Accountants' Handbook, Special Industries and Special Topics

By D. R. Carmichael and Lynford Graham

This highly regarded reference is relied on by a considerable part of the accounting profession in their day-to-day work. This handbook is the first place accountants, auditors, bankers, lawyers, financial analysts, and other preparers and users of accounting information look to find answers to questions on accounting and financial reporting. The new edition will be updated to reflect the new FASB Codification, as well as including expanded coverage of fair value and guidance on developing fair value estimates, fraud risk and exposure, healthcare, and IFRS.

• Language: English
• Publisher: Wiley
• Release date: May 4, 2012
• ISBN: 9781118407110

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Table of Contents

Update Service

Title Page

Copyright

Preface

About the Editor

About the Contributors

Chapter 22: Personal Financial Statements

22.1 What Are They? And Why Do We Need Them?

22.2 Practical Tips

22.3 Rules and Guidance in Presenting Asset Values

22.4 Rules and Guidance in Presenting Liabilities

22.5 Provision for Income Taxes

22.6 Statement of Changes in Net Worth

22.7 Disclosures

22.8 Compilation

22.9 Review

22.10 Audits

22.11 Reports

22.12 Compiled Statements Only for Client Internal Use

22.13 Sources and Suggested References

Chapter 23: Stock-Based Compensation

23.1 History of Accounting for Stock-Based Compensation

23.2 Accounting for Stock-Based Compensation

23.3 Estimating Fair Value

23.4 Special Topics

23.5 Disclosure

23.6 Accounting Standards Codification

23.7 International Perspective

23.8 Sources and Suggested References

Chapter 24: Fair Value Measurement

24.1 Introduction

24.2 Why the Trend Toward Fair Value Accounting?

24.3 History and Evolution of Fair Value

24.4 Fair Value Measurements Standards and Concepts

24.5 Fair Value Option

24.6 Auditing Fair Value Measurements

24.7 Conclusion

Chapter 25: Valuation of Assets, Liabilities, and Nonpublic Companies

25.1 Introduction

25.2 Standards of Value

25.3 Auditing Guidance

25.4 Business Valuation Basics

25.5 Business Valuation Methods

25.6 Discounts and Premiums

25.7 What a Valuation Report Should Contain

25.8 Intangible Assets—ASC 805/350 Issues

25.9 Does It All Add Up?

25.10 Credentials of a Valuation Analyst

Appendix A BVR's Glossary of Business Valuation Terms, 2009

Appendix B Additional Sources of Study

Chapter 26: Accounting for Derivatives: A Primer

26.1 Overview

26.2 Definition of a Derivative

26.3 Exemptions

26.4 Embedded Derivative Instruments

26.5 Accounting Treatment

26.6 Disclosures

26.7 International Financial Reporting Standards and Derivatives

26.8 Sources and Suggested References

Chapter 27: Pension Plans and Other Postretirement and Postemployment Benefits

27.1 Background, Environment, and Overview

27.2 Sponsor Accounting

27.3 Sponsor Accounting for Nonrecurring Events

27.4 Sponsor Accounting for Nonqualified Plans

27.5 Plan Accounting

27.6 Accounting for Postretirement Benefits Other Than Pensions

27.7 Employers' Accounting for Postemployment Benefits

27.8 Sources and Suggested References

27.9 Appendix

Chapter 28: Not-for-Profit Organizations

28.1 Not-for-Profit Accounting Environment

28.2 Not-for-Profit Accounting Principles and Reporting Practices

28.3 Specific Types of Organizations

28.4 Audit Considerations for a Not-for-Profit Organization

28.5 Sources and Suggested References

Appendix 28.1: Factors to Be Considered in Distinguishing Contracts for the Purchase of Goods or Services from Restricted Grants

Appendix 28.2: Factors to Be Considered in Assessing Whether Contributed Services Require Specialized Skills

Appendix 28.3: List of Factors to Be Considered in Determining Whether an Organization Would Typically Need to Purchase Services if Not Provided by Donation

Appendix 28.4: Factors to Be Considered in Assessing Whether a Donor Has Made a Bona Fide Pledge to a Donee

Appendix 28.5: List of Factors to Be Considered in Deciding Whether a Gift or Pledge Subject to Donor Stipulations Is Conditional or Restricted

Appendix 28.6: Consideration of Whether Items May Be Reported as Operating or Nonoperating

Appendix 28.7: Not-for-Profit Accounting Literature: Cross-References Between the ASC Topics and Previous Guidance

