6HSWHPEHU )W /DXGHUGDOH - CPA · PDF fileRisk 1based 1standards 1in 1the 1clarified 1SASs • The codification of the clarified standards was established by the issuance of SAS No

RandeeAbramsonJaime AngaritaAlan CampbellBethany Carr

Lynn ClementsRichard Dotson

Lucinda GallagherWendy Johnson

Thomas LongmanJames LuffmanWilliam MaloneyRoger Michels

Christine MorenoMario Nowogrodzki

Pat PattersonRobert RankinRichard Shapiro

Poornima Srinivasan

Donald A. CarobineSenior Audit ManagerBerman Hopkins Wright & LaHam CPAs & Associates, LLP

Steven W. Bierbrunner, CPA,MSTPartner- Shareholder Berman Hopkins Wright & LaHam, CPAs & Associates, LLP

Lynn H. Clements, CFE, CFMProfessor of AccountingFlorida Southern College Barnett School of Bus & Economics

Audit Risk Assessment

Don Carobine, CPA

Donald A. Carobine, CPA (Florida & California)Senior Audit Manager

Berman Hopkins Wright & LaHam CPAs and Associates, LLP

Mr. Carobine graduated from Indiana University of Pennsylvania with a B.S. in Accounting in 1986, has over 25 years of public accounting and auditing experience, and joined Berman Hopkins Wright & LaHam in March 2011 as a Senior Audit Manager. Don was formerly a partner and quality control officer with a 120 person CPA firm in Santa Monica, California. His clients have been diversified in size and industry, and have included private companies as well as public. In addition to leading audits, reviews and compilations, and providing outside CFO services, Don consults with clients on the design and effectiveness of internal controls, on the application of more complex accounting standards, and on merger and acquisition decisions. The industries he has served include, but are not limited to, the following:

Distribution of a wide variety of productsManufacturers and sellers of a wide variety of productsAgriculturePharmaceutical sales, medical device development, Hospital and ambulatory surgical centersTelecommunicationsFinancial institutions and finance companiesSoftwareReal estate and constructionAttorney’s and doctorsNot-for-profit organizationsCoal mining, washing and cokingA variety of others such as retail coffee shops, licensor of apparel and footwear brands, security guard and video surveillance, limousine service, internet anti-piracy, fitness clubs, entertainment, online advertising and gaming

FICPA27th Annual Accounting Show

Audit Risk AssessmentSeptember 21, 2012

Donald A. Carobine, CPA (Florida & California)

General Outline

• Risk based standards in the clarified SASs and other sources of guidance

• Techniques & Efficiency Tips (Think scalability)

• Internal Control, Revisited

Risk based standards in the clarified SASs


• The Clarity Project – IN GENERAL:

o Joint effort of the AICPA Auditing Standards Board (ASB) and International Auditing and Assurance Standards Board (IAASB).

o To converge U.S. GAAS & International Standards on Auditing (ISA) by December 2012. (FYI - GAAS & IAS will then be essentially the same)

o To make GAAS for nonpublic companies easier to understand and apply.

o To make GAAS more consistent across international boards.

o While avoiding unnecessary conflict with auditing standards for public companies issued by the PCAOB.


• The codification of the clarified standards was established by the issuance of SAS No. 122,Statements on Auditing Standards: Clarification and Recodification

• The clarified standards are effective for periods ending on or after December 15, 2012.


• The AICPA updated their professional standards for now to include…

o U.S. Auditing Standards• The “AU Sections”

o U.S. Auditing Standards – AICPA (Clarified)• The “AU-C Sections”


• “AU-C” is a temporary identifier to avoid confusion with existing standards in force.

• The “AU” sections remain effective through 2013 (considering fiscal years).

• The “AU-C” identifier will revert to “AU” in 2014, bywhich time SAS No. 122 becomes fully effective for all engagements.


Prior to the Clarified SASs Clarified SASs

• 8 SASs referred to as the “Suite of Risk Based Standards”

• These were SAS No.’s 104 to 111

• They were integrated into various AU Sections at the time (e.g. AU Sections 230, 150, 326, 312, 311, 314, 318, & 350)

• Now mostly grouped in one overall category:

o AU-C Section 300-499—RISK ASSESSMENT AND RESPONSE TO ASSESSED RISK

• With sub-categories:o Planningo Understanding the entityo Materialityo Procedures in response to risks and

evaluating the evidence obtainedo Service organization considerationso Evaluation of identified

misstatements


• As part of the drafting conventions for the clarified SASs, the ASB decided to provide special considerations for smaller non-complex entities.

• The ASB makes it clear that the audit standards apply to all sizes of entities.

• Yet, the Board realized that a significant contributor to standards overload for small and medium sized firms was the SAS.

• The Clarity Project provided the context for improvement.

