Not-for-Profit Accounting and Auditing Update · Not-for-Profit Accounting and Auditing Update is intended ... 4-15 Solutions ... Many recent developments at the federal level affect

Not-for-Profit Accounting and Auditing Update

Not-for-Profit Accounting and Auditing Update By Lynda Dennis, CPA, CGFO, Ph.D.

Notice to Readers

Not-for-Profit Accounting and Auditing Update is intended solely for use in continuing professional education and not as a reference. It does not represent an official position of the American Institute of Certified Public 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.

Copyright © 2014–2015 by

American Institute of Certified Public Accountants, Inc.

New York, NY 10036-8775

All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please email [email protected] with your request. Otherwise, written requests should be mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC 27707-8110. Course Code: 746130 NAU GS-0414-0A Revised: April 2014

Use of Materials This course manual accompanies all formats in which the course is offered, including self-study text, self-study online, group study, in-firm, and other formats, as applicable. Specific instructions for users of the various formats are included in this section. Continuing Professional Education (CPE) is required for CPAs to maintain their professional competence and provide quality professional services. CPAs are responsible for complying with all applicable CPE requirements, rules, and regulations of state licensing bodies, other governmental entities, membership associations, and other professional organizations or bodies. Professional standards for CPE programs are issued jointly by the American Institute of Certified Public Accountants (AICPA) and the National Association of State Boards of Accountancy (NASBA) to provide a framework for the development, presentation, measurement, and reporting of CPE programs. These standards are entitled Joint AICPA/NASBA Statement on Standards for Continuing Professional Education Programs (CPE standards), and are available as part of the AICPA’s Professional Standards three-volume set, either in paperback or as on online subscription through the AICPA’s Online Professional Library. Review Questions for Self Study Participants The CPE standards require that self study programs include review questions (also known as feedback questions) that provide feedback to both correct and incorrect responses. Note that these questions are provided only as learning aids and do not constitute a final examination. Requirements for Claiming and Receiving CPE Credit CPE standards place responsibility on both the individual participant and the program sponsor to maintain a record of attendance at a CPE program. CPAs who participate in only part of a CPE program should only claim CPE credit for the portion that they attended or completed. CPE participants must document their claims of CPE credit. Examples of acceptable evidence of completion include:

for group and independent study programs, a certificate or other verification supplied by the CPE program sponsor.

for self-study programs, a certificate supplied by the CPE program sponsor after satisfactory completion of an examination.

Participants in group study and other live presentations will receive a completion certificate from the program sponsor. CPE program sponsors are required to keep documentation on programs for five years, including records of participation. All self-study participants must complete the exam within one year of date of course purchase in order to receive a certificate indicating satisfactory completion of the CPE program.

When purchased as a self-study course in text format, the exam is located in the Examination section at the end of the course manual.

The course code number for both the self study exam and the self study evaluation can be found in the Examination’s introductory material.

The self study examination answer sheet and evaluation form are included with your course materials. Participants may complete them online or use the paper forms. If using the paper forms, you should mail the original answer sheet and course evaluation form in the pre-addressed envelope. Photocopies or faxes of the original forms are not acceptable. The paper grading process averages five to seven business days from date of receipt. During peak reporting periods (June, September. and December), the processing time may be 10 to 15 business days.

Alternatively, self-study participants may choose to complete the exam and course evaluation online at https://cpegrading.aicpa.org. Participants must provide the unique serial number printed on the Answer Sheet.

Participants must achieve a minimum passing grade of at least 70 percent to qualify for CPE credit. o Upon achieving a passing grade, participants will receive a certificate displaying the

number of CPE credits earned based on a 50-minute hour, in compliance with CPE standards.

If you do not achieve a passing grade and you mailed in the exam, you will not receive any notification.

If you do not achieve a passing grade and you completed the exam online, the website will notify you of your score.

Self study online participants may print the completion certificate after successful completion of the exam. Participants who do not pass the exam within three attempts must mail in the answer key.

Program Evaluations The information accumulated from participant evaluation forms is an important element in our continual efforts to provide high quality continuing education for the profession. Participants in group study and other live presentations should return their evaluation forms prior to departing their program sessions. Self-study participants should either mail the completed evaluation form along with the examination answer sheet in the envelope provided, or complete the course evaluation online. Your comments are very important to us. Customer Service For help and support, including information on refund claims and complaint resolutions, please call AICPA Member Service at 1-888-777-7077, or visit the online Help page of the AICPA Store at www.cpa2biz.com.

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Not-for-Profit Accounting and Auditing Update

Table of Contents

Chapter 1 ..................................................................................................................... 1-1

Federal Government Activities ................................................................................. 1-1

OMB Reforms Relating to Federal Awards ........................................................................................... 1-2

2011 Government Auditing Standards ................................................................................................ 1-18

OMB Compliance Supplement for Single Audits ................................................................................. 1-22

Update on Federal Funding Accountability and Transparency Act ..................................................... 1-26

2013 Data Collection Form .................................................................................................................. 1-28

Status of the HUD Consolidated Audit Guide ...................................................................................... 1-30

Chapter 2 ..................................................................................................................... 2-1

AICPA Activities ......................................................................................................... 2-1

Status of the Clarified Auditing Standards ............................................................................................. 2-2

Audits of Group Financial Statements ................................................................................................... 2-8

AICPA Audit and Accounting Guide Not-for-Profit Entities .................................................................. 2-29

Changes to AICPA Professional Ethics Rule 101, Independence ...................................................... 2-32

AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities ................................ 2-34

Chapter 3 ..................................................................................................................... 3-1

FASB Activities .......................................................................................................... 3-1

Private Company Council ...................................................................................................................... 3-2

Recent FASB Standards........................................................................................................................ 3-5

ASU No. 2013-01: Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities ......................................................................................................................................... 3-8

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ASU No. 2013-03: Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities ................................................................................................................................ 3-10

ASU No. 2013-06: Not-for-Profit Entities: Services Received from Personnel of an Affiliate ............. 3-12

ASU No. 2013-07: Presentation of Financial Statements: Liquidation Basis of Accounting ............... 3-16

ASU No. 2013-12: Definition of a Public Business Entity ................................................................... 3-20

ASU No. 2014-01: Accounting for Investments in Qualified Affordable Housing Projects .................. 3-23

ASU No. 2014-05: Service Concession Arrangements ....................................................................... 3-28

FASB Projects Affecting Not-for-Profit Entities .................................................................................... 3-31

Other FASB Projects ........................................................................................................................... 3-37

Chapter 4 ..................................................................................................................... 4-1

Emerging Issues Affecting Not-for-Profit Entities ................................................... 4-1

Social Entrepreneurship ........................................................................................................................ 4-2

Theft and Fraud at Not-for-Profit Entities ............................................................................................... 4-5

Organizational Sustainability ................................................................................................................. 4-8

Payments in Lieu of Taxes .................................................................................................................... 4-9

Measuring Organizational Effectiveness ............................................................................................. 4-11

Social Impact Bonds ............................................................................................................................ 4-13

Accounting Areas of Interest in NFPs .................................................................................................. 4-15

Solutions ................................................................................................... Solutions 1-1

Chapter 1 ............................................................................................................................... Solutions 1-1




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Chapter 1

Federal Government Activities

Learning Objectives

Understand the revisions to the single audit process, federal cost principles, administrative requirements, and audit requirements for federal awards.

Be aware of common errors made in implementing the independence-related requirements of the 2011 revision of Government Auditing Standards.

Review other important developments.

Introduction

Many recent developments at the federal level affect governmental and not-for-profit entities and their auditors. In addition, prior federal initiatives still affect governmental and not-for-profit entities. This chapter discusses recent and ongoing developments related to generally accepted government auditing standards (GAGAS) and compliance audits including the following:

Changes to the single audit process, federal cost principles, administrative requirements, and audit requirements for federal awards based on recent reforms by the Office of Management and Budget (OMB)

Early lessons learned from implementation of the 2011 revision of Government Auditing Standards (the Yellow Book)

The OMB Circular No. A-133 Compliance Supplement

Revisions to the Federal Audit Clearinghouse Data Collection Form

Other important items


OMB Reforms Relating to Federal Awards

Overview of Reforms

On December 26, 2013, the OMB published Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards; Final Rule (the rule). The rule establishes uniform cost principles1 and audit requirements for all federal awards to nonfederal entities and administrative requirements for all federal grants and cooperative agreements. As a result, the rule supersedes a number of OMB circulars. Those superseded include the following:

No. A-21, Cost Principles for Educational Institutions

No. A-87, Cost Principles for State, Local and Indian Tribal Governments

No. A-89, Federal Domestic Assistance Program Information

No. A-102, Grants and Cooperative Agreements With State and Local Governments

No. A-110, Uniform Administrative Requirements for Grants and Other Agreements with Institutions of Higher Education, Hospital, and Other Non-Profit Organizations

No. A-122, Cost Principles for Non-Profit Organizations

No. A-133, Audits of States, Local Governments and Non-Profit Organizations

Those sections of No. A-50, Audit Followup, related to single audits

The rule consolidates the guidance found in the superseded circulars to improve both the clarity and accessibility of the guidance. In addition, the rule includes revisions to modify existing rules considered to be outdated, ineffective, insufficient, or excessively burdensome. As it relates to the existing cost principles, the rule consolidates the cost principles (other than those related to hospitals) into a single document with limited variations by type of entity. Combining these various circulars and requirements necessitated revising terms and definitions where applicable in the rule. 1 Cost principles applicable to hospitals are not superseded with the issuance of Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards; Final Rule (the rule). As noted in appendix IX to Part 200, Hospital Cost Principles, the Office of Management and Budget (OMB) will instead establish a review process to consider existing hospital cost determination and how best to update and align the cost principles with the guidance in the rule. Until revised guidance is proposed and implemented for hospitals, existing principles in appendix E, Principles for Determining Cost Applicable to Research and Development Under Grants and Contracts with Hospitals, to Title 45 Part 74 of the Code of Federal Regulations (CFR) remain in effect.


All guidance previously found in the cost principles, circulars, and other documents noted above is now located in the rule in the following sections of Chapter 1, Part 200:

Subpart A Acronyms and Definitions 200.0 – 200.99

Subpart B General Provisions 200.100 – 200.113

Subpart C Pre-Federal Award Requirements and Contents of Federal Awards 200.200 – 200.211 Subpart D Post Federal Award Requirements 200.300 – 200.345

Subpart E Cost Principles 200.400 – 200.475

Subpart F Audit Requirements 200.500 – 200.521

There are also 11 appendixes that follow the Subpart F, Audit Requirements, in the rule. These appendixes are as follows:

Appendix I to Part 200 “Full Text of Notice of Funding Opportunity”

Appendix II to Part 200 “Contract Provisions for Non-Federal Entity Contracts Under Federal Awards”

Appendix III to Part 200 “Indirect (F&A) Costs Identification and

Assignment, and Rate Determination for Institutions of Higher Education (IHEs)”

Appendix IV to Part 200 “Indirect (F&A) Costs Identification and

Assignment, and Rate Determination for Nonprofit Organizations”

Appendix V to Part 200 “State/Local Government and Indian Tribe-

Wide Central Service Cost Allocation Plans”

Appendix VI to Part 200 “Public Assistance Cost Allocation Plans”

Appendix VII to Part 220 “States and Local Government and Indian Tribe Indirect Cost Proposals”

Appendix VIII to Part 200 “Nonprofit Organizations Exempted From

Subpart E, Cost Principles, of Part 200”

Appendix IX to Part 200 “Hospital Cost Principles” (see footnote 1)


Appendix X to Part 200 “Data Collection Form” (Form SF-SAC)

Appendix XI to Part 200 “Compliance Supplement”

The remainder of this section provides a high-level overview of the reforms included in the rule as a detailed discussion of the rule is outside the scope of this course. At the end of this section, a number of other resources are listed that may prove helpful in understanding the more detailed aspects of the reforms. Reforms Relating to the Single Audit Process

As it relates to the guidance currently found in Circular No. A-133, the reforms affecting the auditor performing, and the auditee undergoing, a single audit are numerous. Some are wording changes or updates due to the use of different terminology, passage of time, or use of technology. In some cases, the auditee’s responsibilities previously found in Circular No. A-133 are located in areas other than the audit requirements section of the rule. For example, the auditee’s responsibilities with respect to maintaining internal control along with guidance related to subrecipient monitoring and management are now in Subpart D, Post Federal Award Requirements.

Standards set forth in Subpart F, Audit Requirements, will apply to audits of fiscal years beginning on or after December 26, 2014. Therefore, auditees subject to a single audit with December 31, 2015 (and later) year ends will be required to undergo the single audit in conformity with the rule.

Some of the more significant reforms sound in Subpart F, Audit Requirements, relate to the following:

Single audit threshold increased:

— Nonfederal entities that expend $750,000 or more of federal awards in a year will be required to have a single audit or program-specific audit (increased from $500,000).

Changes to the major program determination process

— The minimum threshold for type A/B major program determination increases from $300,000 to $750,000.

— Criteria for the determination of low-risk type A programs are revised. For a type A program to be considered low-risk, it must have been audited as a major program in one of the two most recent audit periods, and in the most recent audit period the program must not have had


internal control deficiencies identified as a material weakness in the auditor’s report on internal control for major programs (a significant deficiency in internal control will no longer preclude a type A program from being low-risk),

a modified opinion on the program in the auditor’s report on major programs, or

known or likely questioned costs that exceed 5 percent of the total federal awards expended for the program.

— The selection of high-risk type B programs (assuming minimum coverage requirements are met) to be tested is revised to require the risk assessment and selection of at least one-fourth the number of low-risk type A programs. (Option one under the current guidance requires risk assessment and selection of at least one half the number of type B programs identified as high-risk up to the number of low-risk type A programs. In addition, the option to select one high-risk type B program for every low-risk type A program is eliminated.)

— Risk assessments on small type B programs will be required to be performed on type B programs that exceed 25 percent of the type A threshold (currently the lowest threshold amount is $100,000).

Percentage of coverage changes

— The percentage of coverage required in a single audit is changed to 40 percent (non-low-risk auditee) and 20 percent (low-risk auditee) from the current 50 percent (non-low-risk auditee) and 25 percent (low-risk auditee) requirement.

Criteria for a low-risk auditee

— The criteria for low-risk auditee status adds a requirement that, for each of the two preceding audit periods, the auditor did not report a substantial doubt about the auditee’s ability to continue as a going concern.

— The low-risk auditee criteria was revised to require that the financial statements are prepared in accordance with GAAP, or based on accounting prescribed by applicable state law.

Threshold for reporting questioned costs

— Known and likely questioned costs that are greater than $25,000 for a type of compliance requirement for a major program must be reported as an audit finding (increased from $10,000)


Schedule of Expenditures of Federal Awards (SEFA)

— All expenditures of federal awards, including noncash assistance and loan program balances and activity, are required to be reported on the face of the SEFA.

Changes that affect reporting by the auditor and/or auditee in a single audit include the following:

1 The summary schedule of prior audit findings will require additional information that describes the reason for the finding’s recurrence when an audit finding from a prior year is not corrected, or only partially corrected, in a subsequent year.

2

Under the rule, auditees and auditors must ensure that that their respective parts of the reporting package do not include protected personally identifiable information. In addition, the statement signed by a senior level representative of the auditee as part of the data collection form submission must now include a statement that the

reporting package does not include protected personally identifiable information;2 and

FAC is authorized to make the reporting package and the form publicly available on a website.3

3

The required elements of a finding are expanded to include a statement as to whether a finding is a repeat finding from the immediately prior audit and, if so, any applicable prior year audit finding number(s). In addition, it is now explicitly stated that the cause of a finding should be included (in addition to the possible asserted effect).

4 Audit finding detail will require, where appropriate, a statement on whether the sampling was a statistically valid sample.

5 Each finding in the schedule of findings and questioned costs must include a reference number in the format meeting the requirements of the data collection form submission.

6 Subrecipients are no longer required to submit a reporting package to a pass-through entity as previously required in certain circumstances. This change is due to the public availability of FAC reporting packages.

7 Federal agencies will no longer have the authority to grant extensions of the due date of reports.

2 This requirement is added because the Federal Audit Clearinghouse (FAC), or other designated clearinghouse, is now required to make audit reporting packages available to the public. 3 Indian tribes may opt to not authorize the FAC to make the reporting package publicly available by excluding the authorization for the FAC publication reference in this requirement.


The OMB issued various proposed reforms for public comment as part of the process leading to the final version of the rule. These public comment documents included some proposals that are not included in the final version of the rule including reforms designed to reduce the types of compliance requirements to be considered for a major program. The final version of the rule does not provide a list of types of compliance requirements and it is not yet known how many there will be and what they will encompass. The compliance supplement applicable to audits performed under the final version of the rule will be the basis for the auditor’s determination of which (and how many) compliance requirements to consider.

Changes intended to streamline compliance requirements are expected to be issued in the 2015 OMB compliance supplement.

Reforms Relating to General Provisions and Pre- and Post-Award Requirements

Changes to the previous administrative requirements and portions of Circular No. A-133 are now found in the following subparts to the rule:

Subpart B – General Provisions.

Subpart C – Pre-Federal Award Requirements and Contents of Federal Awards.

Subpart D – Post-Federal Award Requirements.


The final version of the rule states that the standards in Subpart B, General Provisions, that affect administration of federal awards issued by federal agencies become effective once implemented by federal agencies or when any future amendment to Subpart B becomes final. Federal agencies are required to implement the policies and procedures applicable to federal awards by promulgating a regulation to be effective by December 26, 2014 (unless different provisions are required by statute or approved by the OMB). Note that all federal agencies are expected to implement the guidance in unison to provide for a smooth transition for entities that are required to comply with the guidance. Upon implementation, the guidance will be in effect for all federal awards or funding increments provided after the effective date. Non-federal entities will need to implement the new administrative requirements and cost principles upon the effective date. Further clarification is expected regarding this as an entity may be subject to both old and new regulations depending on their mix of awards. However, it is stated that non-federal entities wishing to implement entity-wide system changes (applicable to all awards) to comply with the guidance after the effective date will not be penalized for doing so.

The rule requires federal agencies to take a number of actions and to put in place various policies and procedures. Requirements for federal agencies to review the merit of an applicant’s proposal and the risk posed by the applicant may significantly affect state and local governments and not-for-profit organizations. Subpart C, Pre-Federal Award Requirements and Contents of Federal Awards suggests that federal awarding agencies may use a risk-based approach to items such as the following:

Financial stability

Quality of management systems and ability to meet the management standards prescribed in Subpart B

History of performance

Reports and findings from single audits

Applicant’s ability to effectively implement imposed statutory, regulatory, or other requirements


A sampling of the provisions affecting non-federal recipients of federal awards relating to general provisions and to the pre- and post-federal award requirements are as follows.

A number of requirements relate to responsibilities of pass-through entities which somewhat follow those required of federal awarding agencies. A few of the more noteworthy requirements include:

— Evaluate each subrecipient’s risk of noncompliance for purposes of determining appropriate monitoring including consideration of whether the subrecipient has new personnel or systems

— Review financial and programmatic reports required by the pass-through entity

— Verify each subrecipient is audited as required by Subpart F, Audit Requirements

— Consider taking enforcement action against noncompliant subrecipients

Non-federal entities must disclose in writing any potential conflict of interest to the federal awarding or pass-through entity. In addition, non-federal entities must maintain written standards of conduct covering conflicts of interest and governing performance of its employees engaged in the selection, award, and administration of contracts.

Non-federal entities or applicants for a federal award must disclose, in a timely manner, in writing to the federal awarding agency or pass-through entity all violations of federal criminal law that could affect the federal award that involve

— fraud,

— bribery, or

— gratuity violations.

At the end of a federal award, non-federal entities are required to certify in writing that the project or activity was completed or the level of effort was expended. If the required level of activity or effort was not carried out, the amount of the federal award is required to be adjusted.

Changes in the principal investigator, project leader, project partner, or scope of effort must receive the prior written approval of the federal awarding agency or pass through entity. In addition, recipients must request prior approval from federal awarding agencies to change key persons specified in the application.

Federal award recipients are required to relate financial data to performance accomplishments of the federal award; and when applicable, recipients must also provide cost information to demonstrate cost effective practices.


Internal control provisions include the following:

— Nonfederal entities must (emphasis added) establish and maintain effective internal control that provides reasonable assurance the entity is managing federal awards in compliance with federal statutes, regulations, and terms and conditions of the federal award.

— Internal controls over federal awards should (emphasis added) be in compliance with Standards for Internal Control in the Federal Government and the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

— Additionally, internal controls should include reasonable measures to safeguard protected personally identifiable information and other information designated by the federal awarding agency or pass-through entity as sensitive, or that the recipient considers sensitive.

Procurement procedure provisions include the following:

— Non-federal entities must use their own documented procurement procedures which are to reflect applicable state and local laws and regulations.

— In addition, non-federal entities must use one of the following methods of procurement:

Procurement by micro-purchases (less than $3,0004 and no quotations required)

Procurement by small purchase procedures (less than the simplified acquisition threshold—currently $150,000—and quotations must be obtained from an adequate number of qualified sources)

Procurement by sealed bids (preferred method for construction contracts) submitted in response to formal advertising

Competitive or noncompetitive proposals

— A non-federal entity must perform a cost or price analysis for every procurement action in excess of the simplified acquisition threshold, including contract modifications. In addition, an independent estimate of the cost must be made before receiving bids or proposals.

4 If the requirements of the Davis-Bacon Act of 1931 are applicable, this threshold is $2,000.


Key Point

The requirements in the rule are based on the 8 circulars that are superseded by it. While certain sections are based primarily on certain of the circulars, because of terminology changes and the combining of guidance from those circulars, it is important to obtain a thorough understanding of the uniform guidance set forth in the rule.

Reforms Relating to Federal Cost Principles

Subpart E, Cost Principles, supersedes all existing OMB cost circulars other than previous guidance relating to hospitals (see footnote 1). In addition, Subpart E makes limited exceptions to the cost principles based on entity type. A number of clarifications are made in Subpart E related to direct costs which may prove problematic for some non-federal entities that do not have effective cost accounting systems. Direct costs are defined as those that can be specifically identified with a particular cost objective such as a federal award or that can be directly assigned to such activities relatively easily with a high degree of accuracy (emphasis added). The revised guidance also states that the identification of a cost with a federal award (rather than the nature of the goods or services received) is the determining factor in distinguishing between direct and indirect costs. Some of the more significant reforms relating to the federal cost principles follow.

Indirect cost rates

— Most non-federal entities that have never received a negotiated indirect cost rate may elect to charge a de minimis rate of 10 percent of modified total direct costs which may be used indefinitely.

— Any non-federal entity that has a federally negotiated indirect cost rate may apply for a one-time extension of a current negotiated indirect cost rate for a period of up to four years.

Required certifications

— Annual and final fiscal reports (or vouchers) requesting payment signed by an official who is authorized to legally bind the non-federal entity. The required language for this certification is located in section 200.415, Required Certifications.

— Cost allocation plan or indirect cost rate proposal.


— For non-profit organizations only, certifications as appropriate that they did not meet the definition of a major corporation as defined in section 200.414, Indirect (F&A) Costs.

Collection costs incurred to recover improper payments are allowable as direct or indirect costs.

Computing devices are now subject to the less burdensome administrative requirements of “supplies” (as opposed to “equipment”) providing the acquisition cost is less than the lessor of

— $5,000 or

— Capitalization threshold established by the non-federal entity.

Conference costs incurred by a sponsor or host may include the costs of

identifying (not providing) locally available dependent care resources. Additionally, temporary dependent care costs, above and beyond regular dependent care resulting directly from travel to conferences, are allowable under certain circumstances.

Standards for documentation of personnel expenses include the following:

— Charges to federal awards must be based on records that accurately reflect the work performed. Such records must

be supported by a system of internal control that provides reasonable assurance the charges are accurate, allowable, and properly allocated.

be incorporated into the official records of the non-federal entity.

reasonably reflect the total activity for which the employee is compensated.

encompass both federally assisted and all other activities compensated by the non-federal entity on an integrated basis.

comply with established accounting policies and practices of the non-federal entity.

What Do You Think?

Should non-federal entities receiving federal awards that include computing devices consider changing their capitalization threshold for such equipment in light of the change in the cost principles?


support the distribution of the employee’s salary or wages among specific activities or federal award or other cost objective (for employees working on more than one federal award, a federal award and a non-federal award, an indirect cost activity and a direct cost activity, and other similar circumstances).

— Non-federal entities meeting the above noted standards will not be required to provide additional support or documentation for the work performed other than that required under Department of Labor regulations implementing the Fair Labor Standards Act of 1938.

Charges for salaries and wages of nonexempt employees must be supported by records indicating the total number of hours worked each day in addition to the previously noted documentation requirements.

— In certain circumstances, states, local governments, and Indian tribes, may use substitute processes or systems for allocating salaries and wages to federal awards in place of or in addition to the requirements noted above.

— When records of a non-federal entity do not meet the standards prescribed, the federal government may require personnel activity reports including prescribed certifications or equivalent documentation to support the records required in the cost principles.

