April 30, 2010
To our peer review clients:
Annually we make an effort to highlight recent changes in professional standards for our peer review clients. We hope what follows is helpful to you in your accounting and auditing practice.
New Accounting Standards
Although footnote disclosure requirements for small business clients have not changed significantly in several years, there has been a fair amount of activity in this area recently.
Accounting Codification: On July 1, 2009, the FASB Accounting Standards Codification officially became the single source of nongovernmental GAAP. You will need to comb through your footnote disclosures and eliminate references to FASB Statements, Interpretations, and Staff Positions, replacing them with codification references. The acronym you will be using is ASC, for Accounting Standards Codification.
Two New Footnote Disclosures to Include in Financial Statements This Year: One of these new disclosures has been in the works for some time, while the other one seemed to come out of nowhere in mid 2009. In both instances you may wish to include language in your footnote concerning the implementation of a new accounting standard. The first disclosure concerns “uncertain tax positions” as defined in FIN No. 48 (now part of ASC 740). Accounting Standards Update (ASU) 2009-6 issued in September 2009 reduced the disclosure required under ASC 740 for nonpublic entities. If there are no uncertain tax positions, the required disclosure is minimal, and might read as follows:
On January 1, 2009, the Company adopted the provisions of Interpretation (“FIN”) No. 48, “ Accounting for Uncertainty in Income Taxes–an Interpretation of FASB Statement No. 109” (ASC 740) . ASC 740 prescribes a new threshold for determining when an income tax benefit can be recognized, which is a higher threshold than the one imposed for claiming deductions on income tax returns. The adoption of ASC 740 did not have any impact on the Company's financial statements. The Company's federal and state income tax returns are subject to possible examination by the taxing authorities until the expiration of the related statutes of limitations on those tax returns. In general, the federal and state income tax returns have a three year statute of limitations. The Company would recognize accrued interest and penalties associated with uncertain tax provisions, if any, as part of the income tax provision.
Before you use this disclosure you need to have a discussion with your client regarding the client's tax positions. The client may be able to argue there are no uncertain tax positions to record in its financial statements if: 1) it is more likely than not the client's tax positions will survive an audit, and 2) there is a more than 50% probability the full amount of the related tax benefits will be realized upon settlement. The other significant new footnote disclosure this year concerns subsequent events. The standard requiring the disclosure, SFAS No. 165 (now ASC 855), was issued is May 2009 with a June 2009 effective date and requires disclosure of the date through which management has evaluated subsequent events even if there are no actual subsequent events to disclosure. In most instances, the date disclosed will be the same as the report date. The disclosure might read as follows:
The Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent Events” (ASC 855), as of June 30, 2009. ASC 855 establishes new accounting and disclosure requirements for subsequent events. Management has evaluated subsequent events through July 1, 20XX, the date on which the financial statements were available to be issued. Management is not aware of any subsequent events that require recognition or disclosure in the financial statements.
In February 2010, FASB issued ASU 2010-09, which amends ASC 855. Under the amendments, nonpublic companies will perform subsequent event evaluations on the date financial statements are available to be issued. Under the original standard nonpublic companies sometimes had to perform subsequent events evaluations through a later date. ASU 2010-09 also provides disclosure guidance for re-issued financial statements.
Fair Value Disclosures: SFAS No. 157 (now ASC 820) was effective for fiscal years beginning after November 15, 2007, and required extensive new disclosure of fair values. If you have clients with investments, their financial statements needed to have these fair value disclosures beginning in 2008. The nonprofit and ERISA industries may be the most affected. Virtually any financial statement you issue for a retirement plan will have these disclosures. Most of your larger nonprofit clients will have these disclosures too. Much of the disclosure is tabular, categorizing investments according to methodology used to compute the fair value. Note that only assets revalued subsequent to initial measurement belong in the tabular disclosure. For example, a nonprofit organization would include investments, beneficial interests and impaired assets in the table, but would exclude contributions (pledges) receivable and split-interest obligations from the table because their values are not adjusted in subsequent years. ASU 2009-12 provides guidance for valuing and disclosing “alternative investments” such as private equity funds and hedge funds, and is effective for periods ending after December 15, 2009. ASU 2010-06, “Improving Disclosures about Fair Value Measurements,” amends ASC 820 and for the most part is effective for periods beginning after December 15, 2009. It requires more disaggregation of data and additional disclosure about valuation techniques used.
Business Combinations: SFAS No. 141R (now ASC 805) on business combinations was effective for years beginning after December 15, 2008. This is a significant revision in the accounting for business combinations and consolidations.
