Accounting & Auditing Conference · Accounting & Auditing Conference October 14, 2019 THANK YOU FOR...
Transcript of Accounting & Auditing Conference · Accounting & Auditing Conference October 14, 2019 THANK YOU FOR...
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Accounting & Auditing Conference
October 14, 2019WSCPA Learning Center and Webcast
LUNCH SPONSOR
Accounting & Auditing Conference October 14, 2019
THANK YOU FOR ATTENDING THE ACCOUNTING & AUDITING CONFERENCE!
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Accounting & Auditing Conference October 14, 2019
SCHEDULE OF EVENTS
7:00-7:50 am Sign-In and Breakfast 7:50-8:00 am Welcome and Announcements 8:00-9:30 am FASB Update: What’s New?
Michael Cheng, CPA, Frazier & Deeter 9:30-9:45 am Networking Break
9:45-10:45 am The Impact of Artificial Intelligence and Cognitive Technologies on Audits Jared Theis, CPA, KPMG LLP
10:45-11:00 am Networking Break 11:00 am-12:00 am Auditing the Implementation of ASC 606: A Practical Example
from a Mid-Market Firm Peter Miller, CPA, CFE, Clark Nuber PS
12:00-12:45 pm Lunch 12:45-1:45 pm Utilizing Data Visualization and Analytics in Auditing
Tania Fleming, Washington State Auditor’s Office 1:45-200 pm Networking Break
2:00-3:30 pm Lease Accounting Michael Cheng, CPA, Frazier & Deeter
3:30-3:40 pm Networking Break 3:40-4:40 pm
Finding Fraud in an Audit Nancy Pasternack, Foster School of Business, University of Washington
5:00 pm Adjourn
Accounting & Auditing Conference October 14, 2019
FASB Update: What’s New?
Michael Cheng, CPA, Frazier & Deeter
Find out what's new with FASB and how it could affect private companies. Learn about new standards that may have a significant impact on private companies and hear an overview of select projects on the PCC and FASB’s current technical agenda.
Mike Cheng joined Frazier & Deeter in 2019 as the Partner who oversees the firm’s professional practices related to accounting and audit. As part of this role, he specializes in assisting clients with complex accounting and financial reporting issues. Prior to joining the firm, Mike was a Senior Project Manager at the Financial Accounting Standards Board (FASB). At the FASB, he served as the Private Company Council (PCC) coordinator, where he was responsible for all PCC related matters. In addition, Mike led projects to simplify the accounting for non-employee share-based payments, help shape the future of the FASB technical agenda and improve consolidations guidance (VIE guidance). Most recently, he worked on the FASB’s implementation team on revenue recognition (ASC Topic 606) and lease accounting (ASC Topic 842). Prior to joining the FASB, Mike held various management positions with PricewaterhouseCoopers. He was an Audit Senior Manager, Private Company Services, in the firm’s Stamford, CT office. From 2003-2011, he also held roles of increasing responsibility in PwC’s Core Assurance divisions in Buffalo and Rochester, NY.
TEL 425.644.4800 | www.wscpa.org | [email protected] 140th Ave NE | Bellevue, WA 98005-3480
NOTES
General FASB UpdateWSCPAOctober 14, 2019
Michael Cheng
Partner
This is what every winter looked like growing up
22
Yummy!!! A Garbage Plate!!!!!
33
44
ASUs Effective in 2019 – Private Companies (Calendar Year End)
5
• ASUs: 2014-02, 2015-14, 2016-08, 2016-10, 2016-12, 2017-05, 2017-10
Revenue Rec (Topic 606)
• ASU 2016-01, 2018-03Financial Instruments – Rec & Measurement
• ASU 2017-07Presenting
Pension/OPEB Cost
• ASU 2017-01 (Def of Business)Business
Combination
• ASU 2016-04Liabilities – breakage of
prepaid cards
• ASU 2016-15 (various), 2016-18 (restricted cash)Cash Flows
ASUs Effective in 2019 – Private Companies (Calendar Year End)
6
• ASU 2018-08NFP – Contribution Guidance
• ASU 2016-16Taxes – Intra-entity transfers
• ASU 2018-02Stranded Tax Effects in OCI from Tax Cuts and Jobs Act
• ASU 2017-06Plan Accounting: Defined Benefit
• ASU 2017-15Eliminating Steamship Entity Guidance
ASU 2016-01Recognizing and Measuring Financial Instruments
What’s Changing?
8
Equity Investments at FV Through Net Income
More Common Exceptions
Equity
investments
without readily
determinable fair
value (latest
observable)
Equity method
investments
Less Common Exceptions:
Equity
investments that
result in
consolidation of
the investee
Equity
investment in
federal home
loan bank and
federal reserve
bank stock
Ownership
interest in an
exchange
What’s Changing?
Fair value change resulting from changes in own credit for financial liabilities measured under fair value option will be recognized through other comprehensive income (OCI)
9
What’s Changing? -Disclosure Changes
Private entities not required to disclose fair value of financial instruments not recognized at fair value on balance sheet
Reduced disclosures for public entities of methods and assumptions used to estimate fair value for financial instruments not recognized at fair value on balance sheet
10
What’s Changing? -Disclosure ChangesFair value measurements for financial instruments to be based on exit price notion (current GAAP includes practical expedient to measure fair value of certain financial instruments using entry price notion)
Financial assets to be presented grouped by measurement category and form of instrument
Financial liabilities to be presented grouped by measurement category
11
Effective Date for Final Standard
12
All Public Business Entities
Annual & Interim Reporting Periods beginning after Dec.