Key Point

Uniform guidance in the rule relating to personal services is loosely based on the concepts from all three cost circulars (Circular Nos. A-21, A-87, and A-122). However, the final version of the rule increases the emphasis on internal controls and provides less prescriptive guidance on documentation primarily in the area of time and effort reporting of employees.

In addition to the requirements in Subpart E, specific guidance relating to indirect costs, indirect cost proposals, and central service cost allocation plans is now provided in the following appendixes to the rule.

Appendix III to Part 200 Indirect (F&A) Costs Identification and Assignment, and Rate Determination for Institutions of Higher Education (IHEs)

Appendix IV to Part 200 Indirect (F&A) Costs Identification and

Assignment, and Rate Determination for Nonprofit Organizations


Appendix V to Part 200 State/Local Government and Indian Tribe-Wide Central Service Cost Allocation Plans

Appendix VI to Part 200 Public Assistance Cost Allocation Plans

Appendix VII to Part 220 States and Local Government and Indian Tribe Indirect Cost Proposals

Key Point

Because the standards set forth in Subpart F, Audit Requirements will apply to audits of fiscal years beginning on or after December 26, 2014, recipients of federal awards will need to comply with the requirements now found in Subpart B, General Provisions, and Subpart E, Cost Principles, as of the beginning of their 2015 calendar year or the first fiscal year they are subject to an audit under the rule.

Additional Resources

A number of resources are available to assist recipients of federal financial assistance in implementing, and their auditors in understanding, the changes to the administrative requirements and the cost principles. Additionally, a number of resources are available to the auditor engaged in performing single audits. OMB Resources

Final guidance from OMB titled, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, is available on the OMB website under the “Uniform Grants Guidance” section at http://www.whitehouse.gov/omb/grants_docs. The OMB has also made available a number of “crosswalk” documents providing information as to the source of the requirements in the rule and to the requirements previously found in the following circulars:

No. A-21 – Cost Principles for Educational Institutions

No. A-50 – Audit Followup

No. A-87 – Cost Principles for State, Local and Indian Tribal Governments

No. A-89 – Federal Domestic Assistance Program Information

No. A-102 – Grants and Cooperative Agreements with State and Local Governments


No. A-110 – Uniform Administrative Requirements for Grants and Other Agreements with Institutions of Higher Education, Hospitals and Other Nonprofit Organizations

No. A-122 – Cost Principles for Non-Profit Organizations

No. A-133 – Audits of States, Local Governments and Non-Profit Organizations

In addition to the two crosswalk documents noted above, the OMB prepared a chart comparing the paragraph-by-paragraph requirements of Circular No. A-133 to the related paragraph(s) in the proposed guidance. Though the comparison of the existing requirements to those proposed is not based on the final version of the rule, the sections relating to the audit requirements did not change from the section numbers proposed. Therefore, auditors may find it helpful as a cross reference from the existing requirements in Circular No. A-133 to the rule. AICPA Resources

The AICPA has a number of different types of resources to assist recipients of federal awards and their auditors in understanding and implementing the reforms. Some of these resources are as follows:

Government Audit Quality Center (GAQC) website (www.aicpa.org/gaqc)

Self-study and group study courses

Periodic webcasts

Audit Guide, Government Auditing Standards and Circular A-133 Audits

Audit Risk Alert, Government Auditing Standards and Circular A-133 Developments

Other Resources

Non-federal entities must establish and maintain internal control that should be in compliance with the Government Accountability Office’s (GAO’s) Standards for Internal Control in the Federal Government and COSO’s Internal Control—Integrated Framework. Therefore, recipients and their auditors may find the following COSO publications helpful: Internal Control—Integrated Framework (2013 framework).

Internal Control—Integrated Framework: Executive Summary.

Illustrative Tools for Assessing Effectiveness of a System of Internal Control


Internal Control over External Financial Reporting: A Compendium of Approaches and Examples

All of these publications are available at cpa2biz.com.5 Please note that the 1992 COSO Internal Control—Integrated Framework is available only until December 15, 2014 at which time it will be superseded by the 2013 framework.

Key Point

Uniform guidance in the rule makes reference to “written policy” 25 times and in the following sections:

Financial management – Section 200.302 Payment – Section 200.305 Procurement – Sections 200.318, 200.319, and 200.320 Compensation – Sections 200.430 and 200.431 Relocation costs – Section 200.464 Travel costs – Section 200.474

Recipients will need to determine if their existing policies need to be expanded or augmented in order to compliant with the uniform guidance in the rule.

Feedback Questions

1. When did the OMB issue reforms relating to the single audit process?

a. December 26, 2013 b. December 26, 2012 c. December 31, 2013 d. No changes to the single audit process since 1997

2. What is the amount of the new threshold requiring an entity to have a single audit?

a. $25,000 b. $500,000 c. $1,000,000 d. $750,000

5 All of these resources are available from the AICPA in one set at www.cpa2biz.com. Look for product number 990027SET-HI. You can also find them individually by searching for their titles.


3. Changes to the previous administrative requirements are not found in which of the following sections of the rule?

a. Subpart B – General Provisions b. Subpart C – Pre-Federal Award Requirements c. Subpart D – Post Federal Award Requirements d. Subpart F – Audit Requirements

4. Which of the following is true relating to indirect cost rates?

a. All non-federal entities may elect to charge a de minimis rate of 10 percent of

modified total direct costs. b. Any non-federal entity never receiving a negotiated indirect cost rate may elect to

charge a de minimis rate of 10 percent of modified total direct costs. c. Non-federal entities are not permitted to recover any indirect costs. d. Federal agencies must approve the use of all indirect cost rates used by all non-

federal entities in all circumstances.

5. Specific guidance relating to indirect costs, indirect cost proposals, and central service cost allocation plans is not found in which of the following?

a. Appendix III b. Appendix IV c. Appendix V d. Subpart F – Audit Requirements

6. Which of the following entities does not provide additional resources that might be

helpful in understanding the rule?

a. AICPA b. OMB c. IRS d. COSO

7. Which of the following is true about internal controls over federal awards?

a. Should be in compliance with the COSO internal control framework b. Must be in compliance with the COSO internal control framework c. Are not required in the recipient expended less than $1,000,000 of federal awards d. Must be approved by the awarding federal agency


2011 Government Auditing Standards

Overview

With the 2011 revision to the Government Auditing Standards (the Yellow Book), the GAO significantly changed how government auditors evaluate nonaudit services and their potential effect on the auditor’s independence. Among other things, the 2011 Yellow Book establishes a conceptual framework the auditor is required to use to identify, evaluate, and apply safeguards to address significant threats to independence. In addition, the Yellow Book establishes requirements for and guidance on (1) independence when the auditor also performs nonaudit services and (2) the documentation necessary to support adequate consideration of the auditor’s independence. Government auditors engaged to audit financial statements for years ending December 31, 2012 were the first to deal with the 2011 revision of the Yellow Book. Since that time other government auditors have implemented the 2011 revision. A discussion of a number of areas of concern and confusion arising from their experiences follows. Application of the Conceptual Framework

Some government auditors do not believe application of the conceptual framework is required when no nonaudit services are provided. Because the conceptual framework assists the government auditor in identifying and evaluating any threats to independence, it is required to be applied in every engagement. In addition, the conceptual framework is applied at the audit organization, audit, and individual auditor levels.

Application of the framework at all three of the required levels is not always documented or documented adequately.

Adequate explanations do not always exist regarding how safeguards applied by the auditor eliminate or reduce to an acceptable level a significant threat to independence. In addition, documentation may show only safeguards applied by the audited entity without indicating any applied by the audit organization. The 2011 Yellow Book notes that a significant threat will not be eliminated or reduced to an acceptable level solely with safeguards that are in place at the audited entity. Identification of Threats to Independence

Familiarity Threat

Many government auditors have long term relationships with their clients, and in some cases government auditors did not identify this as a potential threat to independence.


Additionally, there was no documentation showing how the auditor reached the conclusion that the familiarity threat was at an acceptable level and therefore did not affect the auditor’s independence.

Self Review Threat

A number of government auditors provide a significant amount of nonaudit services related to preparing accounting records and financial statements. A number of government auditors did not identify the “self review” threat as a significant threat to independence in such cases. Additionally, there was no documentation of how the auditor concluded such nonaudit services did not create a threat or significant self review threat. Valuation services, such as assisting the audited entity in estimating future cash flows and selecting appropriate discount rates for long-term pledges, are often provided as a nonaudit service in audits of not-for-profit organizations. In many cases, this nonaudit service is considered a “bookkeeping service” rather than a valuation service. Generally accepted government auditing standards (GAGAS) clearly state the audit organization’s independence would be impaired when (1) the valuations would have a material effect (separately or in the aggregate) on the financial statements and (2) the valuation involves a significant degree of subjectivity. Therefore, separate consideration of such services is necessary to comply with GAGAS.

In some cases, auditors are not identifying valuation services relating to assistance in fair value measurements separately from other accounting nonaudit services.

Identification of Nonaudit Services

The 2011 revision to the Yellow Book does not change the requirement for the government auditor to identify and document the nonaudit services provided. However, the 2011 revision does require the government auditor to consider financial statement preparation, cash to accrual conversions, and reconciliations as nonaudit services and to evaluate the effect of providing these nonaudit services using the conceptual framework. Cash to accrual conversions and reconciliations are not consistently identified as separate nonaudit services and therefore sometimes are not properly evaluated using the conceptual framework. In a number of cases, the audit engagement letter is dated before the auditor’s documentation of the application of the conceptual framework regarding the nonaudit service. The government auditor is required to evaluate the effect of nonaudit services on independence before agreeing to perform them. Engagement letters are often the sole documentation of the government auditor’s understanding with the audited entity related to providing nonaudit services. In a number of circumstances, the services to be performed as cited in the engagement letter are


inconsistent with the work performed as evidenced in the audit documentation. Additionally, the objectives of the nonaudit service(s) are not separately identified in some cases when only one engagement letter is executed for both the audit and nonaudit services. Documentation

The 2011 revision to the Yellow Book establishes new documentation requirements and some confusion exists as to what exactly the new documentation requirements involve. In some cases, documentation was whatever workpapers the government auditor’s software product provided without any modification to reflect the current year engagement circumstances. It is important for the auditor to be sure that all required documentation is included in the working papers. Documentation of management’s skills, knowledge, and experience (that allow the government auditor to conclude management can effectively oversee the nonaudit services) is not always adequately documented. In addition, it is not always clear from the documentation how the skills, as documented, enable an individual to oversee specific nonaudit services that deal with complex accounting and reporting issues. Yellow Book Independence Practice Aid

In response to practice concerns, a practice aid, 2011 Yellow Book Independence— Non-Audit Services Documentation Practice Aid, has been developed to assist an auditor in evaluating nonaudit services and the effect of performing such services on auditor independence under the 2011 revision of the Yellow Book. The practice aid was developed through a coordinated effort of the Government Audit Quality Center (GAQC) and the AICPA ethics and peer review teams, with practitioners and federal agencies providing input into its content. The practice aid contains numerous explanations and illustrations that will likely help auditors apply the Yellow Book conceptual framework for independence as it relates to nonaudit services and in documenting that consideration. Additionally, the practice aid highlights nonaudit services that are frequently performed for smaller entities, such as preparation of financial statements, preparing journal entries and other proposed audit entries, and preparing reconciliations. AICPA and GAQC members may obtain a PDF of the practice aid at no cost from the GAQC website at www.aicpa.org/GAQC. An electronic version is available for purchase at www.cpa2biz.com (product no. APAYBI12D). The auditor may use this electronic version to document the consideration of nonaudit services and to provide partial audit documentation regarding independence.


Related AICPA Activities

In March 2013, the Professional Ethics Executive Committee of the AICPA adopted a provision that concludes that activities such as financial statement preparation, cash-to-accrual conversions, and reconciliations are considered to be outside the scope of the audit engagement, and therefore are considered to be nonaudit services. This will result in an auditor being required to comply with the general requirements of Interpretation No. 101-3, “Nonattest Services,” under Rule 101, Independence (AICPA, Professional Standards, ET sec. 101 par. .05), when performing such activities. These changes are effective for all engagements performed under Generally Accepted Auditing Standards for periods beginning on or after December 15, 2014. See chapter 3, “AICPA Activities,” of this course for additional information on these changes. Important Note Regarding Auditor’s Reports

Illustrative auditor reports for a single audit that have been revised for both the AICPA’s clarified auditing standards and the 2011 Yellow Book can be found on the GAQC website at www.aicpa.org/GAQC and are open to the public. Included are the reports needed for both GAGAS reporting requirements and OMB Circular No. A-133 reporting requirements. Included are the following:

GAGAS illustrative reports. These include both financial statement reports (for a government and a not-for-profit) and several illustrations of the reporting required under GAGAS related to internal control over financial reporting and on compliance and other matters (variations based on whether there are deficiencies and/or reportable noncompliance).

OMB Circular No. A-133 illustrative reports. These include reporting on compliance for major programs, internal control over compliance, and the schedule of expenditures of federal awards.

Feedback Question

8. What version of GAGAS is currently effective for audits of financial statements for periods ending during calendar year 2014?

a. 2003 b. 2007 c. 2010 d. 2011


OMB Compliance Supplement for Single Audits

The OMB Circular No. A-133 compliance supplement (supplement), updated yearly, is one of the most important sources of guidance for the auditor performing single audits. The supplement identifies the compliance requirements that OMB and the federal agencies expect to be considered as part of a single audit. It provides information for auditors to understand federal program objectives, procedures and compliance requirements as well as audit objectives and suggested audit procedures for the compliance requirements included in the supplement. 2014 Compliance Supplement

As of the writing of this course (February 2014), the 2014 compliance supplement was not available. Information relating to the current status of the 2014 compliance supplement may be available through the Government Audit Quality Center at www.aicpa.org/GAQC. 2013 Compliance Supplement

In July 2013, the OMB issued the 2013 OMB Circular No. A-133 compliance supplement (2013 supplement) which is available at www.whitehouse.gov/omb/grants_circulars/. The 2013 supplement is effective for compliance audits for fiscal years beginning after June 30, 2012. For example, the 2013 supplement applies to compliance audits for annual fiscal periods ending on or after June 30, 2013. The 2013 supplement changes include the yearly changes relating to the addition, deletion, name change, or correction of program or cluster information. Some of the more significant changes found in the 2013 supplement include the following:

Updates to the matrix of compliance requirements for the elimination, (based on a lack of materiality to the program or cluster), of certain compliance requirements in a number of programs. Requirements eliminated include “Equipment and Real Property,” “Procurement and Suspension and Debarment,” “Program Income,” and “Real Property Acquisition and Relocation Assistance.” The matrix was also updated to add or remove programs and compliance requirements to make it consistent with other sections of the 2013 supplement.

Revisions to the suggested audit procedures relating to the Federal Funding Accountability and Transparency Act (FFATA).


Changes to Part 3 regarding the “Procurement and Suspension and Debarment” compliance requirement, including the following:

— Updating and clarifying the compliance requirements

— Updating suggested audit procedures

— Providing clarification that the $100,000 simplified acquisition threshold should continue to be used unless an agency or program has issued guidance raising the threshold or if a raised threshold is specified in the terms and conditions of the award

A new section added to appendix VII, states that effective for proposals due on, or after January 14, 2013, all National Science Foundation (NSF) awards meet the definition of “Research and Development” (R&D). In addition to some other additions to that section, it notes that all NSF awards should be identified as part of the R&D cluster on the Schedule of Expenditures of Federal Awards, and that the auditor should use the R&D cluster guidance when testing the award.

A number of Recovery Act programs are deleted from the 2013 supplement due to the funds being spent or a low amount of remaining funds.

AICPA GAQC Compliance Supplement Practice Tips

The AICPA Governmental Audit Quality Center (www.aicpa.org/gaqc) has assembled a list of tips for utilizing the compliance supplement. The following is derived from that listing:

Practice Tips for Utilizing the Compliance Supplement

1 Be sure you are using the version of the supplement that is effective for the year under audit.

2

As part of your single audit engagement team preparation, hold a planning meeting to review the 2013 supplement with your audit team. Focus the review on the programs to be audited and any significant changes made to the supplement from the prior year. Appendix V of the supplement is particularly useful in identifying the changes made each year. Appendix VII should be a key part of the discussion this year as well.


3

The Matrix of Compliance Requirements in Part 2 identifies the compliance requirements that are applicable to the programs included in the supplement. Many issues with using this part of the supplement have been noted in single audit quality reviews. It is important that you use it correctly.

Remember that even though a “Y” within the matrix indicates that a compliance requirement applies to a federal program, it may not apply at a particular entity, because either that entity does not have activity subject to that type of compliance requirement or the activity could not have a material effect on a major program. Therefore, you need to exercise professional judgment when determining which compliance requirements marked “Y” need to be tested at a particular non-federal entity. Use Part 2 appropriately by

using professional judgment; assessing each compliance requirement individually; considering both quantitative and qualitative materiality when deciding

whether an “applicable” compliance requirement is material to a major program; and

documenting the determination of why an applicable requirement is not deemed direct and material. Just using an “n/a” or “not direct and material” tick mark is not enough. You need to document your logic for making the decision.

4 Because Parts 4 and 5 of the supplement do not include guidance for all types of compliance requirements that pertain to a program (see introduction to Part 4 for additional information), you should use those parts in conjunction with Parts 2 and 3.

5

Refrain from using the supplement as a de facto audit program. Remember that the supplement includes “suggested” audit procedures. Auditor judgment is necessary to determine whether the suggested audit procedures are sufficient to achieve the stated audit objectives or whether additional or alternative audit procedures are needed. Therefore, you should not consider the supplement to be a “safe harbor” for identifying the audit procedures to apply in a particular engagement. A good understanding of your client is necessary to be sure you are performing the correct procedures for your client’s facts and circumstances. Also, you should understand the various federal programs that your client receives to determine whether modifications to the audit approach are necessary.


Feedback Question

9. When was the 2013 OMB Circular No. A-133 compliance supplement issued?

a. March 2013 b. June 2013 c. July 2013 d. September 2013


Update on Federal Funding Accountability and Transparency Act

The Federal Funding Accountability and Transparency Act of 2006 (FFATA) and subsequent 2008 amendments initiated a required federal award reporting process that makes information about federal spending available to the public. The website, accessible at www.fsrs.gov, is designed to include information on federal awards, which includes grants and sub-grants, loans, awards, cooperative agreements and federal contracts and sub-contracts. The reporting is made in the FFATA subaward reporting system, which is also accessible at www.fsrs.gov. Not all recipients of federal awards are aware of the FFAFTA reporting requirements even though the act has been in effect for several years. Here are key details to consider:

Prime grant awardees (that is direct recipients) of federal grants of $25,000 or more must report information on associated “first-tier” sub-grants of $25,000 or more. Such information must be reported by the end of the month following the month the subaward or obligation was made. For example, for a subaward made on November 1, 2013, the reporting would be due by December 31, 2013.

Similarly, prime contract awardees of federal contracts of $25,000 or more must report associated first-tier sub-contracts of $25,000 or more.

The information that needs to be reported includes the following items:

— Name of entity receiving award

— Amount of award (obligated amount)

— Funding agency

— NAICS code for contracts and CFDA program number for grants

— Program source

— Award title descriptive of the purpose of the funding action

— Location of the entity (including congressional district)

— Place of performance (including congressional district)

— Unique identifier of the entity and its parent

— Total compensation and names of top five executives (prime or subawardee)—with certain exceptions similar to those provided for ARRA reporting.

A number of related resources can be found at www.usapending.gov.


Auditors will want to review the 2014 compliance supplement for changes to FFATA audit procedures related to the compliance requirements for reporting. The 2013 compliance supplement, Part 3, Compliance Requirements, Section L, Reporting, contains a subsection titled “Good Faith Effort for Submission.” This section provides guidance for auditors of recipients who have documented evidence that they attempted to comply with the FFATA reporting requirements, but were unable to do so. The section emphasizes that good faith guidance does not relieve a recipient’s responsibility for FFATA reporting, and that FFATA requirements will continue to be subject to audit. Auditors are encouraged to remind those charged with governance of their responsibilities under the FFATA. Feedback Question

10. When did the Federal Funding Accountability Act become law?

a. 2006 b. 2008 c. 2009 d. 2010


2013 Data Collection Form

A version of a data collection form (DCF) typically has a three-year applicability period. The most current form, made available for submissions beginning on January 7, 2014 is for years ending in 2013, 2014, and 2015. Due to the delayed release of the final 2013 form, the OMB granted automatic extensions (that is, no approval is required) until February 28, 2014 for all fiscal year 2013 reporting packages due on or before February 28, 2014. Actual submissions using the 2013 form were accepted beginning January 7, 2014. A number of changes to the 2013 DCF and its instructions relate to the information gathered on the form, to the submission process, and the manner in which the form is accessed and filed. Some of the more significant changes are as follows:

All audit firms (including state audit organizations) will have to include their employer identification number (EIN) on the DCF. Note that social security numbers may not be used instead of an EIN (as is currently done in some cases) because it is personally identifiable information (PII).

There is a new Federal Award Findings page (Part III Item 7) – Auditees will find more detail information about their findings required to be included on the form. The auditor is now required to include the following additional information:

— Finding reference number in a specified format.

Beginning with audit year 2014, there is a new standard format required for audit finding reference numbers consisting of a four digit audit year followed a three digit sequence number for each finding (for example, 2014-001). Though this standard format is required beginning with audit year 2014 submissions, it is requested that auditors begin using this format immediately.

Audit finding reference numbers on the form should match those reported in the schedule of findings and questioned costs and applicable auditor reports.

— Type of compliance requirement to which the finding relates (using the information from the compliance supplement).

— Indication of whether the finding (alone or in combination)

is a compliance finding that resulted in a modified opinion or is an other matter.

is an internal control finding that is a material weakness, significant deficiency, or other finding.


resulted in a questioned cost, indicated by a “yes” or “no” response as to whether questioned costs are being reported.

Beginning with fiscal years ending in 2014,

— the reporting package will be required to be submitted as a text-searchable, unlocked, and unencrypted PDF file.

— the auditee certification and auditor statement include the assertion that the reporting package does not contain PII.

In addition to the changes to the DCF, several changes have been made to the FAC internet data entry system (IDES) itself. Some of these changes include:

New log-in menus and procedures

Additional information to be included for both certifying officials of the auditee and auditors

Signature codes are no longer required as signature access will be restricted to those signing the submission

Improved Excel templates that may be downloaded for all pages where data upload is possible


Status of the HUD Consolidated Audit Guide

The Department of Housing and Urban Development (HUD) Consolidated Audit Guide for Audits of HUD Programs (the guide) is required to be used for audits of for-profit entities spending federal financial assistance provided by HUD. In addition, the guide is used in program specific audits of governmental or non-profit entities spending funds under a single HUD program and having no other requirement for a financial statement audit. Responsibility for the guide rests with the HUD Office of Inspector General. Over the past several years the guide has undergone revision on a chapter-by-chapter basis. In some cases the revisions in a chapter are to particular paragraphs of the chapter. In other cases the revisions are significant enough that the entire chapter is reissued. It is important to closely monitor the HUD Office of Inspector General website (www.hud.gov/offices/oig/) to access the latest guidance. Following is a listing of the chapters issued or reissued through February 2014:


Chapter Date Issued

Chapter 1, “General Audit Guidance and appendix A, Attribute Sampling” May 2013

Chapter 2, “Reporting Requirements and Sample Reports” January 2013

Chapter 2, “Report Examples A, B, and C” March 2013

Chapter 3, “HUD Multifamily Housing Programs” July 2008

Chapter 4, “HUD Multifamily Hospital Program” July 2008

Chapter 5, “Insured Development Cost Certification Audit Guidance” March 2007

Chapter 6, “Ginnie Mae Issuers of Mortgage-Backed Securities Audit Guidance” May 2012

Chapter 7, “FHA-Approved Lenders Audit Guidance” December 2012

Chapter 8, “HUD-Approved Title I”

Chapter cancelled upon issuance of Chapter 7 in December 2012

Changes made in the last few years are effective as follows:

Revised chapter 1 – Effective for audits of entities with fiscal years ending on or after June 30, 2013.

Revised chapter 2 – Effective for audits of entities with fiscal years ending on or after March 31, 2013.

Revised chapter 7 – Effective upon issuance (December 2012) for audits of profit-motivated Federal Housing Administration approved lenders with fiscal years ending on or after December 31, 2012. The December 2012 issuance of chapter 7 eliminates chapter 8 from the guide.


Feedback Question

11. Sample reports are found in which chapter of the HUD guide?

a. Chapter 1 b. Chapter 2 c. Chapter 3 d. Chapter 4


Chapter 2

AICPA Activities

Learning Objectives

Review the status of the clarified auditing standards.

Be aware of common errors made in implementing the clarified auditing standards.

Review standards relating to audits of group financial statements.

Become familiar with recent changes made to AICPA Audit and Accounting Guide Not-for-Profit Entities.

Be aware of changes to Ethics Rule 101, Independence.

