Late Spring 2013

Technical Issues Alert

Information on technical issues affecting small businesses and the CPAs who serve them.

TIC and PCPS EC Share Ideas

TIC is a committee of the AICPA Private Companies Practice Section and in May TIC held its annual liaison meeting with the PCPS Executive Committee. TIC members offered a technical update and exchanged ideas with the Executive Committee on hot topics worth watching and on the best ways to provide members with the information they need to understand and implement new standards. The two committees plan to maintain their close ties to ensure that member needs are well served. TIC also meets annually with influential standard-setters or committees to hear their plans and share information about private companies and the CPAs who serve them. g

AICPA Issues FRF for SMEs

The AICPA has issued its Financial Reporting Framework for Small- and Medium-Sized Entities, which is designed for Americas small business community. It delivers financial statements that provide useful, relevant information in a simplified, consistent, cost-effective manner. It is intended for companies that do not require GAAP financial statements. CPAs can access the free CPA toolkit, segmented by firm size, which contains illustrative financial statements, a learning and implementation plan; staff training PowerPoint; a chapter-by-chapter introduction to the FRF for SMEs that includes sample auditor reports; a presentation and disclosure checklist; comparisons to U.S. GAAP, tax basis OCBOA and IFRS for SMEs; an FRF for SMEs logo for firms to use to market the service to current or potential clients; social media support; a video; customized client letters and other client-facing materials. CPAs may also access the toolkits for the small business community and users of financial statements and are encouraged to share them with stakeholders in financial reporting. TIC Chair Karen Kerber was a member of the task force that has served in an advisory role to the AICPA in the development of the framework. g

TIC Recommendations on FASB Credit Losses ED

TIC recommended that the FASB ED on Financial Instruments Credit Losses, which would cause significant changes in practice if adopted, should be limited to financial institutions. TIC was particularly concerned about the proposed models lack of relevance for private company financial statement users. One noteworthy issue for TIC was the proposals potential impact on credit losses for trade receivables. TIC members believe the process would be very burdensome for private companies because of the need to make future projections based on past history. The owners of commercial enterprises generally use their judgment and familiarity with customers and vendors to determine their creditworthiness. TIC does not believe that the proposed methodology for projecting credit healthiness will provide a more reliable answer, but it will require more time and effort. TIC members noted that the banks using the Future Meetings TIC meetings offer local practitioners the chance to provide their unique perspectives in the standard-setting process. All CPAs are invited to attend. Contact Linda Volkert, CPA, TIC Staff Liaison, at the AICPA at (212) 596-6040 to learn about attending or receiving information on upcoming meetings. The next TIC meeting will be held: September 26-27, Norwalk, CT. This meeting will include liaisons with the FASB and select GASB staff and the GASB chair.
The PCPS Technical Issues Committee (TIC) provides standard setters with the unique perspective of local CPA firms on accounting, auditing and reporting issues. We hope these highlights of issues that affect local firms will help you, your firm or your group to participate in the standard-setting process.

financial statements have their own models for considering historical loss data, making it unnecessary for the small business to change from the incurred loss model to the proposed expected loss model. TIC pointed out that the ED offers numerous examples for financial institutions, but only one generic example for any other type of business, which reinforces the standards greater suitability for financial institutions. If the final standard is not restricted to financial institutions, TIC recommended exempting short-term financial assets. Finally, TIC noted that the proposal did not appear to have been subject to the decision-making framework proposed by the Private Company Council for new pronouncements (see related story in this issue). g

Visit the TIC Advocacy page

Considering a Proposed FASB Recognition and Measurement Model

TIC thought the new comprehensive recognition and measurement model in the FASBs current proposal on recognition and measurement of financial assets and financial liabilities was an improvement over a 2010 ED, which favored fair value as the primary measurement model for financial instruments. The new version offers more opportunities for use of the amortized cost method, which TIC prefers. However, TIC also called for greater clarity in many specific sections of the guidance, which discusses complex topics in unnecessarily complicated language. TIC recommended a scope exclusion for short-term trade receivables and payables and related party loans with owners. If thats not possible, TIC requested that the standard include examples that address the accounting for factoring short-term receivables and related party loans from/to owners of a business because they are common transactions among nonpublic entities. TIC asked for further guidance on circumstances that would trigger a change in business model for a nonpublic, nonfinancial entity. TIC believes nonpublic entities should be given an additional year beyond the required effective date for public companies to implement major standards, such as those involving financial instruments. g

