ACCOUNTING & AUDITING UPDATE
Transcript of ACCOUNTING & AUDITING UPDATE
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ACCOUNTING & AUDITING UPDATE
Siena Rambo, CPATara Fenner, CPA, CMFO
LEASES:ARE YOU READY?
ASU 2016-02 – New Lease Accounting Standard
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Amendments & Clarifications◦ ASU 2016-02 – Leases (Topic 842)◦ ASU 2018-01 – Leases: Land Easement◦ ASU 2018-11 – Leases: Targeted Improvements**◦ ASU 2018-20 – Leases: Narrow-Scope Improvements for Lessors◦ ASU 2019-01 – Leases: Codification Improvements
Current GAAP◦ Capital Lease – recorded on balance sheet as asset & liability◦ Operating Lease – not recorded on balance sheet; just note disclosures
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New StandardFINANCE LEASE OPERATING LEASE
BalanceSheet
Recognize a right-of-use asset and a liability, initially measured at PV of the lease payments
Recognize a right-of-use asset and a liability, initially measured at PV of the lease payments
Income Statement
Recognize interest expense on the lease liability & amortization of the right-of-use asset
Recognize a single lease cost,calculated so that the cost of the lease is allocated over the lease term on SL
Cash Flows
Classify repayments of the principal portion of the lease liability within financing activities & payments of interest with variable lease payments within operating activities
Classify all payments within operating activities
Effective Date◦ Private companies: years beginning after December 15, 2019◦ Implement January 1, 2020
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Is this Applicable to All Leases?◦ Non-cancelable leases over 12 months◦ Permitted to exclude a lease with a term of 12 months or less at commencement date
(FASB ASC 842-20-25-2). (The term would need to consider renewals the lessee is reasonably certain to exercise)
◦ No scope exceptions for small-ticket items
Items for Consideration◦ Debt Covenants◦ Materiality – Capitalization Thresholds◦ Related Party Leases◦ Modifications to Existing Leases
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Debt Covenants◦ Liabilities will be increased◦ Consider including a “Frozen GAAP”
covenant in loan agreement during renewal◦ Debt covenants based on U.S. GAAP at time of
the loan agreement
◦ Exclude Operating Lease liabilities from definition of liabilities in borrowing agreement
Materiality◦ Capitalization threshold can be
used for ROU assets◦ Determine a recognition
threshold for the liability side◦ The asset and liability thresholds
do not have to be the same
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Related Party Leases◦ New standard requires leases between related parties to be accounted for based on
the legally enforceable terms just like leased between unrelated parties◦ Change from basis of the economic substance of the arrangement
Modifications◦ Determine whether modification accounted for as a
separate contract or change to the existing contract◦ Account for as a Separate Contract if:
◦ An additional right-of-use not included in original lease◦ Lease payments increase commensurate with the stand alone
price for the additional right-of-use
◦ If change to existing contract, remeasurement of lease liability and ROU asset required
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Steps for Implementation
STEP 1Identify all
current leases
STEP 2Financing or Right of Use?
STEP 3Identify
Indirect Costs or Non Lease Components
STEP 4Determine PV of lease payments
STEP 5Record Right of Use leases
(verify all Financing
leases already
recorded)
Practical Expedient Package◦ Are permitted to make an election to apply a package of practical expedients that
allow an entity not to reassess:1. Whether any expired or existing contracts are or contain leases2. Lease classification for any expired or existing leases3. Initial direct costs for any existing leases
◦ Must be elected as a package and applied consistently to all its leases◦ For leases that were appropriately assessed under FASB ASC 840
(FASB 842-10-65-1)
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Additional Transition Method◦ ASU 2018-11
◦ Allows application of lease standard at the adoption date (January 1, 2020) instead of the earliest comparative period presented in the financial statements
◦ Note that comparative periods would still be reported under current GAAP
New Look to the Financial Statements◦ Balance Sheet
◦ Operating and Finance leases required to be reported separately
◦ Related ROU assets must be presented separately from other assets, as well as each other
◦ Lease liabilities have same separation requirements
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New Look to the Financial Statements◦ Debt Covenant Considerations
◦ While the FASB has clearly articulated its view that lease liabilities resulting from operating leases under ASC 842 are intended to be characterized as operating liabilities outside of debt, the Board cannot dictate how banks and other lenders view such amounts.
