving commensurate value for the resources provided, the entity must determine whether a transfer of assets represents payment from a third-party payer on behalf of an existing exchange transaction between the recipient and an identified customer. If so, other guidance (for example, FASB ASC 606) would apply.

Conditional vs Unconditional Contribution

This proposed update would also require an entity to determine whether a contribution is conditional based on:

whether an agreement includes a barrier that must be overcome and either a right of return of assets transferred or a right o Either a right of return of the assets transferred or a right of release of the promisor from its

obligation to transfer assets must be determinable from the agreement (or another document referenced in the agreement).

The presence of both a barrier and a right of return or a right of release indicates that a recipient is not entitled to the transferred assets (or a future transfer of assets) until it has overcome the barriers in the agreement.


Once a contribution has been deemed unconditional, an entity would then consider whether the contribution is restricted based on the current definition of the term donor-imposed restriction.

The proposed update would provide a more robust framework to determine when a transaction should be accounted for as a contribution under FASB ASC 958-605 (for example, government grant provided

us an exchange transaction accounted for under other guidance, such as, a government agency provides monies to a NFP and in return, the NFP provides services directly to the government agency). The proposed amendments also would provide additional guidance about how to determine whether a contribution is conditional or unconditional.

The proposed amendments would provide additional clarifying guidance for the evaluation of such arrangements, resulting in greater consistency in application of the guidance, and make the accounting for contributions more operable. The proposed update could result in more grants and contracts being accounted for as contributions (often conditional contributions) than under current GAAP. For this reason, clarifying the guidance about whether a contribution is conditional or unconditional is important because such classification affects the timing of contribution revenue recognition. Recipients of conditional promises to give would be required to comply with current disclosure requirements in paragraph 958-310-50-4. The proposed update would apply to both contributions received by a recipient and contributions made by a resource provider.

Transition/Effective Date This proposed update would be applied on a modified prospective basis in the first set of financial statements following the effective date to agreements that are either:

Not completed as of the effective date or Entered into after the effective date.

The amendments in this proposed update would be applied only to the portion of revenue or expense that has not yet been recognized before the effective date in accordance with current guidance.

No prior-period results would be restated, and there would be no cumulative-effect adjustment to the opening balance of net assets or retained earnings at the beginning of the year of adoption.

Under this approach, an entity would be required to disclose both:

The nature of and reason for the accounting change An explanation of the reasons for significant changes in each financial statement line item in the

current annual or interim period resulting from applying the proposed amendments compared with current guidance.

Retrospective application would be permitted.

The effective date of the amendments in this proposed update would be the same as the effective date of the amendments in FASB ASU 2014-09.

The amendments in FASB ASU. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defer the effective date of the amendments in FASB ASU 2014-09 by one year.

A public business entity and an NFP that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the counter market would apply the amendments in this proposed update to annual periods beginning after December 15, 2017, including interim periods within that annual period.


All other entities would apply the amendments in this proposed update to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.

Early adoption of the amendments in this proposed update would be permitted irrespective of the early adoption of the amendments in FASB ASU 2014-09.

Proposed ASU

Proposed Accounting Standards Update 2017-280 Consolidation (Topic 812) Reorganization

Issue Date

September 20, 2017

Comment Deadline

December 4, 2017

Background

To address concerns that the consolidation guidance in FASB ASC 810 Leases is difficult to navigate and understand, the proposed update would reorganize and clarify certain items.

Main Provisions

The consolidation guidance in FASB ASC 810 (leases) would be reorganized into a new Topic (Topic 812), with separate Subtopics for variable interest entities (VIEs) and voting interest entities (FASB ASC 812-20, Consolidation Variable Interest Entities, and 812-30, Consolidation Voting Interest Entities, respectively). (The board believes that creating a new Topic (Topic 812) that reorganizes the consolidation guidance and clarifies certain areas of the guidance should make navigating and understanding consolidation guidance easier without affecting how consolidation analyses are currently performed.)

FASB ASC 810 would be moved to FASB ASC 958, Not-for-Profit Entities, because that guidance is applicable only for not-for-profit entities.

The guidance in FASB ASC 810-30 for research and development arrangements would be superseded.