15, 2017
Non-Public Business Entities*
Annual Periods beginning after Dec.15, 2018
Non-Public Business Entities*
Annual and Interim Periods beginning after
Dec. 15, 2019
*Includes not-for-profit entities and employee benefit plans
Entire standard is available for early application after Dec. 15, 2017
Certain provisions are available for early application upon issuance:
1. Presentation of FV changes due to entity’s own credit changes in financial liabilities in OCI
2. Non-Public Business Entities no longer required to disclose fair value of financial instruments not recognized at fair value on B/S
Early Application:
ASU 2017-07 -Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
Presentation of net benefit cost in the income statement (retrospectively application)Presentation of net benefit cost in the income statement (retrospectively application)
• Service cost in the same line item or items as other current employee compensation costs
• Remaining components separated from service cost and outside a subtotal of income from operations, if one is presented
Capitalization of only service cost in assets (prospective application)Capitalization of only service cost in assets (prospective application)
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07)
14
Net Periodic Pension Cost Effective Date (ASU 2017-07)
15
• Annual periods beginning after December 15, 2017, including interim periods within those fiscal years
Public Business Entities
• Annual periods beginning after December 15, 2018 and interim periods beginning after December 15, 2019
All other entities (including private companies and NFPs)
• Permitted for all organizations, including application in an interim period
Early Application
Intro to Topic 805Business Combinations
Seller:
You purchased land 30 years ago in Seattle and now you’re planning to sell it
Net book value of the land is $1,000,000
How do you determine what to sell it for?
Buyer:
How much are you willing to pay for it?
How would you account for this?
Do you think the number recorded is close to fair value?
Do we call a simple transaction like this fair value accounting?
Consider this…
17
Seller:
Selling a controlling stake in Whole Foods
Buyer (Amazon):
What am I buying?
~13 Billion Purchase Price
• Generating ~9 Billion in goodwill
• Why would anyone do this?
Consider this…
18
19
Overview of Business Combinations
Broad Steps in Business Combination Accounting
Definition of a Business (ASU 2017-01)
ID the Acquirer
Determine the Acquisition Date
ID and Measure Consideration Transferred
Generally Recognize FV of assets and liabilities assumed
Goodwill or Bargain Purchase
Definition of a Business (ASU 2017-01)
20
Definition of a Business (ASU 2017-01)
Why Does It Matter?Some Acquisition Accounting Differences
21
Asset Business
Contingent
Consideration
Accounted for based on other GAAP (ASC 815, ASC 450)
Recognized at the acquisition date fair value while changes in estimate recognized through earnings after
the acquisition date
In‐Process Research
and Development
Expensed as incurred unless it has an alternative future use
Measured at fair value and recognized as an indefinite‐lived intangible asset until completion or
abandonment of the project.
Transaction Costs Capitalized Expensed
Initial Measurement Allocated cost on a relative fair value basis Measured at fair value
Goodwill/Bargain
Purchase
Goodwill/bargain purchases are not recognized. The overpayment or underpayment is allocated to identifiable assets and liabilities on a relative
fair value basis
Goodwill is recognized as an asset. Bargain purchase recognized immediately in earnings as a gain
(ASU 2017-01) Major Changes
22
Single or Similar Asset Threshold
• If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not considered a business
• The Board intends for this to be a practical “screen”
At a minimum, to be a business, a set must include an input and a substantive process
Remove the evaluation of whether a market participant could replace missing elements
Outputs should be defined similar to goods or services provided to customers (i.e., focus on revenue)
Similar Asset Threshold
23
Not a business when substantially all the FV of gross assets acquired is concentrated in a single asset or group of similar assets
Numerator:
• Single Asset under Topic 805• Similar Asset:
• Nature and risk associated managing and creating outputs
Denominator: (805-10-55-5A)
• Gross Assets includes consideration in excess of net assets• Less
• acquired cash, deferred tax assets and goodwill created from deferred tax liabilities
What’s a Business? (805-10-55-3A)
24
Inputs
Processes
Ability to create outputs
To be considered a business
25
Set is not creating outputs (i.e., no revenues)
Need employees that form an organized workforce
Creating Outputs, then a set is a business when
Employees that form an organized workforce
Acquired Contract that provides access to organized
workforce
Process that can’t be replaced without significant cost, effort or
delay
Process that is considered unique or scarce
26
ID and Measure Consideration Transferred
Consideration equals the sum of the acquisition-date fair value of:
Assets transferred (e.g., cash)
Liabilities incurred by acquirer (e.g., debt)
Equity issued by acquirer (e.g., debt)
Contingent consideration
Consideration excludes:
Transaction costs
Financing costs
Compensation for future services
Consideration Transferred
27
Additional consideration provided to sellers if a future condition is met (aka, Earnout)
For example:
Payment to occur if certain revenue amount is met
Payment if certain EBITDA target is hit
Successful negotiation of contract
Milestone is met
What is Contingent Consideration?
28
At acquisition-date:
Include as consideration measured at fair value
Subsequent measurement:
Usually a liability remeasured at fair value each reporting period until contingency is resolved.
How to Account for Contingent Consideration
29
30
Generally Recognize FV of assets and liabilities assumed
Measuring Assets – Some Examples
31
Cash
Accounts Receivable
Inventory
PP&E
Intangible Assets:• Contractual legal and separable
Measuring Liabilities – Some examples
32
Accounts Payable
Leases
Debt• Deferred Financing Costs
Guarantees
Deferred Revenue
Some exceptions – Not a complete list
33
Assets held for sale
Share-based payments
Contingencies
Benefit Plans• Defined Benefit plans
• Generally follow Topic 715 but OCI stuff disappears• Multiemployer plan
• Follow Topic 450 (Contingencies)
34
Goodwill or Bargain Purchase Gain
Goodwill or Bargain Purchase
35
• Difference is Goodwill
If Consideration > FV of Net Assets
• Bargain Purchase• If you have a Bargain be skeptical
If FV of Net Assets > Consideration
Company Hungry purchases all common share of Company Tasty for $100MM on January 1, 20XX
Company Hungry incurs $10MM in expenses for legal and other professional services related to the transaction
Company Hungry agrees to pay Company Tasty shareholders another $10MM if revenues exceed $250MM in 2 years. FV of this arrangement is $2MM
FV of tangible assets equal $70MM (e.g., inventory, PP&E, etc.)
