1

2014 Accounting & Auditing (mini) Update

Presented by: Wayne Kerr, CPA

2

Wayne Kerr, CPA Wayne Kerr, CPA, is a senior consultant for Thomson

Reuters/AuditWatch. His duties include product development,

program delivery, and technical research. Wayne specializes in

audit methodology/process consulting; helping firms

improve the quality and efficiency of their audits.

Before joining AuditWatch, Wayne was with Grant Thornton;

working with clients in various industries. He also had quality

assurance duties and training responsibilities for his business

unit.

Wayne is a member of the American Institute of Certified Public

Accountants and holds BS and MA degrees from Brigham Young

University.

3

© 2014 Thomson Reuters Tax & Accounting All Rights Reserved

•This course, or parts thereof, may not be reproduced in

another document or manuscript in any form without the

permission of the publisher.

•This material is designed to provide accurate and authoritative

information in regard to the subject matter covered. It is sold

with the understanding that the publisher is not engaged in

rendering legal, accounting or other professional service. If

legal advice or other expert assistance is required, the services

of a competent professional person should be sought – From a

Declaration of Principles jointly adopted by a Committee of the

American Bar Association and a Committee of Publishers and

Associations.

4

Learning Objectives

• Understand the requirements of SSARS 21

• Apply new private company financial reporting

options

• Consider the impact of other recent ASUs

Big Changes

• ARSC issues new standard which

- Clarifies and revises the

SSARS (SSARS 21)

- Introduces a new level of

service – the financial

statement preparation service

• “Biggest change since the

standards were issued over 30

years ago”

Drafting Convention

• States the objectives

• Includes a definitions section

• Separates the requirements from the application

and other explanatory materials

• Numbers the application and other explanatory

materials paragraphs with an A (e.g., AR-C 60.A1)

and includes them in a separate section

• Uses formatting techniques to make them easier

to read

• Eliminates SSARS Interpretations

AR-C Sections After SSARS 21

AR-C Sections after SSARS 21

AR-C 60 General principles for Engagements Performed in

Accordance With Statements on Standards for

Accounting and Review Services

AR-C 70 Preparation of Financial Statements

AR-C 80 Compilation Engagements

AR-C 90 Review of Financial Statements

SSARS 21 supersedes all of the existing AR

sections other than AR 120

The New Preparation Standard

Engaged to Prepare

Assisting in Preparation

Does AR-C 70 Apply?

• Preparation of financial statements prior to audit

or review by another accountant

• Preparation of financial statements when the

accountant is engaged to perform an audit,

review, or compilation of such financial

statements

• Preparation of financial statements for an entity

to be presented alongside the entity’s tax return

• Preparation of financial statements with a tax

return solely for submission to taxing

authorities

R

Q

R

Q

Does AR-C 70 Apply?

• Preparation of personal financial statements for

presentation alongside a financial plan

• Personal financial statements that are prepared

for inclusion in written personal financial plans

prepared by the accountant

• Financial statements prepared in conjunction

with litigation services that involve pending or

potential legal or regulatory proceedings

• Financial statements prepared in conjunction

with business valuation services

R

Q

Q

Q

Does AR-C 70 Apply?

• Maintaining depreciation schedules

• Preparing or proposing certain adjustments,

such as those applicable to deferred income

taxes, depreciation, or leases

• Preparation of single financial statements, such

as a balance sheet or income statement or

financial statements with substantially all

disclosures omitted

• Drafting financial statement notes

Q

Q

Q

R

Does AR-C 70 Apply?

• Using the information in a general ledger to

prepare financial statements outside of an

accounting software system

• Entering general ledger transactions or

processing payments (general bookkeeping) in

an accounting software system

R

Q

AR-C 70 Performance Requirements

• Accept or continue the engagement and obtain a written engagement

letter

• Understand the client’s applicable financial reporting framework

• Prepare the financial statements (Note: special

requirements relating to financial statements that

- Omit substantially all disclosures

- Are prepared using a special purpose

framework)

• Prepare sufficient documentation to provide a

clear understanding of your work

• Include a legend on each page that no assurance

is being provided (“No Assurance Is Provided.”)

14

Example Disclaimer

The accompanying financial statements of XYZ Company as of

and for the year ended December 31, 20XX, were not subjected to

an audit, review, or compilation engagement by me (us) and,

accordingly, I (we) do not express an opinion, a conclusion, nor

provide any assurance on them.

Not a Management-Use-Only Compilation

• Not the same as the existing management-use-only

compilation engagement

• Able to prepare financial statements for use by a third

party without issuing a compilation report

• Required to describe the financial reporting framework

used (if SPF) on the face of the FS or in the notes

• Required to disclose any material misstatements such as

those caused by a known departure or inadequate

disclosures

How Are Compilation Engagements Changing?

• Engagement driven instead of

submission driven

• No management-use-only

compilations without a compilation

report

• Engagement letter signed by both the

CPA and either management or those

changed with governance

How Are Compilation Engagements Changing?

• Report is much shorter

• Report includes the city and state

where the CPA practices

• Report requires additional paragraphs

in certain circumstances

18

New Compilation Report Management is responsible for the accompanying financial

statements of XYZ Company, which comprise the balance sheets

as of December 31, 20X2 and 20X1 and the related statements of

income, changes in stockholders’ equity, and cash flows for the

years then ended, and the related notes to the financial statements

in accordance with accounting principles generally accepted in the

United States of America. I (We) have performed compilation

engagements in accordance with Statements on Standards for

Accounting and Review Services promulgated by the Accounting

and Review Services Committee of the AICPA. I (We) did not audit

or review the financial statements nor was (were) I (we) required to

perform any procedures to verify the accuracy or completeness of

the information provided by management. Accordingly, I (we) do

not express an opinion, a conclusion, nor provide any form of

assurance on these financial statements.