Certain areas of the guidance would be clarified to make the consolidation guidance easier to understand without the intent of (a) changing analyses performed or (b) outcomes currently reached by stakeholders.

Transition/Effective Date The board will set the effective date for the amendments in this proposed update after it considers interested partie

While the board does not anticipate changes in practice or outcomes from the reorganization of consolidation guidance in this proposed update, it has provided transition requirements.

Proposed ASU

Proposed Accounting Standards Update 2017-290 Leases (Topic 842) Land Easement Practical Expedient for Transition to Topic 842

Issue Date

September 20, 2017


Comment Deadline

December 4, 2017

Background

FASB has been assisting stakeholders with implementation questions and issues as organizations prepare for the adoption of FASB ASC842. Some stakeholders have inquired about the application of FASB ASC 842 to land easements (also referred to as rights of way) represent the right to use, access, or cross

easements.

Entities that do not currently apply FASB ASC 840 to land easements have indicated that evaluating all existing land easements when adopting FASB ASC 842 to assess whether they meet the definition of a lease would be costly and complex due to, for example, the volume and age of those easements.

This proposed update seeks to (1) clarify that land easements should be evaluated under FASB ASU 842 and (2) address stakeholder concerns about the costs and complexity of complying with the transition requirements in FASB ASC 842 for land easements not previously assessed under FASB ASC 840 by providing an optional transition expedient.

Main Provisions This proposed update would clarify that land easements are required to be assessed under FASB ASC 842 to determine whether the arrangements are or contain a lease and would permit an entity to elect a transition practical expedient to not apply FASB ASC 842 to land easements that exist or expired before the effective date of FASB ASC 842 and that were not previously assessed under FASB ASC 840.

An entity would be required to apply the practical expedient consistently to all its existing or expired land easements that were not previously assessed under FASB ASC 840 and would

continue to apply its current accounting policy for accounting for land easements that existed before the effective date of Topic 842 and

once an entity adopts Topic 842, apply Topic 842 prospectively to all new (or modified) land easements to determine whether the arrangement should be accounted for as a lease.

This proposed update also would amend Example 10 (paragraphs 350-30-55-29 through 55-32) of FASB ASC 350-30, Intangibles Goodwill and Other General Intangibles Other Than Goodwill by clarifying that an entity should determine whether land easements are leases in accordance with FASB ASC 842 before applying the guidance in that example.

Transition/Effective Date The effective date and transition requirements for the proposed amendments would be the same as the effective date and transition requirements in FASB ASU 2016-02, which will be determined when the board considers feedback on the proposed update.


Proposed ASU

Proposed Accounting Standards Update 2017-300 Technical Corrections and Improvements to Recently Issued Standards Accounting Standards Update No. 2016-01, Financial InstrumentsOverall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

Issue Date

September 27, 2017

Comment Deadline

November 13, 2017

Background

The board has an ongoing project on its agenda about technical corrections and improvements to clarify the Codification or to correct unintended application of guidance. Those items generally are not expected to have a significant effect on current accounting practice or create a significant administrative cost for most entities. The amendments in this proposed update are of a similar nature to the items typically addressed in the Codification improvements project. However, the board decided to issue a separate proposed update for technical corrections and improvements related to FASB ASU 2016-01 to increase stakeholder awareness of the proposed amendments and expedite the improvements.

Main Provisions Issue 1: Equity Securities without a Readily Determinable Fair Value Discontinuation

Issue 2: Equity Securities without a Readily Determinable Fair Value Adjustments

Issue 3: Forward Contracts and Purchased Options

Issue 4: Presentation Requirements for Certain Fair Value Option Liabilities

Issue 5: Fair Value Option Liabilities Denominated in a Foreign Currency

Issue 6: Transition Guidance for Equity Securities without a Readily Determinable Fair Value

Effective Date

For entities that have early adopted the guidance on the presentation change related to fair value option liabilities, the amendments in this proposed update that are relevant to fair value option liabilities would be effective upon issuance of a final update and the transition requirements would be the same as those in FASB ASU 2016-01. For the remaining proposed amendments, the effective date and transition requirements would be the same as the effective date and transition requirements in update 2016-01.