FV of liabilities assumed equal $35MM
FV of intangibles equal $25MM (i.e, brand, customer relationship)
Company Hungry intends to incur $18MM of restructuring costs shortly thereafter
Business Combination Example
36
How should Hungry Company apply the acquisition method?
How should Hungry Company account for the acquisition costs of $10MM?
What about the restructuring costs that have been planned?
Business Combination Example
37
38
Example Walkthrough…
Broad Steps in Business Combination Accounting
Definition of a Business (ASU 2017-01)
ID the Acquirer
Determine the Acquisition Date
ID and Measure Consideration Transferred
Generally Recognize FV of assets and liabilities assumed
Goodwill or Bargain Purchase
How should Company Hungry account for the acquisition costs?
DR Acquisition Expense $10MM
CR Cash $10MM
What is the Consideration Transferred?
$102MM
• $100MM for common shares
• $2MM Contingent Consideration
What has Company Hungry acquired?
Tangible Assets $70MM
Intangible Assets $25MM
Liabilities ($35MM)
Net FV $60MM
Business Combination Example
39
What are the debits and credits for the acquisition?
DR Tangible Assets $70MM
DR Intangible Assets $25MM
DR Goodwill $42MM
CR Liabilities Assumed $35MM
CR Cash $100MM
CR Contingent Consid. $2MM
Business Combination Example
40
Employee Arrangements in a Business Combination
41
Employee compensation should be analyzed to determine if who this benefit.
Benefit Aquiree Precombination services (i.e., consideration transferred)
Benefit AquirerPostcombination services (i.e., expensed in post-acquisition)
Or a mix of both
Consider:
Reason for the transaction?
Who initiated the transaction?
Timing of the transaction?
Employee Arrangements
42
The employment contract for the CEO of Company Tasty provides that if Company Tasty is acquired by another company, the CEO will receive a $5 million cash payment if the CEO remains employed through the acquisition date
Several years after the employment contract is signed, Company Tasty is acquired by Company Hungry.
The CEO is not obligated to remain employed after the acquisition date.
Question - How should Company A account for the cash payment to the Company B CEO?
Example - Golden Parachute Arrangement
43
Who did this primarily benefit?
Company Tasty or Company Hungry?
What was the reason for the bonus payment?
Who initiated the transaction or arrangement?
When was the employee payment contemplated?
Example - Golden Parachute Arrangement
44
Company Hungry acquires Company Tasty and agrees to provide each of the key officers of Company Tasty a cash payment of $1 million if they remain employed with the combined company for at least one year from the acquisition date.
If the key officers resign prior to the first anniversary of the acquisition date, the cash payment of $1 million will be forfeited.
Example – Please Stay Bonus!
45
Who did this primarily benefit?
Company Tasty or Company Hungry?
What was the reason for the bonus payment?
Who initiated the transaction or arrangement?
When was the employee payment contemplated?
Example – Please Stay Bonus!
46
Private Company Alternatives
47
ASU 2014-02 – Amortize Goodwill
Amortize goodwill over 10 years or less
Impairment test based on trigger event
Reporting Unit or Entity Level
ASU 2014-18 – Subsuming Certain Intangibles
Subsume the following into goodwill:
• Customer-related intangibles that can’t make money on its own
• Noncompetition agreements
If elected, must apply ASU 2014-02
Private Company Alternatives
48
4949
5050
Needed reinforcements
5151
Consolidations – ASU 2018-17Focus on Private Company Accounting Alternative
52
Legal Entity?
Scope Exception?
Variable Interest?
Variable Interest Entity?
First… A Recap of VIEs
53
Primary Beneficiary
Related Party Tie-breaker?
Does VIE Guidance Apply?
Who has Controlling Financial Interest?
What’s the problem? - Engine Co. Example
54
OWNER
Car Co.
100% Equity
100% Equity
Purchases90% of Engines Produced
Engine Co.
• Engine Co. has insufficient equity (Equity = 5% of funding)• Industry standard for sufficient equity is 20%
• Loan to Engine Co. represents 15% of funding• Engine Co financed remaining 80% with Bank ABC• Car Co. makes significant decisions • Arms-length pricing
$15k Loan
Another common example…
55
OWNER
Operating Co.
100% Equity
100% Equity
Leases Factory from Lease Co.Lease Co
• Operating Company leases a factory from Lease Co.• Lease Co’s only asset is the factory
• Lease Co financed the purchase of the factory through a mortgage
Lease Payments
Consolidations: Private Company Alternative
56
Policy Election not to apply VIE Guidance to Entities Under Common Control
Criteria to Qualify
• Private company and legal entity under common control• Common control parent is not a PBE• Legal Entity is not a PBE• Don’t have a majority of the voting interest in the Legal Entity
Required Disclosures to under involvement and exposure to legal entity under common control
Accounting Alternative for Leasing Arrangements under common control (ASU 2014-07) Superseded
Combined statements still permitted if entities are under common control
In addition to existing related party disclosures, disclose the following:
a) Nature and risks associated with legal entity under common control.
b) How does legal entity affect the reporting entity’s balance sheet, financial performance, and cash flows.
c) Assets and liabilities on the reporting entity’s balance sheet resulting from its involvement with the legal entity
d) The reporting entity’s maximum exposure to loss related to the legal entity.
e) If the entity’s maximum exposure to loss exceeds assets and liabilities as described in (c), the reporting entity shall provide information to allow users of financial statements to understand the excess exposure. Consider both explicit and implicit arrangements
Consolidations – Private Company Disclosures
57
Calendar-Year End Private Companies -> 2021
Early adoption permitted
Effective Date
58
Leasing arrangements under common control
What do I recognize and measure under Topic 842
What about leasehold improvements?