Understand the applicability of the Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEsTM framework) issued by the AICPA in 2013.

In the December 2013 issue of the PCPS News & Views e-newsletter, the AICPA announced the new Center for Plain English (the center). The center is available to AICPA members that are also members of the Firm Practice Management section (PCPS). The AICPA intends the center to act as a “national office” for small- and medium-sized CPA firms providing accounting and auditing services.


Status of the Clarified Auditing Standards

Overview

As of the date this course was written (early February 2014) the Auditing Standards Board Clarity Project was complete upon the issuance of Statement on Auditing Standards (SAS) No. 128, Using the Work of Internal Auditors. At this point, almost all of the calendar 2012 and fiscal 2012–2013 engagements are likely completed meaning that most entities and their auditors “lived through” implementation of the clarified standards.

TIS Section 8100.03, Generally Accepted Auditing Standards – Using the Current Auditing Standards for Audits of Prior Periods, states that since the clarified standards are now effective and part of GAAS, the auditor may perform and report using the clarified auditing standards. However, the auditor’s documentation should indicate whether the auditor followed GAAS currently in effect or GAAS in effect for the period under audit.

Over the last year and a half, inconsistencies in the application of some of the clarified standards have been noted. In addition, there are several areas of the clarified standards that some auditors found implementation difficult. The following sections discuss a number of these of areas of concern and confusion. Continuance and Acceptance Process

AU-C section 210, Terms of Engagement, delineates the preconditions that the auditor should ensure are present as part of the continuance and acceptance phase of the audit. In some cases, auditors rely on the engagement letter to document management’s acceptance of these preconditions. Since the items in AU-C section 210 are preconditions to acceptance of an engagement by the auditor, the engagement letter may not be the appropriate mechanism to document this. For example, in some engagements the engagement letter is signed by a member of the entity’s board that is not considered management for purposes of applying the relevant audit standards. Additionally, the auditor often signs and dates the engagement letter before the appropriate entity representative signs and dates the engagement letter. In either or both of these cases, it would appear that there is no documentation that the preconditions of an audit were met prior to the auditor’s acceptance of the engagement.


Performance Materiality

AU-C section 320, Materiality in Planning and Performing an Audit, defines performance materiality in terms of the financial statements taken as a whole and specifically states performance materiality “…is to be distinguished from tolerable misstatement.” The definition of tolerable misstatement in AU-C section 530, Audit Sampling, refers to an amount set by the auditor that is not exceeded by the actual misstatement in a population. It has been noted that some software programs do not differentiate between performance materiality and tolerable misstatement in their pre-populated screens. For example, the hard coded line on the form used to calculate planning materiality uses “performance materiality/tolerable misstatement” generically. It would appear that auditors using audit software with this type of presentation will need to manually indicate which term is appropriate in which circumstances.

Key Point

The terms “performance materiality” and “tolerable misstatement” as defined in the respective clarified auditing standards are entirely different concepts. Therefore, it would appear that auditors using audit software packages might need to evaluate how the software provider is using this term. Accordingly, the auditor might need to evaluate how they are interpreting and applying these terms in their audit procedures.

Based on the definitions of performance materiality and tolerable misstatement, total reliance on an audit software product might result in the auditor incorrectly evaluating the results of the related audit procedures performed.

Legal Representation Letters

AU-C section 501, Audit Evidence—Specific Considerations for Selected Items, discusses, among other things the auditor’s responsibilities with respect to litigation, claims, and assessments involving the entity. AU-C section 501 requires that unless the audit procedures required by paragraph .16 of AU-C section 501 indicate that no actual or potential litigation, claims, or assessments that may give rise to a risk of material misstatement exist, the auditor should, in addition to the procedures required by other AU-C sections, seek direct communication with the entity’s external legal counsel. In addition, AU-C section 501 provides a revised audit inquiry letter to legal counsel that is required to be used when the auditor believes a risk of material misstatement exists with respect to litigation, claims, and assessments. Exhibit A, “American Bar Association Statement of Policy Regarding Lawyers’ Responses to Auditors’ Requests for Information,” includes a revised


illustrative response form for use by inside general counsel and outside practitioners or law firms. In some cases, auditors are requesting direct confirmation from an entity’s external legal counsel even though the audit documentation does not indicate that actual or potential litigation, claims, or assessments may give rise to a risk of material misstatement. Audit documentation may be considered deficient in this case since it would not likely, on its own, lead the “experienced auditor” to the conclusion that direct confirmation of external counsel was necessary. The audit risk standards require the auditor to link the risk of material misstatement to the audit procedures, which does not occur when no explanation is provided in the audit documentation in these circumstances.

Key Point

Some auditors elect to directly confirm actual or potential litigation, claims, or assessments with an entity’s external legal counsel in all audits regardless of any related risk of material misstatement. In these cases, the auditor will need to ensure the audit documentation is adequate to link this procedure with the risk of material misstatement in the financial statements.

It has also been noted that a number of responses from an entity’s internal or external legal counsel do not conform with the requirements of the American Bar Association’s related policy statement. The audit documentation in some of cases does not reconcile the information in the actual response with what the auditor requests to be confirmed. Special Reports—Regulator Prescribed Auditor Reports

AU-C section 700, Audit Conclusions and Reporting—Forming an Opinion and Reporting on Financial Statements, provides a new required format for the standard independent auditor’s report. In order for the auditor to refer to the audit being performed in accordance with Generally Accepted Auditing Standards (GAAS), the auditor’s report should include all elements required by GAAS. Many state regulators require the independent auditor to provide an opinion on financial information that is submitted to a regulator, often by means of an auditor’s report using forms prescribed by the regulator. The challenge for the auditor is meeting the requirements of the regulator as well as the requirements of GAAS. In some cases, the regulator’s prescribed report does not include the wording and specific elements required under GAAS. Other times, the regulator may prescribe not only the report form but the basis of preparation and presentation for the financial statements. When this is the case, the auditor needs to consider whether the requirements of AU-C section 800, Special Considerations—Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks, apply.


Under AU-C section 800, the auditor is required to do one of the following:

Reword the prescribed form of the report or attach an appropriately worded separate report.

Contact the regulator to determine if the regulator will accept a reworded form or separate report.

Contact your state society1 to work with the auditor and the regulator to resolve the issue.

The AICPA has developed a web page (available at www.aicpa.org/interestareas/frc/auditattest/pages/regulatorprescribedauditorsreports.aspx) with resources to assist auditors in this area. Information available on this link includes the following:

Summary of the changes the auditor may need to make to be in compliance with the requirements under GAAS

Cover letter for regulators about a specific form

Illustrative report

In addition to these resources, readers may also find the article, “When the Rules and the Law No Longer Agree,” in the November 2013 issue of the Journal of Accountancy helpful. This article is available through www.aicpa.org. Audits of Group Financial Statements

Implementing the requirements of AU-C section 600, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors) (AICPA, Professional Standards) is the single biggest challenge for auditors. There is significant confusion as to when and what procedures apply in the following circumstances:

All audits of group financial statements

Audits of group financial statements in which the group engagement partner is making reference to the work of the component auditor

Audits of group financial statements in which the group engagement partner is assuming responsibility for the work of the component auditor

1 In some states or circumstances it may be more appropriate to approach the state board of accountancy or other appropriate regulatory body.


An overview of AU-C section 600 and a discussion of the most common implementation issues associated with it follow this section. SAS No. 128

With the issuance of SAS No 128, Using the Work of Internal Auditors, in February 2014, the Auditing Standards Board’s Clarity Project is complete. SAS No. 128

supersedes SAS No. 65, The Auditor's Consideration of the Internal Audit Function in an Audit of Financial Statements.

amends various sections of SAS No. 122, Statements on Auditing Standards: Clarification and Recodification.

amends Statement on Quality Control Standards No. 8, A Firm’s System of Quality Control (Redrafted).

SAS No. 128 addresses the external auditor’s responsibilities if using the work of internal auditors; therefore, it does not apply if the entity does not have an internal audit function. If an entity has an internal audit function, the requirements of SAS No. 128 do not apply if either of the following circumstances exists:

The responsibilities and activities of the internal audit function are not relevant to the audit.

The external auditor does not expect to use the work of the internal audit function in obtaining audit evidence.2

Using the work of internal auditors includes both of the following:

Using the work of the internal audit function in obtaining audit evidence

Using internal auditors to provide direct assistance under the direction, supervision, and review of the external auditor

Nothing in SAS No. 128 requires the external auditor to use the work of the internal audit function to modify the nature or timing, or reduce the extent, of audit procedures to be performed directly by the external auditor. It is the external auditor’s decision to establish the overall audit strategy which may or may not include using the work of the internal audit function.

2 This decision is based on the external auditor’s preliminary understanding of the internal audit function obtained as a result of procedures performed to understand the entity and its environment and to assess the risk of material misstatement.


Furthermore, the requirements in SAS No. 128 relating to using internal auditors to provide direct assistance do not apply if the external auditor does not plan to use internal auditors to provide direct assistance. Like International Standard on Auditing (ISA) No. 610, Using the Work of Internal Auditors (Revised 2013), SAS No. 128 includes the concept of a systematic and disciplined approach (emphasis added) with respect to an entity’s internal audit function. Unlike previous guidance in SAS No. 65, SAS No. 128 requires the external auditor to evaluate the internal audit function’s application of a systematic and disciplined approach as a prerequisite to being able to use their work. The systematic and disciplined approach includes the internal audit function’s system of quality control. SAS No. 128 provides application guidance with regard to the external auditor’s evaluation of the application of a systematic and disciplined approach by the internal audit function. SAS No. 128 is effective for audits of financial statements for periods ending on or after December 15, 2014.

Key Point

The “AU-C” convention to differentiate the clarified standards from the extant standards was intended to be a temporary identifier. As of this date, the “AU-C” convention is extended until further notice.

Feedback Questions

1. Preconditions for an audit are delineated in which of the following?

a. AU-C section 200 b. AU-C section 210 c. AU-C section 300 d. AU-C section 320

2. Which of the following is true?

a. Tolerable misstatement is the same as performance materiality b. Tolerable misstatement is a term related to the financial statements as a whole c. Performance materiality is a term related to the financial statements as a whole d. Performance materiality is a term used in audit sampling


Audits of Group Financial Statements

This section provides an overview of the key components of AU-C section 600, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors) (AICPA, Professional Standards). Additionally, areas of AU-C section 600 that are the most misunderstood or misinterpreted are also discussed. Where relevant, reference is made to the corresponding question and answer provided in TIS Section 8800, Audits of Group Financial Statements and Work of Others. Readers are encouraged to review the full text of AU-C section 600 in order to fully understand the auditor’s responsibilities relating to audits of group financial statements.

One of the areas significantly affected by the ASB’s Clarity Project relates to audits of group financial statements. Previous audit standards addressed the principal auditor’s responsibilities when part of the audit was performed by other auditors. The clarified standards, however, related to the audits of group financial statements, are much broader than previous guidance. AU-C section 600 introduces a number of new terms, concepts, and requirements related to audits of group financial statements that will significantly affect current practice. A number of questions have been directed to the AICPA Technical Hotline regarding audits of group financial statements. Some of the more common inquiries relate to the following:

Recognizing group financial statements

Identifying groups, components, and significant components

Responsibilities of the group engagement partner and group engagement team

Factors to consider when determining whether or not to assume responsibility for the work of component auditors

Requirements applicable in all audits of group financial statements

Responsibilities of the group engagement team when reference is made to the work of the component auditor and when the group engagement partner assumes responsibility for the work of the component auditor

Special circumstances arising in audits performed under GAGAS

Required communications between the group engagement team and the component auditor(s)


Overview of AU-C section 600

Group financial statements include the financial information of more than one component which is broader in concept than consolidated or combined financial statements. A component is an entity (or business activity) for which group or component management prepares financial information that is required to be included in the group financial statements. It is a broader concept than in current audit standards and may include, but is not limited to, subsidiaries, geographical locations, divisions, investments, products or services, functions, or processes.

TIS section 8800.12, “Criteria for Identifying Components” (AICPA, Technical Practice Aids) points out that in the audit of a governmental entity a component may be a separate legal entity reported as a component unit or part of the governmental entity, such as a business activity, department, or program.

The auditor who performs work on the financial statements, or financial information, of a component is referred to as the component auditor rather than an “other auditor.” Accordingly, the “auditor of the group financial statements” replaces the concept of the “principal auditor.”

Some practitioners may not realize that the requirements of AU-C section 600 may apply even when they utilize other offices of their firm or when there is only one engagement team involved in the audit of group financial statements. TIS section 8800.24 points out a number of areas requiring consideration in these situations as well as all group audits.

Additionally, AU-C section 600 establishes requirements that apply to all audits of group financial statements whether or not reference is made to the work of the component auditor. However, there are additional specific procedures that are applicable when the auditor of the group financial statements assumes responsibility for the work of a component auditor.

Key Point

The auditor’s responsibilities in audits of group financial statements under AU-C section 600 are significantly different from prior standards when part of an audit was performed by other independent auditors. Because AU-C section 600 is much broader than previous standards, it is important for auditors to fully understand the requirements of the new standard well in advance of accepting or continuing engagements to audit group financial statements.


It should be noted that the phrase “group auditor” is inappropriate because, by definition, a group includes more than one component. A “group audit” is an audit of the financial statements of a group and “group financial statements” represent the financial information of more than one component. Therefore, there is no “group auditor” only the “group engagement partner” who is responsible for both of the following:

Group audit engagement (versus audits of the components) and its performance

Auditor’s report on the group financial statements and the “group engagement team”

Engagement Acceptance or Continuance

Under AU-C section 600, the determination as to whether to accept or continue the group audit engagement is based on whether the auditor believes sufficient appropriate audit evidence over the group financial statements will be obtained (including whether the group engagement team will have appropriate access to information). In the prior standards, this determination was based on whether the auditor would be able to sufficiently participate in the group audit in order to be the principal auditor. In the audits of group financial statements, the auditor’s belief that sufficient appropriate evidence will be obtained is, by necessity, predicated on the work to be performed by the group engagement team and any component auditors. As such, the group engagement partner’s decision as to whether or not to assume responsibility for the work of any component auditors is critical to acceptance or continuance of the engagement.

Key Point

TIS section 8800.03, “Deciding to Act as Auditor of Group Financial Statements,” identifies the following factors that may be relevant for the group engagement partner to consider when deciding to act as the auditor of the group financial statements:

Individual financial significance of the components Extent to which significant risks of material misstatements of the group

financial statements are included in components Extent of the group engagement team’s knowledge of the overall

financial statements

Decision to Assume Responsibility for Work of Component Auditors In general, AU-C section 600 provides guidance for when the auditor of the group financial statements assumes responsibility for the work of a component auditor and when the auditor does not assume responsibility for the work of a component auditor. The decision to assume or not


assume responsibility for the work of a component auditor should be made by the group engagement partner. When the auditor of the group financial statements assumes responsibility for the work of a component auditor, no reference is made to the component auditor in the auditor’s report on the group financial statements. Alternatively, when the auditor of group financial statements does not assume responsibility for the work of a component auditor, the auditor will reference the audit of the component auditor in the auditor’s report on the group financial statements. Requirements in All Audits of Group Financial Statements

Regardless of whether the auditor’s report on the group financial statements will reference the audit of a component auditor, the group engagement team has certain responsibilities with respect to any component auditor. The group engagement team should obtain an understanding of the following in all audits of group financial statements:

Whether a component auditor understands and will comply with the ethical requirements that are relevant to the group audit and, in particular, is independent.

The group engagement team may also need to determine that a component auditor is independent under GAGAS when such standards are applicable.

Component auditor’s professional competence.

Extent, if any, to which the group engagement team will be able to be involved in the work of the component auditor.

Whether the group engagement team will be able to obtain information affecting the consolidation process from a component auditor.

Whether a component auditor operates in a regulatory environment that actively oversees auditors.

Significant Components

It is the responsibility of the group engagement team to identify components that are significant. The group engagement team may identify a component as a significant component based on its individual financial significance to the group. Alternatively, the group engagement team may identify a component as a significant component because its specific nature or circumstances are likely to include significant risks of material misstatement of the group financial statements.


Key Point

TIS 8800.13, Criteria for Identifying Significant Components,” points out that qualitative considerations of significance in audits of governmental organizations may include matters of heightened public sensitivity such as national security issues, donor-funded projects, or reporting tax revenue. While not specifically included in TIS 8800.13, such qualitative considerations may be appropriate in audits of not-for-profit entities as well.

The group engagement team may apply a percentage to a chosen benchmark as an aid to identify components that are of individual financial significance to the group. Depending on the nature and circumstances of the group, appropriate benchmarks relevant to group financial statements of not-for-profit entities might include the following:

Assets

Cash flows

Revenues

Expenses

Net increase in specific classes of or total net assets

In an audit of group financial statements for a governmental organization, the auditor does not report on the financial statements of the governmental reporting entity as a whole. Therefore, it may not be appropriate for the group engagement team to use entity-wide type benchmarks such as total assets or total revenues to identify components that are of individual financial significance to the group. Appropriate benchmarks relevant to group financial statements of governmental organizations might include

assets of government type activities, business type activities, major funds, or aggregate non major funds;

cash flows of various enterprise funds;

revenues of government type activities, business type activities, major funds, or aggregate non major funds;

expenditures and expenses of government type activities, business type activities, major funds, or aggregate non major funds; net increase in specific components of net position or fund balance;

net costs or total budget.


In the context of governmental and not-for-profit entities, components might be significant because of their nature or circumstances, for example, if

they include multiple alternative investments;

they have considerable transactions reported at fair value;

grants constitute a major portion of revenues or expenses and expenditures;

previous experience indicates a high risk of noncompliance with laws, regulations, contracts, and grant agreements;

new programs or revenue sources are significant to total expenses and expenditures and revenues, respectively; or

entities or business activities of concern to elected officials, board members, regulators, grantors, or the public.

Materiality

Materiality is established during the overall group audit strategy phase of the engagement by the group engagement team. In the context of a group audit, materiality, including performance materiality, is established for both the group financial statements as a whole and the financial information of the components.

Component materiality need be established only for those components the group engagement team will perform, or for which the auditor of the group financial statements will assume responsibility for the work of a component auditor who performs an audit or review.

It is necessary to consider all components when determining component materiality regardless of whether or not reference is made to the audit of the component auditor in the auditor’s report on the group financial statements. Different materiality may be established for different components and the aggregate component materiality may exceed group materiality. However, to reduce the risk that the aggregate of uncorrected and undetected misstatements in the group financial statements exceeds the materiality for the group financial statements as a whole, component materiality should be lower than the materiality for the group financial statements as a whole. Component performance materiality should be lower than performance materiality for the group financial statements as a whole.


Lower Levels of Materiality

In certain circumstances materiality is established for particular classes of transactions, account balances, or disclosures in the group financial statements. For example this lower level of materiality should be established when, in the specific circumstances of the group, material misstatements of lesser amounts than materiality (for the group financial statements as a whole) could reasonably be expected to influence the economic decisions of the users of the group financial statements. The group engagement team should also establish the threshold above which misstatements cannot be regarded as clearly trivial to the group financial statements.

Key Point

In the context of an audit of group financial statements, materiality, including performance materiality, is established by the engagement team at a number of different levels during the overall group strategy phase of the audit. Materiality is established for both the group financial statements as a whole and the financial information of the components.

Subsequent Events

Group management is responsible for recognition and disclosure of subsequent events affecting the group financial statements and component management is likewise responsible for subsequent events that affect their respective financial information. However, AU-C section 600 requires the group engagement team, or the component auditors performing audits on financial information of components, to perform procedures related to subsequent events affecting components. The group engagement team or the component auditors should perform procedures designed to identify events at components that occur between the dates of the financial information of the component and the date of the auditor’s report on the group financial statements that may require adjustment to, or disclosure in, the group financial statements.

Key Point

When not assuming responsibility for the work of the component auditor, the group engagement can request only the component auditor to provide information that may have a significant effect on the group financial statements or the auditor’s report thereon. This may be especially problematic when the fiscal period of the group differs from that of a component.

Disclosure of subsequent events relating to a component that are significant to the group financial statements is the responsibility of group management.


Sufficiency of Audit Evidence

When the group engagement team concludes that sufficient appropriate audit evidence has not been obtained on which to base the group audit opinion, the group engagement team may (1) request a component auditor to perform additional procedures or (2) perform its own procedures on the financial information of the component. AU-C section 600 establishes procedures for the group engagement team and the group engagement partner with respect to evaluating the sufficiency and appropriateness of the audit evidence obtained by the group engagement team and the component auditor. Communications From the Group Engagement Team to the Component Auditor

For all audits of group financial statements, the communication from the group engagement team to the component auditor should include the following:

A request that the component auditor, knowing the context in which the group engagement team will use the work of the component auditor, confirm that the component auditor will cooperate with the group engagement team.

The ethical requirements relevant to the group audit and, in particular, the independence requirements.

A list of related parties prepared by group management and any other related parties of which the group engagement team is aware. The group engagement team should request the component auditor to communicate on a timely basis related parties not previously identified by either group management or the group engagement team. Additionally, the group engagement team should identify such additional related parties to other component auditors.

Identified significant risks of material misstatement of the group financial statements, due to fraud or error, which are relevant to the work of the component auditor.

A request that the component auditor communicate matters relevant to the group engagement team’s conclusions to the group engagement team.


Key Point

TIS Section 8800.10, “Terms of the Group Audit Engagement,” identifies the following matters that may be included in the terms of the group audit engagement:

Whether reference will be made to the audit of a component auditor Arrangements to facilitate the following:

— Unrestricted communication between the group engagement team and component auditors

— Communication to the group engagement team of important communications between component auditors, those charged with governance of the

component, and component management regulatory authorities and components related to financial

reporting matters.

Communications From the Component Auditor to the Group Engagement Team

The group engagement team should ascertain that the component auditor’s communication of matters relevant to the group engagement team’s conclusion includes the following:

Whether the component auditor complied with ethical requirements relevant to the group audit, including independence and professional competence

Identification of the financial information of the component on which the component auditor is reporting

Component auditor’s overall findings, conclusions, or opinion

The group engagement team should evaluate the component auditor’s communication and discuss significant findings and issues identified with the component auditor, component management, or group management as appropriate. In addition, the group engagement team should evaluate whether sufficient appropriate audit evidence has been obtained from both

the audit procedures performed on the consolidation process and

work performed by the group engagement team and the component auditors on the financial information of the components on which to base the group audit opinion.


Additionally, the group engagement partner should evaluate the effect on the group audit opinion of any

uncorrected misstatements either identified by the group engagement team or communicated by the component auditor and

instances in which an inability to obtain sufficient appropriate audit evidence exists.

Key Point

TIS Section 8800.28, “Lack of Response From a Component Auditor,” points out that the lack of response from a component auditor does not, by itself, preclude the group engagement partner from deciding to make reference to the audit of the component auditor. However, it may be more difficult for the group engagement team to obtain an adequate understanding of the component auditor in this circumstance.

Requirements When Not Assuming Responsibility for the Work of Component Auditors

If the group engagement partner decides not to assume responsibility for the work of a component auditor, the auditor’s report on the group financial statements should reference the audit of the component auditor. However, the auditor’s report on the group financial statements should not make reference to a component auditor unless the

group engagement partner has determined that the component auditor has performed an audit of the financial statements of the component in accordance with the relevant requirements of GAAS, and

the component auditor has issued an auditor’s report that is not restricted as to use.


If the component’s financial statements are prepared using a different financial reporting framework from that of the group, reference to the audit of a component auditor in the auditor’s report on the group financial statements should not be made unless the

measurement, recognition, presentation, and disclosure criteria that are applicable to all material items in the component’s financial statements under the financial reporting framework3 used by the component are similar to the criteria that are applicable to all material items in the group’s financial statements under the financial reporting framework used by the group; and

the group engagement team has obtained sufficient appropriate audit evidence for purposes of evaluating the appropriateness of the adjustments to convert the component’s financial statements to the financial reporting framework used by the group without the need to assume responsibility for, and, therefore, be involved in, the work of the component auditor.

Additionally, the group engagement team is precluded from making reference to the audit of a component auditor in the auditor’s report on the group financial statements when

a component auditor does not meet the independence requirements that are relevant to the audit of the group financial statements or

the group engagement team has serious concerns about whether a component auditor understands and will comply with the ethical requirements, including independence, that are relevant to the group audit or about a component auditor’s professional competence.

3 The GASB and the Federal Accounting Standards Advisory Board (FASAB) provide for the inclusion of component units in the financial statements of a governmental reporting entity in certain circumstances. The auditor of the group financial statements of a government is permitted to refer to an audit performed by a component auditor on component unit financial statements that are prepared in accordance with a different financial reporting framework when the provisions established by the GASB or FASAB (that require inclusion of the component unit financial statements in the financial statements of the primary government) have been followed.