Proposed ASU

Proposed Accounting Standards Update 2017-310 Technical Corrections and Improvements to Recently Issued Standards Accounting Standards Update No. 2016-02, Leases (Topic 842)

Issue Date

September 27, 2017

Comment Deadline

November 13, 2017


Background

The board has an ongoing project on its agenda about technical corrections and improvements to clarify the Codification or to correct unintended application of guidance. Those items generally are not expected to have a significant effect on current accounting practice or create a significant administrative cost for most entities. The amendments in this proposed update are of a similar nature to the items typically addressed in the Codification improvements project. However, the board decided to issue a separate proposed update for technical corrections and improvements related to FASB ASU 2016-01 to increase stakeholder awareness of the proposed amendments and to expedite the improvements.

Main Provisions Issue 1: Residual Value Guarantees

Issue 2: Rate Implicit in the Lease

Issue 3: Lessee Reassessment of Lease Classification

Issue 4: Lessor Reassessment of Lease Term and Purchase Option

Issue 5: Variable Lease Payments That Depend on an Index or a Rate

Issue 6: Investment Tax Credits

Issue 7: Lease Term and Purchase Option

Issue 8: Transition Guidance for Amounts Previously Recognized in Business Combinations

Issue 9: Certain Transition Adjustments

Issue 10: Transition Guidance for Leases Previously Classified as Capital Leases under FASB ASC 840

Issue 11: Transition Guidance for Modifications to Leases Previously Classified as Direct Financing or Sales-Type Leases under FASB ASC 840

Issue 12: Transition Guidance for Sale and Leaseback Transactions

Issue 13: Impairment of Net Investment in the Lease

Issue 14: Unguaranteed Residual Asset

Issue 15: Effect of Initial Direct Costs on the Rate Implicit in the Lease

Issue 16: Failed Sale and Leaseback Transaction

Effective Date

The amendments in this proposed update would affect the amendments in FASB ASC 2016-02, which are not yet effective, but for which early adoption upon issuance is permitted. For entities that have early adopted FASB ASC 842, the proposed amendments would be effective upon issuance of a final update and the transition requirements would be the same as those in FASB ASC 842. For entities that have not adopted FASB ASC 842, the effective date and transition requirements would be the same as the effective date and transition requirements in FASB ASC 842.


SEC

Order under section 15b, section 17a and section 36 of the securities exchange act of 1934 granting exemptions from specified provisions of the exchange act and certain rules thereunder.

Order under section 6(c) and section 38(a) of the investment company act of 1940 granting exemptions from specified provisions of the investment company act and certain rules thereunder.

Issue Date

September 28, 2017

Background and Main Provisions

On September 28, the Securities and Exchange Commission (SEC) issued an Order providing temporary relief from certain rules under the Securities laws to companies impacted by Hurricanes Harvey, Maria, and Irma and their auditors. The order, referencing section 10A(g)(1) of the Exchange Act and Rule 2-01(c)(4)(i) of Regulation S-X, provides the following main provisions:

Filing Requirements

The lack of communications, transportation, electricity, facilities and available staff and professional advisers due to Hurricane Harvey, Hurricane Irma, and Hurricane Maria could hamper efforts to meet filing deadlines. However, investors have an interest in the timely availability of required information about these companies and the activities of persons required to file schedules and reports with respect to these companies. While providing relief, the commission reminded public companies and other persons who apply this order of their continuing obligation to make materially accurate and complete disclosures in accordance with the anti-fraud provisions of the federal securities laws.

The order stated: pursuant to Section 36 of the Exchange Act, that a registrant (as defined in Exchange Act Rule 12b-2) subject to the reporting requirements of Exchange Act Section 13(a) or 15(d), and any person required to make any filings with respect to such a registrant, is exempt from any requirement to file or furnish materials with the Commission under Exchange Act Sections 13(a), 13(d), 13(f), 13(g), 14(a), 14(c), 14(f), 15(d) and 16(a), Regulations 13A, 13D-G, 14A, 14C and 15D, and Exchange Act Rules 13f-1, 14f-1 and 16a-3, as applicable, where the conditions below are satisfied.