Chapter 29: Cost-Volume-Revenue Analysis for Nonprofit Organizations

29.1 Questions Answered by CVR Analysis

29.2 Analysis of Revenues

29.3 Analysis of Cost Behavior

29.4 CVR Analysis with Variable Revenue Only

29.5 Break-Even Analysis

29.6 CVR Analysis with Fixed Revenue Only

29.7 CVR Analysis with Variable and Fixed Revenues

29.8 Program Mix Analysis

29.9 Management Options

29.10 Sources and Suggested References

Chapter 30: Financial Institutions

30.1 Overview

30.2 Banks and Savings Institutions

30.3 Mortgage Banking Activities

30.4 Investment Companies

30.5 Sources and Suggested References

Chapter 31: Real Estate and Construction

31.1 Real Estate Industry

31.2 Real Estate Transactions

31.3 Capitalized Cost of Real Estate

31.4 Allocation of Costs

31.5 Valuation Issues

31.6 Construction Revenue Recognition

31.7 Operations of Properties in Use

31.8 Accounting for Investments in Real Estate Ventures

31.9 Financial Reporting

31.10 Sources and Suggested References

Chapter 32: Federal Government Accounting, Budgeting, and Auditing

32.1 Federal Government Organization

32.2 Federal Financial Management

32.3 Federal Financial Reporting

32.4 Federal Budget Process

32.5 Auditing in the Federal Government

32.6 Emerging Issues

32.7 Conclusion

Appendix A: Selected Financial Management Legislation

Appendix B: Important Budgetary Accounting Terms

Chapter 33: State and Local Government Accounting

33.1 Introduction

33.2 Nature and Organization of State and Local Government Activities

33.3 Source of Accounting Principles for State and Local Government Accounting

33.4 Governmental Accounting Principles and Practices

33.5 Basic Financial Statements Required for Special-Purpose Governments

33.6 Accounting Principles and Practices—Public Colleges and Universities

33.7 Audits of Governmental Units

33.8 Concluding Remarks

33.9 Sources and Suggested References

Appendix Pronouncements on State and Local Government Accounting

Chapter 34: Oil, Gas, and Other Natural Resources

34.1 Introduction

34.2 Oil and Gas Exploration and Producing Operations

34.3 Accounting for Joint Operations

34.4 Acceptable Accounting Methods

34.5 Accounting for Natural Gas Imbalances

34.6 Hard-Rock Mining

34.7 Accounting for Mining Costs

34.8 Accounting for Mining Revenues

34.9 Supplementary Financial Statement Information—Ore Reserves

34.10 Accounting for Income Taxes

34.11 Financial Statement Disclosures

34.12 Sources and Suggested References

Chapter 35: Health Care Organizations

35.1 The Health Care Industry

35.2 Authoritative Pronouncements

35.3 Accounting Principles

35.4 Special Accounting Problems of Specific Types of Providers

35.5 Financial Statements

35.6 Statutory/Regulatory Reporting Issues

35.7 Sources and Suggested References

Chapter 36: Regulated Utilities

36.1 Nature and Characteristics of Regulated Utilities

36.2 History of Regulation

36.3 Regulatory Commission Jurisdictions

36.4 Traditional Rate-Making Process

36.5 Interrelationship of Regulatory Reporting and Financial Reporting

36.6 Accounting Standards Codification 980, Regulated Operations

36.7 ASC Topic 980-360-35, Cost Disallowances

36.8 ASC Topic 980-340, Other Assets and Deferred Costs

36.9 Discontinuation of Rate-Regulated Accounting: ASC Topic 980-20

36.10 Other Specialized Utility Accounting Practices

36.11 Sources and Suggested References

Chapter 37: Producers or Distributors of Films

37.1 History of Guidance

37.2 Revenue Reporting

37.3 Costs and Expenses

37.4 Presentation and Disclosure

Chapter 38: Estates and Trusts

38.1 Estates—Legal Background

38.2 Accounting for Estates

38.3 Trusts and Trustees—Legal Background

38.4 Accounting for Trusts

38.5 Sources and Suggested References

Chapter 39: Bankruptcy

39.1 Overview

39.2 Alternatives Available to Troubled Companies

39.3 General Provisions of Bankruptcy Code

39.4 Handling of Claims Under Chapter 11

39.5 Operating Under Chapter 11

39.6 Chapter 11 Plan

39.7 Reporting Requirements in Bankruptcy Cases

39.8 Sources and Suggested References

Chapter 40: Detecting Fraud

40.1 Introduction

40.2 Types of Fraud

40.3 Fighting Fraud: An Overview

40.4 Fraud Detection: The Earliest Approaches

40.5 Fraud Detection: The Red-Flag Approach

40.6 Management and the Board of Directors

40.7 Relationships with Others

40.8 Organization and Industry

40.9 Financial Results and Operating Characteristics

40.10 Strategic Fraud Detection

40.11 Conclusion

Chapter 41: Forensic Accounting in Litigation Consulting Services, Investigations, and Compliance Matters

41.1 Introduction

41.2 Accountant's Role in Dispute Resolution Proceedings

41.3 Accountant's Role in Investigations and Compliance Matters

41.4 Globalization Impact

Chapter 42: Introduction to E-Discovery

42.1 Computers? Now, That Changes Everything!

42.2 Shift to Digital Data Storage and Communication

42.3 Increasing Data Volumes

42.4 Increased Value of Digital Data

42.5 Going After Evidence

42.6 The Legal Setting

42.7 Today's Use of Electronic Discovery Techniques

42.8 More/Better Substantive Information (Metadata)

42.9 Audit Trails (Traffic Data)

42.10 Faster/Better/Cheaper

42.11 Role of Computer Forensics

42.12 Evidence Preservation

42.13 Physical Imaging versus Logical Backups

42.14 Forensic Recordkeeping

42.15 Acquisition Notes

42.16 Chain-of-Custody Documentation

42.17 Analysis Workpapers

42.18 Get the Whole Enchilada

42.19 Evidence Discovery

42.20 Data Searching

42.21 Deleted/Slack/Unallocated Space

42.22 Conclusion

Chapter 43: Financial Expert Witness Challenges and Exclusions: Results and Trends in Federal and State Cases since Kumho Tire

43.1 Introduction

43.2 Methodology and Overview of Observations and Conclusions

43.3 Expert Witness Challenges and Exclusions: 2000–2002

43.4 Reasons Financial Experts Were Excluded: Relevance, Reliability, and Qualifications

43.5 Exclusion of Plaintiff Financial Experts

43.6 Types of Financial Experts Excluded

43.7 June 30, 2003 Update: Observations

43.8 Summary and Conclusions

43.9 Final Comments Relevant to the Certified Public Accountant Designation

Index

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Preface

The twelfth edition of Accountants' Handbook continues the tradition established in the first edition nearly 90 years ago of providing a comprehensive single reference source for understanding current financial statement and reporting issues. It is directed to accountants, auditors, executives, bankers, lawyers, and other preparers and users of accounting information. Its presentation and format facilitates the quick comprehension of complex accounting-related subjects updated for today's rapidly changing business environment.

This edition of the Handbook continues the presentation of two soft-cover volumes; this edition contains a total of 43 chapters. To provide a resource with the encyclopedic coverage that has been the hallmark of this Handbook series, this edition again focuses on financial accounting and related topics, including those auditing standards and audit reports that are the common ground of interest for accounting and business professionals.

A few years make quite a difference in the modern accounting and auditing world. Sarbanes-Oxley is part of the fabric of today's business environment, but we wrestle with a codification of generally accepted accounting principles that has reoriented our approach to citing the accounting literature and day-to-day updates on U.S. and Securities and Exchange Commission progress toward adopting International Financial Reporting Standards in the United States. Auditors of public companies continue to follow the growing Standards of the Public Company Accounting Oversight Board, and such Standards continue to diverge from those set by the Auditing Standards Board of the American Institute of Certified Public Accountants and adopted by the Government Accountability Office in its Yellow Book Standards. In 2011, the AICPA implemented a new codification of its literature, more aligned with the presentation format of the International Federation of Accountant's International Audit and Attest Standards Board format. The clarity standards are designed to better highlight the requirements of the standards and significantly align AICPA and IAASB Standards. Chapter 3 in this edition (by Tom Jones) reviews the recent revolution in accounting standards and the contemporary issues in merging U.S and international GAAP. There are also new chapters on fair value (Mark Zyla) and private company valuation issues (Neil Beaton). A new and comprehensive chapter on financial institutions by Zabihollah Rezaee addresses contemporary industry issues including those raised in the Dodd-Frank Financial Reform Act of 2010. We are in the middle of a significant revolution in the health care industry, and there remain a myriad of uncertainties surrounding the future in this industry at the date of publication.

In addition, most chapters have incorporated some international accounting perspectives when possible. Fraud continues to be an important element in our business environment, as we continue to focus on fraud and fraud-related issues. These topics have become more prominent in the business literature and in practice, and management and auditors have, by law and regulation, assumed greater responsibility for preventing and detecting fraud.

References to the professional accounting literature in this edition include references to the new Financial Accounting Standards Board Codification (Accounting Standards Codification, or ASC) in each chapter. Sometimes the original literature is also cited, where it can be helpful in understanding the development of thought and can help orient us to the prior literature. We have retained the chapter by Reed Storey on the development of the conceptual framework and plan to carry it forward because of its unique insight and historical content. In this edition we have also eliminated a number of redundant and overlapping chapters and those that were very specific to historical issues.