This requirement may be troublesome when the group financial statements are required to be audited under GAAS and GAGAS. The OMB requires that the reporting entity for purposes of applying the requirements of OMB Circular No. A-133, Audits of States, Local Governments, and Non-Profit Organizations, be the same as the financial reporting entity. In addition, OMB Circular No. A-133 requires that compliance audits subject to OMB Circular No. A-133 be performed under GAGAS which incorporates GAAS. The state and local government financial reporting entity and consolidated or combined financial statements of not-for-profit entities may meet the definition of group financial statements and may involve component auditors. In that case, the requirements of AU-C section 600 would apply and the group engagement team and all component auditors may be required to meet the independence requirements established in GAAS and GAGAS. Therefore, it is possible that the independence requirements in GAGAS could apply to a component auditor at the level of the group financial statements even though GAGAS did not apply to the component auditor in the audit of the component’s separate stand alone financial statements. If the financial information for such a component was significant to the group financial statements, the auditor’s report on the group financial statements could not reference the work of the component auditor unless the component auditor had performed the audit of the component’s separate stand alone financial statements in accordance with GAGAS.

When the group engagement partner decides, and is able, to make reference to the audit of a component auditor in the auditor’s report on the group financial statements, the group engagement team should obtain sufficient appropriate audit evidence with regard to such components by performing the applicable procedures in AU-C section 600. In addition, the group engagement team should read the component’s financial statements and the component auditor’s report thereon to identify significant findings and issues and, when considered necessary, communicating with the component auditor in that regard.

Key Point

TIS Section 8800.18, “Determining Component Materiality,” emphasizes that when not assuming responsibility for the work of a component auditor, the group engagement team does not establish materiality for the component auditor to use in their separate report on a component’s financial statements.


Effect on the Auditor’s Report on the Group Financial Statements

When the group engagement partner decides to make reference to the audit of a component auditor in the auditor’s report on the group financial statements, the report on the group financial statements should clearly indicate the following:

That the component was not audited by the auditor of the group financial statements but audited by the component auditor

The magnitude of the portion of the financial statements audited by the component auditor

When the component’s financial statements are prepared using a different financial reporting framework from that used for the group financial statements

— The financial reporting framework used by the component and

— That the auditor of the group financial statements is taking responsibility for evaluating the appropriateness of the adjustments to convert the component’s financial statements to the financial reporting framework used by the group

When the

— component auditor’s report on the component’s financial statements does not state that the audit of the component’s financial statements was performed in accordance with GAAS or the standards promulgated by the PCAOB and

— the group engagement partner has determined that the component auditor performed additional audit procedures in order to meet the relevant requirements of GAAS

» the set of auditing standards used by the component auditor; and

» additional audit procedures were performed by the component auditor to meet the relevant requirements of GAAS

When naming a component auditor in the auditor’s report on the group financial statements the component auditor’s express permission should be obtained and the component auditor’s report should be presented with that of the auditor’s report on the group financial statements. When the component auditor modifies his or her opinion, or has included an emphasis-of-matter or other-matter paragraph in his or her report on the financial statements of the component, the auditor of the group financial statements should determine the effect this may have on the auditor’s report on the group financial statements. When appropriate, the auditor of the group financial statements should modify the opinion on the group financial statements or include an emphasis-of-matter or other-matter paragraph in his or her report on the group financial statements.


Requirements When Assuming Responsibility for the Work of Component Auditors

When the group engagement partner decides to assume responsibility for the work of component auditors, no reference is made to the work of a component auditor in the auditor’s report on the group financial statements. AU-C section 600 establishes a number of additional procedures that the group engagement team is required to perform when assuming responsibility for the work of component auditors. However, the group engagement team is precluded from using the work of a component auditor when either of the following situations exists:

A component auditor does not meet the independence requirements that are relevant to the group audit.

The group engagement team has serious concerns about whether a component auditor understands and will comply with the ethical requirements, including independence, that are relevant to the group audit or about a component auditor’s professional competence.

In addition to the procedures that are required in all audits of group financial statements, additional specific procedures are required when assuming responsibility for the work of component auditors in the following areas:

Establishing component materiality

Determining the type of work to be performed on the financial information of the component

Identifying and performing audit procedures for significant components

Identifying and performing audit procedures for components that are not significant

Involvement of the engagement team in the work of the component auditor

Communications with the component auditor

Key Point

The group engagement team is required to perform additional audit procedures related to components when they are assuming responsibility for the work of the component auditor(s).


Materiality

The group engagement team should evaluate the appropriateness of performance materiality at the component level. Like component materiality, component performance materiality should be lower than performance materiality for the group financial statements as a whole. Determining the Type of Work to Be Performed on the Financial Information of Components

For components for which the group engagement partner decides to assume responsibility for the work of component auditors, the group engagement team should determine the following:

Type of work to be performed by the group engagement team or by component auditors on its behalf on the financial information of the components

Nature, timing, and extent of its involvement in the work of the component auditors

Key Point

TIS Section 8800.21, “Factors Affecting Involvement in the Work of a Component Auditor,” points out the following might be considered when determining the level of involvement in the work of the component auditor:

Significance of the component Identified significant risks of material misstatement of the group

financial statements Group engagement team’s understanding of the component auditor

Significant Components

Components are considered for significance by the group engagement team in all audits of group financial statements. For components that are significant due to their individual financial significance to the group, the group engagement team (or a component auditor on its behalf) should perform an audit, adapted as necessary, of the financial information of the component using component materiality. “Adapted as necessary” means the group engagement team may determine something less than a complete audit of a component’s financial statements will provide sufficient audit evidence for purposes of reporting on the group financial statements. Therefore, AU-C section 600 allows the group engagement team to adapt the requirements of an “audit” as necessary to meet their needs with respect to the financial information of the component.


For components that are significant because they are likely to include significant risks of material misstatement of the group financial statements due to their specific nature or circumstances, the group engagement team (or a component auditor on its behalf) should perform one of more of the following:

An audit of the financial information of the component (adapted as necessary to meet the needs of the group engagement team) using component materiality

An audit of one or more account balances, classes of transactions, or disclosure relating to the likely significant risks of material misstatement of the group financial statements (adapted as necessary to meet the needs of the group engagement team)

Specified audit procedures relating to the likely significant risks of material misstatement of the group financial statements

Components That Are Not Significant Components

For components that are not significant components, the group engagement team should perform analytical procedures at the group level. Depending on the circumstances of the engagement, the financial information of the components may be aggregated at various levels for purposes of the analytical procedures. Results of these analytical procedures corroborate the engagement team’s conclusions that no significant risks of material misstatement exist of the aggregated financial information of components that are not significant. The group engagement team may determine that sufficient appropriate audit evidence will not be obtained solely from the analytical and other procedures specified in AU-C section 600. In these cases, the group engagement team should select additional components that are not significant (the individual components selected should vary over time) and perform one or more of the following:

An audit of the financial information of the component (adapted as necessary to meet the needs of the group engagement team) using component materiality

An audit of one or more account balances, classes of transactions, or disclosure relating to the likely significant risks of material misstatement of the group financial statements (adapted as necessary to meet the needs of the group engagement team)

What Do You Think?

What additional procedures might be appropriate to obtain sufficient, appropriate evidence relating to a significant component included in group financial statements for either a governmental or not-for-profit entity?


A review of the financial information of the component (adapted as necessary to meet the needs of the group engagement team) using component materiality

Specified audit procedures relating to the likely significant risks of material misstatement of the group financial statements

Involvement of the Group Engagement Team in the Work Performed by Component Auditors

When a component auditor performs an audit (or other specified audit procedures) of the financial information of a significant component, the group engagement team should be involved in the risk assessment of the component. The purpose of this involvement is for the group engagement team to identify significant risks of material misstatement of the group financial statements. The nature, timing, and extent of this involvement are affected by the group engagement team’s understanding of the component auditor but at a minimum should include the following:

Discussing the component’s business activities that are of significance to the group with the component auditor or component management

Discussing the susceptibility of the component to material misstatement of the financial information due to fraud or error with the component auditor or component management

Reviewing the component auditor’s documentation of identified significant risks of material misstatement of the group financial statements

Significant risks of material misstatement of the group financial statements may be identified in a component for which the auditor of the group financial statements is assuming responsibility for the work of the component auditor. In such circumstances, the group engagement team should evaluate the appropriateness of the further audit procedures to be performed in response to such identified risks. Additionally, the group engagement team should determine whether it is necessary to be involved in the further audit procedures (based on its understanding of the component auditor). Subsequent Events

Recognition or disclosure of subsequent events affecting the group financial statements is the responsibility of group management and likewise the responsibility of component management in the component financial statements. When component auditors perform work other than audits of the financial information of components at the request of the group engagement team, the group engagement team is required to request the component auditors to notify the group engagement team of certain circumstances.


Key Point

The group engagement team should request that the component auditor communicate events at the component (that may require an adjustment to, or disclosure in, the group financial statements) that occur between the dates of the financial information of the component and the date of the auditor’s report on the group financial statements.

Additional Communications From the Group Engagement Team to the Component Auditor

When the auditor of group financial statements is assuming responsibility for the work of a component auditor, the communication should set out the work to be performed and the form and content of the component auditor’s communication with the group engagement team. In the case of an audit or review of the financial information of the component, component materiality (and the amount[s] lower than the materiality for particular classes of transactions, account balances, or disclosures, if applicable) and the threshold above which misstatements cannot be regarded as clearly trivial to the group financial statements should also be included in this communication. The group engagement team should request that the component auditor include the following in their communication to the group engagement team:

Whether the component auditor has complied with the group engagement team’s requirements.

Information on instances of noncompliance with laws or regulations at the component or group level that could give rise to material misstatement of the group financial statements.

Significant risks of material misstatement of the group financial statements, due to fraud or error, identified by the component auditor in the component and the component auditor’s responses to such risks (the group engagement team should request the component auditor to communicate such significant risks on a timely basis).

A list of corrected and uncorrected misstatements of the financial information of the component (misstatements below the threshold for clearly trivial misstatement need not be included).

Indicators of possible management bias regarding accounting estimates and application of accounting principles.

Description of any identified material weaknesses and significant deficiencies in internal control at the component level.


Other significant findings and issues the component auditor communicated or expects to communicate to those charged with governance of the component. Matters that should be included are as follows:

— Fraud or suspected fraud involving component management, employees having significant roles in internal control at the component level.

— Others that resulted in a material misstatement of the financial information of the component.

— Any other matters that may be relevant to the group audit or that the component auditor wishes to draw to the attention of the group engagement team.

This includes exceptions noted in the written representations that the component auditor requested from component management.

As part of the group engagement team’s required evaluation of a component auditor’s communication, the group engagement team should determine whether it is necessary to review other relevant parts of a component auditor’s audit documentation. If the group engagement team concludes the work of a component auditor is insufficient, the group engagement team should determine additional procedures to be performed and whether such procedures are to be performed by the component auditor or the group engagement team.

Key Point

Certain communications between the group engagement team and the component auditor are required in all audits of group financial statements; and, additional communications are required when the auditor of the group financial statements assumes responsibility for the work of a component auditor. The communication need not be in writing when responsibility for the work of the component auditor is being assumed (TIS 8800.22).

Feedback Questions

3. Which of the following is not true?

a. AU-C section 600 does not change existing audit standards relating to principal and other auditors.

b. AU-C section 600 significantly changes existing audit standards relating to principal and other auditors.

c. AU-C section 600 is one of the most misunderstood and misapplied of the Clarified Audit Standards.

d. AU-C section 600 introduces a number of new terms relating to audits of group financial statements.


4. Who makes the decision to make reference to the work of the component auditor?

a. Group engagement team b. Group engagement partner c. Group engagement team and group engagement partner d. Component auditor for the largest significant component

5. Which of the following is true about component materiality?

a. It is determined only for components that will be referenced in the auditor’s report on the group financial statement.

b. It is not a relevant concept in audits of group financial statements. c. It is not addressed in AU-C section 600. d. It is determined only for components that the group engagement team will perform, or for

which the auditor of the group financial statements will assume responsibility for the work of a component auditor.

6. Who establishes materiality for components for which the group engagement partner will

assume responsibility for the work of the component auditor?

a. Group engagement partner b. Group engagement team excluding the group engagement partner c. Group engagement team including group engagement partner d. The auditor of the components the group engagement decides will be referenced in the

auditor’s report on the group financial statements 7. Which of the following is true?

a. AU-C section 600 requires communication between the group engagement team and component auditors in all audits of group financial statements.

b. AU-C section 600 requires no communication between the group engagement team and component auditors in all audits of group financial statements group engagement team.

c. AU-C section 600 requires communication between the group engagement team and only the component auditors whose work will be referenced in the audit report of the group financial statements.

d. AU-C section 600 requires communication between the group engagement team and only the component auditors for whom the group engagement partner will assume responsibility for their work.



a. The group engagement partner decides whether or not to make reference to the work of the component auditor.

b. The group engagement team, excluding the group engagement partner, decides whether or not to make reference to the work of the component auditor.

c. The group engagement team and the group engagement partner decide whether or not to make reference to the work of the component auditor.

d. Component auditors tell the group engagement whether or not their report may be referenced in the audit report on the group financial statements.

9. Which of the following is not an additional procedure required when the group engagement

partner is assuming responsibility for the work of the component auditor?

a. Establishing component materiality b. Determining the type of work to be performed on the financial information of the

component c. Identifying and performing audit procedures for significant components d. Establishing performance materiality, for the group financial statements as a whole


a. The group engagement team is never required to be involved in the work of the component auditor.

b. The group engagement team is required to be involved in the work of the component auditor when the group engagement partner decides to refer to the work of the component auditor in the report.

c. The group engagement team is required to be involved in the work of the component auditor when the group engagement partner decides to assume responsibility for their work.

d. The group engagement team is always required to be involved in the work of the component auditor.

11. Which of the following is not true?

a. The group engagement team is never required to communicate with the component auditor.

b. The group engagement team is required to communicate with component auditors when the group engagement partner decides to make reference to their work.

c. The group engagement team is required to communicate with component auditors when the group engagement partner decides to assume responsibility for their work

d. The group engagement team has responsibilities to communicate with component auditors when reference to their work will be made in the audit report of the group financial statements and when the engagement partner assumes responsibility for their work.


AICPA Audit and Accounting Guide Not-for-Profit Entities

In March 2013, the AICPA issued a comprehensive revision of the Audit and Accounting Guide Not-for-Profit Entities (the guide). This edition represents the first revision, other than annual conforming changes, since the guide’s release in 1996. The primary reason for the revision was to address more than 100 questions received through the AICPA Technical Hotline. Additional topics identified by the AICPA Not-for-Profit Expert Panel during the update process are also incorporated into revision. The guide will continue to be updated annually for conforming changes until such time another revision is needed. Some of the enhancements made to the 2013 guide include the following:

A greatly expanded section in chapter 3, “Basic Financial Statements and General Financial Reporting Matters,” about reporting relationships with other entities. This chapter provides guidance and examples for reporting relationships with not-for-profit entities and the following:

— For-profit corporations

— Limited liability partnerships

— General partnerships

— Financially interrelated entities

New sections in chapter 5, “Contributions Received and Agency Transactions,” that discuss the reporting and measuring of noncash gifts, including the following:

— Gifts-in-kind

— Contributions of fund-raising materials, informational materials, advertising, and media time or space

— Below-market interest rate loans

— Bargain purchases

A new chapter on program-related investments and microfinance loans

A greatly expanded section in Chapter 10, “Debt and Other Liabilities,” that discusses the following:

— Municipal bond debt, including IRS considerations

— Third-party credit enhancements


— Capitalization of interest

— Extinguishments

— Debt modifications

— Effects of terms (such as subjective acceleration clauses) on the classification of debt

New guidance in chapter 11, “Net Assets,” for reporting the expiration of donor-imposed restrictions

Greatly expanded discussion in chapter 15, “Tax Considerations,” about the legal and regulatory environment in which not-for-profit entities operate

To make the content useful to readers, the basis for the accounting content is the authoritative guidance from the FASB Accounting Standards Codification®. This content is supplemented with plain English explanations, examples, and non-authoritative guidance and recommendations from conclusions of the Financial Reporting Executive Committee (FinREC). Additionally, relevant nonauthoritative AICPA literature is incorporated, including

Not-for-profit related TIS section 6140, “Not-for-Profit Entities.”

AICPA white paper, “FASB Accounting Standards Codification Section 820, Fair Value Measurements and Disclosures, for Certain Issues Pertaining to Not-for-Profit Entities”

TIS section 2220, “Long-term Investments,” paragraphs.18–.27, relating to alternative investments

The auditing content of the guide has been conformed to the changes resulting from the ASB Clarity Project. The general auditing content is similar to the prior guide in its coverage of the following:

Audit planning

Risk assessment and design of testing

Evaluation of misstatements

Audit communications

Going concern

Group audits


To further assist auditors in their not-for-profit engagements, most guide chapters have enhanced suggested audit procedures relating to the chapter’s topic specific to audits of not-for-profit entities.

Feedback Question

12. In which year was a major revision to the AICPA Audit and Accounting Guide Not-for-Profit Entities made?

a. 2013 b. 2012 c. 2010 d. 2014

What Do You Think?

What do you find in the guide to be the most helpful in preparing and auditing financial statements of not-for-profit entities?


Changes to AICPA Professional Ethics Rule 101, Independence

In 2013, following a lengthy due process period and extensive deliberations, the Professional Ethics Executive Committee (PEEC) of the AICPA significantly revised Interpretation No. 101-3, “Nonattest Services” under Rule 101, Independence (AICPA, Professional Standards, ET sec. 101, par. .05. The changes to Interpretation 101-3 are effective for engagements covering periods beginning on or after December 15, 2014. Therefore, these changes will need to be reviewed and evaluated during 2014 in order to avoid any independence issues for periods beginning with calendar 2015 and fiscal 2015–2016. One change to Interpretation No. 101-3 delineates certain nonattest services that are consistent with certain nonaudit services in GAGAS. A summary of these revisions follows.

Performing attest services often involves communication between the member and client management. However, the following communications are considered a normal part of the attest engagement and are not subject to the “General Requirements for Performing Nonattest Services” section of the interpretation:

— Client’s selection and application of accounting standards or policies and financial statement disclosure requirements

— Appropriateness of the client’s methods used in determining the accounting and financial reporting

— Adjusting journal entries that the member has prepared or proposed for client management consideration

— Form or content of the financial statements

The member should exercise judgment in determining whether his or her involvement has become so extensive that it would constitute performing a separate service that would be subject to the interpretation’s "General Requirements for Performing Nonattest Services" section.

For example, activities such as financial statement preparation, cash-to-accrual conversions, and reconciliations are considered outside the scope of the attest engagement. These activities constitute nonattest services; however, providing such services would not impair independence provided the requirements of this interpretation are met.

The other change to Interpretation No. 101-3 requires the member to consider the effect of multiple nonattest services on independence. A summary of these new provisions follows.


Performing multiple nonattest services that individually would not impair independence (the safeguards in the general requirements of Interpretation No. 101-3 reduce the self-review and management participation threats to an acceptable) can increase the significance of these threats to independence.

Before agreeing to perform nonattest services, the member should evaluate whether the performance of multiple nonattest services, in the aggregate, creates a significant threat to independence (that cannot be reduced to an acceptable level by applying the safeguards in the general requirements).

When a member determines the threats are not at an acceptable level, safeguards in addition to the general requirements of the interpretation should be applied to eliminate them or reduce them to an acceptable level.

If no safeguards are available to eliminate or reduce threats to an acceptable level, independence will be impaired.

For purposes of this interpretation, the member is not required to consider the possible threats created due to the provision of nonattest services by other network firms within the member’s firm’s network.

Key Point

CPAs subject to the Code of Professional Conduct promulgated by the AICPA will need to consider the effect, if any, the changes to Interpretation No. 101-3 may have on their current practice. In some cases, auditors may need to substantially revise the scope of services they provide to their attest engagement clients.

The full text of the AICPA Code of Professional Conduct and all related interpretations are available at www.aicpa.org. Feedback Question

13. Changes in Interpretation No. 101-3 will be effective for years beginning after which of the following dates?

a. December 15, 2011 b. February 15, 2012 c. December 15, 2013 d. December 15, 2014


AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities

In mid 2013 the AICPA released Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEsTM framework. The FRF for SMEs framework was developed by a task force of CPA practitioners and professionals serving and working as small- and medium-sized entities and the staff of the AICPA. While adopted and released after a public comment period, the FRF for SMEs framework has not been approved, disapproved, or otherwise acted upon by any technical committee of the AICPA or the FASB. Therefore, the framework has no official or authoritative status. The FRF for SMEs accounting framework is a special purpose framework, as defined in AU-C section 800, Special Considerations—Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks, for small- and medium-sized entities. It is a self-contained financial reporting framework not based on accounting principles generally accepted in the United States (U.S. GAAP). As such, it draws upon a blend of traditional accounting principles and accrual income tax methods of accounting and utilizes historical cost as its primary measurement basis. In addition, it may provide management with a suitable option when choosing accounting policies that will better meet the needs of the end users of their financial statements. Being an intuitive and understandable framework for small business owners and the users of their financial statements, the FRF for SMEs framework lays out principles that encourage the use of professional judgment in the particular circumstances of a transaction or event. It may be a cost-beneficial solution for management, owners, and others who either

are not required to prepare financial statements in accordance with U.S. GAAP for external reporting purposes or

do not require information based in U.S. GAAP for internal reporting and decision-making purposes.

Key Point

The FRF for SMEs framework is not authoritative accounting guidance and may be used only when an entity is not required to present external financial statements prepared in accordance with U.S. GAAP.


What Is a SME?

The FRF for SMEs framework does not specifically define a SME (small- to medium-sized entity). However, the term was first introduced by the International Accounting Standards Board (IASB) when International Financial Reporting Standards for SMEs was introduced in July, 2009. Though not all-inclusive, characteristics of typical entities that may utilize the FRF for SME framework include the following:

Entity does not have regulatory reporting requirements that essentially require it to use U.S. GAAP-based financial statements.

Majority of the owners and management of the entity have no intention of going public.

Entity is organized for the purpose of making a profit.

Entity may be owner-managed.

“Owner-managed” means a closely held company in which the people who own a controlling ownership interest in the entity are substantially the same people who run the company.

Management and owners of the entity rely on a set of financial statements to confirm their assessments of performance, cash flows, and of what they own and what they owe.

Entity does not operate in an industry in which it is involved in transactions that require highly-specialized accounting guidance, such as financial institutions and governmental entities.

Entity does not engage in over-complicated transactions.

Entity does not have significant foreign operations.

Key users of the entity’s financial statements have direct access to the entity’s management.

Users of the entity’s financial statements may have greater interest in cash flows, liquidity, statement of financial position strength, and interest coverage.

Entity’s financial statements support applications for bank financing when the banker

— does not base a lending decision solely on the financial statements.

— also considers available collateral or other evaluation mechanisms not directly related to the financial statements.


The full text of Financial Reporting Framework for Small- and Medium-Sized Entities is available for no charge at www.aicpa.org. Feedback Question

14. The AICPA issued Financial Reporting Framework for Small- to Medium-Sized Entities in which year? a. 2011 b. 2012 c. 2013 d. 2014

What Do You Think?

Do you believe a governmental or not-for-profit entity is able to use the FRF for SMEs framework? Why or why not?


Chapter 3

FASB Activities

Learning Objectives

Recognize the work of the Private Company Council (PCC) and the entities their work affects.

Understand recently issued Accounting Standards Updates (ASUs) by the FASB generally and specifically affecting not-for-profit organizations.

Be aware of the status of recent FASB activities affecting not-for-profit entities.

Be familiar with current outstanding FASB projects that might affect not-for-profit entities.


Private Company Council

Introduction

The Financial Accounting Foundation (FAF) established the PCC on May 30, 2012 to address the concerns of constituents related to the development of financial reporting standards for private companies in the United States. Though not the autonomous standard setting body that was requested by many, it is the most significant step taken by the FAF related to standards specifically for private companies. Formation of the PCC

The FAF issued a 39-page final report on May 30, 2012 establishing the PCC and its operations. The PCC is overseen by the FAF Trustees and replaces the Private Company Financial Reporting Committee. The Private Company Review Committee has primary oversight of the PCC for the first three years of its operations. An assessment of the PCC will be made after the 3 year period, and the FAF will determine if further changes are warranted. Objectives of the PCC

These are the primary objectives of the PCC:

1. Study the existing FASB Accounting Standards Codification® (ASC) to determine if there are any changes necessary to enhance financial reporting for private companies.

2. Serve as an advisory board to the FASB on the impact of new standards on private companies as those standards are being deliberated.

Membership of the PCC

Members of the PCC are appointed by the FAF Trustees and membership in the PCC is limited to no more than 12 and no fewer than 9 members all serving without compensation. Current members of the PCC are as follows:

Billy M. Atkinson, Chair, Texas

George Beckwith, North Carolina

Steven Brown, Oregon

Jeffery Bryan, North Carolina


Mark Ellis, New York

Thomas Groskopf, Ohio

Neville Grusd, New York

Carleton Olmanson, Minnesota

Diane Rubin, California

Lawrence Weinstock, New York

Current PCC Agenda

In order for an item to be placed on the PCC agenda, it must be approved by two thirds of the PCC members. Upon consensus being reached, the PCC forwards their position to FASB for endorsement. Once endorsed by FASB, these items are subject to due process the same as any other proposed accounting standard.