• Significant outreach was undertaken throughout the project to assess the needs of the smaller firms and sole practitioners.


• Scalability of audits – Where appropriate, each SAS includes “Considerations Specific to Audits of Smaller, Less Complex Entities”.

• It is in the application material section (labeled with an “A”)

• That section is in the following Clarified Standards:o AU-C: Section 200, General Principles and Responsibilitieso AU-C: Section 210, Terms of Engagemento AU-C: Section 220, Quality Control for an Engagement Conducted in

Accordance With Generally Accepted Auditing Standardso AU-C: Section 230, Audit Documentation


• That section is in the following Clarified Standards:o AU-C: Section 240, Consideration of Fraud in a Financial Statement Audito AU-C: Section 265, Communicating Internal Control Related Matters

Identified in an Audito AU-C: Section 300, Planning an Audito AU-C: Section 315, Understanding the Entity and its Environment and

Assessing the Risks of Material Misstatemento AU-C: Section 320, Materiality in Planning and Performing an Audito AU-C: Section 330, Performing Audit Procedures in Response to Assessed

Risks and Evaluating the Audit Evidence Obtainedo AU-C: Section 402, Audit Considerations Relating to an Entity Using a

Service Organizationo AU-C: Section 540, Auditing Accounting Estimates, Including Fair Value

Accountingo AU-C: Section 550, Related Parties

Sources of Guidance(For Auditors of Smaller Companies)

Sources of Guidance(For Auditors of Smaller Companies)

• AICPA Audit Guide: Assessing and Responding to Audit Risk in a Financial Statement Audit

• PCAOB Staff Views: An Audit of Internal Control over Financial Reporting That is integrated with and Audit of Financial Statements – Guidance for Auditors of Smaller Public Companies (www.pcaobus.org)

• COSO: Internal Control over Financial Reporting Guidance for Smaller Public Companies (www.coso.org)

• IFAC (International Federation of Accountants): Guide to Using International Standards on Auditing in the Audits of Small- and Medium-sized Entities (Don’t shy away from this because the clarified SASs now primarily equal the International Auditing Standards) (www.ifac.org)

Considerations for Audits of Smaller,Less Complex Entities


• Smaller, less complex refers to characteristics such as:

o Concentration of ownership and management in a small number of individuals

o One or more of the following:• Straight forward/uncomplicated transactions• Simple record keeping• Few lines of business/few products• Few internal controls• Few personnel with a wide range of duties


• The guidance generally results in specifying alternate procedures appropriate for situations like:

o Scaling down audit programs and procedures (one size does not fit all)

o Recognizing governance and management are the same people (fewer people to deal with creates audit efficiencies)

o Addressing controls that are not documented or segregated (justbecause they are not documented doesn’t mean the don’t occur; there could be mitigating controls to the lack of segregation of duties)

o Recognizing irrelevant requirements (one size does not fit all, no need to complete meaningless checklists)


• Small and less complex does not always mean not risky

o Active involvement of management can mean more potential for override

o Lack of qualified personnel can mean more potential for errors

o Viewing internal control as an add-on can mean more potential for misappropriation fraud; segregation of duties issues, etc.

o Owner managers understand the business but maybe do not understand financial reporting

• The auditor should not ignore the potential issues and maintain a sufficient level of skepticism

Newly Issued AICPA Audit andAccounting Guide on Audit Risk

Newly Issued AICPA Audit andAccounting Guide on Audit Risk

• A tool for engagement teams that includes numerous illustrative examples, interpretative flowcharts, observations, and suggestions.

• Entitled: Assessing and Responding to Audit Risk in a Financial Statement Audit – 2012

• Revised edition as of March 1, 2012 (through SAS 125)

• Replaced the revised edition as of October 1, 2009.

• Guidance related to the clarified auditing standards (SAS Nos. 122 – 125) has been incorporated throughout the guide.

Appendix F of 2012 AAGPossible Risks of Material Misstatement

at a Small Business Entity

Provides the following examples of conditions and events that may be present at a small business andindicate the existence of risks of material misstatement:

• Lack of personnel with appropriate accounting and financial reporting skills.

• Lack of job descriptions for employees with accounting, financial reporting or internal control responsibilities.



• Application of new or relatively complex accounting standards.

• Past misstatements, history of errors, or a significant amount of adjustments at period end.

• Events or transactions that result in significant measurement uncertainty, including accounting estimates.



• Significant volume of transactions.

• Complex calculations required to prepare the financial statements or apply required accounting standards.

• The use of lower-end general-purpose accounting software that lacks sufficient internal control capabilities.



• New or complex contractual arrangements with third parties, including sales contracts with customers.

• Operations in regions that are economically unstable.

• Operations exposed to volatile markets.

• A complex regulatory environment.



• Going concern and liquidity issues, including loss of significant customers.