PCC Decision-Making Framework ITC Issued

The FASB and the Private Company Council (PCC) have issued anInvitation to Comment:Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies. The ITC formalizes and updates the conclusions reached in the 2012 staff discussion paper of the same name to reflect the views of the FASB and PCC members. The framework is intended to serve as a guide for the FASB and the PCC in determining whether to provide alternative recognition, measurement, disclosure, display, effective date or transition guidance for private companies. In reviewing the ITC, TIC thought that it was a good start in considering GAAP exceptions and modifications for private companies. TIC was pleased that the FASB and the PCC modified some of their earlier proposed language to consider whether the industry-specific recognition, measurement and disclosure requirements applicable to public companies would be equally relevant to the financial statement users of private companies in certain industries. If they are not equally relevant, alternatives may be considered. TIC disapproved of a sentence in the transition section of the ITC that would require the FASB and the PCC to consider a requirement for private companies to disclose quantitative information comparing the current period with prior-period financial statements in certain circumstances when private companies apply an alternative transition method for a new standard. TIC believes this proposed requirement would not be cost/beneficial and would defeat the purpose of permitting the application of an alternative transition method. Read the FASB in Focus article on the framework. CPAs can learn more about the issues the PCC has approved for exposure on the FASB project page. Issue summaries can be found by clicking here. g

TIC Comments on Using the Work of Internal Auditors ED

An ASB ED on Using the Work of Internal Auditors addresses the external auditors responsibility for the work of an internal auditor that is used in the audit and the conditions that would enable the external auditor to use this work. It is designed to provide a framework for the external auditors judgments on the use of an internal auditor. TIC is supportive of the ED. In its comments, TIC recommended that the final standard should clarify that the requirements do apply in companies that dont have a formal internal audit function but that do have someone who handles these responsibilities. g

ASB Corrects Clarified Auditing Standard AU-C 920

As part of the ASB Clarity Project, the auditing sections in AICPA Professional Standards were redrafted to reflect the ASBs established clarity drafting conventions designed to make the clarified standards easier to read, understand and apply. When AU section 634, Letters for Underwriters and Certain Other Requesting Parties, was redrafted and issued as AU-C section 920, Letters for Underwriters and Certain Other Requesting Parties, in SAS No. 122, Clarification and Recodification, the ASB did not intend to change or expand AU section 634 in any significant respect. The ASB believed that the substance of the last sentence in paragraph .42 of AU section 634, In the case of a business combination, the historical financial statements of each constituent part of the combined entity on which the pro forma financial information is based should be audited or reviewed, of AU section 634 had been appropriately captured in paragraph .53 of AU-C section 920. However, in order to reinforce the ASBs intention not to change practice and to avoid unintended consequences, the ASB has added this sentence as the penultimate sentence in paragraph .53 of AU-C section 920. Find an illustration of the changes here. g

COSO Framework and Available Resources

The Committee of Sponsoring Organizations of the Treadway Commission (COSO), which provides thought leadership and guidance on internal control, enterprise risk management and fraud deterrence, has issued its updated Internal ControlIntegrated Framework (Framework) and related illustrative documents. The updated Framework is expected to help organizations design and implement internal control in light of many changes in business and operating environments since the issuance of the original framework in 1992, broaden the application of internal control in addressing operations and reporting objectives, and clarify the requirements for determining what constitutes effective internal control. In addition to the Framework, Internal Control over External Financial Reporting: A Compendium of Approaches and Examples, has been published concurrently to provide practical approaches and examples that illustrate how the components and principles set forth in this Framework can be applied in preparing external financial statements. A PCPS COSO Toolkit is in the works, so watch future TIC Alerts or the PCPS site for more details. g

Accounting Update
The revised FASB and IASB ED on leases puts most leases on the balance sheet and requires lessees to use separate expense recognition for longer-term leases depending on when consumption occurs. In its planned comments, TIC expects to provide the FASB with extensive feedback on the boards lease project as it moves through the standard-setting process. The comment deadline is September 13. Click here to register for the post-implementation review (PIR) process of the Financial Accounting Foundation, which oversees the FASB and the GASB. The PIR is independent of FASB and GASB standard setting and is designed to study significant accounting standards to assess whether the intended financial reporting objectives underlying them are being met. g