Items on the PCC’s current agenda include the following:

PCC Issue No. 13-01A, Accounting for Intangible Assets acquired in a Business Combination.

PCC Issue No. 13-02, Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements. FASB endorsed this accounting alternative in February 2014 with the expectation of issuing a final standard in late March 2014. Upon final adoption, this alternative would be available for early adoption by non-public business entities for any financial statements that have not yet been made available for issuance.

In January 2014, FASB (after appropriate due process) issued the following ASUs approving an exception to existing accounting principles generally accepted in the United States (GAAP).

ASU No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill (a consensus of the Private Company Council). Effective for nonpublic business entities opting to apply this exception to GAAP in periods beginning on or after December 15, 2014

ASU No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable Pay-Fixed Interest Rate Swap - Simplified Hedge Accounting Approach (a consensus of the Private Company Council). Effective for nonpublic business entities opting to apply this exception to GAAP in periods beginning on or after December 15, 2014.


Key Point

As ASU No. 2013-12 specifically excludes not-for-profit entities from the scope of the PCC, a discussion of the updates listed above is beyond the scope of this chapter and this course. However, FASB will be evaluating each PCC consensus to assess whether to issue a similar standard that would make the provisions applicable to not-for-profit entities. Projects are underway related to ASU Nos. 2014-02 and 2014-03 discussed above.

Updates on the PCC

The FASB website has all of the following information about the PCC (www.fasb.org/pcc):

Projects of the PCC

Meetings

News and media

About the PCC

History of establishing the PCC

Feedback Question

1. How many members are currently on the PCC?

a. 7 b. 9 c. 10 d. 12


Recent FASB Standards

The following ASUs issued by FASB in 2013 and in 2014 through the update of this course (early February 2014) that are considered relevant to most not-for-profit entities are discussed in this course. Readers should be aware that other ASUs issued during this time period that are not listed here may apply to them or their clients. Information about ASUs not listed and discussed in this chapter is available at www.fasb.org. Unless otherwise noted, the standards listed below may be adopted prior to the effective date and the effective dates listed are those for annual periods. Certain of these ASUs have different effective dates for interim reporting than those listed here. . The following two ASUs directly affect not-for-profit entities:

Update No. 2013-12, Definition of a Public Business Entity—An Addition to the Master Glossary. This ASU simply adds a definition to the glossary; therefore, it does not have an effective date, per se, but will be considered in standards developed subsequent to its issue date of December 2013.

Update No. 2013-06, Not-for-Profit Entities (Topic 958): Services Received from Personnel of an Affiliate (a consensus of the FASB Emerging Issues Task Force.) Effective for annual periods beginning on or after June 15, 2014

These ASUs are considered relevant to most not-for-profit entities:

Update No. 2014-05, Service Concession Arrangements (Topic 853) (a consensus of the FASB Emerging Issues Task Force). Effective for annual periods beginning on or after December 15, 2014 and on a modified retrospective basis for all service concession arrangements existing at the beginning of the year of adoption.

Update No. 2014-01, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force). Effective for annual periods beginning on or after December 15, 2014

Update No. 2013-07 – Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting. Effective for annual periods beginning on or after December 15, 2013.

Update No. 2013-03 – Financial Instruments (Topic 825) Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities. Effective upon issuance in February 2013.


Update No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. Effective for annual period beginning on or after January 1, 2013.

The following ASUs issued by the FASB in 2012 are considered relevant to most not-for-profit entities and are listed here because they are effective for years ending in 2013. These standards are not discussed in this course and readers are encouraged to access the full text of these standards at www.fasb.org. Unless otherwise noted, the standards listed below may be adopted prior to the effective date and the effective dates listed are those for annual periods. Certain of these ASUs have different effective dates for interim reporting than those listed here. The first ASU in this list has a direct effect on not-for-profit entities.

Update No. 2012-05, Statement of Cash Flows (Topic 230): Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows (a consensus of the FASB Emerging Issues Task Force). Effective for annual periods beginning on or after June 15, 2013.

Update No. 2012-04, Technical Corrections and Improvements. Effective for annual period beginning on or after December 15, 2012 for public business entities and December 15, 2013 for all other entities

Update No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. Effective for annual period beginning on or after September 15, 2012

Update No. 2012-01, Health Care Entities (Topic 954): Continuing Care Retirement Communities—Refundable Advance Fees. Effective for annual period beginning on or after December 15, 2012 and December 15, 2013 for all other entities

In addition to the specific standards indicated, this chapter discusses other FASB projects and their status that have a direct effect on not-for-profit entities. Feedback Questions

2. What is the effective date for ASU No. 2013-06?

a. Annual periods beginning after June 15, 2013 b. Annual periods beginning after December 15, 2013 c. Annual periods beginning after June 15, 2014 d. Annual periods beginning after December 15, 2014



a. Annual periods beginning after June 15, 2013 b. Annual periods beginning after December 15, 2013 c. Annual periods beginning after June 15, 2014 d. Annual periods beginning after December 15, 2014


ASU No. 2013-01: Clarifying the Scope of Disclosures about Offsetting

Assets and Liabilities

Why Was This Update Issued?

The main objective of ASU No. 2013-01 is to address implementation issues about the scope of ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Commercial provisions of many contracts would equate to a master netting arrangement under ASU No. 2011-11. Stakeholders questioned whether it was the board’s intent to require disclosures for such a broad scope, which would significantly increase the cost of compliance. ASU No. 2013-01 clarifies the scope of the offsetting disclosures required in ASU No. 2011-11 and addresses any unintended consequences of that update. Who Does This Update Affect?

This update affects entities that have derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements, and reverse repurchase agreements. In addition, entities with securities borrowing and securities lending transactions that are offset in accordance with either Section 210-20-45 or 815-10-45 or subject to an enforceable master netting arrangement or similar agreement are also affected by this update. Entities with other types of financial assets and financial liabilities subject to a master netting arrangement or similar agreement also are affected because these amendments make them no longer subject to the disclosure requirements in ASU No. 2011-11. What Are the Main Provisions of This Update?

The amendments clarify that the scope of ASU No. 2011-11 applies to derivatives accounted for in accordance with Topic 815 including the following:

Bifurcated embedded derivatives

Repurchase agreements and reverse repurchase agreements

Securities borrowing and securities lending transactions that are offset in accordance with either Section 210-20-45 or 815-10-45 or subject to an enforceable master netting arrangement or similar agreement


When is This Update Effective?

An entity is required to apply the amendments of ASU No. 2013-01 for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods (same as the effective date of ASU No. 2011-11). An entity should provide the required disclosures retrospectively for all comparative periods presented. Implementation Issues

This ASU may affect few not-for-profit entities as it deals with transactions that are more complex than are entered into by most not-for-profit entities. Example of Required Disclosure

Offsetting of Financial Assets and Derivative Assets As of December 31, 20XX

Description Gross Amounts

of Recognized Assets

Gross Amounts

Offset in the Statement of Financial

Position

Net Amounts of Assets

Presented in the Statement of Financial

Position

Financial Instruments

Cash Collateral Received

Net Amt.

Derivatives $ 100 $ (90) $ 10 $ - $ - $ 10 Reverse

repurchase, securities borrowing, and similar

arrangements

90

-

90

(90)

-

-

Total $ 190 $ (90) $ 100 $ (90) $ - $ 10


ASU No. 2013-03: Clarifying the Scope and Applicability of a Particular Disclosure to

Nonpublic Entities


ASU No. 2013-03 clarifies the scope and applicability of a particular disclosure to nonpublic entities that results from the issuance of ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRS. While the stated intent of ASU No. 2011-04 was to exempt all nonpublic entities for a particular disclosure, the actual amendments suggested that nonpublic entities with total assets of $100 million or more or nonpublic entities that have one or more derivative instruments would not qualify for the intended exemption. This ASU amends ASU No. 2011-04 to agree with the intent of that update. Who Does This Update Affect?

This ASU affects nonpublic entities that have total assets of $100 million or more or that have one or more derivative instruments. What Are the Main Provisions of This Update?

The amendments clarify that the requirement to disclose “the level of the fair value hierarchy within which the fair value measurements are categorized in their entirety (level 1, 2, or 3)” does not apply to nonpublic entities for items that are not measured at fair value in the statement of financial position but for which fair value is disclosed. When is This Update Effective?

ASU No. 2013-03 is effective for all entities upon issuance (February 2013). Implementation Issues

This ASU may affect few not-for-profit entities as it deals with transactions that are more complex than are entered into by most not-for-profit entities. Additionally, many not-for-profit entities are not likely to be affected as the ASU relates to entities having $100 million or more of total assets.


Feedback Question


a. Annual periods beginning after December 15, 2013 b. Annual periods beginning after June 15, 2014 c. Annual periods beginning after December 15, 2014 d. Effective on issuance – February 2013


ASU No. 2013-06: Not-for-Profit Entities: Services Received from Personnel of an Affiliate


In practice, differing views exist about whether a recipient not-for-profit entity should consider contributed services received from personnel of an affiliate. This results in diversity in applying the contributed services guidance in Topic 958. The objective of ASU No. 2013-06 is to specify the guidance that not-for-profit entities apply for recognizing and measuring services received from personnel of an affiliate. Who Does This Update Affect?

The amendments in this update apply to not-for-profit entities, including not-for-profit, business-oriented health care entities, that receive services from personnel of an affiliate in the following circumstances:

The services directly benefit the recipient not-for-profit entity, and

The affiliate does not charge the recipient not-for-profit entity for the services.

Charging the recipient not-for-profit entity means requiring payment from the recipient not-for-profit entity at least for either the

— approximate amount of the direct personnel costs (for example, compensation and any payroll-related fringe benefits) incurred by the affiliate in providing a service to the recipient not-for-profit entity or

— approximate fair value of that service.

The amendments in this update do not address transactions between affiliates for which the affiliate charges the recipient not-for-profit entity at least for the approximate amount of direct personnel costs or the approximate fair value of the services provided. What Are the Main Provisions of This Update?

ASU No. 2013-06 adds the following definition of an affiliate to the master glossary:

A party that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with an entity.


Additionally, ASU No. 2013-06 requires a recipient not-for-profit entity to recognize all services received from personnel of an affiliate that directly benefit the recipient not-for-profit entity. Such services should be measured at the cost recognized by the affiliate for the personnel providing those services. However, if measuring a service received from personnel of an affiliate at cost will significantly overstate or understate the value of the service received, the recipient not-for-profit entity may elect to recognize that service received at either

the cost recognized by the affiliate for the personnel providing that service or

the fair value of that service.

Key Point

ASU No. 2013-06 applies when a not-for-profit entity benefits from personnel services provided by an affiliate at no cost. The requirements need only be considered when the not-for-profit entity receiving these services prepares its own stand-alone financial statements.

Services Resulting in Increases in Net Assets

Health Care Entities

A recipient not-for-profit entity within the scope of Topic 954, Health Care Entities, that is required to provide a performance indicator should report as an equity transfer the increase in net assets associated with the services received

that directly benefit the recipient not-for-profit entity and

for which the affiliate does not charge the recipient not-for-profit entity, regardless of whether those services are received from either

— personnel of a not-for-profit affiliate.

— any other affiliate.

Other Not-for-Profit Entities

For other recipient not-for-profit entities, this update does not prescribe presentation guidance for the increase in net assets associated with the services received. However, ASU No. 2013-06 prohibits reporting the amount associated with the services as a contra-expense or a contra-asset.


Services Not Resulting in Increases in Net Assets

This update requires that a recipient not-for-profit entity account for services provided by an affiliate similar to the accounting required for similar transactions in certain circumstances. These circumstances are when the provision of services from an affiliate results in either of the following:

A decrease in net asset

Creation or enhancement of an asset

Disclosures

The requirements of Subtopic 850-10, Related Party Disclosures, apply to services received from personnel of an affiliate. When is This Update Effective?

The amendments in ASU No. 2013-06 may be adopted prior to the effective date which is prospectively for fiscal years beginning after June 15, 2014 and interim and annual period thereafter. Upon adoption, a recipient not-for-profit entity may apply the amendments using a modified retrospective approach. Under this approach, all prior periods presented upon the date of adoption should be adjusted. However, no adjustment should be made to the beginning balance of net assets of the earliest period presented. Early adoption is permitted. Implementation Issues

This ASU is likely to affect a great many not-for-profit entities initially and in the future. Not-for-profit entities involved in higher education and health care as well as very large not-for-profit entities with complex reporting relationships may be more affected by this update than other not-for-profit entities. As a critical transition issue, not-for-profit entities will need to decide if they will choose to apply the ASU’s requirements using the modified retrospective approach. Availability of the information, available staff time, and the effect of implementation on the entity’s financial position may affect this decision. It may benefit the not-for-profit entity to determine the pro forma effects of applying this update to determine how it may affect the entity’s financial position. In some cases, the pro forma effects may need to be discussed with management or the governing body if implementation is projected to have a negative effect on the entity’s financial position.


Not-for-profit entities with the types of transactions subject to the requirements of this update may wish to implement the requirements prior to the effective date. In such circumstances, the entity may wish to discuss this decision with their auditor well in advance of the end of the fiscal period. Early communication will likely allow management and the auditor to coordinate a smooth transition to the new requirements. Feedback Question

5. ASU No. 2013-06 changes reporting relating to which of the following?

a. Services received by not-for-profit entities from affiliated organizations b. Services received by not-for-profit entities from unaffiliated organizations c. Services received by public entities from affiliated organizations d. Services received by nonpublic entities from affiliated organizations


ASU No. 2013-07: Presentation of Financial Statements: Liquidation Basis of Accounting


GAAP has minimal guidance to address when it is appropriate to apply, or how to apply, the liquidation basis of accounting. Consequently, there is diversity in practice. ASU No. 2013-06 clarifies when an entity should apply the liquidation basis of accounting. In addition, the guidance provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. Who Does This Update Affect?

The amendments in this update apply to all entities that issue financial statements that are presented in conformity with GAAP except investment companies that are regulated under the Investment Company Act of 1940. What Are the Main Provisions of This Update?

This update requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Liquidation is imminent when the likelihood is remote that the entity will return from liquidation and either

A plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties or

A plan for liquidation is being imposed by other forces (for example, involuntary bankruptcy).

In some cases, a plan for liquidation may have been specified in the entity’s governing documents from its inception (for example, limited-life entities). These entities should apply the liquidation basis of accounting only if the approved plan for liquidation differs from the plan for liquidation that was specified at the entity’s inception. Initial Measurement

Financial statements prepared using the liquidation basis of accounting are required to present relevant information about an entity’s expected resources in liquidation by


measuring and presenting assets at the amount of the expected cash proceeds from liquidation.

Key Point

In some cases, fair value may approximate the amount that an entity expects to collect. However, an entity shall not presume this to be true for all assets.

The entity should include in its presentation of assets any items it had not previously recognized under GAAP but that it expects to either sell in liquidation or use in settling liabilities (for example, trademarks). An entity should recognize and measure its liabilities in accordance with GAAP that otherwise applies to those liabilities (excluding the accrual of estimated disposal costs and expected income and expenses as described, respectively, in the update). The entity should not anticipate that it will be legally released from being the primary obligor under those liabilities, either judicially or by creditor(s). However, an entity shall adjust its liabilities to reflect changes in assumptions that are a result of the entity’s decision to liquidate (for example, timing of payments). Additionally, the entity is required to accrue and separately present the costs that it expects to incur and the income that it expects to earn during the expected duration of the liquidation, including any costs associated with sale or settlement of those assets and liabilities. Subsequent Measurement

At each reporting date, an entity shall remeasure its assets and other items it expects to sell that it had not previously recognized, liabilities (if required under the relevant topic for those liabilities), and the accruals of disposal or other costs or income to reflect the actual or estimated change in carrying value since the previous reporting date. Other Presentation Matters

At a minimum, an entity that applies the liquidation basis of accounting shall prepare the following:

A statement of net assets in liquidation

A statement of changes in net assets in liquidation.


The liquidation basis of accounting shall be applied prospectively from the day that liquidation becomes imminent. The initial statement of changes in net assets in liquidation shall present only changes in net assets that occurred during the period since liquidation became imminent. Disclosures

Additionally, ASU No. 2013-07 requires disclosures about the amount of cash or other consideration that an entity expects to collect and the amount that the entity is obligated or expects to be obligated to pay during the course of liquidation. At a minimum, an entity shall disclose all of the following when it prepares financial statements using the liquidation basis of accounting:

That the financial statements are prepared using the liquidation basis of accounting, including the following:

— Facts and circumstances surrounding the adoption of the liquidation basis of accounting

— Entity’s determination that liquidation is imminent

A description of the entity’s plan for liquidation, including a description of each of the following:

— Manner by which it expects to dispose of its assets and other items it expects to sell that it had not previously recognized as assets

— Manner by which it expects to settle its liabilities

— Expected date by which the entity expects to complete its liquidation

Methods and significant assumptions used to measure assets and liabilities, including any subsequent changes to those methods and assumptions.

Type and amount of costs and income accrued in the statement of net assets in liquidation and the period over which those costs are expected to be paid or income earned.

When is This Update Effective?

ASU No. 2013-07 is effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. Entities should apply the requirements prospectively from the day that liquidation becomes imminent. Early adoption is permitted.


Entities that use the liquidation basis of accounting as of the effective date in accordance with other Topics in the FASB ASC (for example, terminating employee benefit plans) are not required to apply the amendments in this update. Instead, those entities should continue to apply the guidance in those other topics. Implementation Issues

As the requirements of this statement are required when liquidation is imminent it is likely to be applied on a prospective basis. Not-for-profit entities and their auditors will need to be familiar with the requirements of this update in order to recognize when liquidation is imminent. Feedback Question

6. ASU No. 2013-07 establishes guidance relating to which of the following?

a. Services received by not-for-profit entities from affiliated organizations b. Offsetting assets and liabilities c. Liquidation basis of accounting d. Health Care entities


ASU No. 2013-12: Definition of a Public Business Entity


Issued in December 2013, the main objective of ASU No. 2013-12 is to determine which entities would be within the scope of the Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Financial Reporting for Private Companies (the guide). Who Does This Update Affect?

This update affects all entities in that it redefines “public business entity” and specifically exempts not-for-profit entities and employee benefit plans from this definition and from the scope of the guidance. Prior to this ASU, not-for-profit entities were considered public business entities on the basis of whether they had public debt securities, including conduit debt. ASU No. 2013-12 does not affect existing requirements in GAAP.

Key Point

Because ASU No. 2013-12 excludes all not-for-profit entities from the definition of public business entities, there will no longer be public versus nonpublic distinctions between not-for-entities in future standard setting. Instead, the FASB will consider factors such as user needs and resources of a not-for-profit entity, on a standard-by-standard basis when determining whether all, none, or only some not-for-profit entities will be eligible to apply financial accounting and reporting alternatives within GAAP for private companies.

What Are the Main Provisions of This Update?

The ASU defines a public business entity as a business entity meeting any one of the criteria below. However, neither a not-for-profit entity nor an employee benefit plan is a business entity (emphasis added).

The SEC requires the business to file or furnish financial statements, or the business does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).


The Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, requires the business to file or furnish financial statements with a regulatory agency other than the SEC.

The business is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.

The business has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.

The business has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.

An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is a public business entity only for purposes of financial statements that are filed or furnished with the SEC. In that case, the entity is a public business entity only for purposes of financial statements that are filed or furnished with the SEC. When is This Update Effective?

There is no actual effective date for this ASU; however, the term “public business entity” will be used in future accounting standards updates. Implementation Issues

This ASU may significantly affect many not-for-profit entities in the future. It is expected that FASB may reevaluate existing guidance relating to not-for-profit entities in light of this new definition. Not-for-profit entities and their auditors will need to monitor future ASUs to determine what effect they might have for not-for-profit entities.


Feedback Question

7. ASU No. 2013-12 establishes the following:

a. Guidance relating to services received by not-for-profit entities from affiliated organizations

b. Requirements for offsetting assets and liabilities in the balance sheet c. Guidance relating to patient revenues d. A definition of a public business entity


ASU No. 2014-01: Accounting for Investments in Qualified Affordable Housing Projects


The main objective of this update is to provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. Who Does This Update Affect?

The amendments in this update apply to all reporting entities that invest in qualified affordable housing projects through limited liability entities that are flowthrough entities for tax purposes as follows:

For reporting entities that meet the conditions for and that elect to use the proportional amortization method to account for investments in qualified affordable housing projects, all amendments in this update apply.

For reporting entities that do not meet the conditions for or that do not elect the proportional amortization method, only the amendments in this update that are related to disclosures apply.


Under current GAAP, reporting entities that invest in qualified affordable housing projects may elect to account for that investment using the effective yield method if certain conditions are met. Investments not currently accounted for using the effective yield method are required to account for the investment in accordance with Subtopic 970-323, Real Estate – General – Investments – Equity Method and Joint Ventures. This means the investment is accounted for using either the equity method or the cost method.

ASU No. 2014-01 requires that those investments in qualified affordable housing projects not accounted for using the proportional amortization method, should be accounted for as an equity method investment or a cost method investment in accordance with Subtopic 970-323.


Proportional Amortization Method

The amendments in ASU No. 2014-01 permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method. Using the proportional amortization method, an entity

amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received.

recognizes the net investment performance in the income statement as a component of income tax expense (benefit).

In order to use the proportional amortization method, all of the following conditions must be met:

It is probable that the tax credits allocable to the investor will be available.

The investor does not have the ability to exercise significant influence over the operating and financial policies of the limited liability entity.

Substantially all of the projected benefits are from tax credits and other tax benefits (for example, tax benefits generated from the operating losses of the investment).

Investor’s projected yield is based solely on the cash flows from the tax credits and other tax benefits are positive.

Investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the investor’s liability is limited to its capital investment.

Transactions between the investor and the limited liability entity, other than the investment in the limited liability entity, should not be considered when determining whether the above conditions are met provided that

the reporting entity is in the business of entering into those other transactions (for example, a financial institution that regularly extends loans to other housing projects).

the terms of those other transactions are consistent with the terms of arm’s-length transactions.

the reporting entity does not acquire the ability to exercise significant influence over the operating and financial policies of the limited liability entity as a result of those other transactions.


Key Point

The decision to apply the proportional amortization method of accounting is an accounting policy decision that should be applied consistently to all qualifying affordable housing project investments rather than a decision to be applied to individual investments.

Reevaluation of Conditions

A reporting entity should evaluate whether the conditions have been met to apply the proportional amortization method at the time of initial investment on the basis of facts and circumstances that exist at that time. A reporting entity should reevaluate the conditions upon the occurrence of either of the following:

A change in the nature of the investment (for example, if the investment is no longer a flow-through entity for tax purposes)

A change in the relationship with the limited liability entity that could result in the reporting entity no longer meeting the conditions

Impairment

An investment in a qualified affordable housing project through a limited liability entity should be tested for impairment when there are events or changes in circumstances indicating that it is more likely than not that the carrying amount of the investment will not be realized. An impairment loss should be measured as the amount by which the carrying amount of an investment exceeds its fair value. A previously recognized impairment loss should not be reversed. Disclosures

A reporting entity should disclose information that enables users of its financial statements to understand the nature of its investments in qualified affordable housing projects, and the effect of the measurement of its investments in qualified affordable housing projects and the related tax credits on its financial position and results of operations. When Is This Update Effective?

The amendments in this update should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments.


Amendments in this update are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. For all entities other than public business entities, the amendments are effective for annual periods beginning after December 15, 2014, and interim periods within annual reporting periods beginning after December 15, 2015. Early adoption is permitted. Implementation Issues

There are a number of not-for-profit entities that are either involved in or have created separate legal entities to participate in public housing projects as contemplated in this update. In some cases, these separate legal entities may be required to be consolidated in the not-for-profit entity’s financial statements. Therefore, these entities and their auditors will need to be familiar with the requirements of ASU No. 2014-01 and then determine what effect it will have on their financial position. Not-for-profit entities required to implement the requirements of this update will need to become familiar with these requirements as soon as possible. There will be a greater sense of urgency for not-for-profit entities involved in these projects that have a December 31 year end (the update is effective for annual periods beginning after December 15, 2014). Because the requirements of this update are required to be applied retrospectively to all periods presented, implementation of this update may require additional effort for entities that present comparative financial statements. Not-for-profit entities, or their subsidiaries, that currently use the effective yield method will need to determine if they will change from this method to the proportional allocation method for any existing public housing projects. Factors that may affect this decision include the following:

The number of public housing projects

Availability of data

Staff time required to convert to the proportional allocation method

Impact on financial position

It may benefit the not-for-profit entity to determine the pro forma effects of applying this update to determine how it may affect the entity’s financial position. In some cases, the pro forma effects may need to be discussed with management or the governing body if implementation is projected to have a negative effect on the entity’s financial position. Not-for-profit entities may wish to discuss implementation of this update with their auditors well in advance of the end of the fiscal period. Early communication will likely allow management and auditors to coordinate a smooth transition to the new requirements.