This edition of the Handbook is divided into two convenient volumes. Volume One: Financial Accounting and General Topics includes:

A comprehensive review of the framework of accounting guidance today and the organizations involved in its development, including the development of international standards

A compendium of specific guidance on general aspects of financial statement presentation, disclosure, and analysis, including SEC filing regulations

Coverage of specific financial statement areas from cash through shareholders' equity, including coverage of financial instruments

Volume Two: Special Industries and Special Topics includes:

Comprehensive coverage of the specialized environmental and accounting considerations for key industries, including a chapter on the film industry

Coverage of accounting standards applying to pension plans, retirement plans, and employee stock compensation and other capital accumulation plans

Diverse topics, including reporting by partnerships, estates and trusts, and valuation, bankruptcy, and forensic accounting

The specialized expertise of the individual authors remains a critical element in this edition, as it has been in all prior editions. Although the editor worked with the authors, in the final analysis, each chapter is the work and presents the viewpoint of the individual author or authors.

Content of the chapters in this edition has been prepared and/or reviewed by professionals practicing in accounting firms, financial executives, university professors, and financial analysts and executives. Every major international accounting firm is represented among the authors. These professionals bring to bear their own and their firms' experiences in dealing with accounting practice problems. All of the authors and technical reviewers are recognized authorities in their fields and have made significant contributions to the twelfth edition of the Handbook.

Our greatest debt is to the authors and reviewers of this edition. We deeply appreciate the value and importance of their time and efforts. We also acknowledge our debt to the editors of and contributors to 11 earlier editions of the Handbook. This edition draws heavily on the accumulated knowledge of those earlier editions.

Finally, we wish to thank John DeRemigis and Brandon Dust at John Wiley & Sons, Inc., for handling the many details of organizing and coordinating this effort.

For convenience, the pronoun he is used in this book to refer nonspecifically to the accountant and the businessperson. We intend this pronoun to include women.

L. Graham

D. R. Carmichael

About the Editor

Lynford Graham, CPA, PhD, CFE, is a Certified Public Accountant with more than 30 years of public accounting experience in audit practice and national policy development groups. He is a visiting professor of accountancy and executive in residence at Bentley University in Waltham, Massachusetts. He was a partner and the director of audit policy for BDO Seidman, LLP, and was a national accounting and SEC consulting partner for Coopers & Lybrand, responsible for the technical issues research function and database, auditing research, audit automation and audit sampling techniques. Prior to joining BDO Seidman LLP, Dr. Graham was an associate professor of accounting and information systems and a graduate faculty fellow at Rutgers University in Newark, NJ, where he taught financial accounting courses. Dr. Graham is a member of the American Institute of Certified Public Accountants and a past member of the AICPA Auditing Standards Board. He is a Certified Fraud Examiner and a member of the Association of Certified Fraud Examiners. Throughout his career he has maintained an active profile in the academic as well as the business community. In 2002 he received the Distinguished Service Award of the Auditing Section of the AAA. His numerous academic and business publications span a variety of topical areas including information systems, internal controls, expert systems, audit risk, audit planning, fraud, sampling, analytical procedures, audit judgment, and international accounting and auditing. Dr. Graham holds an MBA in industrial management and PhD in business and applied economics from the University of Pennsylvania (Wharton School).

About the Contributors

Michael A. Antonetti, CPA, CMA, is a partner with Crowe Horwath LLP. Mr. Antonetti has over 20 years of experience providing assurance and business advisory services to clients in many industries including manufacturing, distribution, banking, professional services, transportation and hospitality. Mr. Antonetti's experience also includes assisting clients with merger, acquisition, and divestiture transactions and application of related accounting standards. Mr. Antonetti also serves clients with international operations in Europe, Asia, and North and South America.

Yogesh Bahl, CPA, MBA, has more than 18 years of experience in leading global forensic investigations, delivering dispute consulting services, and helping companies manage enterprise risks. He leads the National Life Sciences Practice and the Northeast Antifraud practice. Yogesh specializes in assisting companies manage issues involving accounting, third parties, strategic alliances, and intellectual property. He has helped companies address and resolve multimillion-dollar issues involving accounting and finance, business partner reporting, unclear contract terms, and supply chain infiltration. In addition, Yogesh's experience includes strengthening the financial and audit-related provisions in various types of agreements including licensing, collaboration, distribution, and co-promotion agreements. By leveraging his advisory experience with corporations, Yogesh is effective when testifying on industry practice, breach of contract, accounting, and intellectual property matters.

Noah P. Barsky, PhD, CPA, CMA, is an associate professor at the Villanova School of Business. He earned his BS and MS in accounting from The Pennsylvania State University and his PhD from the University of Connecticut. His professional experience includes practice in the fields of accounting and finance as an analyst, auditor, and business consultant as well as instructional design and delivery for global professional services firms. He has been recognized with multiple national and international awards and grants for his scholarly writing and curriculum innovation.

Neil Beaton, CPA, ABV, CFAI, ASA, MBA is a managing director with Alvarez & Marsal Valuation Services in Seattle, Washington. He specializes in the valuation of public and privately held businesses and intangible assets for purposes of litigation support (marriage dissolutions, lost profits claims and others), acquisitions, sales, buy-sell agreements, ESOPs, incentive stock options, and estate planning and taxation. He also performs economic analysis for personal injury claims and for wrongful termination and wrongful death actions. His primary areas of concentration are valuations of early-stage, venture-backed company and litigation support across a broad spectrum of financial and economic matters. With more than 23 years of valuation and litigation support experience, Mr. Beaton has been involved in valuing companies in all major industries and has provided expert testimony in a number of domestic and international venues. Prior to joining A&M, Mr. Beaton spent nine years with Grant Thornton, where he most recently served as the Global Lead of Complex Valuation. He is a co-chair of the AICPA's Valuation of Private Equity Securities Task Force and a member of the AICPA's Mergers & Acquisitions Disputes Task Force. He is a member of the Business Valuation Update Editorial Advisory Board and on the Board of Experts, Financial Valuation and Litigation Expert.

Benedetto Bongiorno, CPA, CRE, has more than 40 years of public accounting experience providing auditing, accounting, and consulting services to both public and private real estate companies. He has served as national director of real estate for Deloitte & Touche and BDO and has many years of experience in research and practical application of specially developed substantive analytical audit procedures and technologically based tools. He has made major contributions in public accounting, both in real estate and financial audits and in the field of continuous audit. As a cofounder and head of audit and accounting consulting services at Natural Decision Systems, Inc., he was awarded U.S. patents in both continuous assurance and internal control. Mr. Bongiorno continues to apply his extensive expertise in improving real evaluation techniques, transparency, and cost-effective auditing strategies through consulting for public accounting firms as well as both public and privately held companies.