◦ Separate presentation of finance and operating leases may reduce exposure to potential debt covenant violations if the entity was required to characterize all lease liabilities as debt.
New Look to the Financial Statements
Property, Plant & EquipmentFinance Lease Right-of-Use Asset
Accumulated Depreciation - Finance Lease ROU AssetFinance Lease ROU Asset, NetOperating Lease ROU Asset
Current LiabilitiesFinance Lease LiabilityOperating Lease Liability
Long-Term LiabilitiesFinance Lease LiabilityOperating Lease Liability
Company AItems on the Balance Sheet
12/31/2020
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New Look to the Financial Statements◦ Income Statement
◦ Finance leases:◦ Portion related to interest on the lease liability presented with other
interest expense◦ Portion related to amortization of the ROU asset presented with
depreciation expense
◦ Operating leases:◦ Lease expense presented as a single operating expense from
continuing operations
New Look to the Financial Statements◦ Cash Flow Statement
◦ Finance leases:◦ Principal portion classified as Financing Activities◦ Interest portion classified same as interest paid
◦ Operating leases:◦ Lease payments classified within Operating Activities
(Expenses to make asset ready for use – e.g. moving and related setup costs – classified as investing activities)
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Considerations for Non-GAAP Bases◦ Cash basis◦ Modified Cash basis◦ Tax basis
Example 1
Commencement Date January 1, 2019Lease Term 5 years
Annual Rental Payments
Lease Classification at inception under FASB ASC 840 OperatingABC's incremental borrowing rate at January 1, 2020 6%
$31,000 first 2 yrs; $33,000 thereafter
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Example 1Amounts Notes
Lease Liability 112,034$
ROU Asset 112,034$ Sum of lease liability recognizedAnnual Lease Expense 32,500$
Remaining minimum rental payments ($31,000 for 2020, $33,000 for each of 2021-2023) discounted at 6%
Remaining rental pymts ($31,000 for 2020; $33,000 for each of 2021-2023) divided by remaining lease term (4 yrs)
Example 1◦ Record the following at January 1, 2020:
(Using transition method allowed by ASU 2018-11)
Debit CreditROU Asset 112,034
Lease Liability 112,034
Account
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Example 1◦ Assuming lease is not modified and no remeasurement of lease liability, would be
amortized as follows:
Year EndExpense
A Payment
B Interest
C Principal
B - CROU Amort
A - C12/31/2020 32,500 31,000 6,902 24,098 25,598 12/31/2021 32,500 33,000 5,424 27,576 27,076 12/31/2022 32,500 33,000 3,723 29,277 28,777 12/31/2023 32,500 33,000 1,917 31,083 30,583
Totals 130,000 130,000 17,966 112,034 112,034
Example 1◦ Record following entry at December 31, 2020 (and similar entries through lease term):
Debit CreditLease Liability 24,098 Lease Expense 32,500
ROU Asset 25,598 Cash 31,000
Account
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Example 2◦ On January 1, 2020 entered a 10 year lease for 10,000 square feet of office space with
fixed payments of $100,000 per year◦ In January 2025 lease is modified for the final 4 years to include an additional 10,000
square feet in the same building. ◦ Increase in lease payment is commensurate with the market rate at date of
modification
Separate Contract or Remeasurement?
Example 3◦ On January 1, 2020 entered a 10 year lease for 10,000 square feet of office space with
fixed payments of $100,000 per year◦ In January 2025 lease is modified for the final 4 years to include an additional 10,000
square feet in the same building for an additional $50,000 ($150,000 annual fixed pymt) ◦ Increase in lease payment is substantial discount to market rate at date of modification
Separate Contract or Remeasurement?
