Carbis Walker LLP & wphfmapresentAccounting and Auditing Standards UpdateJanuary 25, 2013
Presenters • Michael F. Garczynski, CPA, Partner - Health Care Services • Kelly S. Nord, CPA, Senior Manager - Health Care Services • Brandon W. Harlan, CPA, Senior Manager - Health Care Services • James A. Raley, CPA, Manager - Health Care Services • Jack H. Lynn, Supervisor - Health Care Services
Agenda • Welcome • IFRS • Background: Public and private company standard setting • FASB Not-for-Profit Advisory Committee (NAC) and projects central to improving NFP GAAP: • - NFP Financial Reporting (two projects) • - Disclosure Framework • - Nonpublic Entity Definition • Three EITF issues of note for NFPs • Update on major convergence projects: • - Leases • - Revenue Recognition • - Financial Instruments • Recent ASUs and other FASB projects of note for NFPs
Agenda • Accounting Standards Update • Goodwill and Indefinite – Lived Intangible Assets • Health Care Topics • Charity Care • Bad Debts • Malpractice Insurance • Meaningful Use • RAC Audits • ICD – 10 Costs • HUD and Governmental Reporting Update • Special Considerations of Not-For-Profit Fraud • Auditing Standards Board – Clarity Project
IFRS for the U.S.? The Latest from the SEC • On July 13, 2012, the SEC’s Office of the Chief Accountant published its final staff report, “Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers.” • “…the Work Plan did not set out to answer the fundamental question of whether transitioning to IFRS is in the best interests of the U.S. securities markets generally and U.S. investors specifically.” • Summarizes the observations and analyses in six key areas identified for study.
SEC Decision and NFPs • Even if the SEC decides to adopt IFRS, FASB would likely need to retain specialized industry guidance • This would include NFP guidance
Private Company Council • Blue-Ribbon Panel Recommendation • FAF Trustee Proposal • FAF Creates PCC • AICPA Reaction
Private Company Council • Established May 2012 • Purpose is to improve the process of setting accounting standards for private companies • Two principal responsibilities • Determine whether exceptions or modifications to existing GAAP are needed • Advise FASB on private-company accounting matters during the standard setting process
Private Company Council • Exceptions or modifications to U.S. GAAP advanced by the PCC and endorsed by a simple majority of FASB members will be exposed for public comment. Following the comment process, the PCC will re-deliberate the proposed exceptions or modifications and send final decisions to FASB. • Upon FASB endorsement, exceptions or modifications will be incorporated into U.S. GAAP.
Private Company Council • FASB already is developing a private entity Decision-Making Framework. • Will be a set of criteria for decisions about whether and when to adjust requirements for recognition, measurement, presentation, disclosure, effective dates, and transition methods for private entity standards. • FASB will not complete the framework until the PCC provides input. • FASB also has a project to provide a consistent, clear definition of a nonpublic entity.
Private Company Council • Inaugural meeting held on December 6, 2012 • Identified four areas to research for agenda consideration: • Consolidation of VIEs • Accounting for “plain vanilla” interest rate swaps • Accounting for uncertain tax positions • Recognizing and measuring various intangible assets (other than goodwill) acquired in a business combination at fair value
Private Company Framework • In conjunction with the private company framework project, part of the project was to define a nonpublic entity • FASB has tentatively decided that an entity is not private if: • Files or furnishes F/Ss with a regulatory agency for purposes of issuing securities • Is a for-profit conduit bond obligor • Is an employee benefit plan
Private Company Framework • Certain entities are not excluded from the definition of a private company unless they meet the previous definition • Financial institution • A consolidated subsidiary of an entity that is a public company • An entity that has a controlled and consolidated subsidiary that is a public company
Definition of a Private Company • FASB has tentatively defined a private company as an entity that: • Does not file or furnish F/Ss with a regulatory agency for purposes of issuing securities in a public market or issuing securities that trade in a public market; and/or • Is not a for-profit conduit bond obligor for conduit debt securities that are traded in a public market
Private Company Framework • The Private Company Framework and Definition of Nonpublic Company will be addressed by the Private Company Council in future sessions • No expected standard issuance date yet announced
From FASB to AICPA We go! • AICPA will develop an OCBOA framework that it said will provide a less comprehensive and less costly alternative to U.S. GAAP for entities that do not need to comply with U.S. GAAP. • AICPA will also use its resources and expertise to develop an enhanced OCBOA financial reporting framework that is objective, relevant, and responsive to the concerns of preparers and users of small and medium private company financial statements where GAAP financial statements are not required.
AICPA Financial Reporting Framework • Terry Polly of the FAF stated: “We also believe that the AICPA’s plan to develop a financial reporting framework for smaller private entities, which would be used as a form of OCBOA reporting where appropriate, is an important and complementary undertaking,” she said. “Taken together, these actions demonstrate the commitment of both organizations to the private company financial reporting constituency.”