Variable Interest Entities: SFAS No. 167 (ASC 810) on consolidating variable interest entities is a significant revision of the standards in this area, and includes enhanced disclosure requirements including summarized financial statements for the variable interest entity in the footnotes of the primary beneficiary. In addition, the primary beneficiary must now present separately certain of the variable interest entity's assets and liabilities on its consolidated balance sheet. The new standard is effective for periods beginning after November 15, 2009.
New Formats for Financial Statements: Working jointly with the International Accounting Standards Board, the FASB continues with its project to significantly revise the formats of the basic financial statements. We described this project in our 2008 and 2009 update letters. Based on our reading of the “Summary of Decisions Reached to Date” appearing on the FASB Web site, FASB has not significantly revised the views expressed in its discussion paper. The Exposure Draft will appear in May 2010.
Lease Accounting: As noted in our 2009 update letter, FASB will require lessees to account for operating leases as capital leases. A lessee will record a “right-of-use” asset and a liability for the obligation to pay rents. FASB had planned to release the Exposure Draft in June 2010, but disagreements within FASB and the IASB, regarding the accounting on the lessor side of the transaction, may postpone its release.
Blue Ribbon Panel: The AICPA has been negotiating with FASB over the past several years in an effort to convince the FASB to establish accounting standards for private companies. FASB has been reluctant to establish standards for private companies that are separate and distinct from the standards for public companies. The AICPA has now approached FASB's parent organization, the Financial Accounting Foundation (FAF), to pursue this issue. The AICPA and FAF have formed a panel, called the Blue Ribbon Panel, to establish recommendations on the future of standard setting for private companies.
New Compilation and Review Standards
The AICPA issued SSARS No. 19, “Compilation and Review Engagements,” in December 2009. This is the most significant change in compilation and review standards since 1978. SSARS No. 19 replaces the 18 previously issued statements. It is intended to converge US and international standards.
SSARS No. 19 introduces the concepts of materiality and “review evidence” to the compilation and review standards. There is no requirement to document materiality considerations, however.
The new standard will require the accountant to obtain an engagement letter from the client, although whether the letter must be obtained annually or less frequently is not addressed. If you already have engagement letters, they will need to be revised to conform to SSARS No. 19.
In addition, there are new documentation requirements, including the requirement to document significant issues and findings in the working papers.
When independence is impaired on a compilation engagement, you will now have the option of disclosing the reason or reasons for the impairment in the report. This is optional. If you provide the explanation, however, all reasons that independence is impaired must be included.
The compilation and review reports are longer and the language changes significantly. For example, there is a new reference to standards “generally accepted in the United States of America.” In addition, both compilation and review reports will include a paragraph describing management's responsibilities and both reports should have a title (just as auditor's reports are titled). The standard compilation report on GAAP financial statements will read as follows:
Accountant's Compilation Report
To the Board of Directors
I (we) have compiled the accompanying balance sheet of XYZ Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year then ended. I (we) have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or provide any assurance about whether the financial statements are in accordance with accounting principles generally accepted in the United States of America.
Management (owners) is (are) responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements.
My (our) responsibility is to conduct the compilation in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. The objective of a compilation is to assist management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements.
[Firm's signature]
[Report Date]
The title of a review report should include the word “independent,” such as the following: Independent Accountant's Review Report.
SSARS No. 19 is effective for periods ending after December 15, 2010, although the optional explanation of independence impairment is allowed immediately. The exposure draft included a provision that would have permitted you, in some circumstances, to issue a review report on a client when you were not independent with respect to that client, but this provision was removed and is not part of the final statement.
See discussion below for firms with audit clients about the new language for audit opinions.
Firms with Audit Clients
The standards for reporting control deficiencies to management are changing this year, with SAS No. 115 replacing SAS No. 112. Take care to revise your communications with management to reflect the new definitions contained in SAS No. 115.
The AICPA recently issued three new statements (SAS Nos. 118, 119 and 120) on supplementary information, but these statements are not effective until periods beginning after December 15, 2010.
These statements have been issued in the “clarity format,” as part of the Auditing Standards Board's Clarity Project. The Clarity Project involves the converging of US GAAS with International Standards on Auditing (ISA). SAS No. 117 (discussed below under the “Firms with Governmental Audits” heading) was the first statement to be issued in the clarity format. The AICPA is in the process of rewriting all previously issued statements on auditing standards in this new format. As with SSARS No. 19 discussed above, which overrode all previously issued standards on accounting and review services, once a significant portion of the auditing standards have been clarified, they will be issued as one SAS that will be codified in the “AU section” format and supersede SAS issued prior to SAS No. 117.