Brad A. Davidson, CPA, is partner in charge of the Securities and Exchange Commission competency center of the national office of Crowe Horwath LLP. The Assurance Professional Practice group (or national office) has responsibility for technical consultations, quality control, and communications of current SEC and accounting developments. Brad specializes in the financial institutions industry. He serves as Crowe's representative to the Center for Audit Quality's SEC Regulations Committee, which meets quarterly with SEC staff to discuss emerging financial reporting issues. In December 2010, Brad served as steering committee chair of the American Institute of Certified Public Accountants annual national conference on current Securities and Exchange Commission and Public Company Accounting Oversight Board developments. Earlier in his career, he completed a two-year professional fellowship with the AICPA in Washington, DC.

Jason Flynn, FSA, MAAA, is a principal in the Human Capital Total Rewards practice at Deloitte Consulting LLP, where he provides broad technical guidance and advisory consulting with regard to pension and retiree medical benefit plans to a wide spectrum of clients including multinational clients. Jason serves as a national leader for Deloitte Consulting's retirement practice.

Sydney Garmong, CPA, is partner in the audit practice with Crowe Horwath LLP and located in Washington, DC. Her primary responsibility is to address accounting and regulatory issues affecting financial institutions. She is a member of the American Institute of Certified Public Accountants Depository Institutions Expert Panel, which maintains an ongoing liaison with various regulatory and standard-setting agencies that impact financial institutions, including the federal bank regulators, the Securities and Exchange Commission, and the Financial Accounting Standards Board. In addition to addressing technical issues, Sydney is a frequent speaker at industry and regulatory conferences. Prior to joining Crowe Horwath, she was a senior manager at the AICPA in Washington, DC. During her time with the AICPA, she addressed financial institution and financial instrument accounting, auditing, and regulatory matters.

Martha Garner, CPA, is a managing director in PricewaterhouseCoopers' national office specializing in health care, not-for-profit, and governmental accounting and financial reporting matters. She currently chairs the American Institute of Certified Public Accountants' Health Care Expert Panel and has served on numerous Financial Accounting Standards Board, Government Accounting Standards Board, and AICPA task forces and committees. She is a contributing author for Montgomery's Auditing (John Wiley & Sons, 1998) and the Financial and Accounting Guide for Not-for-Profit Organizations (John Wiley & Sons, 2012), and has authored articles and publications on a variety of accounting topics.

Timothy Geddes, FSA, MAAA, is a senior manager in the Human Capital Total Rewards practice at Deloitte Consulting LLP, where he provides broad technical guidance and advisory consulting with regard to pension and retiree medical benefit plans to a wide spectrum of domestic and multinational clients. Timothy serves on the American Academy of Actuaries Pension Committee and has spoken at numerous national actuarial meetings.

Frederick Gill, CPA, is senior technical manager on the Accounting Standards Team at the American Institute of Certified Public Accountants, where he provides broad technical support to the Accounting Standards Executive Committee. During his over 20 years with the AICPA, he participated in the development of numerous AICPA Statements of Position, Audit and Accounting Guides, Practice Bulletins, issues papers, journal articles, and practice aids. He was a member of the U.S. delegation to the International Accounting Standards Committee, represented the U.S. accounting profession on the United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting, and was a member of the National Accounting Curriculum Task Force. Previously he held several accounting faculty positions.

Alan S. Glazer, PhD, CPA (inactive), is the Henry P. and Mary B. Stager Professor of Business at Franklin & Marshall College, Lancaster, Pennsylvania. He was associate director of the Independence Standards Board's conceptual framework project and has been a consultant to several AICPA committees. His articles on auditor independence, not-for-profit organizations, and other issues have been published in the Journal of Accountancy, CPA Journal, Issues in Accounting Education, Accounting Horizons, and other academic and professional journals. He is also coauthor of a three-volume series of portfolios on financial statement analysis published by Bloomberg BNA.

Lynne M. Glennon, CPA, MST, is a full-time instructor for DePaul University's Master of Science in Taxation program. She currently teaches accounting for income taxes, transactions in property, and taxation of corporations and shareholders on campus as well as online for a national CPA firm. Prior to teaching full time, she worked in both industry and public accounting for 20 years as a tax director and tax consultant. As director of tax planning for Global Hyatt Corporation, she was primarily responsible for tax planning support on large-scale restructurings and mergers, acquisitions and dispositions, and management and control of the federal audit process, including communications with the Internal Revenue Service. As senior manager in Deloitte & Touche's lead tax services group, she focused on corporate and partnership taxation and served a number of multinational clients in the manufacturing, distribution, and service industries. Ms. Glennon is a Certified Public Accountant in the State of Illinois and a member of the American Institute of Certified Public Accountants. She is a graduate of the University of Notre Dame with a BA in economics; her MST degree is from DePaul University.

Bill Godshall, CPA. Since joining Coopers & Lybrand in 1990, Bill has had extensive experience in the energy and mining sector of assurance practices at two international accounting firms. He has worked on oil and gas audit and attestation engagements; utility audits, controls projects, and attestation engagements; and mining joint venture costs reviews. Bill also assisted his energy and mining clients with special accounting and auditing projects in the areas of derivatives, asset retirement obligations, leasing, and other complex topics. Bill spent two years at the Public Company Accounting Oversight Board, where he authored the inspection guidance for derivative accounting and auditing areas that is still in place today. In addition, Bill led the inspection of the audits of several energy and natural resource Securities and Exchange Commission issuers. Bill joined Frazier & Deeter's assurance practice in 2005 and serves as the lead partner for the assurance group's quality control function.

Richard A. Green, CPA, has over 25 years of auditing, accounting, and consulting experience, including all phases of external and internal auditing. Mr. Green leads the Sacramento public sector assurance practice of Macias Gini & O'Connell LLP. He served on the Governmental Accounting Standards Board Task Force on Pension Accounting Research and was recently appointed to the American Institute of Certified Public Accountants' State and Local Government Expert Panel Pension Comment Letter Task Force. Mr. Green is the engagement partner on the largest pension plan in the nation, the State of California Public Employees' Retirement System.

Frank J. Grippo, MBA, CPA, CFE, is an associate professor of accounting at William Paterson University in Wayne, NJ. He earned his BS in accounting from Seton Hall University and his MBA from Fairleigh Dickinson University. Prior to teaching, he was an auditor with Arthur Andersen & Co. His firm performs financial and accounting consulting for various nonprofit organizations, specializing in internal control structures, auditing, and fraud detection. Clients include well-known health and welfare, religious, and educational organizations.

Wendy Hambleton, CPA, is an audit partner working in the National SEC Department in BDO Seidman LLP's Chicago office. Prior to joining the SEC Department, Ms. Hambleton worked in the firm's Washington, DC, practice office. She works extensively with clients and engagement teams to prepare SEC filings and resolve related accounting and reporting issues. Ms. Hambleton coauthors a number of internal and external publications, including the AICPA's Guide to SEC Reporting and Warren Gorham & Lamont's Controller's Handbook chapter on public offering requirements.