AICPA – Quotes from Melancon • “For owner-managed, small- and medium-sized, for-profit entities that do not use GAAP, the AICPA is working on a self-contained financial reporting framework for release in the first half of 2013” • “While its use will be completely voluntary, it promises to be less complex and less costly than following GAAP. FAF publicly supported this project, calling it “important and complementary.” It is a top priority for us. Watch for an exposure draft this fall.”
AICPA – Financial Reporting Framework (FRF) Details • Will be a standalone, self-contained other comprehensive basis of accounting intended for use by privately held small to medium sized entities (SMEs) in preparing their financials. • The FRF for SMEs will be a less complicated and less costly system of accounting for SMEs that do not need U.S. GAAP F/Ss. • Will be a cost-beneficial solution for SMEs and others who need F/Ss that are prepared in a consistent and reliable manner in accordance with a framework that has undergone public comment and professional scrutiny.
AICPA – Financial Reporting Framework (FRF) Details (cont.) • The accounting principles comprising the FRF are intended to be the most appropriate for the preparation of SME F/Ss based on the needs of the F/S users and cost-benefit considerations. • Accounting principles in the FRF for SMEs will be responsive to the well documented issues and concerns stakeholders currently encounter when preparing F/Ss for SMEs. • FRF for SMEs may be used by every industry group and business structure. • AICPA has no authority to require the use of FRF for SMEs. The use will be up to the users.
AICPA –FRF Framework • Not like OCBOA as you have come to know it • There will be a separate implementation volume with a full set of illustrative F/Ss • No comprehensive income • It will have the following sections: • Financial Statement Concepts • General Standards of F/S Presentation • Disclosure of Accounting Policies (and Changes) • Current Assets and Current Liabilities • Statement of Income, Financial Position, and SCF • Business Combinations – pre FIN 46R (no VIEs!!!) • Goodwill Amortization to Match Federal Tax Purposes • Leases – like FASB 13, but match federal tax purposes
AICPA – FRF Framework • Revenue – will not follow FASB ED • Income Taxes – allowed to use current taxes or can opt to include deferred taxes, no FIN 48 • Risks and Uncertainties – use SOP 94-6 • Financial Instruments: use cost and not marked to market, unless held for sale, under 20% = cost, no hedge accounting, consolidation = more than 50% owned • No guidance on: Earnings per share, interim reporting, personal financials, segment reporting
AICPA – FRF Timeline • Meeting currently and working on the FRF • Expect exposure draft for comment by this fall • Will gather responses and issue an updated draft early in 2013 • Will issue final document in 2013 • AICPA and CPAs will need to tell their clients, bankers, sureties about this FRF in order to get acceptance instead of GAAP financials • Will take time for agreements to change for SMEs to be able to use this new framework
AICPA – FRF Exposure Draft • Released on November 1, 2012 • Comments requested by January 30, 2013 • FRF for SMEs is not proposed as an authoritative document • Will have no effective date • Management can decide to use it once it is released
AICPA – FRF Exposure Draft • Highly useful and responsive to the financial reporting needs of lenders and other F/S users: • Built upon a foundation of reliable and comprehensive accounting principles • Historical cost is primary measurement basis • Reduced, yet relevant, disclosures • Book to tax adjustments/reconciliations reduced • Principles-based framework across all industries • Will not undergo frequent changes
AICPA – FRF Exposure Draft • Implementation guidance will be provided: • Application examples • Illustrative financial statements • Disclosure checklists • Other tools • Stay tuned for further details as it gets released!
FASB Not-for-Profit Advisory Committee (NAC) • Established in October 2009 to serve as a standing resource for the FASB in obtaining input from the NFP sector on existing guidance, current and proposed technical agenda projects, and longer-term issues affecting those organizations • 17 members, plus 4 participating observers • NFP financial officers, auditors, foundation and other donors, creditor, watchdog agency, charities regulator, attorney, and academic • Also, NFP Resource Group (a standing group of 225+ members)
NAC Discussions on Issues with GAAP:Primary Areas in Need of Attention • The NFP financial reporting model (“FAS 117”) is in need of “refreshing” • Key vehicle: Two new NFP Financial Reporting projects • Unlike private companies, no “hue and cry” for different underlying accounting in certain areas, but a more liberal use of practical expedients may be warranted • Area most frequently cited: Fair value measurements • Primary general GAAP issue: “Disclosure Overload” (and effectiveness) • Key vehicles: Disclosure Framework project and NFP Financial Reporting projects • Important NAC role: advise FASB staff and Board on potential piggybacking opportunities for NFPs with regard to projects of the new Private Company Council • Key project: Nonpublic Entity Definition
Net Asset Classes • Might the current three classes of net assets based on donor-imposed restrictions be improved? • Are they still relevant and most useful? • Can they be improved to better convey information about liquidity and financial performance? For example: • Should donor-restricted classes be expanded to include restrictions imposed by other sources (for example, limits imposed by statutes, debt covenants, and other contracts)? • Should net asset classes be narrowed to just two (e.g., donor-restricted and other) with use of subclasses and/or notes?
