Annual Update for Accountants and Auditors

By Kurt Oestriecher and Mark Beasley

The rate of change in today’s regulatory environment can make it challenging to stay current on the topics affecting the accounting profession. Keep abreast of the fast-paced changes in accounting and auditing in this comprehensive book that provides information critical to an accountant’s success. This book covers relevant pronouncements, exposure drafts, and other guidance recently issued in the accounting, auditing, and compilation, preparation, and review arenas. This book covers important topics such as revenue recognition, leases, financial instruments, as well as intangible assets, consolidation, and statement of cash flows. The authors sort through the complexities and help identify and apply recently issued FASB, PCAOB, and ASB standards and guidance.

This book will prepare the accountant to do the following:

• Understand recently issued FASB standards and guidance.
• Assess the effect of recently issued auditing standards, attestation standards, and standards on accounting and review services.
• Become familiar with exposure drafts and other projects in accounting, auditing, compilation, preparation, and review services.

• Language: English
• Publisher: Wiley
• Release date: Feb 16, 2018
• ISBN: 9781119511458

Book preview

Title Page

Notice to Readers

Annual Update for Accountants and Auditors is intended solely for use in continuing professional education and not as a reference. It does not represent an official position of the Association of International Certified Professional Accountants, and it is distributed with the understanding that the author and publisher are not rendering legal, accounting, or other professional services in the publication. This course is intended to be an overview of the topics discussed within, and the author has made every attempt to verify the completeness and accuracy of the information herein. However, neither the author nor publisher can guarantee the applicability of the information found herein. If legal advice or other expert assistance is required, the services of a competent professional should be sought.

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© 2017 Association of International Certified Professional Accountants, Inc. All rights reserved.

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Course Code: 730793

AUAA GS-0417-0A

Revised: May 2017

TABLE OF CONTENTS

Chapter 1 Fasb Accounting Standards Updates—Broad Issues

FASB ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern

FASB ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory

FASB ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes

FASB ASU No. 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting

FASB ASU No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities

FASB ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)

FASB ASU No. 2016-16, Income Taxes (Topic 740): Intra- Entity Transfers of Assets Other than Inventory

FASB ASU No. 2016-17, Consolidation (Topic 810): Interests Held Through Related Parties That Are Under Common Control

FASB ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)

FASB ASU No. 2017-01, Clarifying the Definition of a Business (Topic 805)

FASB ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

Chapter 2 Fasb Accounting Standards Updates—Narrowly Applicable

FASB ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis

FASB ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs

FASB ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments

Chapter 3 Revenue Recognition, Financial Instruments, and Leases

FASB ASU No. 2014-09, Revenue From Contracts with Customers (Topic 606)

FASB ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

FASB ASU No. 2016-02, Leases (Topic 842)

Chapter 4 Private Company Financial Reporting

Private Company Council

FASB ASU No. 2016-03, Intangibles—Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance (a consensus of the Private Company Council)

FASB ASU No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill (a consensus of the Private Company Council)

FASB ASU No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach (a consensus of the Private Company Council)

FASB ASU No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (a consensus of the Private Company Council)

FASB ASU No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination (a consensus of the Private Company Council)

Current PCC Issues

Summary of PCC Activities

Chapter 5 Fasb Exposure Drafts and Projects

Recognition and Measurement Projects

Presentation and Disclosure Projects

Chapter 6 The Current Environment and Implications for Audit Planning

Obtaining an Understanding of the Entity and Its Environment

Considering Economic Conditions to Lower Audit Engagement Risk

Other Issues to Monitor

Summary

Chapter 7 Recently Issued Auditing Standards

Recently Issued SASs

SAS No. 131, Amendment to SAS No. 122 Section 700, Forming an Opinion and Reporting on Financial Statement Audits