Conditions.(a) The registrant or person other than a registrant is not able to meet a filing deadline due to Hurricane Harvey, Hurricane Irma, or Hurricane Maria and their respective aftermaths; (b) The registrant or person other than a registrant files with the commission any report, schedule, or form required to be filed during the applicable period of relief on or before the applicable deadline set forth in Section I; and (c) In any such report, schedule or form filed pursuant to this order, the registrant or person other than a registrant must disclose that it is relying on this order and state the reasons why, in good faith, it could not file such report, schedule or form on a timely basis.

Proxy, Information Statements, Semin-Annual and Annual Reports

The conditions in the areas affected by Hurricane Harvey, Hurricane Irma, and Hurricane Maria, including displacement of thousands of individuals and the destruction of property, have prevented and will continue to prevent the delivery of mail to the affected areas. Due to these conditions, the SEC also provided to those seeking to comply with their rules imposing requirements to furnish materials to security holders when mail delivery is not possible and that the following exemption is necessary and appropriate in the public interest and consistent with the protection of investors.


The order stated: pursuant to Section 36 of the Exchange Act, that a registrant or any other person is exempt from the requirements to furnish proxy statements, annual reports, and other soliciting materials,

e Exchange Act and the rules

apply the order.

The SEC also provided additional relief to companies that are required to transmit annual and semi-annual reports to investors affected by Hurricane Harvey, Hurricane Irma, or Hurricane Maria.

Auditor Independence

The destruction of property and loss or destruction of corporate records may require extraordinary efforts to reconstruct those accounting records. An audit client may look to its auditor for assistance in

l systems and records. Auditors are prohibited from providing bookkeeping or other services relating to the accounting records of the audit client (per the rule, these prohibited services are considered to be

However, the SEC believes that limited relief from these prohibitions is warranted and necessary and in the public interest and consistent with the protection of investors. Conditions for applying this order are as follows:

Services performed in accordance with the order are limited to reconstruction of previously existing accounting records that were lost or destroyed as a result of Hurricane Harvey, Hurricane Irma, or Hurricane Maria.

reconstructed, its financial systems are fully operational and the client can affect an orderly and efficient transition to management or another service provider.

As required by Rule 2-01(c)(7) of Regulation S- -approve the auditor's services.

Other

The SEC provided relief from certain requirements for:

Transfer agent compliance with sections 17a and 17(f) of the exchange act Filing of annual update to form ma as required by the exchange act and the rules thereunder

The order and each of the particular areas where relief is provided are subject to specific time limits, based on which storm had impact.

PCAOB

Supplemental Request for Comment: Proposed Amendments Relating to the Supervision of Audits Involving Other Auditors and Proposed Auditing Standard Dividing Responsibility for the Audit with Another Accounting Firm

Issue Date

September 26, 2017


Comment Deadline

Comments on the supplemental request are due November 15, 2017.

Background

The PCAOB held an open meeting on September 26, 2017, to consider certain clarifications and refinements to the "Proposed Amendments Relating to the Supervision of Audits Involving Other Auditors and Proposed Auditing Standard Dividing Responsibility for the Audit with Another Accounting Firm." These changes were driven by comments received on the proposed standard, which was issued in April 2016.

The proposed standards seek to strengthen existing requirements and impose a more uniform approach They volvement in and

evaluation of the work of other auditors, enhance the ability of the lead auditor to prevent or detect deficiencies in the work of other auditors, and facilitate improvements in the quality of the work of other auditors.

Based on that meeting, the PCAOB issued a supplemental request for comment.

The supplemental request for comment:

discusses significant comments received on the 2016 proposal; presents the revisions to the proposed amendments that the PCAOB is considering for adoption

request); and requests comment on those revisions and related matters.

The PCAOB also is reopening the comment period for the 2016 proposal for additional comments from the public on any other aspects of the proposal.


Determining whether the firm can serve as lead auditor

The revised proposal would require auditors to consider the importance of the locations or business units on which the lead auditor performs procedures in relation to the financial statements as a whole. Considerations would include quantitative and qualitative factors.

Other auditors' knowledge, skill, and ability

The supplemental and procedures related to the training of all personnel who work on audits performed under PCAOB standards and the assignment of personnel to PCAOB audits.