How does this interact with the Topic 842
59
Michael ChengNational Professional Practice Partner
Michael ChengNational Professional Practice [email protected]
Direct Phone: 404.573.4538
1230 Peachtree Street NESuite 1500Atlanta, GA 30309
Mike Cheng joined Frazier & Deeter in 2019 as the Partner who oversees the firm’s professional practices related to accounting and audit. As part of his role, Mike specializes in assisting clients with complex accounting and financial reporting issues. Mike currently serves on AICPA’s PCPS Technical Issues Committee
Prior to joining Frazier & Deeter, Mike was a Senior Project Manager at the Financial Accounting Standards Board (FASB). In addition to serving as the Private Company Council Coordinator, Mike led projects to: simplify the accounting for nonemployee share-based payments, help shape the future of the FASB technical agenda and improve consolidations guidance (VIE guidance). Most recently, Mike worked on the FASB’s implementation team on revenue recognition (ASC Topic 606) and lease accounting (ASC Topic 842).
Prior to joining the FASB, Mike was an Audit Senior Manager at PricewaterhouseCoopers (PwC).
Mike earned his Bachelor of Science degree in Accounting with a concentration in Finance from Binghamton University in Binghamton, New York.
Accounting & Auditing Conference October 14, 2019
The Impact of Artificial Intelligence and Cognitive Technologies on Audits
Jared Theis, CPA, KPMG LLP
This session will provide an overview of current technologies that are currently being used on audits or that are currently being developed and tested for use. It will also cover how these technologies are disrupting the traditional audit approach for firms, clients, and those entering the profession in the coming years. The session will cover:
• Overview of some of the current technologies that are being enabled on audits
• The impact of these technologies on the audit process, client deliverables, and evidence obtained
• How these technologies may change the tools and skillsets required by auditors in the future
Jared Theis, CPA, is an Audit Senior Manager in the Seattle office of KPMG LLP, working remotely out of Spokane. He provides financial statement and internal control audit services to a variety of public and non-public companies, primarily in the forest products, manufacturing, and real estate industries. Jared maintains an in-depth understanding of requirements and standards of the PCAOB, FASB, SEC, and Private Company Council. He is also frequently a guest speaker at various professional events and local college campuses, and currently serves as a member of the Accounting Advisory Boards for Washington State University and Eastern Washington University. He is a member of the WSCPA Board of Directors, serving as Vice Chair for 2019-2020.
TEL 425.644.4800 | www.wscpa.org | [email protected] 140th Ave NE | Bellevue, WA 98005-3480
NOTES
The technology enabled audit
Jared Theis
October 14, 2019
2© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
2© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
Agenda
The worldis changing
Automation in action
Accounting innovation
journey
What is expected of
professionals
The world is changing
4© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
4© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
The data shift: How do we make sense of the data being generated?
Source: https://medium.com/@VidrihMarko/this-happens-every-60-seconds-online-in-2018-27a81e5fa306
Every MINUTE of the DAY
2018 AMAZON
SHIPS 1,111PACKAGES
THE WEATHERCHANNEL
RECEIVES18,055,555FORECAST REQUESTS
GIPHYSERVES UP1,388,889GIFS
NETFLIX
USERS STREAM97,222
HRS OF VIDEO
SNAPCHATUSERS SHARE2,083,333SNAPS
GAINS 120+ NEW PROFESSIONALS
YOUTUBE
USERS WATCH4,333,560VIDEOS
TWITTERUSERS
SEND473,400
TWEETS
12,986,111
TEXTS SENT
SKYPEUSERS MAKE176,220CALLS
INSTAGRAMUSERS POST
49,380PHOTOS
AMERICANSUSE 3,138,420 GBOF INTERNET DATA
SPOTIFYSTREAMS OVER 750,000SONGS
UBER USERSTAKE1,389
RIDES
VENMOPROCESSES $68,493PEER-TO-PEERTRANSACTIONS
TINDERUSERS MATCH6,940 TIMES
GOOGLECONDUCTS3,877,140 SEARCHES
1.25 NEW
BITCOINARE CREATED
SOCIAL NEWSRECEIVES 1,944NEW COMMENTS
TUMBLRUSERS PUBLISH79,740 POST
5© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
5© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
Making sense of the data
How can auditors effectively capture, analyze and ultimately use the vast amount of information that is now available for an audit?
Digital tools
Automation and robotics
Tech savvy people
Cognitive computing
Data analytics
The Answer lies in a combination of capabilities
6© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
Marketplace perspective
Google recently announced they have changed from“mobile first” to “AI first.”
There are now more than
1,500 AI start-ups with
$10 billion in funding.4
Global market forAI systems will reach
$70 billion by 2020.4
Amount of data collected each day:
2.5 billion GBs or 2,500,000,000,000,000,000 bytes1
Google, Microsoft, and Amazonwill each spend more than
$12 billion on R&D this year,2
(with much of this dedicated todigitization and intelligent automation).
of CEO’s considertheir company to bea technology company.3
1. Source: 2017 JPMorgan annual report2. Source: Satya Nadella – September, 2017
3. Source: Fortune CEO Daily – June 18, 20174. Source: KPMG Innovation snapshot #74 – January 6, 2017
71%
7© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
7© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
US CEO views on the impact of technology
Source: KPMG U.S. CEO Outlook 2018 Survey, May 2019
of US CEOs feel personally responsible for leading technology strategy. 89%
of US CEOs prioritize technology investments over people investments, yet they are aware of disruptors beyond technology.