• Constraints on the availability of capital and credit.

• Changes in the industry in which the entity operates.

• Changes in the company’s suppliers or purchasing procedures.



• Developing or offering new products or services, expanding into new locations, or moving into new lines of business.

• Actual or proposed changes in the entity, such as:

o change in ownership, o new financing arrangements, o sale of assets or other unusual events.



• Complex alliances and joint ventures.

• Significant transactions with related parties.

• Changes in key personnel, including departure of key executives, operating personnel or support staff.

• Weaknesses in internal control, especially those not addressed by management.



• Installation of significant new IT systems.

• Inquiries into the entity’s operations or financial results or into key management personnel by regulatory or government bodies.

• Significant amount of nonroutine or nonsystematic transactions, including intercompany transactions and large revenue transactions at period end.



• Transactions that are recorded based on management’s intent, for example, debt refinancing, assets to be sold, and classification of marketable securities.

• Complex processes related to accounting measurements.

• AND FINALLY: Pending litigation and contingent liabilities.

Appendix H of 2012 AAGConsideration of Prior Year Uncorrected

Misstatements


Misstatements

• At the final stage of the audito We assess uncorrected misstatements that affect the current year financial

statements…o To determine whether they are material, individually or in the aggregate.

• Although commonly overlooked, this includes…o Misstatements that arose in a prior period that were not corrected, o but still have an effect on the current financial statements.

• The cumulative effect of uncorrected misstatements related to prior periods may have a material effect onthe current period’s financial statements and therefore should be considered.

o For example, a liability that grows to a material amount over a period of years such as accrued sick pay when carryover is allowed indefinitely.


Misstatements

• Approaches to assessing the effect of current and prior year misstatements have evolved and include…:

o The income-focused approach: Considering whether current period income is materially misstated and if so, record the adjustment(s).

o The balance sheet-focused approach: Considering whether the ending balance sheet is materially misstated and whether such misstatements would materially misstate income in future periods when they correct themselves or are corrected, and if so, record the adjustment(s).

o Applying both approaches: Requiring an adjustment if either approach indicates an adjustment is necessary. This retains the benefits of each approach and overcomes the weaknesses of each approach.

• The SAS recognizes all of the above approaches and does not prescribe the use of any specific one.

Techniques & Efficiency Tips(Think scalability)


• Focus on adherence to the SASs, not on adherence to audit methodologies

• Methodology software we all use (e.g. CCH, PPC, etc.) is not always your friend when scaling an audit to the “right size”. They are structured for a standard audit and yours may not be a standard audit

• Where appropriate, consider using Checklists as memory joggers instead of painstakingly filling out dozens of pages when most answers are “N/A”

• Actively avoid a “Check the box” approach


• Partner involvement in risk assessments and scoping decisions is critical – Less experienced staff will generally default to higher risk assessments.

• Audits of smaller entities may be handled by smaller audit teams

o Communication can be less formalizedo Audit strategy issues can be easily discussed and documented in a brief

memoo Need not be a time consuming exercise

• Consider a process where a brief memo at the end of the current year engagement provides the start of the next year’s engagement (Notes for next year…)


• Consider one memo covering all of the required elements of planning:

o Client continuanceo Understanding of the entity and internal controlo Audit strategyo Audit plano Materialityo Assessed riskso Significant findings and conclusions

• Use the memorandum as a dynamic document which is updated throughout the audit as necessary


• Information that does not change can be carried over (no need to reinvent the wheel)

• The goal is to “right size” the documentation

• Just enough is good enough

• There is no extra credit for enhancement to client service from over-documenting


• Focus on work where the risk is the greatest

• Pay attention to the fraud risks

• For fraud inquiries, rather than sitting with people and rattling off the same questions every year taken from a checklist, ……

… take a conversational approach where you will be able to obtain answers perhaps throughout various meetings and discussions throughout the audit.

“What do you think everyone’s response will be when directly asked if fraud has been committed ???????? “Um, NO.”

When it is necessary, and perhaps when your interaction with certain people is limited to the conversation, ask the direct questions about their knowledge of fraud, but don’t do so until the end of the conversation.


• Where risk is low: default to analytical procedures, unless a SAS requires detail testing

• Yes, there is a risk of management override, but determine where the specific risk is and focus your efforts there. Where are the weaknesses?


• Consider incorporating Qualitative Assessments inplanning:

o FASB ASU No. 2011-08 was issued in September 2011 and provides an option toperform an initial assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.

o FASB ASU No. 2012-02 was issued in July 2012 and provides an option toperform an initial assessment of qualitative factors to determine whether it is more likely than not that a non-goodwill indefinite-lived intangible is impairedand thus whether it is necessary to calculate the asset’s fair value for the purpose of comparing it with the asset’s carrying amount.

o The information should be readily available from the client if they are performing such assessments and would have implications as to risk assessments for other audit areas and the audit overall.