Feedback Question


a. Services received by not-for-profit entities from affiliated organizations b. Offsetting assets and liabilities c. Investments in affordable housing projects d. Health Care entities


ASU No. 2014-05: Service Concession Arrangements


The objective of ASU No. 2014-05 is to specify that an operating entity should not account for a service concession arrangement as defined in this update as a lease in accordance with Topic 840, Leases. Service concession arrangements are more and more prevalent in the United States, and this update provides guidance for entities involved in these arrangements. This update adds Topic 853, Service Concession Arrangements to FASB ASC. Who Does This Update Affect?

This ASU applies to an operating entity of a service concession arrangement entered into with a public-sector entity grantor when the arrangement meets both of the following conditions:

The grantor controls or has the ability to modify or approve the services that the operating entity must provide with the infrastructure, to whom it must provide them, and at what price.

The grantor controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement.


ASU No. 2014-05 defines a service concession arrangement as follows:

An arrangement between a public-sector entity grantor and an operating entity under which the operating entity operates the grantor’s infrastructure. The operating entity also may provide the construction, upgrading, or maintenance services of the grantor’s infrastructure.

— A public-sector entity includes a governmental body or an entity to which the responsibility for the public service has been delegated.

— Examples of service concession arrangements include contracts to operate airports, roads, bridges, hospitals, schools, parks, and so forth.

The amendments of this update specify that an operating entity should not account for a service concession arrangement (within the scope of this update) as a lease in accordance


with Topic 840. Instead, an operating entity should refer to other Topics in the FASB ASC as applicable to account for various aspects of a service concession arrangement. For example, an operating entity shall account for revenue and costs relating to construction, upgrade, or operation services in accordance with Topic 605 on revenue recognition. ASU No. 2014-15 also specifies that the infrastructure used in a service concession arrangement shall not be recognized as property, plant, and equipment of the operating entity.

Key Point

Over the past several years, there has been an increase in the number of agreements between not-for-profit entities and governmental organizations. Some of these arrangements may meet the definition of a service concession arrangement.

When Is This Update Effective?

The amendments in this update should be applied on a modified retrospective basis to service concession arrangements that exist at the beginning of an entity’s fiscal year of adoption. The modified retrospective approach requires the cumulative effect of applying this update to arrangements existing at the beginning of the period of adoption to be recognized as an adjustment to the opening retained earnings balance for the annual period of adoption. Early adoption of the update is permitted The amendments are effective for a public business entity for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For an entity other than a public business entity, the amendments are effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Implementation Issues

This ASU is likely to affect a number of not-for-profit entities as “public-private” partnerships between not-for-profit entities and governmental organizations have increased in popularity over the last several years. In some cases, these arrangements may also have a contribution component to them. To prepare for transition, not-for-profit entities may wish to calculate the pro forma effects of applying this statement to determine how it may affect the entity’s financial position. In some cases, the pro forma effects may need to be discussed with management


or the governing body if implementation is projected to have a negative effect on the entity’s financial position. Not-for-profit entities with the types of transactions subject to the requirements of this update may wish to implement the requirements of this standard prior to the effective date. In such circumstances, the entity may wish to discuss this decision with their auditor well in advance of the end of the fiscal period. Early communication will likely allow management and the auditor to coordinate a smooth transition to the new requirements. Feedback Question


a. Service concession arrangements b. Offsetting assets and liabilities c. Investments in affordable housing projects d. Services received by not-for-profit entities from affiliated organizations


FASB Projects Affecting Not-for-Profit Entities

FASB Resource Groups

Not-for-Profit Advisory Committee

Several years ago FASB added a staff member dedicated to advising the board and other staff on issues affecting not-for-profit entities and communicating with members in the not-for-profit sector. To provide additional guidance to the board, FASB established the Not-for-Profit Advisory Committee (NAC) in October 2009. The NAC works closely with FASB in an advisory capacity to ensure the perspectives from the not-for-profit sector are effectively communicated to FASB on a timely basis. Other responsibilities of the NAC are as follows:

To provide focused input and feedback relating to

— the need for and relative priority of proposed FASB projects

— conceptual and practical implications of proposals under development in active project.

— practice issues including implementation issues arising from new standards, potential areas for improvement pertinent to the not-for-profit sector, and longer term issues important to the not-for-profit sector

To assist FASB and its staff with communication and outreach activities to the not-for-profit sector on the following:

— Recent standards and other existing guidance

— Current and proposed projects

— Longer-term issues

Advise on other matters for which the FASB may seek guidance

The NAC comprises 15 to 20 members who demonstrate the following:

A keen interest in and knowledge of financial accounting and reporting matters

Experience working within the not-for-profit sector

A commitment to improving financial reporting for users of financial statements

The ability to provide input on a wide variety of financial reporting matters


Additional information about the NAC is available by contacting either of the following FASB staff.

Jeffrey D. Mechanick, Assistant Director – Nonpublic Entities [email protected] 203-956-5301

Alicia A. Posta, Executive Director – FASB Advisory Groups [email protected] 203-956-5207

Not-for-Profit Resource Group

In addition to the NAC, FASB has Not-for-Profit Resource Group (NRG) whose members primarily serve as a resource to the NAC. Periodically all members of the NRG or particular types of members (for example preparers, auditors, creditors, donors and grantors, etc.) are surveyed on matters of interest to the NAC. Persons interested in serving on the NRG are encouraged to contact Ron Bossio at [email protected] or 203-956-5213. Current FASB Projects Affecting Not-for-Profit Entities

Financial Reporting

In November 20111 FASB added a standards-setting project to its agenda relating to financial reporting by not-for-profit entities. The objective of this project, “Not-for-Profit Financial Reporting: Financial Statements,” is to reexamine existing standards for financial statement presentation by not-for-profit entities by focusing on improvements relating to net asset classification requirements and information provided in financial statements and notes about liquidity, financial performance, and cash flows. Tentative decisions reached by the board (through the writing of this course) that may affect current practice include the following:

Changing the classes of net assets for which information will be required to be presented in the financial statements to the following:

— Net assets with donor imposed restrictions. The hard line distinction between temporary and permanent restrictions would be removed. The focus instead would be on describing differences in the nature of the donor imposed restrictions and how and when those resources can be used.

1 A project relating to other financial communications by not-for-profit entities was also approved at this meeting. In January 2014, the Board removed the communications project from its Current Technical Plan.


— Net assets without donor imposed restrictions. Board designated net assets would be reported in this category and disclosure of information about the amount and purposes of board designations would be required.

Requiring not-for-profit entities to do the following:

— Present the statement of cash flows using the direct method. The requirement to reconcile the change in net assets to net cash flows from operating activities would be removed with this change.

The Board will also consider revising the cash flow categories to better align them with the tentative decision for an intermediate measure of operations.

— Report expenses by their nature and retaining the requirement to report expenses by function.

— Provide an analysis of all expenses (operating and nonoperating) by function and by nature in one location, the statement of activities, a separate statement of expenses (currently the statement of functional expenses), or a schedule in the notes.

This analysis would neither require nor preclude functionalization of nonoperating expenses. Additionally, a specific format of the analysis would not be required even though such information is typically provided in the form of a matrix.

Voluntary health and welfare organizations currently required to present this information in a statement would be allowed the same presentation and disclosure flexibility as other not-for-profit entities in how they communicate this information.

Defining an intermediate operating measure on the basis of the following two dimensions:

— Mission dimension. Resources from or directed at carrying out a not-for-profit entity’s purpose for existence.

— Availability dimension. Resources available for current period activities reflecting both external limitations and internal actions of a not-for-profit entity’s governing board.


Presenting an intermediate measure of operations that would present all legally available mission related revenues before reductions for amounts designated by the governing board for use in future periods.

The Board will also consider whether the presentation of an intermediate measure of operations will be required, permitted, or encouraged.

An exposure draft relating to this project is expected to be issued in the second half of 2014. Readers are encouraged to follow the status of this project at www.fasb.org.

Key Point

FASB’s not-for-profit financial reporting project could have a significant impact on financial reporting by not-for-profit entities. Preparers of not-for-profit entity financial statements and their auditors, as well as users of this information are strongly encouraged to follow the status of this project at www.fasb.org.

Accounting for Goodwill

In late November 2013, the board added accounting for goodwill for public business and not-for-profit entities to its agenda. The objective of the project is to reduce the cost and complexity of the subsequent accounting for goodwill for these entities. This project results from the board’s consideration of goodwill in connection with PCC Issues No. 13-01B which resulted in the issuance of ASU No. 2014-02, Intangibles: Goodwill and Other (Topic 350): Accounting for Goodwill (a consensus of the Private Company Council). As of the writing of this course (February 2014), no documents had been issued relating to this subject. Readers are encouraged to follow the status of this project at www.fasb.org. Accounting for Government Assistance

This is a research project to explore whether there is a need to establish explicit guidance for the accounting and disclosure of government assistance. The results of this research effort will be used by the board to decide whether to add a standards-setting project to its agenda. To date, there have been no board meetings where this topic has been discussed. Currently, Topic 958, Not-for-Profit Entities, provides guidance for contributions received and applies to all entities that receive contributions. However, this guidance excludes tax exemptions, tax incentives, tax abatements, and the transfer of assets from governments to business entities.


The scope and accounting considerations of a potential project on the accounting for government assistance would consider the following:

Types of government assistance pervasive and material to reporting entities

Complexities and terms of government assistance programs

Any diversity in practice that currently exists

Certain types of government assistance programs that may be considered in a potential project include the following:

Grants related to assets or capital projects

Payments for expenditures

Low-interest and interest-free loans

Loan guarantees

Bond guarantees

Revenue subsidies

Certain insurance payments

Tax assistance including:

— Tax credits

— Payments in lieu of tax credits

— Tax exclusions or exemptions

— Property tax abatements

— Other tax benefits

Readers are encouraged to follow the status of this research project at www.fasb.org.


Key Point

A number of not-for-profit entities have arrangements with governments that might be affected by any guidance resulting from this research project. Preparers of not-for-profit entity financial statements and their auditors, as well as users of this information are strongly encouraged to follow the status of this project at www.fasb.org.

Feedback Questions

10. When did FASB establish the Not-for-Profit Advisory Committee?

a. Several years ago b. 2009 c. 2011 d. 2013

11. What does the acronym “NRG” represent?

a. Not-for-Profit Resource Group b. Not-for Profit Reference Group c. Not Really Good d. National Resource Group

12. Which of the following types of government assistance programs is not under

potential consideration in the Accounting for Government Assistance Project?

a. Bond guarantees b. Nonexchange financial guarantees c. Revenue subsidies d. Loan guarantees


Other FASB Projects As of the writing of this course (February 2014), four projects remain on the FASB and International Accounting Standards Board (IASB) joint agenda. These projects and their current status are as follows. Revenue Recognition

The board completed its discussions on revenue at its November 6, 2013 meeting. Currently FASB staff is continuing to draft the final ASU. Both boards tentatively decided that public entities will be required to apply the revenue recognition standard for annual and interim reporting periods beginning after December 15, 2016. For nonpublic entities, the tentative effective date is for annual and interim periods beginning after December 2017. Early adoption by public entities is prohibited; however, nonpublic entities may elect to apply the revenue recognition standard for periods beginning after December 15, 2016. That said, retrospective application of the standard could be applied. Issuance of the final ASU is expected in the first half of 2014. Accounting for Financial Instruments – Classification and Measurement and Impairment

Both boards continue to redeliberate the feedback received on the FASB’s December 2012 proposal and the IASB’s March 2013 exposure draft. Issuance of a final standard for both the “Classification” and “Measurement and Impairment” portions of this project are expected in the second half of 2014. Insurance Contracts (applies to entities that issue insurance contracts)

FASB began redeliberations after the end of the comment period and at the conclusion of various outreach activities in the first quarter of 2014. Currently, there is no date indicated for the issuance of a final standard.


Leases

On May 16, 2013 the FASB issued a proposed ASU revising the 2010 proposed ASU relating to Topic 840 – Leases. Both the FASB and IASB began redeliberations of their respective proposals at the joint meeting held January 23, 2014. However, no decisions were made at that meeting. Currently, there is no date indicated for the issuance of a final standard. Readers are encouraged to follow the status of these projects at www.fasb.org.

Copyright 2014–2015 AICPA Unauthorized Copying Prohibited 4-1

Chapter 4

Emerging Issues Affecting Not-for-Profit Entities

Learning Objectives

Social entrepreneurship

Theft and fraud at not-for-profit entities

Organizational sustainability

Payments in lieu of taxes

Measurement of organizational effectiveness

Social impact bonds

Accounting areas of interest to not-for-profit entities


Social Entrepreneurship

Though not a new concept, social entrepreneurship is becoming a viable alternative to traditional fundraising for not-for-profit entities. Social entrepreneurship is the process of pursuing innovative solutions to social problems to create and sustain social value. It involves thinking like a business as well as like a mission-driven not-for-profit entity. To paraphrase a popular adage, social entrepreneurs are not happy giving a man a fish or teaching that man to fish. A social entrepreneur seeks to revolutionize the entire fishing industry. Social entrepreneurship, as a term, was first used in the social change literature in the 1960s and 1970s and became widespread in the 1980s and 1990s. However, throughout history there have been individuals, such as the following, that exemplify social entrepreneurship.

Dr. Maria Montessori. Developer of the Montessori approach to early childhood education

John Muir. Naturalist and conservationist who established the National Park System and helped found the Sierra Club

Florence Nightingale. Founder of the first nursing school and developer of modern nursing practices

Robert Owen. Founder of the cooperative movement

Vinoba Bhave. Founder of India’s Land Gift Movement

Today, not-for-profit and governmental entities, as well as foundations, play a role in promoting, funding, and advising social entrepreneurs. Programs focusing on educating and training social entrepreneurs are increasingly being offered by colleges and universities. A few examples of social entrepreneurship in the United States follow. Community Based Care of Central Florida

As a not-for-profit entity, Community Based Care develops community-based services and support for children and families served by the child welfare system in Central Florida. It does this, in large part, by transferring public child welfare services to the private sector. Several years ago, changes in the Medicaid system led Community Based Care to seek alternatives to its funding and operational models. Community Based Care was faced with finding $7 million in venture capital in a very short amount of time in order to continue services to its beneficiaries. A health maintenance organization and investors interested in child welfare, health care, and other areas relating to the mission and operations of Community Based Care came together with Community Based Care to create a limited liability corporation (LLC). Through this LLC,


Community Based Care is able to continue providing much needed services to children and families in Central Florida. Delancey Street Foundation

Called the most successful rehabilitation project in the United States, the Delancey Street Foundation is a residential education center where drug addicts, criminals, and the homeless learn to lead productive, crime-free lives. Based in San Francisco, the foundation earns revenue by operating more than 20 businesses, such as restaurants, which not only generate income but also teach residents marketable skills and instill in them habits of self-control and self-discipline. Revenues generated by these business pay for 65 percent of the foundation’s operating costs with private donations funding the remaining costs. Enterprise Community Partners

Headquartered in Maryland, Enterprise Community Partners has worked for nearly 30 years as an advocate of affordable housing. They do this through a number of services including preventing foreclosure, building energy-efficient rental properties, and issuing more than $1.6 billion worth of loans to impoverished communities. Funding for these initiatives is through investors, private donors, and government funding. Genesys Works

Operating in Chicago, Houston, Minneapolis-St. Paul, and the San Francisco Bay Area, Genesys Works provides inner city high school students meaningful internships at major corporations during their senior year in high school. Students are provided an intensive eight week training program prior to being placed with one of Genesys Works’ numerous client companies. The experience shows students that they can break through barriers and discover that they can succeed as professionals in the corporate world. Over 95 percent of Genesys Works graduates enroll in college immediately after high school. Rebuild Globally

While working as a disaster relief volunteer in Haiti after the 2010 earthquake, the founder of what would become Rebuild Globally, learned that the Haitians being provided disaster relief aid would rather have had a job. While Rebuild Globally is a not-for-profit entity, it operates a for-profit sustainable social enterprise in Haiti that produces Strides sandals. Haitians employed by the for-profit social enterprise fashion hand-made sandals from recycled tires. Prior to the advent of this social enterprise, old discarded tires littered streets and clogged drainage systems or were regularly burned which released dangerous toxins into the air.


Terracycle

With a $2,000 angel investment from a venture capitalist, borrowed money from family and friends, and the founder’s entire personal savings, Terracycle was born. The founder of the company began by packaging worm excrement in used soda bottles for use as an organic fertilizer. Today, the organic fertilizer is sold in Home Depot, Target, and Wal-Mart. In addition, Terracycle collects trash and turns them into bright, fun products (urban art trash cans and messenger bags made from Capri Sun packages). The company donates two cents to not-for-profit entities for each waste item it recycles which has raised $3.2 million through 2012.


Theft and Fraud at Not-for-Profit Entities

The risk of fraud is a serious concern for all types of entities, but fraud can be particularly damaging to a not-for-profit entity and a damaged reputation can have devastating consequences. In addition to setting the right tone at the top, the officers and governing board of a not-for-profit entity should take the lead in establishing and maintaining a formal fraud risk management program, which should include a fraud risk assessment designed to identify certain vulnerabilities and internal control gaps that could leave the organization exposed to financial and reputational damage. According to the most recent global fraud study by the Association of Certified Fraud Examiners, the typical organization loses an estimated 5 percent of its annual revenue to fraud. Although fraud in not-for-profit entities results, on average, in a smaller net loss than fraud in commercial enterprises, the not-for-profit entities in the study reported a median loss of $100,000, an 11 percent increase from the previous study and a significant loss to almost any charitable organization. Beyond the immediate financial loss, however, an even greater potential cost of fraud to not-for-profit entities is the reputational damage that can occur. Because most not-for-profit entities depend on support from donors, grantors, and other public sources, their reputations are among their most valued assets. As the Center for Audit Quality has noted, “fraud cannot occur unless an opportunity is present. Opportunity has two aspects: the inherent susceptibility of the organization’s accounting to manipulation, and the conditions within the organization that may allow a fraud to occur.” In addition, the opportunity for fraud is also affected by an organization’s culture, a factor that is often overlooked. The very nature of some not-for-profit entities makes them tempting targets. Characteristics that distinguish not-for-profit entities from business entities and governmental organizations are as follows:

Significant amounts of contributions of resources are received from resource providers not expecting commensurate or proportionate financial return.

The organization operates for purposes other than to provide goods or services at a profit.

Ownership interests such as those found in business enterprises are absent.

These differences make it necessary for management and auditors of not-for-profit organizations to consider fraud risks differently than fraud risks typically associated with for-profit entities.


With respect to how and where fraud occurs, governmental and not-for-profit organizations share a number of areas in common with private sector entities. Some areas where fraud occurs in the private sector as well as in governmental and not-for-profit organizations are as follows:

Overstatement of earnings and increases in net assets

Fictitious revenues

Improper revenue recognition

Understatement of expenses and expenditures

Overstatement of assets

Understatement of allowances for receivables

Overstatement of inventories due to inclusion of obsolete goods

Overstatement of property values and creation of fictitious assets

There are a number of areas of concern that are unique to not-for-profit organizations with respect to the potential for fraud. Some of these unique areas are illustrated below.

Not-for-Profit Entities and the Fraud Triangle

Struggling not-for-profit entities may experience relatively high staff turnover, making training and adequate segregation of duties more difficult. Not-for-profit entities are also at risk from the lack of segregation of duties and the potential for management override of controls. Finally, many not-for-profit entities depend heavily on volunteers and other community members, which can further complicate efforts to establish or maintain internal controls. It is important to remember that internal controls can be designed and implemented to prevent or detect fraud. But

Contributions received from resource providers

Functional allocation of expenses

Lack of ownership interests

Related-party transactions

Internal accounting controls

Unique Areas of Concern in Not-for-Profit Engagements

Goods or services not provided at a profit

Repeat significant deficiencies, material weaknesses, and other matters related to internal control

Split-interest agreements

Other areas


it can be very difficult or even impossible to implement controls to prevent all fraud from occurring. Feedback Question

1. Which organization noted that fraud cannot occur unless an opportunity is present?

a. Association of Certified Fraud Examiners b. Auditing Standards Board c. Public Company Accounting Oversight Board d. Center for Audit Quality


Organizational Sustainability

Organizational sustainability, something for which not-for-profit entities strive, is a multidimensional set of present-day practices, both financial and programmatic, combined with forward-looking goals and ideals that work together to ensure the continuity of an entity. Ensuring organizational sustainability is a dynamic process that requires not-for-profit entities to remain nimble in business, governance, and programming and touches on issues such as the following:

Financial strength that includes maintaining adequate operating reserves, maintaining and enhancing revenue streams, adapting to changing government funding policies and models, and controlling costs

Leadership that includes day-to-day business operations, effective resource management, strategic long- and short-term planning, succession planning, volunteer management, and building and nurturing long-term relationships with individual and institutional funders

Mission clarity and programming that includes remaining focused on keeping services closely aligned with the mission and continually evolving those services to produce measurable, positive outcomes using best practices

Challenges facing not-for-profit entities are greater today than perhaps they have ever been. To survive, not-for-profit entities need to begin to explore collaboration, sharpen their focus, or modify services to meet changing community priorities. To this, some experts believe the key to a not-for-profit entity’s sustainability is adaptability. These experts believe adaptability is considered the ability of the not-for-profit entity and the individuals connected to it to both (a) generate additional revenue successfully and (b) succeed at the difficult task of doing more with less. Others, however, believe staff and board leadership or improved management systems are the answer to a not-for-profit entity’s sustainability. A sustainability formula developed by The TCC Group assesses the capacity of a not-for-profit entity using adaptive, leadership, management, and technical capacities. Using their assessment tool the TCC Group found that most not-for-profit entities were not financially sustainable. Only 28 percent of the entities surveyed perceived themselves to be “strong” with respect to organizational resource sustainability and 30 percent of the entities perceived themselves to be “challenged.” The TCC Group concludes, among other things, that fundraising and financial management make the difference, when paired with strong leadership, between a sustainable and unsustainable not-for-profit entity.


Payments in Lieu of Taxes

Payments in lieu of taxes (PILOT) are amounts paid to a state or local government in place of some or all of the tax revenue lost because of the nature of the ownership or use of a particular piece of real property. Usually this payment relates to the foregone property tax revenue. PILOT payments can arise in several different ways for not-for-profit entities. In some states, real estate owned by colleges and universities is not subject to local property taxes. The state government reimburses the local governments for part of the tax revenue it would otherwise have collected had the property been held by an individual or a for-profit entity. In other cases, the institution may be asked to make a direct payment to the local government to help the local government offset the costs of providing services to the institution. Similarly, while a not-for-profit entity may be exempt from equipment taxes and sales taxes, its mission may permit payment of an agreed PILOT to the local tax authorities to offset the impact on local services funded by property taxes. A PILOT for not-for-profit entities is voluntary but as state and local governments continue to face fiscal challenges, PILOTs are proposed as a way to provide them additional resources. At issue are the vast amounts of land owned by universities, hospitals, churches, and other not-for-profit entities that are typically exempt from property taxes. Were these properties owned by for profit business entities, property taxes would be assessed and these entities would be required to pay them. According to a recent survey conducted by Grant Thornton LLP, not-for-profit entities throughout the United States are receiving requests from various municipal governments to pay taxes, to make PILOT, or to pay fees to cover local government services (such as water and sewer service and police and fire protection) that were previously provided at no charge. Thirty-one percent of the not-for-profit entities responding to this survey indicated that they are paying taxes outright to their municipal governments, and 8 percent are making PILOT. Another 33 percent of respondents are paying service fees to their local government, and six percent anticipate that they will be approached to make payments sometime in the future. According to the National Council of Nonprofits, the not-for-profit community recognizes the budget challenges state and local governments face because these are the same challenges they face. Because not-for-profit entities often struggle to maintain services to their communities which they believe earns them their tax exempt status. If governments impose additional taxes or fees, such as PILOTs, it diminishes the impact not-for-profit entities have in their communities. A report from the Lincoln Institute of Land Policy finds that asking not-for-profit entities for PILOTs does not provide the budget solutions local governments need. According to the report, PILOTs account for only .13 percent, on average, of the general revenue of those governments assessing them. The study also found that 80 percent of the local governments with some form of PILOT are in the northeast.