Liquidity and Financial Health • How can we best improve information about an entity’s financial health, particularly the liquidity of its resources and its financial flexibility? • Limits on assets • Demands on assets (e.g., maturity of liabilities and other commitments) • Classifications of net assets, including added emphasis on ability to spend, for example:
Financial Performance • How might the statements of activities and cash flows be improved to better convey financial performance? • Should we have one model or two? • Should an operating measure be required? • If yes, should there be a single defined measure or some latitude to select from among a few different measures? • Should there be one statement or two statements (e.g.,statement of operations, statement of other changes in net assets)? • Should functional expense reporting still be required for all and a statement of functional expenses for voluntary health & welfare organizations? • How about a spectrum, ranging from functional expense reporting to a functional/ natural expense matrix to functional P&L reporting to “segment-like” reporting?
Financial Performance • How might the statements of activities and cash flows be improved to better convey financial performance? (cont’d.) • How can we better link the statements of activities and cash flows? At the very least, can we better align “operating”? • Should we require the direct method for reporting operating cash flows?
“Telling the Story”Other Financial Communications • NAC View—Financial Reporting can be enhanced through other narrative communications, such as: • Management commentary that explains financial information provided in financial statements, including trends over time • Issues include: • Are standards needed? If not, would they be helpful? • Should such information be required or encouraged? If required, for all NFPs or only certain types? • If standards are to be developed, should a reporting framework require certain components?
FASB NFP Financial Reporting Projects • Have formed project resource groups and completed other detail project planning • Deliberations on standards project expected to begin in early 1Q 2013. Current estimated completion date is 2H 2014 • NAC discussion on net asset classes in March 2012 • NAC discussion on liquidity and the proposed ASU on Liquidity Risk Disclosures in September 2012 • Work on research project has already begun. Current estimated date for decision on adding standards project: mid-2013 • Progress report at September 2012 NAC meeting
FASB Disclosure Framework Project • Goal: disclosure standard or conceptual framework guidance that helps reduce disclosure overload while making disclosures more comparable and effective • Two approaches within project: • “Top down” (development of principles) • “Bottom up” (looking at actual current disclosure requirements) • Many view this as a critical project in addressing GAAP complexity for all entities (public companies, private companies, NFPs)
FASB Disclosure Framework Project • Invitation to Comment (ITC) issued in July. Comment period ended November 30 • ITC focuses on investors and creditors, but asked for input to help in also focusing on donors and other unique users of NFP financial statements • Discussed by NAC at September 2012 meeting
What is the Disclosure Framework Project? • Project began as a response to a December 11, 2007, letter from the Investors Technical Advisory Committee to the FASB • FASB issued an “Invitation to Comment” on July 12, 2012 – comment period extended through November 30, 2012 • Goal of project is to improve disclosure effectiveness • Complaints of cost effectiveness and relevance of disclosures for smaller entities
Addressing disclosure effectiveness • Notes will address only information that is relevant to primary users of financial statements • Relevant information: useful info for investing and credit decisions, which are based upon implicit or explicit assessments of prospects for cash flows to investors or creditors • Flexible disclosure requirements that could be adapted by each entity to focus on relevant information to its specific circumstances
Addressing disclosure effectiveness (cont.) • FASB also addressed format and organization of notes • Disclosures should be entity specific and should identify judgments and assumptions made by management • Most relevant info should be given more recognition • Reorder notes by relevance • Use different text fonts or styles to draw attention to most relevant info • Potential to group related notes together • Not stated goal, but would likely lead to reduced disclosures, which would enhance effectiveness
Changes to Codification? • Invitation to Comment does not propose any specific changes, but rather suggests a number of possibilities that could lead to more effective disclosures • FASB states that establishing a framework for disclosure is an important first step before any specific changes to existing disclosure requirements are considered • FASB plans to apply framework to existing standards by either modifying existing standards or establishing new standards
Achieving disclosure selectivity • Two extremes – 1) FASB takes most responsibility for judgments, or 2) reporting entities take most responsibility for judgments • Several alternatives: • FASB change wording re: disclosures to be less prescriptive and allow for flexibility. • FASB identify one set of potential disclosures for each Topic and require reporting entities to make their own decisions about relevance of each item. • FASB set minimum disclosure requirements or set of disclosures and an expanded set of disclosures. Reporting entities use judgment to provide minimum disclosures or some or all of the expanded disclosures. • FASB establish tiers of info items or a graduated scale of info requirements for each Topic. Reporting entities use judgment to determine which level applies to them.