Examples of the Qualitative Factors from those standards you could consider in planning include

• Macroeconomic conditions such as:

o A deterioration in general economic conditions,

o Limitations on accessing capital,

o Fluctuations in foreign exchange rates, or

o Other developments in equity and credit markets.



• Industry and market considerations such as:

o A deterioration in the environment in which an entity operates,

o An increased competitive environment,

o A decline in market-dependent multiples or metrics (consider in both absolute terms and relative to peers),

o A change in the market for an entity’s products or services, or

o A regulatory or political development.



• Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows

• Overall financial performance such as:

o Negative or declining cash flows,

o Or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods.



• Other relevant entity-specific events such as:

o Changes in management, key personnel, strategy, or customers,

o Contemplation of bankruptcy,

o Or litigation.



• Events affecting a reporting unit such as:

o A change in the composition or carrying amount of its net assets,

o A more-likely-than-not expectation of selling or disposing all, or a portion, or a reporting unit,

o The testing for recoverability of a significant asset group within a reporting unit,

o Or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.



• If applicable, A sustained decrease in share price(consider in both absolute terms and relative to peers).


• Preliminary analytics:

o If the client does not have strong interim closes, don’t use the information for analytical procedures

o When providing bookkeeping services to assist in adjusting and closing the books, take credit for this when planning and scoping low risk areas.

o If you maintain the client’s fixed assets as a client service, then there isn’t a need to test depreciation calculations.

o Of course we cannot audit our own work so be sure the client is taking responsibility for any such services and be sure they basically equate to math exercises and do not involve judgment such as determining estimates for them.


• Set a firm-wide goal for completing the planning processthrough manager and partner level review several weeks (atleast three in my view) before fieldwork. This will help ensure adequate time is given for consideration of the audit and that the team is ready.

• If controls will be relied upon to reduce control risk, then the control testing should be done well in advance of the fieldwork for substantive testing and definitely before samples are selected using control risk assessed below maximum.

• Consider the cost/benefit of control testing before deciding to do such. Control testing is not required and it may be more efficient to perform substantive testing in certain cases rather than also doing control testing.


• Stop control testing early on if errors are found to the extent that the control may not be relied upon.

o There is no need to continue testing the entire sample selected.

• Customize audit programs:o Delete steps from canned programs that don’t applyo Add steps that are specific to the cliento This will make the staff more efficient and they won’t

spend time doing steps that have no meaning.


• A significant account in amount DOES NOT always equal significant risk.

o Just because an account balance is high in dollar amount doesn’t mean that it is risky

o Fixed assets and cash are good examples. They may be high dollar, but low risk because they may not be complex areas to account for or audit.

• Low risk areas may not require any testing, or perhaps only minimal testing. Have clear discussions during planning to avoid over auditing of these areas.


• Segregation of dutieso Often an issue in smaller organizations with fewer

employees

o Owner-manager involvement here can provide mitigation to such a situation

• Periodic reviews• Approval of major transactions• Receiving and reviewing bank statements directly• Monitoring accounts receivable actively• Inventory counts


• IT issues for smaller entities

o Many smaller entities use of the shelf software without modifications

o This reduces risk of override of program controls

o There is still a need to understand and document basic IT controls:

• Secure access to databases and critical applications• Control of upgrades, including keeping current such as for

payroll software• Data back-up routines• Restricting access to critical hardware


• Documenting understanding of ICFR (internal control over financial reporting)

o A memorandum is probably the most efficient method for smaller less complex organizations

o Be sure to cover the COSO elements at a high level

o Address the significant cycles:• Revenue/receivables• Purchases/payables• Payroll

o Memos covering these areas can touch on cash, asset capitalization and debt


• Documenting understanding of ICFR (internal control over financial reporting)

o Add inventory control where relevant

o Customize further based on the industry and entity

o Use job titles rather than people’s names when documenting. This cuts down on re-work

o Questionnaires and checklists could be useful, but think twice because they are loaded with boiler plate

• This often leads to repeated responses of not applicable or not present

• Can be a time waster


• When doing walkthroughs

o Follow the entire process, cradle to grave

o Be sure to interview all of the staff along the process, don’t just rely on the narrative from controller or bookkeeper

o See if the personnel understand what they are doing and why

o Corroborate: ask to be shown what happens, not just told


• When doing walkthroughs

o Use follow-up questions

o Consider the findings and document appropriately

o This is typically an area where inexperienced staff require a lot of coaching


• Auditing accounting estimates

o Making accounting estimates will often fall to the owner-manager. As such, inquires can be focused on one person.

o With respect to estimates, particularly related to fair value, it is beneficial to meet with management early in the process to discuss the need for a specialist.