How Are Review Engagements Changing?

• Engagement letter signed by both the

CPA and management

• Report incorporates headings and

includes the city and state where the CPA

practices

• Introduces the terms emphasis–of-matter

and other-matter to the review literature,

with a requirement to include those

paragraphs in certain instances

How Are Review Engagements Changing?

• CPA required to obtain evidence that the

financial statements reconcile to the

accounting records

• Introduces requirements when using the

work of other accountants

• CPA required to accumulate and evaluate

misstatements and determined whether

modification should be made

• Reviews can be applied to other historical

information

21

Review Report

22

New Review Report Independent Accountant’s Review Report

I (We) have reviewed the accompanying financial statements of

XYZ Company, which comprise the balance sheets as of

December 31, 20X2 and 20X1, and the related statements of

income, changes in stockholders’ equity, and cash flows for the

years then ended, and the related notes to the financial

statements. A review includes primarily applying analytical

procedures to management’s (owners’) financial data and making

inquiries of company management (owners). A review is

substantially less in scope than an audit, the objective of which is

the expression of an opinion regarding the financial statements

as a whole. Accordingly, I (we) do not express such an opinion.

23

New Review Report Management’s Responsibility for the Financial Statements

Management (Owners) is (are) responsible for the preparation

and fair presentation of these financial statements in accordance

with accounting principles generally accepted in the United States

of America; this includes the design, implementation, and

maintenance of internal control relevant to the preparation and fair

presentation of financial statements that are free from material

misstatement whether due to fraud or error.

24

New Review Report Accountant’s Responsibility

My (Our) responsibility is to conduct the review engagements in

accordance with Statements on Standards for Accounting and

Review Services promulgated by the Accounting and Review

Services Committee of the AICPA. Those standards require me

(us) to perform procedures to obtain limited assurance as a basis

for reporting whether I am (we are) aware of any material

modifications that should be made to the financial statements for

them to be in accordance with accounting principles generally

accepted in the United States of America. I (We) believe that the

results of my (our) procedures provide a reasonable basis for our

conclusion.

25

New Review Report Accountant’s Conclusion

Based on my (our) reviews, I am (we are) not aware of any

material modifications that should be made to the accompanying

financial statements in order for them to be in accordance with

accounting principles generally accepted in the United States of

America.

Effective Date

• Effective for engagements on

financial statements for periods

ending on or after December 15,

2015

• Early implementation is allowed

Private Company Accounting ASU Topic Effective Date

2014-02 Goodwill – Private Company Option PBA 12/15/14

2014-03 Interest Rate Swaps – Private Company

Option

PBA 12/15/14

2014-07 Applying VIE Guidance to Common

Control Leasing Arrangements

PBA 12/15/14

28

ASU 2014-02 Highlights

• Goodwill amortized on a straight-line basis over 10

years or less

• Goodwill tested for impairment only when a

triggering event occurs.

• Accounting policy election to test goodwill for

impairment either at the entity level or at the

reporting unit level.

• No more two-step process: Impairment = the

excess of the carrying amount , including goodwill,

over its fair value

29

ASU 2014-03 Highlights

• Swap must meet certain qualifications

• Interest expense similar to fixed-rate borrowing

• Measure swap at settlement value instead of fair

value – affects fair value disclosures

• Assume no hedge ineffectiveness

• Required documentation to qualify for hedge

accounting required before first F/S are issued

instead of at inception of the hedge

30

ASU 2014-07 Highlights

• When the arrangement between a private

company lessee and a lessor entity meets certain

conditions, the private company lessee can elect to

not apply the VIE guidance to the lessor entity.

31

Example Common Control Leasing Arrangement

Owner

Reporting

Entity

Leasing

Entity

Bank

Controlling Interest Controlling Interest

Debt

RE pays rent to LE

LE leases land

and building to RE

32

ASU 2014-07 Conditions (all of the

following must apply)

a) the private company lessee and the lessor legal entity are

under common control.

b) the private company lessee has a lease arrangement with

the lessor entity.

c) substantially all activities between the two entities are

related to leasing activity (including supporting leasing

activities) between the two entities.

d) if the private company lessee explicitly guarantees or

provides collateral for any obligation of the lessor entity

related to the asset leased by the private company, then the

principal amount of the obligation at inception of such

guarantee or collateral arrangement does not exceed the

value of the asset leased by the private company from the

lessor entity.

33

ASU 2014-07 Disclosures

• Amount and terms of liabilities of the lessor that

expose the lessee to provide financial support to

the lessor

• Circumstances not recognized in the financial

statements that expose the lessee to provide

financial support to the lessor

• Disclosures must meet other requirements; for

example guarantees, leases and related parties

34

Other Notable Recent ASUs ASU Topic Effective Date

2014-08 Discontinued Operations PBA 12/15/14

2014-09 Revenue From Contracts With

Customers

PBA 12/15/16 (public)

PBA 12/15/17 (nonpublic)

2014-15 Going Concern PBA 12/15/16

2014-17 Push-Down Accounting Immediately

35

Q&A

I will be happy to take questions at this

time.