Philip M. Herr, JD, CPA, PFS, is a senior case design analyst in the advance markets unit of AXA Equitable Life Insurance Company located in New York City. He is a former adjunct professor at Fairleigh Dickinson University, School of Continuing Education, and New Jersey City University. Phil specializes in the areas of: tax; estate and trusts; business succession and planning; personal financial planning; Employee Retirement Income Security Act issues and transactions; retirement, employee benefit, and executive compensation planning; and the use of life insurance, annuities, and insurance products. Phil is admitted to the New York and U.S. Tax Court Bars and is a member of the New York State Bar Association, American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants, and Association for Advanced Life Underwriting. Phil holds life, health, and variable insurance licenses in New Jersey and New York and Financial Industry Regulatory Authority 7, 24, 55, 63 and 65 securities licenses.

Frank Hydoski, PhD, is a director in the New York Forensics & Dispute Services practice of Deloitte Financial Advisory Services LLP. He is responsible for developing new products and approaches in forensic accounting and investigations for clients in both the private and public sector. Mr. Hydoski is internationally recognized for his work in complex investigations, especially those requiring information technologies to facilitate forensic analysis. He was the chief investigator examining the United Nations Oil-for-Food Programme and led a crucial part of the massive forensic effort in the investigation of Holocaust-era accounts held by Swiss banks.

Henry R. Jaenicke, PhD, CPA, was the C. D. Clarkson Professor of Accounting at Drexel University. He is the author of Survey of Present Practices in Recognizing Revenues, Expenses, Gains, and Losses (FASB, 1981) and is the coauthor of the twelfth edition of Montgomery's Auditing (John Wiley & Sons, 1998). He has served as a consultant to several American Institute of Certified Public Accountants committees, the Independence Standards Board, and the Public Oversight Board.

Richard R. Jones, CPA, is a senior partner in the National Accounting Standards Professional Practice Group of Ernst & Young LLP, where he is responsible for assisting the firm's clients in understanding and implementing today's complex accounting requirements. Mr. Jones's fields of expertise are in the areas of impairments, equity accounting, real estate, leasing, and various financing arrangements.

Tom Jones was the vice chairman of the International Accounting Standards Board from its founding in 2001 until 2009. Prior to this he was a trustee and vice chairman of the Financial Accounting Foundation, which oversees the Financial Accounting Standards Board. He was a member of the ITF and was chairman of the American Bankers Association CFO Committee. He has been elected to the Financial Executives International Accounting Hall of Fame. Mr. Jones's corporate experience includes 20 years with Citibank/Citicorp as executive vice president and principal financial officer. He previously served for 15 years with IT&T in Italy, Belgium, and New York.

Ira G. Kawaller is the founder and principal of Kawaller & Co., a boutique consulting firm that specializes in assisting commercial enterprises with their use of derivative contracts. He is also the managing partner of the Kawaller Fund. He can be reached at [e-mail]; additional biographical information about Dr. Kawaller can be accessed at www.kawaller.com/Ira_Kawaller_vita.pdf.

Darin W. Kempke, CPA, is a partner at KPMG LLP in its Philadelphia office. He is the national audit sector leader for KPMG's power and utility practice. He has been working with power and utility clients (regulated and nonregulated) all over the world in his 21-plus years in the industry both with Arthur Andersen LLP and currently with KPMG LLP. He specializes in business and accounting services to regulated and nonregulated energy companies, provides energy thought leadership for publications and the KPMG Global Energy Institute, is a frequent speaker on the power and utility conference and webinar circuit. He spent time in the KPMG LLP Department of Professional Practice working on energy issues including derivatives, leases, emissions, and variable interest entities. He is a Certified Public Accountant licensed in Missouri, Kansas, New York, New Jersey, Pennsylvania, and the District of Columbia. He is a graduate of the University of Kansas with a BS in accounting and a BS in business administration.

Cynthia L. Krom, PhD, CPA, CFE, is assistant professor of accounting and organizations at Franklin & Marshall College, Lancaster, Pennsylvania. She is active in the New York State Society of Certified Public Accountants as well as the American Accounting Association. She has published articles on the Bank Secrecy Act and terrorism financing in professional journals, and her research interests include strategic bankruptcy and accounting history.

Richard F. Larkin, CPA, is technical director of not-for-profit accounting and auditing for BDO USA, LLP, in Bethesda, MD. Previously he was the technical director of the Not-for-Profit Industry Services Group in the national office of PricewaterhouseCoopers. He is a Certified Public Accountant with over 40 years of experience serving not-for-profit organizations as independent accountant, board member, treasurer, and consultant. He teaches, speaks, and writes extensively on not-for-profit industry matters and is active in many professional and industry organizations. He has been a member of the Financial Accounting Standards Board Not-for-Profit Advisory Task Force and the American Institute of Certified Public Accountants Not-for-Profit Organizations Committee and chaired the AICPA Not-for-Profit Audit Guide Task Force. He participated in writing both the third and fourth editions of Standards of Accounting and Financial Reporting for Voluntary Health and Welfare Organizations, and the AICPA Practice Aid Financial Statement Presentation and Disclosure Practices for Not-for-Profit Organizations (1999). He graduated from Harvard College and has an MBA from Harvard Business School. He is a coauthor of the fourth, fifth, and sixth editions of Financial and Accounting Guide for Not-for-Profit Organizations (John Wiley & Sons).

Elizabeth Lindsay-Ochoa, JD, LLM (Taxation), joined AXA Equitable in July 2002. Her primary focus is in estate and charitable planning. She has presented to Certified Public Accountants, attorneys, and financial professionals on charitable and estate-planning topics. Speaking engagements have included the Association of Fundraising Professionals International Conference on Fundraising; the American Bar Association Real Property, Trust and Estate; and the ABA Tax Section and the Association for Advanced Life Underwriting. Liz has written articles for the Tax News Quarterly, Probate and Property, and National Underwriter. She also has submitted comments to Congress, the Federal Deposit Insurance Company, and the Internal Revenue Service as part of her committee work for the ABA. Liz graduated from Michigan State University with a BA in telecommunications. In 2001, she received her JD from Thomas M. Cooley Law School and, in 2005, her LLM (taxation) from the University of Denver. Previously, Liz was a fellow with the Charitable Planning and Organizations Committee with the ABA's RPTE section (2005–2007). She is the chair of the Non-Tax Issues Affecting the Planning and Administration of Estates and Trust and an acquisitions editor for ABA RPTE publications. Liz is admitted to practice law in Michigan, Colorado (inactive), New York, and Connecticut. She is a member of the Colorado and Michigan Bar Associations and the National Committee on Planned Giving. She also holds Financial Industry Regulatory Authority Series 7, 66 and 24 securities registrations.