Governmental News
The GASB has posted an updated and revised version of the white paper,Why Governmental Accounting and Financial Reporting Isand Should Be Different. The new paper reflects changes made by the more than 20 statements that have been issued since the original paper was published in 2006. The GASBs recently issued Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees, is effective for reporting periods beginning after June 15, 2013. The Financial Accounting Foundation, which oversees the GASB, has issued for public comment GASBs Scope of Authority: Proposed Changes to Agenda-Setting Process. The FAF is seeking to clarify the GASBs scope and better enable the GASB to serve stakeholders within the context of its mission. In its comment letter, the AICPA expressed concerns about the potential expansion of the FAFs role in the standard-setting process. The OMB has recently proposed changes to the data collection form that auditees must submit summarizing the results of each finding relative to each program. If a single audit for a fiscal period ending in 2013 is due before the 2013 form is available, auditees will not be able to meet the 30-day deadline for submission prescribed by OMB Circular A-133. Therefore, OMB has granted an extension until September 30, 2013 for reporting packages due to the Clearinghouse before that date. The draft form, instructions, and a summary of the changes can be found under Recent News at www.whitehouse.gov/omb/financial_default. See the AICPAs comment letter here, which includes certain comments submitted by TIC. The new form and instructions will apply for audit periods ending in 2013, 2014, and 2015. In its comment letteron the OMBProposed Rule,Reform of Federal Policies Relating to Grants and Cooperative Agreements: Cost Principles and Administrative Requirementsand the related Proposed OMB Uniform Guidance: Cost Principles, Audit, and Administrative Requirements for Federal Awards, the AICPA GAQC supported the overall direction of many of the changes proposed and expressed appreciation for the OMBs responsiveness to the GAQC feedback on the previous Advance Notice. However, the letter does express significant concerns in a number of areas, including the future effective date; federal capacity and coordination issues; and a lack of clarity around certain changes to the cost principles, indirect cost rules, and time and effort requirements. TIC contributed comments that were included in the GAQC letter. A recent HUD revision toChapter 1,General Audit Guidance, of the HUD Guide applies to all entities required to undergo an audit under the HUD Guide and is effective for audits of entities with year ends ending on or after June 30, 2013. The transmittal letterfor Chapter 1 indicates that the revision is intended to reflect changes in Government Auditing Standards and the clarified auditing standards issued by the AICPA. g

Ethics Update
An AICPA video provides updates on the most recent revisions to independence guidance on nonattest services, as well as an overview of the general requirements for maintaining independence when providing nonattest services. Updates to ET Section 101-3 can be found on the AICPA Code of Conduct page. PEEC adopted, with minor revisions, the partner equivalent proposals contained in its September 19, 2012, exposure draft. Under the adopted guidance, a partner equivalent would need to apply certain independence requirements that apply to partners. Partner equivalents are professional employees who are not partners but who have (a) the authority to bind the firm to conduct an attest engagement without partner approval or (b) ultimate responsibility for the conduct of an attest engagement, including the authority to sign or affix the firms name to an attest report or to issue, or authorize others to issue, an attest report on behalf of the firm without partner approval. The adopted guidance is effective for engagements covering periods beginning on or after December 15, 2014. PEEC approved the deletion of the holding out definition and related proposals contained in the September 19, 2012, exposure draft, with minor revisions. The adopted guidance became effective on May 31. g