68%
of US CEOs cite disruptive technology as the risk posing the greatest risk to their organization’s growth
23%
of US CEOs believe that, overall, technology will be a job creator. 72%
8© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
Audit 2025: The future is now
A KPMG and Forbes Insights survey reveals that auditors need to use technology to expand their roles, but this need has grown much stronger over the last two years
25%Increase in the number of executives who
believe auditors should be more proactive about expanding the role of the audit
27%Increase in the number of executives who believe the auditor of the future needs technology skills
Skills that are becoming more important
66%Communicationskills
65%Critical thinking and judgment skills
59%Investigative financial skills
49%Ability to work across siloes
Future auditors should have the following skills:
Learn more by downloading, “audit 2025: the future is now.”
Accounting Innovation Journey
10© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
Meeting the challenge of innovation
Key investments are needed in:
PeopleEnhancedMethodologies
Strategic Relationships
Today Tomorrow
People, intellectual property and audit processes
Cognitive and deep learning
Robotics and leading D&A tools
Strategic relationships with leading technology companies
11© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
11© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
Transformation through technology
Market disruptors
Digital Labor
Client Investments
Explosion of Data
Disruptive Technologies
Influencing the vision for change
Robust Shared Services
Next Gen Auditors
Innovative audit platform
EnablingTechnologies
Enhanced Client Experience
Our profession’s commitment to quality demands that we drive change as well through innovative ideas, processes, and tools.
Automation in action
13© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
13© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
Understanding the automation spectrum
Emerging technologies are integral to the KPMG Audit Transformation strategy and cover the full spectrum of automation leveraging key elements including robotics, natural language processing, machine learning and Artificial Intelligence.
Automation of entry-level, transactional, rule-based, and repeatable processes
Processing of unstructured data and base knowledge
Automation driven by self learning and adaptive technologies
Macro-based
Unstructured Data
NaturalLanguageProcessing
KnowledgeBase
ActiveLearning
Macro-based
UnstructuredData
NaturalLanguageProcessing
KnowledgeBase
ActiveLearning
Macro-based
UnstructuredData
NaturalLanguageProcessing
KnowledgeBase
ActiveLearning
PredictiveAnalytics
MachineLearning
Reasoning Large-ScaleProcessing
Big DataAnalytics
PredictiveAnalytics
MachineLearning
Reasoning Large-ScaleProcessing
Big DataAnalytics
PredictiveAnalytics
MachineLearning
Reasoning Large-ScaleProcessing
Big DataAnalytics
Basic Automation
Enhanced Automation
Cognitive Automation
Key features Key features Key features
14© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
14© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
Digital automation
Through data extraction and analysis, the following audit-related insights can be attained:
— Investment in ERP/Integrated accounting system is not being leveraged properly
— There is manual intervention in processes that should be automated
— Internal policies and procedures may not be complied with
— Insight into specific countries or departments that are recording the most manual and/or unusual journal entries
Journal entry analysis
— Areas where information is being stored outside of the core GL system
— Transactions processed manually, rather than via automated processes
— Potential for missed revenue opportunities
— Process improvement opportunities
Revenue three way match
— Compliance with segregation of duties policies
— Potential fraudulent transactions
— Opportunities to reduce risk exposure
Segregation of dutiesanalysis
15© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
Journal entries analysis
Generate highly customizable analyses for identification of inappropriate journal entries.
— Journal entries recorded on weekends, holidays, or unusual times outside of business hours that may indicate fraudulent activity
— All journal entries recorded by a preparer or approver, can be analyzed
Filter weekend Values
Saturday Sunday
Automated or manual entry User name
Document number –distinct count
Amount in document currency – sum
Document number –distinct count
Amount in document currency – sum
Automated 69,791 2,083,786 5,744 1,042,157
Manual EC241F8E-315 53 1,907,300
0954B949-649 5 15,608 2 3,070
E8DEE2FC-1AF 1 740
EC241F8E-315 32 3,558,601 316 673,069
Manual Total 90 5,481,509 319 676,879
Grand Total 69,881 7,565,295 6,063 1,719,036
Account number Account category Dr amount Cr amount Local currency
User namePosting date
Entry dateAuto or manual?
A6B98EB7-D Trade receivables third party
1,097,300 - USD EC241F8E-315 2013-09-30 2013-10-05 Manual
99AC9424-6 Non current assets - 1,097,300 USD EC241F8E-315 2013-09-30 2013-10-05 Manual
99AC9424-6 Non current assets 1,097,300 - USD EC241F8E-315 2013-09-30 2013-10-05 Manual
A1A21AX7-B Cash - 1,097,300 USD EC241F8E-315 2013-09-30 2013-10-05 Manual
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Revenue 3 way match – Price results
Price difference analysis
Price risk categoryRevenues subject
to 3 way match# of
transactions%
(amount) % (number)Extended
difference
No difference 303,232,241 1640 94.5% 92.9% 0
PO > invoice price 14,438,076 73 4.5% 4.2% 823,682
PO < invoice price 3,175,837 51 1.0% 2.9% 98,740
Total 320,846,154 1764 100.% 100.0% 922,422
124 transactions for a total of $17,613,913 were identified with price differences
94.5% of transactions analyzed contained no price differences
$922,422 total “extended” difference or 0.3% of total amount tested
17© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
Intelligent automation – Expense vouching
18© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
Conflicting authorization in purchasing
Potential risk where 7 users posted $10 million in transactions with conflicting authorizations: goods/service receipt entry, A/P invoice entry, and payment approval
After investigating the underlying transactions and discussing with the client, we may conclude there is little or no risk here.