• Auditing accounting estimates

o While the process for making the estimates is less formal, there still should be a process. The auditor can provide advice on how management might address critical estimates, but be wary of actually making the estimates for management.

o Management must consider estimation uncertainty in their process. Smaller entities are less likely to have the experience in this area. Here auditors can provide some advice and direction.


• Related parties

o Related party transactions create risk in all sizes of entity and merit special consideration

o In smaller entities, controls over related party transactions are likely to be less formal and undocumented

o The auditor should discuss related parties with management and its process for internal controls over these transactions

o Audit procedures should be designed to identify related party transactions which were not discussed with management


• Client assistance:o Assess the level of client assistance

o Yell for help as soon as you need it

o Prepare tailored, specific PBC lists with examples of formats you would like the client to use

o Use terminology that is familiar to the client to enhance their understanding, inclusive of specific report titles

o Include prioritization of items requested and indicate timelines of when they will be needed

o Consider having your client populate testing spreadsheets based on the sample selected

o Be careful when the client overloads you with documents and information. Keep only what you need.


• Fieldwork:o Get teams to focus on complex, more troublesome areas

first

o Permanent file documents should be bookmarked and highlighted by the first person to read them to facilitate faster review and ease of future reference

o Review workpapers in the field so the coaching notes can be addressed on the spot with the client if necessary

o The manager and partner need to be accessible to resolve issues timely


• Fieldwork:

o Financial statements should be drafted in the field.

o Consider drafting the financial statements upfront when the trial balance is provided by the client.

o Stay in the field until the job is substantially complete. Team members get pulled in various directions when they return to the office.


• Wrap-up and lock down:

o Have SAS 114 and 115 letters completed and delivered with financial statements

o Goal should be to have workpapers finalized prior to or concurrently with financial statement issuance.

o Consider having review and compilation workpaperslocked down as well. This forces timely finalization of binders.

Internal Control, Revisited


• As you know, COSO created (in 1992) the internalcontrol framework that is widely accepted in the US.

• It is the framework that all of our internal control work in our attestation engagements is based upon.

• Also SOX 404.

• A new exposure draft was released by COSO in December 2011.

• Updates the original framework with a fresh, modern approach.


• The original components of internal control willremain the same

o Control Environmento Risk Assessmento Control Activitieso Information and Communicationo Monitoring Activities

• New to the framework are 17 principles across the 5 components of internal control. Each principle is described with specific attributes in the framework.


• The new document contains more explicit advice and implementation guidance.

• Examples make it easy to use, clearer and relevant to today’s business environment.

• COSO expects to issue the updated framework and supporting documents during the first quarter of 2013.

• Time will tell how this will affect our audit process or at a minimum the guidance we use for such.

Questionsor

Comments?

Thank You!

Financial Statement Disclosure and Deficiencies

Steven W. Bierbrunner, CPA, MST

Steven Wm. BierbrunnerAudit Partner

Berman Hopkins Wright & LaHam,CPAs and Associates, LLP

Steve provides clients with a wide array of audit and tax functions, as well as consulting and entrepreneurial advice. His experience and education from both the accounting and tax side gives him a unique opportunity to help clients satisfy the necessary requirements for bonding and third party funding. Steve helps clients with forward looking strategies to help reduce tax liability and protect capital for growth.

FICPA 27th Annual Accounting Show

Steven W. Bierbrunner, CPA, MST (Florida, New Jersey & Virginia)

Financial Statement Disclosure &Deficiencies

September 21, 2012

Outline

• Determining necessary disclosures

• Peer Review and key issues reviewers look for

• Specific disclosures and examples

Determining Necessary Disclosures

• What is required for conformity with GAAP, must consider:

o Specific disclosures required by authoritative pronouncements (ASC, IFRS)

o Disclosures not specifically required by authoritative pronouncements but that are necessary to keep the financial statements from being misleading

o Other disclosures that may be helpful to third party stakeholders using the financial statements as well as considering how those disclosures may affect their conclusions about statements

Determining Necessary Disclosures

Keep in Mind:

• Financial statements and note disclosures are notabout reflecting the best possible results for the Company.

• Financial statements should reflect the true financial picture of the Company. What story do the financials and disclosures tell about the Company?