James Mraz, CPA, MBA, is a professor of accounting and business at the University of Maryland University College. Mr. Mraz has taught accounting and business for over 30 years in several colleges. Mr. Mraz has also conducted accounting accuracy reviews for John Wiley & Sons since 2005 and completed the instructor's manual for Prentice Hall's Accounting Information System's textbook. Mr. Mraz was a government auditor for 33 years while serving in the Marine Corps, Department of Health & Human Services, and the Department of Defense. Mr. Mraz served as chief financial officer for a resale and recreation government organization.

Grant W. Newton, PhD, CPA, CIRA, is a professor of accounting at Pepperdine University. He is the author of the two-volume set Bankruptcy and Insolvency Accounting: Practice and Procedures: Forms and Exhibits, Sixth Edition (John Wiley & Sons, 2006) and coauthor of Bankruptcy and Insolvency Taxation, Second Edition (John Wiley & Sons, 1994). He is a frequent contributor to professional journals and has lectured widely to professional organizations on bankruptcy-related topics.

Don M. Pallais, CPA, has his own practice in Richmond, VA. He is a former member of the American Institute of Certified Public Accountants Auditing Standards Board and the AICPA Accounting and Review Services Committee. He has written a host of books, articles, and continuing professional education courses on accounting topics.

Cynthia Pon, CPA, has over 20 years of professional experience providing auditing, accounting, and consulting services to the private and public sectors. Ms. Pon leads the San Francisco Bay Area public sector assurance practice of Macias Gini & O'Connell LLP, bringing extensive experience in federal, state, and local financial and compliance auditing. She is experienced in the application of generally accepted accounting principles and has been recognized by the Governmental Accounting Standards Board for her leadership in assisting California governments with early implementation of its standards. Ms. Pon also serves on the Government Finance Officers Association Special Review Committee for Comprehensive Annual Financial Report awards and has instructed numerous governmental clients on a variety of accounting and audit issues and challenges.

Zabihollah Rezaee, PhD, CPA, is the Thompson-Hill Chair of Excellence and Professor of Accountancy at the University of Memphis and has served a two-year term on the Standing Advisory Group of the Public Company Accounting Oversight Board. He received his BS degree from the Iranian Institute of Advanced Accounting, his MBA from Tarleton State University in Texas, and his PhD from the University of Mississippi. Professor Rezaee holds a number of certifications, including Certified Public Accountant, Certified Fraud Examiner, Certified Management Accountant, Certified Internal Auditor, Certified Government Financial Manager, Certified Sarbanes-Oxley Professional, Certified Corporate Governance Professional, and Certified Governance Risk Compliance Professional. He has also been a finalist for the SOX Institute's SOX MVP 2007, 2009, and 2010 Award. Professor Rezaee has published over 180 articles in a variety of accounting and business journals and made more than 200 presentations at national and international conferences. He has also published seven books: Financial Institutions, Valuations, Mergers, and Acquisitions: The Fair Value Approach (John Wiley & Sons, 2007); Financial Statement Fraud: Prevention and Detection (John Wiley & Sons, 2002); U.S. Master Auditing Guide, Third Edition (Commerce Clearing House, 2004); Audit Committee Oversight Effectiveness Post-Sarbanes-Oxley Act; Corporate Governance Post-Sarbanes-Oxley: Regulations, Requirements, and Integrated Processes (John Wiley & Sons, 2007); Corporate Governance and Business Ethics (John Wiley & Sons, 2008); and Financial Services Firms: Governance, Regulations, Valuations, Mergers and Acquisitions (John Wiley & Sons, 2011).

Francis E. Scheuerell, Jr., CPA, is a managing director at Navigant Consulting and is a Certified Public Accountant and certified management accountant. Frank has almost 30 years of diverse business experience in all areas of financial management and technical accounting, including accounting for business combinations, restatements, corporate restructurings, spin-offs, inventory, leases, revenue recognition, income taxes, equity method investments, segments, and consolidations, including variable interest entities. He has extensive experience addressing accounting and reporting issues for the real estate, construction, health care, hospitality, software, entertainment, retail, and manufacturing industries. Frank has served as an interim executive and/or consultant for numerous billion-dollar companies facing complex and extensive financial reporting issues. He has managed teams restating financial results and rebuilding financial reporting infrastructures while helping to restore regulator and investor confidence in those organizations. Frank has represented and testified on behalf of clients at Securities and Exchange Commission and NASDAQ hearings. Additionally, he has served as an expert witness in a securities litigation case. He has assisted numerous clients with their initial public offering or private place memorandums. He is an accomplished public speaker and author of numerous articles, publications, and continuing professional education seminars. Frank was a Project Manager—Research and Technical Activities for the Financial Accounting Standards Board and is a graduate of Illinois State University.

Jae K. Shim, PhD, is a professor of accounting and finance at California State University, Long Beach, and chief executive officer of Delta Consulting Company, a financial consulting and training firm. Dr. Shim received his MBA and PhD degrees from the University of California at Berkeley (Haas School of Business). He has been a consultant to commercial and nonprofit organizations for over 30 years. Dr. Shim has also published numerous articles in professional and academic journals and has over 50 college and professional books to his credit.

Reed K. Storey, PhD, CPA, had more than 30 years of experience on the framework of financial accounting concepts, standards, and principles, working with both the Accounting Principles Board, as director of Accounting Research of the American Institute of Certified Public Accountants, and the Financial Accounting Standards Board, as senior technical advisor. He was also a member of the accounting faculties of the University of California, Berkeley, the University of Washington, Seattle, and Bernard M. Baruch College, CUNY, and a consultant in the executive offices of Coopers & Lybrand (now PricewaterhouseCoopers LLP) and Haskins & Sells (now Deloitte & Touche, LLP).

B. Scott Teeter, MBA, CMA, is the vice president of land acquisition and development for the Austin/San Antonio, TX, division of Ryland Homes. He earned his BS in finance from The Pennsylvania State University and his MBA from the Wharton School of the University of Pennsylvania.

Daniel Thomas, EA, MAAA, is a specialist leader in the Human Capital Total Rewards practice at Deloitte Consulting LLP, where he serves as an actuarial specialist for the Deloitte audit teams and as a technical resource and reviewer within Deloitte's pension actuarial practice.

George I. Victor, CPA, is a partner in Giambalvo, Stalzer & Company, CPAs, P.C., and is the firm's director of quality control, where he is responsible for formulating the firm's accounting and auditing policy standards, including monitoring, consulting, technical research, staff training, and review of completed engagements. Mr. Victor has extensive experience in providing accounting and advisory services to both privately held and Securities and Exchange Commission–reporting companies. He also provides consulting services in areas of quality control, U.S. generally accepted accounting principles, and International Financial Reporting Standards matters to other certified public accounting firms in the United States and abroad. He is a member of the American Institute of Certified Public Accountants as well as the New York State Society of CPAs, where he serves as a member of its board of directors, chaired various committees, and serves as a member of the Editorial Board of the CPA Journal. He is an adjunct professor at the City University of New York. Mr. Victor has been published or quoted in various professional journals and books and frequently lectures on accounting and auditing related topics.