The business may wish to streamline authorizations and eliminate a potential control deficiency related to the number of individuals with conflicting duties.
19© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
Impact of weather patterns
Thechallenge
— Model the impact of discrete weather behavior at individual locations on weekly store sales performance.
KPMG response
— Create a model that statistically linked weather observations geo-mapped to individual store locations with differences between forecast and actual store sales.
— Calculate the impact of weather on sales for a given week and adjusted rates for same-store weekly sales comps.
$
Do I buy something in
store?
Yes
No
Yes
No
Other…
Brand Preference
Availability/Schedule
Ability
to Pay
Consumer Profile
? Yes
No
W eather aside, will I go to the
store?
Yes
No
Given the weather, do I go
to the store?Shopping Triggers
Other…
“Need”1
Marketing
By definition, the “No” paths are not modeled because they cannot be observed these in the sales and traffic data
Do I buy something online?
Scope of modeled weather impact
30
10
15
Reported LY Comp
105
Forecast Growth
Weather-Adjusted LY Comp
Actual Weather Impact
Non-Weather Impact
Actual
+20%+5%
100
Weekly Dollar Sales
TY LY
20© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
Predicting student withdrawals
The challenge
— A leading university wanted to reduce students leaving before graduating by approaching at-risk students with targeted remedial actions to prevent their withdrawal.
KPMG response
— Developed a survival analysis model that combined advanced analytics, various data sources, along with machine learning, to identify characteristics of students likely to leave the university prematurely.
— Model examined over 1,500 initial data signals, pulls data from relevant sources, and provides a hazard score for each student.
— Model enables the university to intervene on a timely basis with customized interventions to improve student retention.
21© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
What is cognitive technology?
Cognitive technology employs a range of capabilities that can:
Perceive Reason Learn
The analytical capabilities of cognitive technology are well-suited tothe expanding data volumes
and automated processes prevalent in today’s audit environment.
Hypothesize and weigh supporting evidence
Improve confidence levels with experience
Interpret sensory input beyond traditional data
22© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
22© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
More effective decision making
Cognitive technology and data and analytics are highly complementary capabilities that support complex decision making.
Logic
AnalyticsRationale
CognitiveAnalyze
Compare
Measure
Optimize
Calculate
Prevent
Monitor
Prescribe
Learn
Assess
Infer
Debate
Hypothesize
Probability
Analogize
Options
001001010100110011
Help me do THINGS right Help me do the RIGHT things
23© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
23© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
Cognitive technology in action
Key attributes from unstructured data
Cognitive system to perform judgmental activities
1. Extract 2. Train
More detailed evidence forauditor evaluation
Machine learning to enhance points 1 and 2
4. Generate3. Engage
Client Information
24© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
The benefits of cognitive technology
Cognitive technology
Inp
uts
Ou
tco
mes
Analyze data
Generate hypothesis
Evaluate evidence
Judgment based decisions
Insights
Cognitive technology drives audit quality by enhancing:
Speed Enablement Focus
Of audit professionals for success in a digital and mobile world
Deeper views into data to better identify risks for high confidence outcomes
Accelerated path to meaningful insights and decision making
Transformed sampling techniques
25© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
25© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
CMLA – Journey to cognitive automation
Credit file
Understand the facts
Translate into a loan rating
Interpret a client-specific loan grading scale
Prepare summary of findings
Manual processes are limited to a subset* of the entire loan population.Today
* Approximately 40-60 credit files
26© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
CMLA – Journey to cognitive automation
We will be able to analyze larger, more complete data sets from selected loan portfolios up to, and including, the entire bank loan portfolio.
KPMG and client scales alignedWeighting scale
Payment History: Weak
PSOR: Strong
Collateral: Strong
Guarantor: Weak
Loan Amount: $10M
Purpose: re-finance
Collateral: A properties
Appraised value: $100M
Third-party information
100
90
80
70
AAA
AA
A
Evidence
Understand facts
Assign weightsto facts
Translate into a loan
rating
Extract facts from credit file and
other sources
Auditor reviews potential
exceptions
Loan #
KPMGrating
Clientrating
1
2
3
B
C
AAA
B
B
AAA
Future
What is expected of audit professionals
28© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
The next generation of audit professionals
Is prepared for an evolving profession
Has strong investigative skills
Applies critical thinking and reasoned judgment
Is innovative
Embraces change
Applies advanced technologies
— Core technical skills in audit and accounting
— Business process acumen
— Understanding of statistics and predictive analytics
— Analytical mindset
— Interpersonal
— Flexible and agile
Technical skills
Soft skills
29© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
What you can do now
Stay current on trendsand seize industry opportunities
Challengeyourself to thinkcritically
Gain dataand analyticsskills
Learn effective communication
Questions
Thank you
© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 886541
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.
kpmg.com/socialmedia
Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.
Accounting & Auditing Conference October 14, 2019
Auditing the Implementation of ASC 606: A Practical Example from a Mid-Market Firm
Peter Miller, CPA, CFE, Clark Nuber PS
The long-anticipated guidance related to Revenue from Contracts with Customers is nearly upon us. Given the prolonged implementation period, the basics of this new guidance have been covered many times over. This session will provide a practical example for how the implementation of ASC 606 was applied by a mid-market firm serving private companies and nonprofits. TAKEAWAYS:
• For attendees in the practice of public accounting this session will provide an example of a practical approach to auditing the implementation of ASC 606.
