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
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Presenter
Carlos Hernandez
Southeast Assurance Leader
2
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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
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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
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ACCOUNTING UPDATE
ACCOUNTING AND AUDITING UPDATE >
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FASB UPDATERECENT ASU’S
ACCOUNTING AND AUDITING UPDATE >
ACCOUNTING UPDATE >
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Final standards recently issued - Revenue
ASU 2014-09, Revenue from Contracts with Customers (Topic
606)
ASU 2016-08, Revenue from Contracts with Customers (Topic
606): Principal versus Agent Considerations (Reporting Revenue
Gross versus Net)
ASU 2016-10, Revenue from Contracts with Customers (Topic
606): Identifying Performance Obligations and Licensing
ASU 2016-12, Revenue from Contracts with Customers (Topic
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)
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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)
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ASU 2014-09: New effective dates
Permitted
2018
Effective date for calendar year-ends
Required
(Public companies
and certain NFP)
Required
(Private
companies)
20192017
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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)
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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
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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
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Revenue Recognition Health Care Implementation Issues
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?
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Revenue Recognition Health Care Implementation Issues
Implementation Issue Considerations
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?
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Revenue Recognition Health Care Implementation Issues
Implementation Issue Considerations
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
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Revenue Recognition Health Care Implementation Issues
Implementation Issue Considerations
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?
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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
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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
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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
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Implementation Paper – Issue 8 – 1: Application of Step 1 and Step 3 to Self-Pay Patients
• 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
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Implementation Paper – Issue 8 – 1: Application of Step 1 and Step 2 to Self-Pay Patients
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
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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
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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
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Revenue Recognition Task Force
https://www.aicpa.org/InterestAreas/FR
C/AccountingFinancialReporting/Reven
ueRecognition/Pages/RRTF-
HealthCare.aspx
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Revenue Recognition Task Force
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Revenue Recognition Task Force
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Revenue Recognition Task Force
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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
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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
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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
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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
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ASU 2015-07: Fair Value Hierarchy Disclosures for Investments Measured at NAV
• 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
− 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 12/15/16
and interim periods within those years
• Early adoption is permitted
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ASU 2015-07: Fair Value Hierarchy Disclosures for Investments Measured at NAV
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
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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
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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
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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)
• Effective for fiscal years beginning after
− 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
• 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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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ASU 2016-15: Statement of cash flows
Cash Flow Issue Summary of Amendments
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.
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ASU 2016-15: Statement of cash flows
Cash Flow Issue Summary of Amendments
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
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ASU 2016-15: Statement of cash flows
Cash Flow Issue Summary of Amendments
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.
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ASU 2016-15: Statement of cash flows
Cash Flow Issue Summary of Amendments
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.
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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
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ASU 2016-18: Restricted Cash
• Effective for fiscal years beginning after
− 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
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GASB UPDATE
ACCOUNTING AND AUDITING UPDATE >
ACCOUNTING UPDATE >
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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
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GASB Statement 72 – Fair Value Measurement and Application
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)
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GASB Statement 72 – Fair Value Measurement and Application
• 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
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GASB Statement 72 – Fair Value Measurement and Application
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:
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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
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GASB Statement 79 – Certain External Investment Pools and Pool Participants
• 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
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GASB Statement 79 – Certain External Investment Pools and Pool Participants
• 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
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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.
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GASB Statement 83 – Certain Asset Retirement Obligations
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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
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Exposure Draft – Leases
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
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Exposure Draft – Leases
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
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AUDITING UPDATE
ACCOUNTING AND AUDITING UPDATE >
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PROPOSED/RECENT STATEMENTS
ACCOUNTING AND AUDITING UPDATE >
AUDITING UPDATE >
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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
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Proposed Statement on Auditing Standards
Auditor Involvement With Exempt Offering Documents
• 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
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Proposed Statement on Auditing Standards
Auditor Involvement With Exempt Offering Documents
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
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Proposed Statement on Auditing Standards
Auditor Involvement With Exempt Offering Documents
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
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Proposed Statement on Auditing Standards
Auditor Involvement With Exempt Offering Documents
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
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Proposed Statement on Auditing Standards
Auditor Involvement With Exempt Offering Documents
• 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
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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
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QUESTIONSAND ANSWERS
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