Jan R. Williams, PhD, CPA, is the Ernst & Young Professor and Dean, College of Business Administration, at the University of Tennessee. He is past president of the American Accounting Association and a frequent contributor to academic and professional literature on financial reporting and accounting education. Most recently he has been involved in the redesign of the CPA Examination and is a frequent speaker on this and other topics of professional significance.

Caroline H. Walsh, CPA, has over 33 years of specialized experience in auditing and consulting for local government agencies, nonprofit, and corporate enterprises. Ms. Walsh serves as the Quality Control Partner at Macias Gini & O'Connell LLP and leads the firm's Professional Standards Group. From October 2006 through 2009, Ms. Walsh served on the American Institute of Certified Public Accountants American Institute of Certified Public Accountants State and Local Government Expert Panel, where her role was to provide review and technical support services for the public accounting profession, including drafting and updating the AICPA guides for Audits of State and Local Governments and Government Auditing Standards and Circular A-133 Audits. Since 2009, Ms. Walsh has participated on the Expert Panel Task Force, which reviews and comments on the recent Governmental Accounting Standards Board due process documents related to accounting and reporting for pension benefits. In 2009, she was appointed for a three-year term to the GASB Advisory Committee, a standing committee whose members review the GASB staff's annual proposed changes and additions to the GASB's Comprehensive Implementation Guide.

David M. Zavada, CPA, MPA, is a partner with Kearney & Company in Alexandria, VA, where he specializes in providing accounting and audit services to the federal government. He is a former chief of the Financial Standards and Grants Branch within the Office of Federal Financial Management at the Office of Management and Budget and deputy to the Controller of the U.S. Government. He was director of the Office of Financial Management at the Department of Transportation, Federal Aviation Administration, and served as the Assistant Inspector General, Office of Audits at the Department of Homeland Security. In all of these positions David played a leadership role in developing and implementing government-wide financial management policies.

Mark L. Zyla, CPA/ABV, CFA, ASA, is managing director of Acuitas, Inc., an Atlanta, GA–based valuation and litigation consultancy firm. As a valuation specialist, Mark has provided consulting for numerous valuations in financial reporting and other types of engagements. He was the 2011 chair of the American Institute of Certified Public Accountants National Business Valuation Conference and presented AICPA's Fair Value Measurement Workshop. He is the author of Fair Value Measurements, Second Edition: Practical Guidance and Implementation (John Wiley & Sons).

Chapter 22

Personal Financial Statements

George I. Victor, CPA

Giambalvo, Stalzer & Company, CPAs, P.C.

22.1 What Are They? And Why Do We Need Them?

(a) What Is a Personal Financial Statement?

(b) Whose Financial Statement Is It?

(c) Why Are They Needed?

(d) Cash, Accrual, or Something Else?

(e) Which Asset/Liability Goes First?

22.2 Practical Tips

(a) Due Diligence in the Accountant–Client Relationship

(b) Understanding of the Engagement to All Parties

(c) Value of Written Representations

(d) Operating Rules Are Otherwise Known as Applicable Professional Standards

22.3 Rules and Guidance in Presenting Asset Values

(a) Start by Using the Estimated Current Value

(b) What Is Owed from Others?

(c) Stock Market and Other Markets

(d) Limited Partnership Interests Are Limited

(e) Gold, Silver, and Other Precious Metals

(f) Options on Assets Other Than Marketable Securities

(g) Life Insurance

(h) A Real Challenge Is Valuing a Closely Held Business

(i) Real Estate

(i) Location, Location, Location

(j) Personal Property

(k) Intangible Assets

(l) Future Interests

22.4 Rules and Guidance in Presenting Liabilities

(a) Start by Using the Estimated Current Amount of the Debt or Liability

(b) Fixed Commitments

(c) Contingencies, Risks, and Uncertainties

(d) Paying the Devil His Due: Income Taxes

22.5 Provision for Income Taxes

(a) Definition

(b) Computing the Provision for Income Taxes

(c) Tax Basis

(d) Disclaimer

(e) Omission of Disclosure

22.6 Statement of Changes in Net Worth

(a) Definition

(b) Uses

(c) Format

22.7 Disclosures

22.8 Compilation

22.9 Review

22.10 Audits

22.11 Reports

(a) Standard Compilation Report

(b) Reporting When Substantially All Disclosures Are Omitted

(c) Reporting When the Accountant Is Not Independent

(d) Reporting on Prescribed Forms

(e) Reporting When There Is a Departure from Generally Accepted Accounting Principles

(f) Standard Review Report

(g) Standard Audit Report

22.12 Compiled Statements Only for Client Internal Use

22.13 Sources and Suggested References

22.1 What Are They? And Why Do We Need Them?

(a) What Is a Personal Financial Statement?

A standard definition of a personal financial statement is: a listing of everything owned or owed presented in a uniform way so that the user of the statement can understand it.

A personal financial statement presents the personal assets and liabilities of an individual, a couple or a family. It is not a financial statement on a business owned by the person; however, it does contain important information about such business interests.

The essential purpose of a personal financial statement is to measure wealth at a specified date—to take a snapshot of the person's financial condition. It does this by presenting:

Estimated current values of assets

Estimated current amounts of liabilities

A provision for income taxes based on the taxes that would be owed if all the assets were liquidated and all the liabilities paid on the date of the statement

Net worth

Although both personal and business financial statements are presented for the purpose of informing a reader about the finances of the entity being presented, the statements have many significant differences (see Exhibit 22.1).

Exhibit 22.1 Personal and Business Financial Statements Compared

The basic personal financial statement containing this information is called a statement of financial condition, not a balance sheet. Values and amounts for one or more prior periods may be included for comparison with the current values and amounts, but this is optional. The statement of changes in net worth is also optional (also see Section 22.6). It presents the major sources of increase or decrease in net worth (see Exhibit 22.2).

Exhibit 22.2 Illustrative Financial Statements

Source: SOP No. 82-1(FASB ASC 274-10).

NumberTableNumberTable

Note 1 The accompanying financial statements include the assets and liabilities of James and Jane Person. Assets are stated at their estimated current values and liabilities at their estimated current amounts.

Note 2 The estimated current values of marketable securities are either (a) their quoted closing prices or (b) for securities not traded on the financial statement date, amounts that fall within the range of quoted bid and asked prices.

Marketable securities consist of the following:

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Note 3 Jane Person owns options to acquire 4,000 shares of stock of Winner Corp. at an option price of $5 per share. The option expires on June 30, 20X5. The estimated current value is its published selling price.