• For attendees preparing financial statements this session will provide clarity on what you can expect from your service provider and what you will need to have prepared.
Pete Miller, CPA, CFE, is a shareholder in the audit and assurance practice at the accounting firm Clark Nuber PS, headquartered in Bellevue, Washington. Pete serves privately-held and closely-held businesses in a wide range of industries and sizes. Clark Nuber partners with those businesses to help them achieve their financial goals and Pete primarily does this by providing executive leadership to a number of concurrent teams conducting audits, reviews and compilations. In addition to these duties, Pete directs the firm’s Forensic Accounting and Fraud Investigation practice, which includes the examination of internal control environments, the analysis of a variety of cash flow behavior, due diligence reviews, and a variety of litigation support projects. Pete has been a practicing CPA (Certified Public Accountant) since 2000 and a practicing CFE (Certified Fraud Examiner) since 2006. In his free time, Pete and his family enjoy hiking, running, and camping – just about anything outdoors. As an avid music lover, Pete can be found drumming in the company rock band or expanding his 70K+ song digital music collection.
TEL 425.644.4800 | www.wscpa.org | [email protected] 140th Ave NE | Bellevue, WA 98005-3480
NOTES
© 2017 Clark Nuber all materials included Seek permission for republishing
Auditing the Implementation of ASC 606
A Practical Example from a Mid‐Market Firm
Pete Miller, CPA, CFE
Shareholder, Clark Nuber P.S.
[email protected]; 425.709.6696
1. Our journey to here
2. Key takeaways of the new guidance
3. What a client can expect to be asked
4. Our planned audit strategy
5. Disclosures
6. Transition items
Agenda
1. The amount of revenue you recognize may not change, but the path will be different.
2. How will you know that you are complying with the new standard?
3. How will your CPA be able to audit that you are compliant with the new standard?
4. How will you know which disclosure requirements apply to you?
Why is this important?
1. It is important to read through the guidance in its entirety at some point.• Consider forming a multi‐disciplined steering committee
2. Effective for years beginning after 12/15/2018.• Years beginning after 12/15/2017 for public business entity
3. Linear process involving 5 steps:i. Identify the contract(s) with a customerii. Identify the performance obligations in the contractiii. Determine the transaction priceiv. Allocate the transaction price to the performance obligations in the contractv. Recognize revenue when (or as) the entity satisfies a performance obligation
4. Many industry‐specific Transition Resource Groups have been developed to assist in analyzing implementation issues.
8 Things to Know About ASC 606
5. Revenue amounts/timing may change as a result; disclosure requirements likely will change.
6. Two ways to implement this change:i. Full restatement – prior periods would be recast to show comparative
information as though the new guidance were in place.
ii. Modified retrospective approach – record an adjustment to retained earnings and not restate previous years.
7. Commissions expensemay be impacted as a byproduct of this process.
8. Tax treatment will generally need to follow GAAP.
8 Things to Know About ASC 606
Revenue Recognition Task Force (assume 12/31 YE)
Individual TrainingJuly/Aug 2017
Group TrainingSept 2017
Initial RRTF
MeetingDec 2017
Research consult Feb 2018
Publish talking points
Early March
Publish mock‐up of new disclosures
End of March
Develop narrative/ questionnaire tool for clients
March ‐ April
Rollout client narrative/
questionnaireMay
Consult and assess with clientsMay – December 2018
Audit testing and implementationQ4 2019 and forward
Revenue Recognition Timeline
Discuss overall timeline and milestonesMonth XX
CN to provide sample
transition disclosureMonth XX
Formal audit walkthroughs at interimQ4 2019
Complete narrative/
questionnaireMonth XX
Assess validity of new policy against small sample of existing
contractsMonth XX
December 31, 2018
Monitor inputs for estimates and adjust modelongoing
Go liveJanuary 1, 2019
• Different from other ASC Topics
• Auditing the discrete event
• Requests from clients
• Audit plan• Obtain an understanding• Test changes to revenue recognition timing
• Consider completeness of disclosures
• Do the same steps with costs to obtain a contract
• Consider the need to modify the auditor’s report
Auditing the implementation of 606
• Audit plan• Obtain client analysis of homogenous revenue streams
• Review analysis in light of prior audit knowledge for reasonableness• If necessary, review sample of customer contracts to further consider
• If no change to revenue recognition timing, stop here
• If changes to timing,• Consider the transition method elected by the client
• Test the calculation
Auditing the implementation of 606
• ADD DISCLOSURE CHECKLIST MATERIALS
Disclosures
• Simple example
• More complicated
Disclosure examples
• Transition disclosures?• Material impact?
• No material impact?
• Emphasis of a matter?
Transition items
Questions
State and Local Tax Considerations in Mergers and Acquisitions 13
Accounting & Auditing Conference October 14, 2019
Utilizing Data Visualization and Analytics in Auditing
Tania Fleming, Washington State Auditor’s Office
Data is everywhere, but it’s how we present that data that make it so valuable. Data storytelling helps connect the dots. The Office of the Washington State Auditor uses charts, graphs, maps, and dashboards to make the results from their audits understandable and dynamic. During this session, you'll learn about how:
1) The Office of the Washington State Auditor uses data to tell stories, 2) To effectively communicate with data by choosing the right chart, and 3) To drive effective decision making.