A number of states and local governments are currently researching the viability and reception of PILOTs for all or certain tax exempt not-for-profit entities. Following are some of the state and local governments imposing some form of PILOT over the last several years:

Hartford, Connecticut

New London, Connecticut

Belmont, Massachusetts

Boston, Massachusetts

Lawrence Township, New Jersey

Reading, Pennsylvania

Racine, Wisconsin

Feedback Question

2. What does the acronym PILOT represent?

a. Payments in lieu of taxes b. Payments in light of taxes c. Paid instead of legitimate taxes d. Payment income lost on taxes


Measuring Organizational Effectiveness

Organizational effectiveness is the concept of how effective an organization is in achieving the outcomes it intends to produce. This concept is especially important to not-for-profit entities because most donors are interested in knowing whether the not-for-profit entity is effective in accomplishing its mission. Therefore, managers of not-for-profit entities are increasingly interested in management practices and principles that will help them build high-performing organizations rather than simply building strong programs. Financial reporting is only one aspect of organizational effectiveness and it is rarely relevant to a wide general audience without additional context. Some not-for-profit entities, such as the American Cancer Society and World Vision believe in doing their best to provide information the public desires in an easily accessible format. To address this challenge, both charities take unique approaches. For example, the American Cancer Society annually prepares its Stewardship Report, which includes a forthright narrative of where the society has been effective and where it has not. World Vision has created web pages to provide the public with information not only about its accomplishments, but also to communicate its unique approach to program design, monitoring, and evaluation. Not-for-profit entities have begun to hold themselves accountable not only financially, but also for their results with donors and beneficiaries. Reporting on an organization’s effectiveness is complex because multiple factors come together at various times to cause change. A charity should be careful to describe its impact in terms of what results it contributed to, as well as what results may be attributed to its work. Because it may be difficult to determine a charity’s impact, many charities are focusing on providing information about their outputs. The Bridgespan Group notes that highly effective organizations have strengths across five interconnected areas:

Leadership

Decision making and structure

People

Work processes and systems

Culture

Therefore, to improve effectiveness, the not-for-profit entity will need to take a holistic approach to strengthen all of these areas as strengths in one area may be offset by weaknesses in another. The Bridgespan Group concludes that all five of these elements must be strong to create a highly effective organization.


Feedback Question

3. Which of the following not-for-profit entities is mentioned as an innovator in measuring organizational effectiveness?

a. Boys and Girls Clubs b. YMCA c. American Cancer Society d. World Charities


Social Impact Bonds

Today, new thinking abounds regarding how to encourage social outcomes through alternative financing for not-for-profit entities. One of the more creative financing tools being piloted are social impact bonds. Also known as “pay for success bonds” or “social benefit bonds”, a social impact bond is a contract with the public sector in which a commitment is made to pay for improved social outcomes that result in public sector savings. The first social impact bond was launched in September 2010 by Social Finance UK. Since that time, the United States federal government and a few state and local governments initiated pilot social impact bond programs some of which are discussed below. U.S. Government

In 2012 and 2013, respectively, the U.S. Department of Justice (DOJ) and the U.S. Department of Labor (DOL) began funding pay for success programs. The DOJ gave “priority consideration” to Second Chance Act grant applications in 2012 that included a pay for success component. Nearly $24 million was awarded by the DOL in 2013 for pay for success projects. Such projects were to provide employment services to formerly incarcerated individuals in an effort to increase employment and reduce recidivism. New York City

New York City embarked on a social impact bond program with the goal of providing an innovative way to fund promising new programs at no cost to taxpayers. To that end, the city issued a $9.6 million social bond for prisoner rehabilitation in February 2012. The program benefiting from this transaction is run by The Osborne Association with support from Friends of Island Academy. Goldman Sachs bought the bond and will profit if recidivism decreases. The prisoner rehabilitation program, the Adolescent Behavioral Learning Experience (ABLE), a component of the larger Young Men’s Initiative program, focuses on personal responsibility, education, training, and counseling, with the goal of reducing the likelihood of recidivism of convicted felons. MDRC, a not-for-profit entity located in New York City (formerly known as the Manpower Demonstration Research Corporation), monitors the organizations that assist with intervention to adolescents. While the City of New York did not actually issue bonds or provide up-front capital for MDRC to run the recidivism program, the city may be liable for some amount if the program is successful. Funding for this potential amount will presumably be paid with savings associated with reduced recidivism. However, if the program does not meet its targets for reducing recidivism, New York City pays nothing.


New York State

The state of New York has initiated several social impact bond programs over the last few years. In mid-2012, the State DOL partnered with Social Finance US to structure an application for federal funding for a social impact bond. In September 2013 the state received a $12 million grant from the U.S. DOL (the largest grant awarded for Pay for Success Projects) to fund a Pay for Success project to increase employment and reduce recidivism among 2,000 former inmates. This program is a partnership with Social Finance US and the Center for Employment Opportunities. In addition, the state budgeted a total of $30 million in 2013 to support social impact bonds over the next five years. Commonwealth of Massachusetts

In August 2012, Massachusetts partnered with Third Sector Capital Partners and New Profit, Inc. in a youth recidivism initiative. Several other organizations, including the United Way of Massachusetts Bay and Merrimack Valley and Youth Options Unlimited, are also participating in the initiative. The program, Social Innovation Financing, is a simple pay for success model in which not-for-profit entities must demonstrate they are keeping youth from reincarceration. Feedback Question

4. What city announced its first social impact bond program in 2012?

a. San Francisco b. Miami c. New York City d. Chicago


Accounting Areas of Interest in NFPs

Generally accepted accounting principles applicable to not-for-profit entities are not always consistently, or appropriately, applied in practice. Two areas in which significant diversity in practice is sometimes seen are gifts-in-kind and grants. Gifts-in-Kind

A large number of not-for-profit entities receive significant noncash gifts-in-kind that are critical in sustaining their mission. These gifts-in-kind can take a variety of forms, such as property, equipment, medical supplies, food, clothes, and household items. When donors contribute resources to not-for-profit entities, it is generally beneficial to both the not-for-profit entity and donor. The not-for-profit entity is able to operate its programs and activities without having to purchase these items, and donors, such as corporations, have an opportunity to give back to their communities by putting excess inventory to good use. Not-for-profit entities that receive gifts-in-kind should consider the following issues when determining how to account for the gifts-in-kind received:

FASB ASC 958-605-30-11 indicates that the gifts-in-kind that can be used or sold shall be measured at fair value. If the gifts-in-kind received have no value, as might be the case for certain items that cannot be (a) used internally by the not-for-profit entity for program or supporting service activities or (b) sold by the not-for-profit entity, the gift received should not be recognized as contribution revenue.

FASB ASC 958-605 provides guidance for agency transactions. The not-for-profit entity should determine if the gifts-in-kind received should be accounted for as a contribution or an agency transaction.

FASB ASC 958-605 provides guidance for differentiating between contributions and exchange transactions. If a donor voluntarily transfers assets to the not-for-profit entity or performs services for the not-for-profit entity in exchange for assets of substantially lower value, and no unstated rights or privileges are involved, the contribution received that is inherent in that transaction may be recorded as contribution revenue. When obtaining gifts-in-kind in which a fee is paid by the not-for-profit entity to the resource provider, the not-for-profit entity must determine if the fee is an indicator of an exchange transaction based on the value of the gifts-in-kind relative to the fee paid.

FASB ASC 958-605-30 provides guidance on the initial measurement of contributions, including gifts-in-kind, at fair value. Some donations of gifts-in-kind are relatively easy to measure at fair value because observable inputs often are readily available, such as donations of marketable securities, automobiles, or real estate. Other donations of gifts-in-kind, such as certain pharmaceuticals, are more difficult to measure at fair value due to a lack of readily available observable inputs.


Feedback Question

5. Accounting for gifts-in-kind for not-for-profit entities is found in which topic of FASB ASC.

a. ASC 958 b. ASC 954 c. ASC 952 d. ASC 908

Grants

FASB ASC 958-605 provides guidance for differentiating between contributions and exchange transactions. Exchange transactions are transfers of assets that are, in substance, purchases of goods or services in which each party receives and sacrifices commensurate value. Generally, grants are contributions if either (a) the resource provider (grantor) receives no value in exchange for the assets/services transferred to the not-for-profit organization (grantee), or (b) the value received by the resource provider (grantor) is incidental to the potential public benefit from the not-for-profit organization (grantee) using the transferred assets/services Grants made to a not-for-profit organization (grantee) by a resource provider (grantor) that (1) provides materials to be tested in the grant activity and (2) that retains the right to any patents or other results of the grant activity would likely be an exchange transaction. On the other hand, if the grant activity is (a) planned and carried out by the not-for-profit organization (grantee) and (b) the not-for-profit organization (grantee) retains the right to the benefits of carrying out the grant activity, the grant would likely be a contribution. Indicators of Grants as Exchange Transactions or Contributions

The following indicators (based on FASB ASC 958) may be helpful in determining if grants are exchange transactions, contributions, or both. None of the following indicators alone determines the classification of revenues from grants, awards, or sponsorship. However, some indicators may be more significant than others depending on the facts and circumstances. Indicators of Grants as Exchange Transactions

The not-for-profit organization (grantee) asserts it is seeking resources in exchange for providing specified benefits.

The resource provider (grantor) asserts it is transferring resources in exchange for it being provided specified benefits by the not-for-profit organization (grantee).

Method of delivery (such as time, place or type of delivery mechanism) of the assets or services to be provided by the not-for-profit organization (grantee) to third party beneficiaries/recipients is specified by the resource provider (grantor).


Payment by the resource provider (grantor) equals (1) the value of assets or services to be provided by the not-for-profit organization (grantee) or (2) the cost of the assets or services plus markup. Alternatively, the total payment is based on the quantity of the assets or services to be provided by the not-for-profit organization (grantee).

Provisions for economic penalties to be assessed by the resource provider (grantor) exist if the not-for-profit organization (grantee) fails to make timely delivery of the assets or services (that is, the not-for-profit organization [grantee] is penalized for nonperformance).

Assets and services are to be delivered to the resource provider (grantor) or to individuals or organizations closely connected to the resource provider (grantor).

Indicators of Grants as Contributions

The not-for-profit organization (grantee) asserts it is soliciting the assets or services as a contribution.

The resource provider (grantor) asserts it is making a donation to support the not-for-profit organization’s (grantee’s) programs.

Time or place of delivery of the assets or services to be provided by the not-for-profit organization (grantee) to third party beneficiaries or recipients is at the discretion of the not-for-profit organization (grantee).

The resource provider (grantor) determines the amount of the payment to be made to the not-for-profit organization (grantee).

Penalties, to be assessed by the resource provider (grantor) if the not-for-profit organization (grantee) fails to make timely delivery of the assets or services, are limited to the assets or services already provided and the return of any unspent amounts [the not-for-profit organization (grantee) is not penalized for nonperformance].

Assets or services provided by the not-for-profit organization (grantee) are to be delivered to individuals or organizations other than the resource provider (grantor).


Copyright 2014–2015 AICPA Unauthorized Copying Prohibited Glossary-1

Exempt Organizations Glossary

Governmental Terminology

Accounting System – The methods and records established to identify, assemble, analyze, classify, record, and report a government’s transactions and to maintain accountability for the related assets and liabilities. Accrual Basis of Accounting – The recording of financial effects on a government of transactions and other events and circumstances that have consequences for the government in the periods in which those transactions, events, and circumstances occur, rather than only in the periods in which cash is received or paid by the government. Ad Valorem Tax – A tax based on value (such as a property tax). Advance From Other Funds – An asset account used to record noncurrent portions of a long-term debt owed by one fund to another fund within the same reporting entity. (See Due to Other Funds and Interfund Receivable/Payable). Agency Funds – A fund normally used to account for assets held by a government as an agent for individuals, private organizations or other governments and/or other funds. Appropriation – A legal authorization granted by a legislative body to make expenditures and to incur obligations for specific purposes. An appropriation is usually limited in amount and time it may be expended. Assigned Fund Balance – A portion of fund balance that includes amounts that are constrained by the government’s intent to be used for specific purposes, but that are neither restricted nor committed. Basis of Accounting – A term used to refer to when revenues, expenditures, expenses, and transfers, and related assets and liabilities are recognized in the accounts and reported in the financial statements. Specifically, it relates to the timing of the measurements made, regardless of the nature of the measurement. (See Accrual Basis of Accounting, Cash Basis of Accounting, and Modified Accrual Basis of Accounting). Bond – A written promise to pay a specified sum of money (the face value or principal amount) at a specified date or dates in the future (the maturity dates[s]), together with periodic interest at a specified rate. Sometimes, however, all or a substantial part of the interest is included in the face value of the security. The difference between a note and bond is that the latter is issued for a longer period and requires greater legal formality. Business Type Activities – Those activities of a government carried out primarily to provide specific services in exchange for a specific user charge.


Capital Grants – Grants restricted by the grantor for the acquisition and/or construction of (a) capital asset(s). Capital Projects Fund – A fund used to account for and report financial resources that are restricted, committed, or assigned to expenditures for capital outlays, including the acquisition or construction of capital facilities and other capital assets. Capital project funds exclude those types of capital-related outflows financed by proprietary funds or for assets that will be held in trust for individuals, private organizations, or other governments. Cash Basis of Accounting – A basis of accounting that requires the recognition of transactions only when cash is received or disbursed. Committed Fund Balance – A portion of fund balance that includes amounts that can only be used for specific purposes pursuant to constraints imposed by formal action of the government’s highest level of decision-making authority. Consumption Method – The method of accounting that requires the recognition of an expenditure/expense as inventories are used. Contributed Capital – Contributed capital is created when a general capital asset is transferred to a proprietary fund or when a grant is received that is externally restricted to capital acquisition or construction. Contributions restricted to capital acquisition and construction and capital assets received from developers are reported in the operating statement as a separate item after nonoperating revenues and expenses. Debt Service Fund – A fund used to account for and report financial resources that are restricted, committed, or assigned to expenditure for principal and interest. Debt service funds should be used to report resources if legally mandated. Financial resources that are being accumulated for principal and interest maturing in future years should also be reported debt service funds. Deferred Revenue – Amounts for which asset recognition criteria (receivable) have been met, but for which revenue recognition criteria have not been met. Under the modified accrual basis of accounting, amounts that are measurable but not available are classified as deferred revenue. Cash received in advance of the period of applicability is also recorded as deferred revenue. Deficit – (a) The excess of the liabilities of a fund over its assets. (b) The excess of expenditures over revenues during an accounting period, or in the case of proprietary funds, the excess of expenses over revenues during an accounting period. Disbursement – A payment made in cash or by check. Expenses are only recognized at the time physical cash is disbursed. Due From Other Funds – A current asset account used to indicate account reflecting amounts owed to a particular fund by another fund for goods sold or services rendered. This account includes only short-term obligations on open account, not interfund loans.


Due To Other Funds – A current liability account reflecting amounts owed by a particular fund to another fund for goods sold or services rendered. This account includes only short-term obligations on an open account, not interfund loans. Fund Financial Statements – Each fund has its own set of self-balancing accounts and fund financial statements that focus on information about the government’s governmental, proprietary, and fiduciary fund types. Enabling Legislation – Legislation that authorizes a government to assess, levy, charge, or otherwise mandate payment of resources from external resource providers, and includes a legally enforceable requirement that those resources be used for the specific purposes stipulated in the legislation. Encumbrances – Commitments related to unperformed (executory) contracts for goods or services. Used in budgeting, encumbrances are not GAAP expenditures or liabilities, but represent the estimated amount of expenditures ultimately to result if unperformed contracts in process are completed. Enterprise Fund – A fund established to account for operations financed and operated in a manner similar to private business enterprises (such as gas, utilities, transit systems, and parking garages). Usually, the governing body intends that costs of providing goods or services to the general public be recovered primarily through user charges. Expenditures – Decreases in net financial resources. Expenditures include current operating expenses requiring the present or future use of net current assets, debt service and capital outlays, intergovernmental grants, entitlements, and shared revenues. Expenses – Outflows or other using up of assets or incurrences of liabilities, or a combination of both, from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations. Fund – A fiscal and accounting entity with a self-balancing set of accounts in which cash and other financial resources, all related liabilities and residual equities, or balances, and changes therein, are recorded and segregated to carry on specific activities or attain certain objectives in accordance with special regulations, restrictions, or limitations. Fund Balance – The difference between fund assets and fund liabilities of the generic fund types within the governmental category of funds. Fund Type – The 11 generic funds that all transactions of a government are recorded into. The 11 fund types are as follows: general, special revenue, debt service, capital projects, permanent, enterprise, internal service, private purpose trust, pension trust, investment trust, and agency.


GASB – The Governmental Accounting Standards Board (GASB) was organized in 1984 by the Financial Accounting Foundation (FAF) to establish standards of financial accounting and reporting for state and local governmental entities. Its standards guide the preparation of external financial reports of those entities. General Fund – The fund within the governmental category used to account for all financial resources except those required to be accounted for in another governmental fund. General-Purpose Governments – General-purpose governments are governmental entities that provide a range of services, such as states, cities, counties, towns, and villages. Governmental Funds – Funds used to account for the acquisition, use, and balances of spendable financial resources and the related current liabilities, except those accounted for in proprietary funds and fiduciary funds. Essentially, these funds are accounting segregations of financial resources. Spendable assets are assigned to a particular government fund type according to the purposes for which they may or must be used. Current liabilities are assigned to the fund type from which they are to be paid. The difference between the assets and liabilities of governmental fund types is referred to as fund balance. The measurement focus in these funds types is on the determination of financial position and changes in financial position (sources, uses, and balances of financial resources) rather than on net income determination. Government-Wide Financial Statements – The government-wide financial statements are highly aggregated financial statements that present financial information for all assets (including infrastructure capital assets), liabilities, and net assets of a primary government and its component units, except for fiduciary funds. The government-wide financial statements use the economic resources measurement focus and accrual basis of accounting. Infrastructure Assets – Infrastructure assets are long-lived capital assets that normally are stationary in nature and normally can be preserved for a significantly greater number of years than most capital assets. Examples of infrastructure assets are roads, bridges, tunnels, drainage systems, water and sewer systems, dams, and lighting systems. Buildings, except those that are an ancillary part of a network of infrastructure assets, are not considered infrastructure assets. Internal Service Fund – A generic fund type within the proprietary category used to account for the financing of goods or services provided by one department or agency to other departments or agencies of a government, or to other governments, on a cost-reimbursement basis. Investment Trust Fund – A generic fund type within the fiduciary category used by a government in a fiduciary capacity, such as to maintain its cash and investment pool for other governments. Major Funds – A government’s general fund (or its equivalent), other individual governmental type, and enterprise funds that meet specific quantitative criteria, and any other governmental or enterprise fund that a government’s officials believe is particularly important to financial statement users.


Management’s Discussion and Analysis (MD&A) – MD&A is RSI that introduces the basic financial statements by presenting certain financial information as well as management’s analytical insights on that information. Measurement Focus – The accounting convention that determines (a) which assets and which liabilities are included on a government’s balance sheet and where they are reported, and (b) whether an operating statement presents information on the flow of financial resources (revenues and expenditures) or information on the flow of economic resources (revenues and expenses). Modified Accrual Basis of Accounting – The basis of accounting adapted to the governmental fund type measurement focus. Revenues and other financial resource increments are recognized when they become both measurable and available to finance expenditures of the current period. Available means collectible in the current period or soon enough thereafter to be used to pay liabilities of the current period. Expenditures are recognized when the fund liability is incurred and expected to be paid from current resources except for (a) inventories of materials and supplies that may be considered expenditures either when purchased or when used, and (b) prepaid insurance and similar items that may be considered expenditures either when paid for or when consumed. All governmental funds are accounted for using the modified accrual basis of accounting in fund financial statements. Modified Approach – Rules that allow infrastructure assets that are part of a network or subsystem of a network not to be depreciated as long as certain requirements are met. Nonspendable Fund Balance – The portion of fund valance that includes amounts that cannot be spent because they are either (a) not in spendable form, or (b) legally or contractually required to be maintained intact. Pension Trust Fund – A trust fund used to account for a PERS. Pension trust funds use the accrual basis of accounting and the flow of economic resources measurement focus. Permanent Fund – A generic fund type under the governmental category used to report resources that are legally restricted to the extent that only earnings, and not principal, may be used for purposes that support the reporting government’s programs and, therefore, are for the benefit of the government or its citizenry. (Permanent funds do not include private-purpose trust funds, which should be used when the government is required to use the principal or earnings for the benefit of individuals, private organizations, or other governments). Private Purpose Trust Fund – A general fund type under the fiduciary category used to report resources held and administered by the reporting government acting in a fiduciary capacity for individuals, other governments, or private organizations.


Proprietary Funds – The government category used to account for a government’s ongoing organizations and activities that are similar to those often found in the private sector (these are enterprise and internal service funds). All assets, liabilities, equities, revenues, expenses, and transfers relating to the government’s business and quasi-business activities are accounted for through proprietary funds. Proprietary funds should apply all applicable GASB pronouncements and those GAAP applicable to similar businesses in the private sector, unless those conflict with GASB pronouncements. These funds use the accrual basis of accounting in conjunction with the flow of economic resources measurement focus. Purchases Method – The method under which inventories are recorded as expenditures when acquired. Restricted Fund Balance – Portion of fund valance that reflects constraints placed on the use of resources (other than nonspendable items) that are either (a) externally imposed by creditor such as through debt covenants, grantors, contributors, or laws or regulations of other governments, or (b) imposed by law through constitutional provisions or enabling legislation. Required Supplementary Information (RSI) – GAAP specify that certain information be presented as RSI. Special-Purpose Governments – Special-purpose governments are legally separate entities that perform only one activity or only a few activities, such as cemetery districts, school districts, colleges and universities, utilities, hospitals and other health care organizations, and public employee retirement systems. Special Revenue Fund – A fund that must have revenue or proceeds from specific revenue sources which are either restricted or committed for a specific purpose other than debt service or capital projects. This definition means that in order to be considered a special revenue fund, there must be one or more revenue sources upon which reporting the activity in a separate fund is predicated. Transfers – All interfund transfers, such as legally authorized transfers from a fund receiving revenue to a fund through which the resources are to be expended, where there is no intent to repay. Interfund transfers are recorded on the operating statement. Unassigned Fund Balance – Residual classification for the general fund. This classification represents fund balance that has not been assigned to other funds and that has not been restricted, committed, or assigned to specific purposes within the general fund. The general fund should be the only fund that reports a positive unassigned fund valance amount. In other funds, if expenditures incurred for specific purposes exceeded the amounts restricted, committed, or assigned to those purposes, Unrestricted Fund Balance – The total of committed fund balance, assigned fund balance, and unassigned fund balance.


Not-for-Profit Terminology

Charitable Lead Trust – A trust established in connection with a split-interest agreement, in which the not-for-profit organization receives distributions during the agreement’s term. Upon termination of the trust, the remainder of the trust assets is paid to the donor or to third-party beneficiaries designated by the donor. Charitable Remainder Trust – A trust established in connection with a split-interest agreement, in which the donor or a third-party beneficiary receives specified distributions during the agreement's term. Upon termination of the trust, a not-for-profit organization receives the assets remaining in the trust.

Collections – Works of art, historical treasures, or similar assets that are (a) held for public exhibition, education, or research in furtherance of public service rather than financial gain, (b) protected, kept unencumbered, cared for, and preserved, and (c) subject to an organizational policy that requires the proceeds of items that are sold to be used to acquire other items for collections.

Conditional Promise to Give – A promise to give that depends on the occurrence of a specified future and uncertain event to bind the promisor.

Contribution – An unconditional transfer of cash or other assets to an entity or a settlement or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner.

Costs of Joint Activities – Costs of joint activities are costs incurred for a joint activity. Costs of joint activities may include joint costs and costs other than joint costs. Costs other than joint costs are costs that are identifiable with a particular function, such as program, fundraising, management and general, and membership development costs. Donor-Imposed Restriction – A donor stipulation that specifies a use for the contributed asset that is more specific than broad limits resulting from the nature of the organization, the environment in which it operates, and the purposes specified in its articles of incorporation or bylaws, or comparable documents for an unincorporated association. A restriction on an organization's use of the asset contributed may be temporary or permanent. Functional Classification – A method of grouping expenses according to the purpose for which the costs are incurred. The primary functional classifications are program services and supporting activities. Joint Activity – A joint activity is an activity that is part of the fundraising function and has elements of one or more other functions, such as programs, management and general, membership development, or any other functional category used by the entity. Joint Costs – Joint costs are the costs of conducting joint activities that are not identifiable with a particular component of the activity.


Natural Expense Classification – A method of grouping expenses according to the kinds of economic benefits received in incurring those expenses. Examples of natural expense classifications include salaries and wages, employee benefits, supplies, rent, and utilities. Permanently Restricted Net Assets – The part of the net assets of a not-for-profit organization resulting (a) from contributions and other inflows of assets whose use by the organization is limited by donor-imposed stipulations that neither expire by passage of time nor can be fulfilled or otherwise removed by actions of the organization, (b) from other asset enhancements and diminishments subject to the same kinds of stipulations, and (c) from reclassifications from (or to) other classes of net assets as a consequence of donor-imposed stipulations. Promise to Give – A written or oral agreement to contribute cash or other assets to another entity. A promise to give may be either conditional or unconditional. Temporarily Restricted Net Assets – The part of the net assets of a not-for-profit organization resulting (a) from contributions and other inflows of assets whose use by the organization is limited by donor-imposed stipulations that either expire by the passage of time or can be fulfilled and removed by actions of the organization pursuant to those stipulations, (b) from other asset enhancements and diminishments subject to the same kinds of stipulations, and (c) from reclassifications to (or from) other classes of net assets as a consequence of donor-imposed stipulations, their expiration by passage of time, or their fulfillment and removal by actions of the organization pursuant to those stipulations. Unrestricted Net Assets – The part of net assets of a not-for-profit organization that is neither permanently restricted nor temporarily restricted by donor-imposed stipulations. Single Audit & Yellow Book Terminology

Attestation Engagements – Attestation engagements concern examining, reviewing, or performing agreed-upon procedures on a subject matter or an assertion about a subject matter and reporting on the results. Compliance Supplement – A document issued annually in the Spring by the OMB to provide guidance to auditors. Data Collection Form – A form submitted to the Federal Audit Clearinghouse which provides information about the auditor, the auditee and its federal programs, and the results of the audit. Federal Financial Assistance – Assistance that non-federal entities receive or administer in the form of grants, loans, loan guarantees, property, cooperative agreements, interest subsidies, insurance, food commodities, direct appropriations, or other assistance, but does not include amounts received as reimbursement for services rendered to individuals in accordance with guidance issued by the Director.