Peer Review & Key Issues

• Peer reviewer guides highlight current key issues to focus on, where disclosures may be inadequate: o Income Taxeso Fair Value Measurementso Debto Risks & Uncertainties – Going Concerno Related Partieso Share based compensationo Subsequent Events

Income TaxesASC 740

• General Disclosures for Income Taxes

• Specific to newer standards – ASC 740-10-50 Accounting for Uncertainty in Income Taxes

General Disclosures – Income Taxes

Requirements:

• Types of temporary differences

• Components of net deferred tax assets & liabilities

• Available operating loss carryforwards

• Benefits of operating loss carryforwards

• Variances between expected income tax provision & income tax provision allocated to continuing operations (tax rate reconciliation)

Significant Temporary DifferencesASC 740 10 50 8

• Defined as differences between financial and tax bases of assets & liabilities

• Use balance sheet terms (accounts receivable instead of bad debts)

• Usually describe items & methods of accounting in Summary of Accounting Policies

Components of Net Deferred Tax Assets& Liabilities

• Own note labeled Income Taxes• Table format works best

• Recommended/should:- All current & deferred tax assets & liabilities

off-set and presented as single amount- All non-current deferred tax assets & liabilities

off-set and presented as single amountRequired:

- show gross amounts def tax asset/liability then valuation allowance

Available Operating Loss CarryforwardsASC 740 10 50 3

• Requires:

o Amounts and expiration dates of loss carryforwards for income tax reporting purposes

o Loss carryforward for tax purposes = amount available to offset future taxable income

o Does not require disclosure of book (GAAP basis financial statement) operating loss carryforwds

Benefits of Loss CarryforwardsASC 740 10 50 9

• Requires: components of income tax provision to be disclosed and deferred tax asset recognized generally in income tax note

(may be on face of financial statement)• Components include tax benefit of loss

carryforward, less valuation allowance if, morelikely than not, all or portion of benefit will not be realized

• Deferred tax expense reduced by benefits of NOL carryforward in year NOL arises

Reasons for Differences between Income TaxProvision & Expected Provision

(Tax Rate Reconciliation)• Requires the reasons for difference be disclosed

o Numerical reconciliation only required for public companies

o Expected provision calculated by applying applicable federal/state rates to pretax income as reported on income statement compared to provision

o Differences caused by one or more of the following:• Permanent differences (T&E, Officer Life, Political

Donations)• Valuation allowances and changes to it• Tax credits• Enacted tax rate changes• Reversal of temporary differences in years with different

enacted tax rates

Sample DisclosureAccounting Policies – Income Taxes

Sample Disclosure NoteIncome Taxes

Accounting for Uncertainty in Income TaxesASC 740 10 50 15

• Required disclosures:

• Years open to examination• Prescribes more likely than not recognition threshold• Tax positions evaluated at least annually for recognition,

de-recognition and measurement using consistentcriteria.

• Disclose: interest, penalties, reconciliation of beginning balances to ending balances (activity during year = changes on balances forward, current year activity, lapses in statute of limitations, settlements)

Uncertainty in Income TaxesSample Disclosure Detailed

• See Sample under Income Tax in Significant Accounting Polices for summary disclosure of uncertainty in income taxes

Fair Value Measurement DisclosureASC 820 10 50 2, 3, 8

• Requires several disclosures about assets and liabilities

• Broke down between recurring and non-recurring basis

• General policy disclosures

Fair Value MeasurementsGeneral Disclosure

• Summary of Significant Accounting Policies –General policy disclosure

• Even if detail disclosure required

Fair Value MeasurementsRecurring Basis

Includes: items that need to be valued on recurringbasis – financial assets and liabilities, investments,accounts receivable/payable, most current assets and liabilities

• Fair value of investments by levels 1(active markets), 2(other observable inputs) or 3(unobservable inputs)

• Amounts of transfers between levels, if applicable• Change in valuation technique• Quantitative information about significant unobservable

inputs (Level 3)

Fair Value MeasurementsRecurring Basis

Level 3• Reconciliation from beginning balances to closing

balances – includes transfers between levels, gains/losses, purchases, sales

• Valuation processes and inputs used

• Sensitivity to change inputs may have

Fair Value MeasurementsNon recurring Basis

• Includes: items not required to be measured on regular basis, only if incident occurred that would require management to address fair value/impairment- goodwill, intangible assets, long term non-financial assets and liabilities

• Fair value at end of period and reasons for measurement

• Level of fair value hierarchy (level 1, 2 or 3)

• For Levels 2 & 3:- Valuation techniques & inputs used- Change in valuation technique & why

Fair Value MeasurementsNon recurring Basis

• For Level 3:- Description of valuation process, policies and any

changes- Quantitative information about unobservable

inputs- Reconciliation beginning of period to end of

period including gains/losses, transfers, additions/purchases etc.

Fair Value MeasurementsSample Disclosures

DebtASC 470 10 50

YES, Debt - Believe it or not• Requires:

o Combined aggregate amount of maturities and sinking fund (principle reductions) requirements for all long term borrowings for each year for 5 years following balance sheet date (asc 470-10-50-1).

o Interest Costs (asc 835-20-50-1)o Current and long term portions, total debt outstandingo Collateralized by what, if applicable

• Should disclose:o Timing of payments (monthly, quarterly, annual)o amount of payments, including interest o interest rate o Maturity dates

• Terms for combined debt, individually immaterial o Only total amount payable and timing (“notes payable in monthly

installments”)o Current total of installments, range of interest rates and maturities.