SAS No. 132, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern

Proposed SAS

Summary of Recently Issued Audit Interpretations

Summary

Chapter 8 Clarified Attestation Standards

Restructuring of the SSAEs

Recently Issued Measurement Criteria

Summary

Chapter 9 Recent Guidance From the PCAOB

Auditing Standards Projects Underway at the PCAOB

Proposed Auditing Standards

Summary

Chapter 10 Preparation, Compilation and Review Engagements Update

SSARS Clarity Project

Recently Issued SSARS

Recently Issued SSARS Interpretation

Exposure Draft of Proposed New Statements on Standards for Accounting and Review Services

Summary

Chapter 11 Other Recently Issued Guidance

Overview of COSO

Proposed Revision of COSO’s ERM Framework

Audit Quality Initiatives

Summary

Glossary

Solutions

Chapter 1

Chapter 2

Chapter 3

Chapter 4

Chapter 5

Chapter 6

Chapter 7

Chapter 8

Chapter 9

Chapter 10

Chapter 11

EULA

Recent Developments

Users of this course material are encouraged to visit the AICPA website at www.aicpa.org/CPESupplements to access supplemental learning material reflecting recent developments that may be applicable to this course. The AICPA anticipates that supplemental materials will be made available on a quarterly basis. Also available on this site are links to the various Standards Trackers on the AlCPA’s Financial Reporting Center which include recent standard-setting activity in the areas of accounting and financial reporting, audit and attest, and compilation, review and preparation.

Chapter 1

FASB ACCOUNTING STANDARDS UPDATES—BROAD ISSUES

LEARNING OBJECTIVE

After completing this chapter, you should be able to do the following:

•

Identify recently issued FASB Accounting Standards Updates (ASUs) that cover broad issues, other than those related to the Big 3 of revenue recognition, financial instruments, and leases.

This chapter presents ASUs that are general in nature and typically originated with the input of the full board. The ASUs covered in this chapter are those that have effective dates in 2016 or later. Thus several ASUs issued in prior years are included in this chapter. Effective dates for public business entities are frequently different than those for other entities.

Broadly Applicable ASUs

FASB ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern

WHY WAS THIS ASU ISSUED?

Under generally accepted accounting principles (GAAP), continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. This presumption is commonly referred to as the going concern basis of accounting.

Until now, GAAP had no guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or how an entity should disclose the relevant information in its footnotes. The only guidance was contained in auditing standards, which led to diversity of views and practice when there is substantial doubt a bout an entity’s ability to continue as a going concern. The update provides guidance in GAAP about management’s responsibility for evaluating whether there is substantial doubt about an entity’s ability to continue as a going concern and provides guidance for the required footnote disclosures.

WHO IS AFFECTED BY THIS ASU?

The update applies to all entities.

WHAT ARE THE MAIN PROVISIONS OF THIS ASU?

An entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable).

Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in FASB Accounting Standards Codification (ASC) 450, Contingencies.

When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent that

•

it is probable that the plans will be effectively implemented and, if so,

•

it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

If the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following:

•

Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)

•

Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations

•

Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern

If substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose information that enables users of the financial statements to understand all of the following:

•

Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern

•

Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations

•

Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern

WHEN WILL THIS ASU BE EFFECTIVE?

For all entities, the update is effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted.

KNOWLEDGE CHECK

1.    

ASU No. 2014-15 requires management to evaluate conditions and events that may lead to uncertainty about the ability of the entity to continue as a going concern for one year from what date?

a.    

The balance sheet date.

b.    

The audit report date.

c.    

The date the financial statements are available for issuance.

d.    

The date that management discloses as the date through which subsequent events have been evaluated.

2.    

When determining if there is substantial doubt about the ability of an entity to continue as a going concern, ASU No. 2014-15 requires management to evaluate

a.    

Only conditions and events that are known at the balance sheet date.

b.    

Conditions and events that the auditor brings to the attention of management.

c.    

Conditions and events that are both known and reasonably knowable.

d.    