The AICPA recently released six clarified AU sections, covering such areas as audit planning, risk assessment and materiality. This involves more than simply rewording existing guidance. New concepts and new requirements are introduced. The clarified section on materiality, for example, introduces the term “performance materiality” and requires the auditor to determine and document the amount or amounts. Although performance materiality is in some ways similar to “tolerable misstatement,” it is not the same thing. The six clarified AU sections are currently effective for periods beginning after December 15, 2010, although the AICPA has indicated the effective date may be delayed one more year.
Continuing with the Clarity Project, the AICPA issued an exposure draft in September 2009 that will completely revise the language of the auditor's opinion to conform to ISA format. The comment period is already closed, and the provisional effective date is for periods beginning after December 15, 2010. The new audit opinion is much longer than the old version and includes “section headings” to help the reader navigate through the report. The language is consistent with the language used in the new compilation and review reports, including a paragraph on management's responsibilities. The AICPA recognizes that there will now be two different standard auditor reports used in the United States, since the report for publically traded companies will not follow this new standard, but the AICPA believes converging with ISA takes precedence.
Firms with Governmental Audits
The new report language for audits performed under Government Auditing Standards, including Circular A-133 audits, may be found on the Governmental Audit Quality Center at:
http://gaqc.aicpa.org/Resources/Illustrative+Auditors+Reports/
If you perform Circular A-133 audits, there are a number of changes affecting you this year.
• Funding under the American Recovery and Reinvestment Act will tend to increase the number of major programs subject to audit this year.
• No extensions for the clearing house filing will be permitted, and late submissions in either 2008 or 2009 will make your client a high risk auditee this year, requiring 50% coverage.
• The 2009 edition of the AICPA Accounting and Auditing Guide “Government Auditing Standards and Circular A-133 Audits” has a new chapter, Chapter 11, on sampling you will need to follow in determining your sample sizes for control and compliance testing. Although the guidance in Chapter 11 recommends a sample size of no more than 60 units for both control and compliance samples, this is with no exceptions expected. The authors at Practitioners Publishing Company recommend a sample size as high as 138, where there are two expected deviations in the sample.
• SAS No. 117 on compliance auditing requires risk assessments on the controls over compliance effective with the June 30, 2010 year ends.
• The AICPA has issued a new peer review checklist for peer reviewers to use in their reviews of A-133 audits. This is a two-part checklist, with “Part A” and “Part B” sections. The AICPA is advising peer reviewers that a “No” answer in the “Part A” checklist will usually lead to a pass with deficiencies peer review report.
GASB No. 51 on intangible assets is effective for years ended June 30, 2010 and later. Although it isn't effective until next year, you might start a discussion with your clients this year regarding GASB No. 54. This standard on fund balances may require clients close some of their special revenue funds to the general fund (impacts budget process).
Peer Review and Regulators
Under the AICPA Facilitated State Board Access Program, many state CPA societies, including the Oregon Society of CPAs, are posting peer review reports to a secure web site that state board representatives are able to access. The peer review reports are posted on an “opt-out” basis, which means that your peer review report will be posted to the web site automatically unless you take action to prevent it. In Oregon, this program commenced January 2009. The web site is not open to public use. The Oregon Board plans to request paper copies of the peer review documents if your firm opts out of the web site posting. Since these paper copies become a public record, there does not appear to be any incentive for Oregon CPAs to opt out. In addition, the Oregon State Board of Accountancy revised the firm registration form to require that you disclose the outcome of your most recent peer review.
Further, the Oregon Board is asking firms to submit their “letter of acceptance” from the OSCPA peer review committee. There has been some confusion regarding this request. Apparently some firms sent their peer review reports to the Board instead of the acceptance letters. Doing this may make your peer review report a public record.
Our Peer Review Clients
When scheduling your peer review with the state society, the scheduling form requests information about the firm you have hired to perform the peer review. This is the information you will need if you select our firm to perform your peer review:
Name of Reviewing Firm: Read & Bose, PC
AICPA Firm Number: 10083621
Team Captain's Name: Harry Bose
AICPA Member Number: 01153765
___________________________
This letter will be posted on our award-winning home page, along with additional guidance on peer reviews. Our web site address is:
Our email address if your wish to contact us about peer review is:
Please do not hesitate to contact us if you have any questions. We appreciate your business.
Very truly yours,
Read & Bose, PC