Audit Update
Two additional Technical Questions and Answers (TPAs) have been included as paragraphs .40.41 of TIS section 8800, Audits of Group Financial Statements and Work of Others (AICPA, Technical Practice Aids), to provide nonauthoritative guidance on the implementation of AU-C section 600, Special ConsiderationsAudits of Group Financial Statements (Including the Work of Component Auditors) (AICPA, Professional Standards). The additional TPAs address questions that have arisen from implementation issues, particularly regarding variable interest entities and the components use of a basis of accounting that differs from that of the group. Technical Question and Answer (TPA) 9110.22 (AICPA, Technical Practice Aids) provides nonauthoritative guidance to state that when an entitys financial statements are audited in accordance with both GAAS and Government Auditing Standards, an auditor may include a restricted alert paragraph using the language required by AU-C section 905, Alert That Restricts the Use of the Auditors Written Communication (AICPA, Professional Standards), as long as the compliance report is not required to be issued in accordance with Government Auditing Standards and the report does not refer to Government Auditing Standards. TPA 9110.23 says that based on the facts in TPA 9110.22, the auditor does not need to modify the illustrative report language to indicate that the financial statement audit was also conducted in accordance with Government Auditing Standards and could refer only to the audit being conducted in accordance with auditing standards generally accepted in the United States. Technical Question and Answer (TPA) 9110.21 (AICPA, Technical Practice Aids) provides nonauthoritative guidance to state that the auditor may accept an engagement to report on currentvalue financial statements that supplement historical-cost financial statements if certain conditions exist, and report on such currentvalue financial statements in a manner similar to that discussed in AU-C section 800, Special ConsiderationsAudits of Financial Statements Prepared in Accordance With Special Purpose Frameworks (AICPA, Professional Standards). Since the issuance of FASB ASC 718 and 505-50 in 2004, valuing stock-based compensation (cheap stock) has been a significant challenge for private companies. Valuation of Privately Held Company Equity Securities Issued as Compensation - Accounting and Valuation Guide has been designed to mitigate those challenges. It features practical guidance and illustrations related to accounting, disclosures and valuation of privately held company equity securities issued as compensation. g

AICPA Resources on Regulator-Prescribed Forms Not in Accordance With GAAS

Many state regulators require that independent auditors provide an opinion on financial information that is submitted to a regulator, often by means of an auditors report on forms prescribed by the regulator. While auditors want to comply with these regulations, they are also required to comply with state accountancy laws that require auditors to follow GAAS. If a state regulators prescribed report does not include the specific elements and wording of GAAS, an auditor is placed in the awkward position of signing a report that is not in compliance with state accountancy law. If the minimum required reporting elements and wording are not contained in the prescribed form, the auditor is required by GAAS to reword the prescribed form of the report or attach an appropriately worded separate report. continued on page 5

continued from page 4 This issue first surfaced with the New York State Society of CPAs, specifically regarding the New York City Tax Commission. The NYSSCPA and the AICPAs technical teams crafted a solution that allows auditors to meet the AICPA Auditing Standards Boards new standards without requiring the City of New York to issue a new form, by getting the commissions agreement to accept either footnotes to the citys form, or a separate report attached to the form. Members who encounter this issue are encouraged to reach out to their state societies and to the AICPA for assistance and to turn to available resources for help in finding solutions. Please contact Ahava Goldman, AICPA Senior Technical Manager (agoldman@aicpa. org/212-596-6056), with questions. g

New Website and Chairs at FASB and GASB

As the FAF and the FASB celebrate their 40th anniversaries, a number of changes are under way at the FASB and the GASB, which is also overseen by the FAF.The FASB has launched a new website with more user-friendly navigation, new plain English explanations of major FASB projects and a digital timeline highlighting the most important events in the history of the three organizations. The FAF has also redesigned its website and the GASB plans to do so later this summer. All three organizations have new logos. The FAF also named Russell G. Golden as the next chairman of the FASB, effective July 1. Golden, who will succeed current FASB Chairman Leslie F. Seidman, has served as a FASB member since 2010 and was previously a member of the FASB staff. His initial term as chairman will extend to June 30, 2017, when he will be eligible to serve another term of three years. (FASB members are limited to serving a total of ten years on the board.) The FAF has named Iowa Auditor of State David A. Vaudt as the GASBs next chairman, also effective July 1. He was appointed to a single, seven-year term, a change from the past practice of appointing GASB chairs to an initial five-year term with the possibility of serving a second five-year term. He will succeed current GASB Chairman Robert H. Attmore. g

Let Us Hear From You If you have questions, local firm advocacy issues or suggestions for TIC, contact:

Karen Kerber, CPA TIC Chair E-mail: karen.kerber@kerberrose.com

Linda Volkert, CPA TIC Staff Liaison E-mail: lvolkert@aicpa.org

This publication has not been approved, disapproved or otherwise acted upon by any senior technical committees of, and does not represent an official position of, the American Institute of Certified Public Accountants. It is distributed with the understanding that the contributing authors and editors, and the publisher, are not rendering legal, accounting, or other professional services in this publication. The views expressed are those of the authors and not the publisher. If legal advice or other expert assistance is required, the services of a competent professional should be sought.