Review of the work of other auditors

The supplemental proposal clarifies that the level of detail of documentation to be obtained and reviewed by the lead auditor will depend on the extent of supervision of the other auditor's work deemed necessary.

Multi-tiered audits

In a multi-tiered audit, the lead auditor would be required to obtain, review, and retain a copy of communications a summary memorandum between other auditors.


Independence

The new proposal would require the lead auditor to understand the other auditor's process for determining compliance with ethics and independence requirements and their experience in applying those requirements, which according to the discussion in the release, would allow the lead auditor to identify any gaps in process and therefore, compliance. In addition, the board may include a requirement that the lead auditor get written confirmation from each other auditor regarding all relationships between the auditor and the audit client or persons in financial reporting oversight roles at the client that may bear on independence, which would not only facilitate independence compliance but also the lead auditor's reporting under Rule 3526, Communication with Audit Committees Concerning Independence. Lastly, the supplemental proposal would also require the other auditors to confirm if the firm is in compliance with applicable rules, and if not, explain the noncompliance.

KNOWLEDGE CHECK

3. Which statement about a proposed standard issued by FASB in the third quarter of 2017 is correct?

a. FASB restructured the guidance applicable to not-for-profit pension accounting. b. FASB waived the independence requirements in total to companies and auditors in areas affected

by 2017 hurricanes. c.

contributions applies to all entities. d. FASB issued a new proposal on the use of specialists in a multi-national audit.

AA3 GS-0417-0A

ACCOUNTING AND AUDITING

SUPPLEMENT NO. 3 2017

Solutions

The AICPA offers a free, daily, e-financial articles as well as video content, research and analysis concerning CPAs and those who work with the accounting profession. Visit the CPA Letter Daily news box on the www.aicpa.org home page to sign up. You can opt out at any time, and only the AICPA can use your e-mail address or personal information. Have a technical accounting or auditing question? So did 23,000 other professionals who contacted the AICPA's accounting and auditing Technical Hotline last year. The objectives of the hotline are to enhance members' knowledge and application of professional judgment by providing free, prompt, high-quality technical assistance by phone concerning issues related to: accounting principles and financial reporting; auditing, attestation, compilation and review standards. The team extends this technical assistance to representatives of governmental units. The hotline can be reached at 1-877-242-7212.

Copyright 2017 AICPA Unauthorized Copying Prohibited Solutions 1

SOLUTIONS

CHAPTER 1

Solutions to Knowledge Check Questions

1. a.

to be involved in the offering and therefore subject to SAS No. 133. b. Correct. If Rose CPA has no knowledge that D Company has included its report in the offering,

Rose is not involved, and therefore is not subject to SAS No. 133. c. Incorrect. If Rose CPA helps D Company prepare the information included in the offering, Rose

is involved with the offering and is therefore subject to SAS No. 133. d. Incorrect. Once D Company informs Rose CPA about the offering, asks Rose CPA to read the

offering document, Rose is involved and subject to SAS No. 133.

2. a. Correct. Kim should consider whether threats to his independence caused by long association

with G Company were significant, and if threats are significant, apply appropriate safeguards to reduce or eliminate the threat.

b. after a specified period, although partner rotation may be used as a safeguard, if needed.

c. Incorrect. The proposed interpretation would not require a quality review partner to review although second review may be used as a safeguard, if needed.

d. Incorrect. The proposed interpretation requires a different approach and would not require a senior member of management to review the entire engagement team for conflicts of interests.

3. a. Incorrect. FASB did not propose restructuring the guidance applicable to not-for-profit pension

accounting. FASB did propose to reorganize the consolidation (topic 812) guidance in the third quarter.

b. Incorrect. The SEC provided relief to companies and auditors in areas affected by 2017 hurricanes to allow auditors to help companies reconstruct pre-existing accounitng records, but they did not completely waive the independence requirements.

c. contributions applies to all entities, although the impact will generally be greater on not-for-profit entities.

d. Incorrect. FASB did not issue a new proposal on the use of specialists in a multi-national audit. The PCAOB issued a proposal on use of specialists in the second quarter.

Accounting and Auditing Supplement No. 3 2017 · 2020-04-26 · FASB Accounting Standards Updates...

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