Conditions and events that lead to an operating loss.

FASB ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory

WHY WAS THIS ASU ISSUED?

FASB identified this topic as a part of their simplification initiative because the current guidance for subsequent measurement of inventory was deemed to be unnecessarily complex with several potential outcomes. FASB ASC 330, Inventory, currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin.

The measurement conventions as a result of this update are also now closely aligned with IFRS.

WHO IS AFFECTED BY THIS ASU?

The amendments in this update apply to all entities who measure inventory using first-in, first-out (FIFO) or average cost.

WHAT ARE THE MAIN PROVISIONS OF THIS ASU?

Scope

This update does not apply to inventories measured using:

•

LIFO

•

Retail inventory method

Measurement

Inventory should be measured at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

In order to achieve the objectives of this update, ASC 330-10 has been modified by removing the reference to lower of cost or market with applicable subsequent measurement guidance. The effect of the change is to replace market with net realizable value.

Other than the change in the subsequent measurement guidance, there are no substantive changes to the guidance on measurement of inventory.

WHEN WILL THIS ASU BE EFFECTIVE?

For public business entities, the amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.

For all other entities, the amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017.

Early adoption is allowed. The guidance should be applied prospectively.

CASE STUDY 1-1

Cajun Roads RV Company operates a dealership that sells recreational vehicles. The company has been profitable in the past and decided to carry additional lines in 2016. One of the additional lines was from a new manufacturer, Comfort Cruising RVs. Not long after purchasing three units from Comfort Cruising, a public investigation into its labor practices caused an outcry against the company, fueled by social media. People that owned a Comfort Cruising RV were no longer welcome at certain campgrounds. Tailgaters at college games chose to no longer bring their Comfort Cruising RVs to games. The company became an outcast and the market for the brand became very soft.

The controller for Cajun Roads was preparing year-end inventory adjustments and determined that each of the three Comfort Cruising units with an identical dealer cost of $135,000 had a market value of $115,000, based on listings found on the Internet. Cajun Roads had a sticker price of $199,800 for each unit but, based on normal industry discounts, had expected to sell each unit for $160,000. The controller had heard the sales manager remark that because of the disdain for the Comfort Cruising line and the close-knit RV community, the best hope for the company was to sell the units for $50,000 each to a government agency for use as emergency response mobile bases.

How should Cajun Roads account for the inventory in the December 31, 2016, financial statements, assuming that the company early adopts ASU No. 2015-11?

FASB ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes

WHY WAS THIS ASU ISSUED?

This ASU is part of the overall simplification project of FASB. Stakeholders had determined that the current requirement to classify deferred taxes into a current and noncurrent portion added unnecessary complication, and ultimately did not conform to when the actual tax benefits or costs would be incurred.

WHO IS AFFECTED BY THIS ASU?

This ASU applies to all entities who present a classified statement of financial position.

WHAT ARE THE MAIN PROVISIONS OF THIS ASU?

All deferred tax assets and liabilities will be classified as noncurrent in a classified balance sheet. Furthermore, as is required by current GAAP, deferred tax assets and liabilities will continue to be offset.

The end result of this update is that an entity that is within the scope of the standard will now present a deferred tax asset, or a deferred tax liability only as noncurrent.

WHEN WILL THIS ASU BE EFFECTIVE?

For public business entities, the effective date is for annual periods beginning after December 15, 2016, and interim periods within those annual periods.

For all other entities, the effective date is for annual periods beginning after December 15, 2017, and for interim periods within annual periods beginning after December 18, 2018.

Early application is permitted for all entities as of the beginning of an interim or annual reporting period.

The guidance in this update may be applied prospectively or retrospectively for all periods presented. The entity should disclose the change in the first period in which the change is adopted and quantitative information about the effects of the accounting change on prior periods (when retrospective application is adopted).

KNOWLEDGE CHECK

3.    

Upon the effective date of ASU No. 2015-17, what will be the correct presentation of deferred taxes?

a.    