Financial Audits – Financial audits are primarily concerned with providing reasonable assurance about whether financial statements are presented fairly, in all material respects, in conformity with generally accepted accounting principles (GAAP) or with a comprehensive basis of accounting other than GAAP. GAGAS – Generally Accepted Government Auditing Standards issued by the GAO. They are also commonly known as the Yellow Book. GAO – The United States Government Accountability Office. Among their responsibilities is the issuance of Generally Accepted Government Auditing Standards (a.k.a. the Yellow Book). OMB – The Office of Management and Budget. OMB assists the President in the development and implementation of budget, program, management, and regulatory policies. Pass-Through Entity – A non-federal entity that provides federal awards to a subrecipient to carry out a federal program. Performance Audits – Performance audits entail an objective and systematic examination of evidence to provide an independent assessment of the performance and management of a program against objective criteria as well as assessments that provide a prospective focus or that synthesize information on best practices or cross-cutting issues. Program-Specific Audit – An audit of one federal program. Single Audit – An audit of a non-federal entity that includes the entity’s financial statements and Federal awards. Single Audit Guide – This AICPA Audit Guide formally titled Government Auditing Standards and Circular A-133 Audits (the Single Audit Guide) is the former Statement of Position (SOP) 98-3. The Single Audit Guide provides guidance on the auditor’s responsibilities when conducting a single audit or program-specific audit in accordance with the Single Audit Act and Circular A-133. Subrecipient – A non-federal entity that receives federal awards through another non-federal entity to carry out a federal program, but does not include an individual who receives financial assistance through such awards.


Copyright 2014 2015 AICPA Unauthorized Copying Prohibited Index-1

Index

A

A-133 ............................ 1-1, 1-2, 1-4, 1-7, 1-15, 1-21, 1-22, 1-25, 2-19

Agency Transactions............................................ 2-29, 4-15 AICPA ..................................... 1-15, 1-16, 1-17, 1-20, 1-21,

1-23, 2-1, 2-5, 2-8, 2-9, 2-29, 2-30, 2-31, 2-32, 2-33, 2-34, 2-36

Amortization ............................................... 3-23, 3-24, 3-25 Audit Procedures .............................. 1-22, 1-23, 1-24, 1-27,

2-3, 2-4, 2-6, 2-16, 2-20, 2-21, 2-23, 2-24, 2-28, 2-31

C

Cash Flows .............. 1-19, 2-12, 2-35, 3-6, 3-24, 3-32, 3-33 Communicating ................................................... 2-19, 3-31 Comparative Financial Statements ................................ 3-26 Compliance Audit ......................................... 1-1, 1-22, 2-19 Compliance Supplement ............... 1-1, 1-4, 1-7, 1-22, 1-23,

1-25, 1-27, 1-28 Component Units .......................................................... 2-18 Contributions ..............................2-29, 3-34, 4-5, 4-15, 4-16 Cost Principles ....................... 1-1, 1-2, 1-3, 1-8, 1-11, 1-12,

1-13, 1-14, 1-15 Costs .................. 1-3, 1-5, 1-6, 1-11, 1-12, 1-13, 1-16, 1-28,

1-29, 2-12, 3-12, 3-17, 3-18, 3-29, 4-3, 4-8, 4-9

D

Data Collection Form............................... 1-1, 1-4, 1-6, 1-28 Derivative .............................................................. 3-9, 3-10 Derivative Instruments .................................................. 3-10 Direct Costs ......................................................... 1-11, 1-17 Disclosures........................... 2-14, 2-25, 2-30, 3-6, 3-8, 3-9,

3-14, 3-18, 3-23, 3-25 Disposal ........................................................................ 3-17

E

Exchange Transaction .......................................... 4-15, 4-16 Exchange Transactions ........................................ 4-15, 4-16

F

Fair Value ....................... 1-19, 2-13, 2-30, 3-10, 3-12, 3-13, 3-17, 3-25, 4-15

Fair Value Measurement ............................ 1-19, 2-30, 3-10 FASB ...............................2-30, 2-34, 3-1, 3-2, 3-3, 3-4, 3-5,

3-6, 3-19, 3-20, 3-21, 3-28, 3-29, 3-31, 3-32, 3-34, 3-36, 3-37, 3-38, 4-16

Federal Funding Accountability and Transparency Act 1-22, 1-26, 1-27

Financial Instruments ..................................... 3-5, 3-9, 3-37 Financial Statements .......................... 1-5, 1-12, 1-13, 1-14,

1-16, 1-18, 1-19, 1-20, 1-21, 2-3, 2-4, 2-6, 2-7, 2-8, 2-9, 2-10, 2-11, 2-12, 2-13, 2-14, 2-17, 2-18, 2-19, 2-20, 2-22, 2-24, 2-25, 2-26, 2-29, 2-31, 2-32, 2-34, 2-35, 3-3, 3-5, 3-13, 3-16, 3-18, 3-20, 3-21, 3-25, 3-26, 3-31, 3-32, 3-34, 3-36

Fund .................................................. 2-12, 2-29, 4-13, 4-14

G

GAGAS ...................... 1-1, 1-19, 1-21, 2-8, 2-11, 2-19, 2-32 GAO ..................................................................... 1-15, 1-18 GASB ............................................................................ 2-18 Going Concern ................................................................ 1-5 Government Auditing Standards ......... 1-1, 1-15, 1-18, 1-19 Governmental ..................... 1-1, 1-23, 1-30, 2-9, 2-12, 2-13,

2-18, 2-23, 2-35, 2-36, 3-28, 3-29, 4-2, 4-5, 4-6 Group Audit .............................. 2-9, 2-10, 2-11, 2-13, 2-15,

2-16, 2-17, 2-18, 2-21, 2-26 Group Financial Statements ..................... 2-1, 2-5, 2-8, 2-9,

2-10, 2-11, 2-12, 2-13, 2-14, 2-15, 2-17, 2-18, 2-19, 2-20, 2-21, 2-22, 2-23, 2-24, 2-25, 2-26, 2-27, 2-28

Guarantees ............................................................ 3-35, 3-36 Guide ..... 1-15, 1-30, 1-31, 1-32, 2-1, 2-29, 2-30, 2-31, 3-20

H

Hedge Accounting ........................................................... 3-3 Housing and Urban Development .............. 1-30, 1-31, 1-32

Copyright 2014 2015 AICPA Unauthorized Copying Prohibited Index-2

I

Impairment.................................................... 3-6, 3-25, 3-37 Independence ..................... 1-1, 1-18, 1-19, 1-20, 1-21, 2-1,

2-15, 2-16, 2-18, 2-19, 2-21, 2-32, 2-33 Indirect Cost ..................... 1-3, 1-11, 1-12, 1-13, 1-14, 1-17 Intangible Assets ...................................................... 3-3, 3-6 Internal Auditor ................................................ 2-2, 2-6, 2-7 Internal Control ........................... 1-4, 1-5, 1-10, 1-12, 1-13,

1-15, 1-16, 1-17, 1-21, 1-28, 2-25, 2-26, 4-5, 4-6 Investments ........................ 2-9, 2-13, 2-29, 2-30, 3-5, 3-23,

3-24, 3-25, 3-27, 3-30

M

Material Misstatement .................. 2-3, 2-4, 2-6, 2-10, 2-11, 2-14, 2-15, 2-22, 2-23, 2-24, 2-25, 2-26

Materiality ......................... 1-22, 1-24, 2-3, 2-7, 2-13, 2-14, 2-19, 2-21, 2-22, 2-23, 2-24, 2-25, 2-27, 2-28

N

Nonprofit ...................................................... 1-3, 1-13, 1-15

O

OMB ............................. 1-1, 1-2, 1-7, 1-8, 1-11, 1-14, 1-15, 1-16, 1-17, 1-21, 1-22, 1-25, 1-28, 2-19

P

Payments in Lieu of Taxes ..................................... 4-9, 4-10

R

Reporting ............................ 1-5, 1-6, 1-13, 1-16, 1-20, 1-21, 1-26, 1-27, 1-28, 1-29, 1-31, 2-1, 2-4, 2-12, 2-16, 2-18, 2-19, 2-20, 2-22, 2-29, 2-30, 2-32, 2-34, 2-35, 2-36, 3-2, 3-5, 3-6, 3-13, 3-14, 3-15, 3-17, 3-18, 3-20, 3-23, 3-24, 3-25, 3-26, 3-31, 3-32, 3-34, 3-35, 3-37, 4-11

Revenue Recognition ................................... 3-29, 3-37, 4-6 Revenues ............................. 2-12, 2-13, 3-22, 3-34, 4-3, 4-6

S

SAS .................................................................. 2-2, 2-6, 2-7 Schedule of Expenditures of Federal Awards ........ 1-6, 1-23 Service Concession ...................................... 3-5, 3-28, 3-29 Social Impact Bonds ............................................. 4-13, 4-14 Special Reports................................................................ 2-4 Subsequent Events ............................................... 2-14, 2-24 Sustainability ............................................................ 4-1, 4-8

T

Transactions ..................... 2-13, 2-14, 2-23, 2-25, 2-35, 3-8, 3-9, 3-10, 3-12, 3-14, 3-15, 3-24, 3-30, 4-16

Y

Yellow Book .............................. 1-1, 1-18, 1-19, 1-20, 1-21

Not-for-Profit Accounting and Auditing Update By Lynda Dennis, CPA, CGFO, Ph.D.

SOLUTIONS

Course Code: 746130 NAU GS-0414-0A

Revised: April 2014

Copyright 2014–2015

By American Institute of Certified Public Accountants Durham, North Carolina

All Rights Reserved

The AICPA offers a free, daily, e-mailed newsletter covering the day’s top business and financial articles as well as video content, research and analysis concerning CPAs and those who work with the accounting profession. Visit the CPA Letter Daily news box on the www.aicpa.org home page to sign up. You can opt out at any time, and only the AICPA can use your e-mail address or personal information. Have a technical accounting or auditing question? So did 23,000 other professionals who contacted the AICPA's accounting and auditing Technical Hotline last year. The objectives of the hotline are to enhance members' knowledge and application of professional judgment by providing free, prompt, high-quality technical assistance by phone concerning issues related to: accounting principles and financial reporting; auditing, attestation, compilation and review standards. The team extends this technical assistance to representatives of governmental units. The hotline can be reached at 1-877-242-7212.

Copyright 2014-2015 AICPA Unauthorized Copying Prohibited Solutions 1-1

Chapter 1

Solutions to Feedback Questions

1. a. Correct. The rule was issued December 26, 2013. b. Incorrect. The rule was issued December 26, 2013. c. Incorrect. The rule was issued December 26, 2013. d. Incorrect. The rule was issued December 26, 2013.

2.

a. Incorrect. The threshold is $750,000. b. Incorrect. The threshold is $750,000. c. Incorrect. The threshold is $750,000. d. Correct. The threshold is $750,000.

3.

a. Incorrect. Administrative requirements are found in Subpart B – General Provisions.

b. Incorrect. Administrative requirements are found in Subpart C – Pre-Federal Award Requirements.

c. Incorrect. Administrative requirements are found in Subpart D – Post Federal Award Requirements.

d. Correct. Administrative requirements are not found in Subpart F – Audit Requirements.

4.

a. Incorrect. Only certain non-federal entities may elect to charge a de minimis rate of 10 percent of modified total direct costs.

b. Correct. Any non-federal entity never receiving a negotiated indirect cost rate may elect to charge a de minimis rate of 10 percent of modified total direct costs.

c. Incorrect. Non-federal entities are permitted to recover indirect costs. d. Incorrect. Federal agencies approve the use of certain indirect cost rates used by

all non-federal entities in certain circumstances. 5.

a. Incorrect. This guidance is found in appendix III. b. Incorrect. This guidance is found appendix IV. c. Incorrect. This guidance is found in appendix V. d. Correct. Subpart F – Audit Requirements does not provide this guidance.


6. a. Incorrect. The AICPA provides these resources. b. Incorrect. The OMB provides these resources. c. Correct. The IRS does not provide these resources. d. Incorrect. Use of the COSO Internal Control Framework is specifically required

in the rule. 7.

a. Correct. Internal controls should be in compliance with the COSO internal control framework.

b. Incorrect. Internal controls should be in compliance with the COSO internal control framework.

c. Incorrect. Internal controls are required of all recipients regardless of amounts received or expended.

d. Incorrect. Federal agencies do not approve a recipient’s internal controls. 8.

a. Incorrect. This version is no longer effective. b. Incorrect. This version is no longer effective. c. Incorrect. This version is no longer effective. d. Correct. This version is effective now.

9.

a. Incorrect. The 2013 compliance supplement was issued in July 2013. b. Incorrect. The 2013 compliance supplement was issued in July 2013. c. Correct. The 2013 compliance supplement was issued in July 2013. d. Incorrect. The 2013 compliance supplement was issued in July 2013.

10.

a. Correct. The act became law in 2006. b. Incorrect. The act was amended in 2008. c. Incorrect. The act became law in 2006. d. Incorrect. The act became law in 2006.

11.

a. Incorrect. Chapter 1 deals with general audit guidance. b. Correct. Sample reports are found in chapter 2. c. Incorrect. Chapter 3 deals with HUD multifamily housing programs. d. Incorrect. Chapter 4 deals with the HUD multifamily hospital program.


Chapter 2


1. a. Incorrect. AU-C section 200 discusses the overall objectives of an audit. b. Correct. Preconditions for an audit are delineated in AU-C section 210. c. Incorrect. AU-C section 300 discusses audit planning. d. Incorrect. AU-C section 320 discusses materiality.

2.

a. Incorrect. Tolerable misstatement is not the same as performance materiality. b. Incorrect. Tolerable misstatement is a not term related to the financial statements

as a whole. Performance materiality relates to the financial statements as a whole. c. Correct. Performance materiality is a term related to the financial statements as a

whole – tolerable misstatement is a term that relates to audit sampling. d. Incorrect. Performance materiality is not a term used in audit sampling.

3.

a. Correct. AU-C section 600 does change existing audit standards relating to principal and other auditors.

b. Incorrect. AU-C section 600 does significantly change existing audit standards relating to principal and other auditors.

c. Incorrect. AU-C section 600 is one of the most misunderstood and misapplied of the Clarified Audit Standards.

d. Incorrect. AU-C section 600 introduces a number of new terms relating to audits of group financial statements.

4.

a. Incorrect. The group engagement partner makes this decision. b. Correct. The group engagement partner makes this decision. c. Incorrect. The group engagement partner makes this decision. d. Incorrect. The group engagement partner makes this decision.

5.

a. Incorrect. Component materiality is not determined only for components that will be referenced in the auditor’s report on the group financial statement – it is determined for components for which the group engagement partner has assumed responsibility for their work.

b. Incorrect. Component materiality is a relevant concept in audits of group financial statements.

c. Incorrect. Component materiality is addressed in AU-C section 600. d. Correct. Component materiality is determined only for components that the group

engagement team will perform, or for which the auditor of the group financial statements will assume responsibility for the work of a component auditor.


6. a. Incorrect. The group engagement team, including the group engagement partner,

makes this decision. b. Incorrect. The group engagement team, including the group engagement partner,

makes this decision. c. Correct. The group engagement team, including the group engagement partner,

makes this decision. d. Incorrect. The group engagement team, including the group engagement partner,

makes this decision. When making reference to the work of the component auditor, that component auditor determines materiality for the audit of the component’s financial statements.

7.

a. Correct. AU-C section 600 requires communication between the group engagement team and component auditors in all audits of group financial statements.

b. Incorrect. AU-C section 600 requires communication between the group engagement team and component auditors in all audits of group financial statements.

c. Incorrect. AU-C section 600 requires communication between the group engagement team and component auditors in all audits of group financial statements.

d. Incorrect. AU-C section 600 requires communication between the group engagement team and component auditors in all audits of group financial statements.

8.

a. Correct. The group engagement partner decides whether or not to make reference to the work of the component auditor.

b. Incorrect. The group engagement team does not decide whether or not to make reference to the work of the component auditor.

c. Incorrect. The group engagement partner decides whether or not to make reference to the work of the component auditor.

d. Incorrect. The group engagement partner decides whether or not to make reference to the work of the component auditor.

9.

a. Incorrect. This is an additional procedure. b. Incorrect. This is an additional procedure. c. Incorrect. This is an additional procedure. d. Correct. The group engagement team should establish performance materiality,

for the group financial statements as a whole, regardless of whether the group engagement partner is assuming responsibility for the work of the component auditor.


10. a. Incorrect. The group engagement team is required to be involved in the work of

the component auditor when the group engagement partner decides to assume responsibility for their work.

b. Incorrect. The group engagement team is required to be involved in the work of the component auditor when the group engagement partner decides to assume responsibility for their work.

c. Correct. The group engagement team is required to be involved in the work of the component auditor when the group engagement partner decides to assume responsibility for their work.

d. Incorrect. The group engagement team is required to be involved in the work of the component auditor when the group engagement partner decides to assume responsibility for their work.

11.

a. Correct. The group engagement team is required to communicate with the component auditor.

b. Incorrect. The group engagement team is required to communicate with all component auditors—even when the group engagement partner decides to make reference to their work.

c. Incorrect. The group engagement team is required to communicate with all component auditors—even when the group engagement partner decides to assume responsibility for their work

d. Incorrect. The group engagement team has responsibilities to communicate with all component auditors—when reference to their work will be made in the audit report of the group financial statements and when the engagement partner assumes responsibility for their work.

12.

a. Correct. The last revision to the guide was made in 2013. b. Incorrect. The last revision to the guide was made in 2013. c. Incorrect. The last revision to the guide was made in 2013. d. Incorrect. The last revision to the guide was made in 2013.

13.

a. Incorrect. Changes in Interpretation No. 101-3 will be effective for years beginning after December 15, 2014.

b. Incorrect. Changes in Interpretation No. 101-3 will be effective for years beginning after December 15, 2014.

c. Incorrect. Changes in Interpretation No. 101-3 will be effective for years beginning after December 15, 2014.

d. Correct. Changes in Interpretation No. 101-3 will be effective for years beginning after December 15, 2014.


14. a. Incorrect. The AICPA’s Financial Reporting Framework for Small- and Medium-

Sized Entities was issued in 2013. b. Incorrect. The AICPA’s Financial Reporting Framework for Small- and Medium-

Sized Entities was issued in 2013. c. Correct. The AICPA’s Financial Reporting Framework for Small- and Medium-

Sized Entities was issued in 2013. d. Incorrect. The AICPA’s Financial Reporting Framework for Small- and Medium-

Sized Entities was issued in 2013.


Chapter 3


1. a. Incorrect. There are 10 members on the PCC. b. Incorrect. There are 10 members on the PCC. c. Correct. There are 10 members on the PCC. d. Incorrect. There are 10 members on the PCC.

2.

a. Incorrect. ASU No. 2013-05 is effective for annual periods beginning after June 15, 2014.

b. Incorrect. ASU No. 2013-05 is effective for annual periods beginning after June 15, 2014.

c. Correct. ASU No. 2013-05 is effective for annual periods beginning after June 15, 2014.

d. Incorrect. ASU No. 2013-05 is effective for annual periods beginning after June 15, 2014.

3.

a. Correct. ASU No. 2012-05 is effective for annual periods beginning after June 15, 2013.

b. Incorrect. ASU No. 2012-05 is effective for annual periods beginning after June 15, 2013.

c. Incorrect. ASU No. 2012-05 is effective for annual periods beginning after June 15, 2013.

d. Incorrect. ASU No. 2012-05 is effective for annual periods beginning after June 15, 2013.

4.

a. Incorrect. ASU No. 2013-03 was effective on issuance. b. Incorrect. ASU No. 2013-03 was effective on issuance. c. Incorrect. ASU No. 2013-03 was effective on issuance d. Correct. ASU No. 2013-03 was effective on issuance.


5. a. Correct. ASU No. 2013-06 changes reporting relating to services received by not-

for-profit entities from affiliated organizations. b. Incorrect. ASU No. 2013-06 changes reporting relating to services received by

not-for-profit entities from affiliated organizations. The entity must be affiliated with the not-for-profit entity to be within the scope of this ASU.

c. Incorrect. ASU No. 2013-06 changes reporting relating to services received by not-for-profit entities from affiliated organizations. Public entities are outside the scope of this ASU.

d. Incorrect. ASU No. 2013-06 changes reporting relating to services received by not-for-profit entities from affiliated organizations. Nonpublic entities include privately held companies and would be outside the scope of this ASU.

6.

a. Incorrect. ASU No. 2013-06 establishes guidance relating to services received by not-for-profit entities from affiliated organizations.

b. Incorrect. ASU No. 2013-01 establishes guidance relating to offsetting assets and liabilities.

c. Correct. ASU No. 2013-07 establishes guidance relating to the liquidation basis of accounting.

d. Incorrect. ASU No. 2013-12 establishes the definition of a public business entity. 7.



c. Incorrect. ASU No. 2011-07 establishes guidance relating to patient revenues. d. Correct. ASU No. 2013-12 establishes a definition of a public business entity.

8.



c. Correct. ASU No. 2014-01 establishes guidance relating to investments in affordable housing projects.

d. Incorrect. ASU No. 2014-01 establishes guidance relating to investments in affordable housing projects – several other ASUs relate to guidance for health care entities.


9. a. Correct. ASU No. 2014-05 establishes guidance relating to service concession

arrangements. b. Incorrect. ASU No. 2013-01 establishes guidance relating to offsetting assets and

liabilities. c. Incorrect. ASU No. 2014-01 establishes guidance relating to investments in

affordable housing projects. d. Incorrect. ASU No. 2013-06 establishes guidance relating to services received by

not-for-profit entities from affiliated organizations. 10.

a. Incorrect. The FASB established the Not-for-Profit Committee in 2009. b. Correct. The FASB established the Not-for-Profit Committee in 2009. c. Incorrect. The FASB established the Not-for-Profit Committee in 2009. d. Incorrect. The FASB established the Not-for-Profit Committee in 2009.

11.

a. Correct. NRG represents Not-for-Profit Resource Group. b. Incorrect. NRG represents Not-for-Profit Resource Group. c. Incorrect. NRG represents Not-for-Profit Resource Group. d. Incorrect. NRG represents Not-for-Profit Resource Group.

12.

a. Incorrect. This is a type of assistance under consideration. b. Correct. This is not a type of assistance under consideration. c. Incorrect. This is a type of assistance under consideration. d. Incorrect. This is a type of assistance under consideration.



Chapter 4


1. a. Incorrect. The ACFE issued the report on occupational fraud. b. Incorrect. The ASB issues auditing standards relating to the auditor’s

responsibility for fraud. c. Incorrect. The PCAOB is not mentioned in this section. d. Correct. The Center for Audit Quality noted that fraud cannot occur unless an

opportunity is present. 2.

a. Correct. PILOT in this chapter represents payments in lieu of taxes. b. Incorrect. PILOT in this chapter represents payments in lieu of taxes not in light

of taxes. c. Incorrect. PILOT in this chapter represents payments in lieu of taxes not paid

instead of legitimate taxes. d. Incorrect. PILOT in this chapter represents payments in lieu of taxes not payment

income lost on taxes. 3.

a. Incorrect. The Boys and Girls Clubs are not mentioned in this chapter. b. Incorrect. The YMCA is not mentioned in this chapter. c. Correct. The American Cancer Society is mentioned in this chapter in this

context. d. Incorrect. World Vision, not World Charities, is mentioned in this chapter.

4.

a. Incorrect. San Francisco is not mentioned in this chapter in this context. b. Incorrect. Miami is not mentioned in this chapter in this context. c. Correct. New York City is mentioned in this chapter in this context. d. Incorrect. Chicago is not mentioned in this chapter in this context.

5.

a. Correct. ASC 958 provides guidance for not-for-profit entities. b. Incorrect. ASC 954 provides guidance for health care entities. c. Incorrect. ASC 952 provides guidance for franchisors. d. Incorrect. ASC 908 provides guidance for airlines.


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Not-for-Profit Accounting and Auditing Update · Not-for-Profit Accounting and Auditing Update is intended ... 4-15 Solutions ... Many recent developments at the federal level affect