DebtSample Disclosures

Risks & Uncertainties GeneralASC 275 10 50

• Existing at balance sheet date and subsequently up to the date of issuance

• Could significantly affect amounts reported in financial statements or functioning of Company

• Communicate inherent limitations to users of financial statements

• Does not require disclosure of all possible risks & uncertainties

Risks & UncertaintiesGeneral

• Requires disclosure of:o Nature of operations (all financial statements)o Use of Estimates (all financial statements)o Certain significant estimates (where applicable) ASC 275-10-50-8o Current vulnerability due to certain concentrations (where applicable)

• In current global and domestic economic, political and financial times, be prudent to disclose:

o Principle markets, geographic areas , foreign operationso Relative importance of each business line o Inventory subject to rapid technological obsolescenceo Real estate - assets, debt related

Risks & UncertaintiesGeneral

Sample Disclosures

Risks & UncertaintiesGoing Concern

• SAS 59 (AU341)

• If company’s ability to continue as going concern is in doubt, may be necessary to disclose conditions that raise a question.

• Judgment needed as to when necessary and how to word disclosure in notes and at what level put into opinion paragraph of auditor opinion/accountants report

Going Concern

• Defined as - inability to meet obligations as they come due without:

1) substantial disposition of assets outside ordinary course of

business2) restructuring of debt3) externally forced revisions to operations

• Requires modification of report if auditor/accountant has substantial doubt about entity’s ability to continue as going concern

Going Concern

If decide disclosure necessary, it should include:

• Conditions &events giving rise to assessment of entity’s ability to continue

• Possible effects of conditions & events• Managements evaluation of conditions & events and

any mitigating factors• Management’s plans• Information about recoverability or classification of

assets & liabilities• Use neutral wording (neither overly optimistic or

pessimistic, just disclosing not opining)

Going Concern

FASB currently working on incorporating authoritative literature guidance on required disclosures and

liquidation basis of accounting (exposure draft out for comment this summer)

Related Party TransactionsASC 850 10 50 1

• Why identification and disclosure is important:

o Transactions not assumed to be at arms length

o Activities may not normally be entered into with third parties

o Potential for fraud/abuse

Related Parties

• Requires the following disclosures:

o Nature of relationship

o Description of transactions for each of the financial statement periods presented (info deemed necessary to understand effects on financial statements)

o Amount of transactions for each period of financial statements

o Amounts/balances due to/from related parties at date of balance sheet

Related Parties

• Typical transactions include:

o Officer/stockholder loanso Guaranteeso Purchases, sales and AR/AP between affiliated

companieso Leases between stockholder & company

Related PartiesSample Disclosures

Share Based CompensationASC 718 10 50 1

• Requires disclosure of:

o Nature & terms of arrangements that existed during period & potential effects on shareholders

o Income statement effect of compensation cost arising form arrangements

o Method of determining fair value of goods/services received or equity instruments granted during the period

o Cash flow effects of arrangements

Share Based Compensation

The following should be disclosed:

• Description of arrangement including general terms, service period, substantive conditions, maximum contractual term of options & number of shares authorized

• Method used to determine compensation cost from arrangements with employees

Shared Based Compensation

Should be disclosed (continued):• For most recent year income statement presented:

- Number & weighted average exercise price for options outstanding at beginning of year, end of year, exercisable or convertible at end of year,and granted, exercised, converted, forfeited or expired during the year.

- Number & weighted average grant date fairvalue(or calculated/intrinsic value) of equityinstruments non-vested at beginning of year, end of year & granted, vested, or forfeited during the year


Should be disclosed (continued):

For each year income statement presented:

• Weighted average grant date fair value (calculated or intrinsic value) of options or other equity instruments granted during the year

• Total intrinsic value of options exercised or converted, share-based liabilities paid and total fair value of shares vested during the year



For fully vested options & options expected to vest at date of balance sheet:

• Number, weighted average exercise price & weighted average remaining contractual term options outstanding

• Number, weighted average exercise price & weighted average remaining contractual term options currently exercisable



Entity’s total share based payment or compensation arrangements:

• Each year income statement presented:o Total compensation cost recognized in income as well as related

tax benefit and capitalized as part of asseto Description of significant modifications , number employees

affected, & total incremental compensation cost

• As of latest balance sheet date, total compensation cost related to non-vested awards not yet recognized & weighted average period over which expected to be recognized


Entity’s total share based payment or compensation arrangements:• Amount of cash received from exercised options

granted & tax benefit realized from options exercised during the period

• Amount of cash used to settle equity instruments granted

• Description of entity’s policy for issuing shares upon exercise or conversion of options including source of shares and, if entity expects to repurchase shares in following annual period, estimate of amount of shares to be repurchased

Shared Based CompensationSample Disclosure

Subsequent EventsASC 855 10 50 1

Requires disclosure of the date through which subsequent events have been evaluated & whether that date is the date financial statements were issued or available to be issued.

o Regardless of whether a subsequent event is disclosed

Sample

Management has evaluated subsequent events through February 25, 2012, the date which the financial statements were available to be issued, and has determined that no additional material transactions have occurred that would warrant disclosure in the financial statements.