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NFP REPORTINGASU 2016-14
Effective Now◦ Effective for December 31, 2018 year end or FY2019 year end
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Highlights◦ Change in net asset classes
◦ Without donor restrictions◦ With donor restrictions
◦ Additional disclosure of composition of net assets with donor restrictions◦ Liquidity disclosures◦ Statement of Functional Expenses and disclosure of allocation method
REVENUE RECOGNITION
ASU 2014-09
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Main Provisions◦ Effective for 2019 calendar year audits for most nonpublic entities
◦ Revenue will be recognized for contracts as performance obligations are satisfied either over time or at a point in time
◦ Intent to make accounting the same across all industries
◦ Does not include provisions for lease revenue
◦ Does not impact cash or other basis reporting
Five Step Approach
STEP 1Identify the
contracts with your customers
STEP 2Identify the
performance obligations in the
contract
STEP 3Determine the
transaction price
STEP 4Allocate price to the performance
obligations
STEP 5Recognize
revenue when a performance obligation is
satisfied
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What to Expect◦ Change in accounting principle
◦ Expanded footnote disclosures
◦ Possible changes needed to revenue recognition policies
◦ Additional estimates ◦ Variable pricing ◦ Satisfaction of obligations over time◦ Likelihood of future collections
Adoption Method Alternatives◦ Full Retrospective Adoption
◦ Cumulative effect of change on all contracts on retained earnings of earliest year presented
◦ Generally applies to existing contracts, with many exceptions
◦ Includes practical expedients to assist with implementation
◦ Modified Retrospective Adoption◦ Apply to all contracts at the date of initial application OR only to contracts that were not completed at the
date of initial application
◦ Additional disclosures of each financial statement line item affected in the current period with an explanation of the reason for the change
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Resources for Implementation
◦ AICPA Audit & Accounting Guide – issued January 1, 2019◦ Center for Plain English Accounting ◦ FASB Transition Resource Group ◦ FASB Implementation Guide Q&As
Industry Specific Guidance◦ Aerospace & Defense◦ Asset Management◦ Broker & Dealer Services◦ Gaming Entities◦ Health Care ◦ Not-for-Profits◦ Software Entities◦ Airlines
◦ Engineering & Construction Contractors◦ Depository Institutions◦ Telecommunications ◦ Insurance◦ Power & Utility ◦ Time-Share Entities◦ Hospitality ◦ Oil & Gas Production
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Health Care Industry ◦ Items to consider
◦ Charity care – no impact
◦ Price concessions / discounts◦ Explicit – standard rate $1,000 - insurance rate $700 = concession $300◦ Implicit – standard rate $1,000 - historical collection $200 = concession $800
◦ Identifying distinct goods / services vs. bundled services
◦ Termination Clauses
◦ Portfolio Approach – determining contractual adjustments in groups (payor type)
Health Care Example◦ Uninsured patient visits a hospital and receives medical care costing $5,000.◦ The hospital will typically provide a 10% discount to self-pay patients.◦ Historically, collection rates for uninsured patients has been 30%.◦ The patient had a financial hardship and only made payments totaling $1,000.