Note 4 The investment in Kenbruce Associates is an 8% interest in a real estate limited partnership. The estimated current value is determined by the projected annual cash receipts and payments capitalized at a 12% rate.

Note 5 James Person owns 50% of the common stock of Davekar Company, Inc., a retail mail order business. The estimated current value of the investment is determined by the provisions of a shareholders' agreement, which restricts the sale of the stock and, under certain conditions, requires the company to repurchase the stock based on a price equal to the book value of the net assets plus an agreed amount for goodwill. At December 31, 20X3, the agreed amount for goodwill was $112,500, and at December 31, 20X2, it was $100,000.

A condensed balance sheet of Davekar Company, Inc., prepared in conformity with generally accepted accounting principles, is summarized below:

NumberTable

The sales and net income for 20X3 were $10,500,000 and $125,000 and for 20X2 were $9,700,000 and $80,000.

Note 6. Jane Person is the beneficiary of a remainder interest in a testamentary trust under the will of the late Joseph Jones. The amount included in the accompanying statements is her remainder interest in the estimated current value of the trust assets, discounted at 10%.

Note 7. At December 31, 20X3 and 20X2, James Person owned a $300,000 whole life insurance policy.

Note 8. The estimated current value of the residence is its purchase price plus the cost of improvements. The residence was purchased in December 20X1, and improvements were made in 20X2 and 20X3.

Note 9. The estimated current values of personal effects and jewelry are the appraised values of those assets, determined by an independent appraiser for insurance purposes.

Note 10. The mortgage (collateralized by the residence) is payable in monthly installments of $815 a month, including interest at 10% a year through 20Y8.

Note 11. James Person has guaranteed the payment of loans of Davekar Company, Inc., under a $500,000 line of credit. The loan balance was $300,000 at December 31, 20X3, and $400,000 at December 31, 20X2.

Note 12. The estimated current amounts of liabilities at December 31, 20X3, and December 31, 20X2, equaled their tax bases. Estimated income taxes have been provided on the excess of the estimated current values of assets over their tax bases as if the estimated current values of the assets had been realized on the statement date, using applicable tax laws and regulations. The provision will probably differ from the amounts of income taxes that eventually might be paid because those amounts are determined by the timing and the method of disposal or realization and the tax laws and regulations in effect at the time of disposal or realization.

The estimated current values of assets exceeded their tax bases by $850,000 at December 31, 20X3, and by $770,300 at December 31, 20X2. The excess of estimated current values of major assets over their tax bases are—

NumberTable

(b) Whose Financial Statement Is It?

Normally, a personal financial statement is compiled for an individual and his or her spouse or one or the other person individually.

A personal financial statement covering a whole family usually presents the assets and liabilities of the family members in combination, as a single economic unit. However, the members may have different ownership interests in these assets or liabilities. For example, the wife may have a remainder interest in a testamentary trust, whereas the husband may own life insurance with a net cash surrender value. It may be useful, especially when the statement is to be used in a divorce case, to disclose each individual's interests separately. This may be done in separate columns within the statement, in the notes to the statement, or in additional statements for each individual.

Often an individual covered by the statement is one of a group of joint owners of assets, as with community property or property held in joint tenancy. In this case, the statement should include only the individual's interest as a beneficial owner under the laws of the state. If the parties' shares in the assets are not clear, the advice of an attorney may be needed to determine whether the person should regard any interest in the assets as his or her own and, if so, how much. The statement should make full disclosure of the joint ownership of the assets and the grounds for the allocation of shares.

(c) Why Are They Needed?

Many individuals or families use personal financial statements for investment, tax, retirement, gift and estate planning, or for obtaining credit. A personal financial statement may also be required for disclosure to the court in a divorce case or to the public when the individual is a candidate or an incumbent of public office. Another example of the use of a specialized personal financial statement was where the statement was used in litigation to show the solvency of an individual who had been the holder of a business franchise that was terminated due to an alleged insolvency.

(d) Cash, Accrual, or Something Else?

American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) No. 82–1 (Financial Accounting Standards Board [FASB] ASC 274–10; see Section 22.2(d)) establishes the use of estimated current values and amounts and the accrual basis of accounting as generally accepted accounting principles (GAAP) for personal financial statements. The American Institute of Certified Public Accountants (AICPA) Personal Financial Statements Guide (the Guide) allows accountants to prepare, compile, review, or audit personal financial statements on other comprehensive bases of accounting, such as historical cost, tax, or cash. In actual practice, there are many variations on a theme, but the methodologies and approaches should be disclosed and should not be misleading to the user of the statement.

(e) Which Asset/Liability Goes First?

Cash is king (and the most liquid of the assets). So cash is at the top of the list. Assets are presented in order of liquidity and liabilities in order of maturity. No distinction is made between current and long-term assets and liabilities because there is no operating cycle on which to base that distinction in a person's financial affairs.

Assets and liabilities of a closely held business that is conducted as a separate entity are not combined with similar personal items in a personal financial statement. Instead, the estimated current net value of the person's investment in the entity is shown as one amount. But if the person owns a business activity that is not conducted as a separate entity, such as a real estate investment with a related mortgage, the assets and liabilities of the activity are shown as separate amounts.

22.2 Practical Tips

(a) Due Diligence in the Accountant–Client Relationship

As is the case with any potential business relationship, before accepting an engagement involving personal financial statements, the accountant ordinarily would evaluate certain aspects of the potential client relationship.

The accountant may wish to consider facts that might bear on the integrity of the prospective client. Consideration of the character and reputation of the individual helps to minimize the possibility of association with a client who lacks integrity. The extent of the accountant's inquiries before acceptance might depend on his or her previous knowledge of the client and the nature of the client's financial activities. The accountant may want to consult predecessor accountants or auditors, attorneys, bankers, and others having business relationships with the individual regarding facts that might bear on the integrity of the prospective client. This does not suggest that, in accepting an engagement, the accountant vouches for the integrity or reliability of a client. However, prudence suggests that an accountant be selective in determining his or her professional relationships. It is not unknown for a seemingly high-profile potential client, complete with private jet and an entourage of assistants, to be a fraudster, destined for more humble quarters in a prison.

The accountant may also wish to consider circumstances that present unusual business risk, such as considering whether an individual is in serious financial difficulty and if that fact could have a bearing on the integrity of the information presented to the accountant for the preparation of the financial statements.

In addition, the accountant may want to consider up front the effect of any lack of independence on the type of report he may issue in compliance with professional standards. Statements on Standards for Accounting and Review Services (SSARS) No. 19 permits the accountant to issue a compilation report on personal financial statements of an individual with respect to whom the accountant is not independent. However, the accountant must be independent to issue a review report or an audit opinion. For example, if a prospective client requesting a personal financial statement is the co-owner of a business with the spouse of the accountant, the accountant is not independent and can issue a compilation only.

Before accepting an engagement involving personal financial statements, the accountant may want to ask the potential client about the availability of records