Questions ?

Thank You!

IFRS (International) Update - From a Global Perspective

Lynn H. Clements, DBA, CPA, CMA, CFM, CFE, Cr.FA

,

DBA, CPA, CMA, CFM, CFE, CrFAProfessor, Florida Southern College

Dr. Lynn H. Clements, Professor of Accounting at Florida Southern College, began as an adjunct instructor in 1984, and as a full-time instructor in 1990. After earning her Bachelor of Science degree at Florida Southern College, she practiced public accounting for 6 years, and then earned the Master of Business Administration degree at FSC. She has been certified as a Florida CPA since 1980, as a CMA (Certified Management Accountant) since 1992, as a CFM (Certified in Financial Management) since 1997, as a Cr.FA (Certified Forensic Accountant) since 2002, and as a CFE (Certified Fraud Examiner) since 2004. She is a member of the Florida Institute of Certified Public Accountants, American Institute of Certified Public Accountants, the Institute of Management Accountants (IMA), the American Accounting Association, and the Association of Certified Fraud Examiners. Lynn earned her Doctor of Business Administration degree from NovaSoutheastern University in March 2002. Her interests include family activities, reading, travel, and music.

IFRS Update –From a Global Perspective

Dr. Lynn H. ClementsCPA CMA CFM CFE Cr.FA

September 21, 2012

Objectives

What is harmonization?Is harmonization between U. S. GAAP and IFRS probable? What are the current issues affecting harmonization?Where do we stand with harmonization?IFRS for small and medium-sized entities (SMEs).

What is Harmonization?Verbharmonize (third-person singular simple present

harmonizes, present participle harmonizing,simple past and past participle harmonized)

(intransitive) To be in harmonious agreement.(intransitive, music) To play or sing in harmony.(transitive) To bring things into harmony, or to make

things compatible.(transitive) To provide the harmony for a melody.

Source: Wiktionary.org

FASB’s Definition of Harmonization

“Initial efforts focused on harmonization—reducing differences among the accounting principles used in major capital markets around the world. By the 1990s, the notion of harmonization was replaced by the concept of convergence—the development of a single set of high-quality, international accounting standards that would be used in at least all major capital markets.”

Source: “International Convergence of Accounting Standards-Overview” [see next slide]

Is harmonization between U. S. GAAP and IFRS probable?

YES!

What are the current issues affecting harmonization?

SECMary Schapiro

SEC’s acting Chief Accountant, Paul A. BeswickFASBIASB

Where do we stand with harmonization?

It depends on the day

Adoption vs. convergence

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IFRS for small and medium-sized entities (SMEs)

Is this the “little GAAP” we’ve been hoping for?

IFRS for SMEs

What are the IFRS SMEs???

Principles based (not rules based)Qualitative, not quantitativeObject: to provide information:

That is useful for economic decision-makingBy a broad range of usersWho are not in a position to demand reports tailored to meet their particular information needs

ONLY 230 PAGES LONG (preface to glossary)

What companies are SMEs?

NO public accountabilityNeither debt nor equity instruments are traded in a public marketNot in the process of issuing those instruments in the public marketDoes not hold assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses such as

Banks, credit unions, insurance companiesSecurities broker/dealers, mutual funds and investment banks

What companies are SMEs? (cont)

Publish general purpose financial statements for external users such as:

Owners not involved in managing the businessExisting and potential creditorsCredit rating agencies

IFRS SME Requirements

Basis: “Concepts and Pervasive Principles”Financial Statements

“Fair presentation”Complete set of statements

Balance SheetStatement of Revenues, Expenses and Changes in Fund BalanceStatement of Cash FlowsNotes to Financial Statements

All “comparative”

Sources

www.iasb.orgwww.sec.govwww.fasb.org

Questions?

Dr. Lynn H. ClementsCPA CMA CFM CFE Cr.FA

Dorotha C. Tanner Chair in Ethics in Business and EconomicsProfessor of AccountingFlorida Southern College

(863) [email protected]

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Documents

6HSWHPEHU )W /DXGHUGDOH - CPA · PDF fileRisk 1based 1standards 1in 1the 1clarified 1SASs • The codification of the clarified standards was established by the issuance of SAS No