Total Charges 5,000$ Explicit - 10% Self Pay Discount 500$
Historical Collection Rate 30% Implicit - Historical Experience 3,000$
Net Patient Revenue 1,500$ Total Concessions 3,500$
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Health Care Presentation ChangesOld Standards New Standards
◦ Revenue includes all price concessions◦ bad debts expected to decrease
Gross Revenue 5,000$ Contractual Adjustments (500)$
4,500$
Provision for Bad Debts (3,000)$
Net Operating Revenue 1,500$
Net Operating Revenue 1,500$
Operating ExpensesProvision for Bad Debts 500$
Not-for-Profits (NFP)◦ Items to consider
◦ Tuition and housing ◦ nonrefundable deposits◦ cancellation periods
◦ Membership Dues and Subscriptions◦ contribution versus exchange transaction◦ period of performance
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NFP Example
◦ Art School requires a $50 nonrefundable deposit to register for a painting class due 6/1◦ There are 10 classes in the program (1 per week)◦ Student signs contract at registration for the $1,000 tuition due by 7/31 ◦ 20 people have registered for the class and paid by 7/31◦ First day of class is 8/1◦ Students are permitted to drop the class until 8/15 to receive a 75% refund◦ Historical experience has been that 10% of enrollees withdraw◦ 1 student withdraws on 8/10
NFP Example (Continued)Debit Credit
6/1 - record deposits Cash ($50 * 20) 1,000$
Def Rev - Deposit 1,000$
7/31 - record tuitionCash ($1,000 * 20) 20,000$
Refund Liability ($1,000 * 75%) * (20 * 10%) 1,500$ Contract Liability ($20,000 - $1,500) 18,500$
8/1 - recognize week 1 revenueContract Liability ($18,500 * 1/10 weeks) 1,850$ Def Rev - Deposit ($1,000 * 1/10 weeks) 100$
Revenue - Painting Tuition 1,950$
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NFP Example (Continued)Debit Credit
8/8 - recognize week 2 revenue Contract Liability ($16,650 * 1/9 weeks) 1,850$ Def Rev - Deposit ($900 * 1/9 weeks) 100$
Revenue - Painting Tuition 1,950$
8/10 - record refund for 1 withdrawalRefund Liability ($1,000 * 75%) 750$
Cash 750$
8/15 - remove remaining refund liability Refund Liability 750$
Contract Liability 750$
NFP Example (Continued)
◦ This entry will be repeated each week for the remainder of the classes
Debit Credit8/15 - recognize week 3 revenue
Contract Liability ($15,550 * 1/8 weeks) 1,943.75$ Def Rev - Deposit ($800 * 1/8 weeks) 100$
Revenue - Painting Tuition 2,044$
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Construction Contractors◦ Items to consider
◦ Termination clauses
◦ Unit of account – contacts may need to be combined
◦ Pricing estimates – back charges, incentives, retentions, performance bonuses, change orders
◦ Long Term contracts – could have interest impacts
◦ Debt covenants – slower revenue recognition could impact
Construction Contractors ◦ Over time recognition allowed if any of the following are true:
1) Customer simultaneously receives and consumes the benefits2) Contract results in an asset the customer controls3) Asset has no alternative use for the contractor and there is right to payment for performance
completed to date
◦ Other wise – must recognize at a point in time when the contract is complete
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OTHER UPDATES
ASU 2015-17 INCOME TAXES◦ Effective for annual periods beginning after
December 15, 2017
◦ Simplifies disclosures regarding deferred taxes
◦ Eliminates requirement to separate deferred tax liabilities and assets into a current and noncurrent amount
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ASU 2018-13 FAIR VALUE MEASUREMENT DISCLOSURES◦ Disclosure changes only ◦ Some requirements are not applicable to nonpublic entities◦ Effective FY beginning after 12/15/19, early adoption permitted◦ Removal of disclosures regarding some transfers between levels◦ Additional disclosures of level 3 unobservable inputs◦ Modifications of the requirements regarding net asset value, level 3 measurements,
and uncertainties
ASU 2018-14 COMPENSATION –RETIREMENT BENEFITS◦ Disclosure Changes for Defined Benefit Plans◦ Effective for FYE after 12/15/20 for public business entities / one year later for all others◦ Removal of several specific disclosures◦ Adds requirements for weighted average interest crediting rates and explanation of
significant gains/losses in benefit obligations◦ Clarifies guidance on benefit obligation (PBO) and the accumulated benefit obligation
(ABO) in excess of plan assets
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ASU 2018-19 Credit Losses◦ Amends 2016-13, effective for nonpublic entities with years beginning after 12/15/2021◦ Excludes lease receivables ◦ 2016-13 requires assets at amortized costs to have an allowance for credit losses◦ Impact – reporting of net carrying value◦ Includes
◦ Loans◦ Trade receivables◦ Debt securities
This material includes content originally developed by the Center for Plain English Accounting and used by license with the AICPA. ©2019, AICPA. All rights reserved. No further use permitted without express written permission of the AICPA.