Segregated between current assets, current liabilities, noncurrent assets, and noncurrent liabilities.

b.    

As a net amount, presented as a noncurrent asset or liability.

c.    

Segregated between current and noncurrent assets or liability and netted.

d.    

As part of accumulated comprehensive income.

FASB ASU No. 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting

WHY WAS THIS ASU ISSUED?

This update was issued as part of FASB’s Simplification Initiative to reduce cost and complexity without compromising information usefulness to financial statement users. Specifically, this update removes the requirement to retroactively adopt the equity method of accounting when the investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence.

WHO IS AFFECTED BY THIS ASU?

This update applies to all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence.

WHAT ARE THE MAIN PROVISIONS OF THIS ASU?

The amendments in this update remove the requirement of retroactive adjustment of an investment that qualifies for the use of equity method of accounting. Instead, the equity method investor should add the cost of acquiring the additional interest in the investee to the current basis of the previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting.

In addition, an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting should recognize the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for equity method accounting.

WHEN WILL THIS ASU BE EFFECTIVE?

This update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted.

FASB ASU No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities

WHY WAS THIS ASU ISSUED?

FASB added a project to its agenda to improve the current net asset classification requirements and the information presented in financial statements and notes about a not-for-profit entity’s (NFP’s) liquidity, financial performance, and cash flows. FASB’s Not-for-Profit Advisory Committee (NAC) and other stakeholders indicated that existing standards for financial statements of NFPs are sound but could be improved to provide more useful information to users of financial statements. This update is the result of FASB’s efforts in the first of two phases of its project.

WHO IS AFFECTED BY THIS ASU?

All not-for-profit entities are affected. Those NFPs typically include nongovernmental entities such as charities, foundations, colleges and universities, health care providers, cultural institutions, religious organizations, and trade associations, among others. They generally do not include investor-owned entities or entities that provide dividends, lower costs, or other economic benefits directly and proportionately to their owners, members, or participants, such as mutual insurance entities, credit unions, farm and rural electric cooperatives, and employee benefit plans.

WHAT ARE THE MAIN PROVISIONS OF THIS ASU?

This update does not have an impact on any recognition or measurement of assets, liabilities, revenues, or expenditures; it instead focuses on the presentation of the statement of financial position and statement of activities. FASB first addressed this issue in FASB Statement No. 117, Financial Statements of Not-for-Profit Organizations, and not-for-profit entities were required to classify net assets as unrestricted, temporarily restricted, and permanently restricted. The statement of activities was also formatted to present changes in net assets using these parameters.

This update reduces the classification from the three noted to two:

1.    

Net assets with donor restrictions

2.    

Net assets without donor restrictions

The following specific guidance is included within this update to accomplish the objective of making several improvements to current reporting requirements:

1.    

Present on the face of the statement of financial position amounts for two classes of net assets at the end of the period, rather than for the currently required three classes. That is, an NFP will report amounts for net assets with donor restrictions and net assets without donor restrictions, as well as the currently required amount for total net assets.

2.    

Present on the face of the statement of activities the amount of the change in each of the two classes of net assets (noted in item 1) rather than that of the currently required three classes. An NFP would continue to report the currently required amount of the change in total net assets for the period.

3.    

Continue to present on the face of the statement of cash flows the net amount for operating cash flows using either the direct or indirect method of reporting but no longer require the presentation or disclosure of the indirect method (reconciliation) if using the direct method.

4.    

Provide the following enhanced disclosures about

a.

amounts and purposes of governing board designations, appropriations, and similar actions that result in self-imposed limits on the use of resources without donor-imposed restrictions as of the end of the period.

b.

composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources.

c.

quantitative information, either on the face of the balance sheet or in the notes, and additional qualitative information in the notes as necessary, that communicates the availability of an NFP’s financial assets at the balance sheet date to meet cash needs for general