TAKEAWAYS:
• Power of data visualization to communicate audit results • How data visualization helps tell stories
Tania Fleming is a performance auditor and MPA graduate with experience in program evaluation, process improvement, statistical analysis, international development, legislative research, Korean language skills, and exposure to NGOs in Afghanistan, Ghana, South Korea, and Japan. She is an expert in higher education performance-based funding systems, state financial management systems, and low-income rental housing subsidies. She developed and managed budgets, teams and timelines for projects including a review of practices, tools and policies used by Washington's government to process public records requests. I also designed and conducted research methods that included qualitative and quantitative research including phone and web surveys, focus groups, and research on dozens of other states. In addition to project and research management and design, Tania conducted several presentations to legislative committees and other groups, and distilled complex technical information to provide concise, understandable, and informative reports on topics ranging from Public Records Act requests, higher education performance funding, impartiality of administrative appeals, and others.
TEL 425.644.4800 | www.wscpa.org | [email protected] 140th Ave NE | Bellevue, WA 98005-3480
NOTES
Storytelling withDataWSCPA Accounting & Auditing Conference
Pat McCarthyWashington StateAuditor
Tania Fleming
Principal Performance Auditor
October 14, 2019
Storytelling withDataWSCPA Accounting & Auditing Conference
Objectives
• Why visualize data?• What’s the right chart?• What are practical tips for effective
visualizations?
Why visualizedata?
3
7 6 4 9 8 7 5 1 3 6 5
8 4 8 1 6 8 3 1 3 7 3
2 5 7 8 4 6 8 9 3 9 6
8 4 9 6 7 1 2 3 6 4 6
8 5 9 7 8 5 6 3 4 2 8
4 9 8 6 5 7 8 7 6 3 5
2 5 1 8 6 7 7 3 8 2 6
4 9 7 8 5 4 3 3 2 8 8
7 4 5 7 9 8 2 5 6 9 1
6 9 6 8 6 3 1 2 3 4 8
7 8 4 6 8 9 5 6 1 2 3
8 9 8 2 5 6 7 5 8 3 4
HOW MANY NINES ARE THERE?
Why visualizedata?
4
HOW MANY NINES ARE THERE?
7 6 4 9 8 7 5 1 3 6 5
8 4 8 1 6 8 3 1 3 7 3
2 5 7 8 4 6 8 9 3 9 6
8 4 9 6 7 1 2 3 6 4 6
8 5 9 7 8 5 6 3 4 2 8
4 9 8 6 5 7 8 7 6 3 5
2 5 1 8 6 7 7 3 8 2 6
4 9 7 8 5 4 3 3 2 8 8
7 4 5 7 9 8 2 5 6 9 1
6 9 6 8 6 3 1 2 3 4 8
7 8 4 6 8 9 5 6 1 2 3
8 9 8 2 5 6 7 5 8 3 4
Why visualizedata?CaseStudy:PublicRecordsRequests
QUESTION
How much does it cost government agencies to provide public records?
APPROACH
• Detail by entity type
• Filter by entity
ENTITIES SPENT MORE THAN $60MILLION
5
Why visualizedata?CaseStudy:AlternativeLearningExperience(ALE)Programs
QUESTION
How can we help Alternative Learning Experience programs learn how to improve?
APPROACH
• Information bylocation
• Filter by innovative approach
• Detailed examples
INNOVATIVE APPROACHES ALE OFFERS
6
Finding the RightChartA.Abela’sChartChooser
https://img.labnol.org/di/choosing_a_good_chart2.pdf
7
Finding the RightChartMarksandChannelsbyEffectiveness
Position on a common scale
Length
Tilt/angle
Area
Color luminance &saturation
Curvature
Volume (3D)
Least Effective8
Most Effective
Spatial region
Color hue
Shape
Tamara Munzner, Visualization Analysis & Design, 2015
Tips forBuildingDataVisualizations
Text
AdaptedfromStephanieEvergreen’sDataVisualizationChecklist
Short descriptive titleLabels are used sparinglyText size is hierarchical and readableData are labeled directly (rather than using a legend) Subtitle and/or annotations with additional information
Proportions are accurate Data intentionally ordered Axis intervals are equidistant Graph is 2DDisplay is free from decoration
Arrangement
Color scheme is intentionalColor is used to highlight key patternsColor is legible when printed in black and white Color is legible for people with colorblindnessText sufficiently contrasts background
Color
9
Data VisualizationChecklist
Gridlines, if present, are mutedGraph does not have border lineAxes do not have unnecessary tick marks or axis linesGraph has one horizontal and one vertical axis
Graph highlights significant finding or conclusionThe type of graph is appropriate for data Graph has appropriate level of precision
Individual chart elements work together to reinforce takeaway message
Overall
10
Lines
From http://stephanieevergreen.com/wp‐content/uploads/2016/10/DataVizChecklist_May2016.pdf
Howmanynines are there?
1 8 better proc
2 10 • Order
3 15 • Highlig
4 13 • Lines
5 14
6 20
7 15
8 25
9 12
11
How to help your brainess and
compare:
ht
• Labels
FiveThirtyEight’s BiggestDinosaur
12
Accounting & Auditing Conference October 14, 2019
Lease Accounting
Michael Cheng, CPA, Frazier & Deeter
Topic 842 (Leases) is sure to have a major impact on your (or your client’s) balance sheet. This session provides an overview what you need to know about the upcoming changes to lease accounting from a lessee’s perspective. OBJECTIVES:
• Learn how to identify a leasing arrangement • Understand the overall model for finance and operating leases
Mike Cheng joined Frazier & Deeter in 2019 as the Partner who oversees the firm’s professional practices related to accounting and audit. As part of this role, he specializes in assisting clients with complex accounting and financial reporting issues. Prior to joining the firm, Mike was a Senior Project Manager at the Financial Accounting Standards Board (FASB). At the FASB, he served as the Private Company Council (PCC) coordinator, where he was responsible for all PCC related matters. In addition, Mike led projects to simplify the accounting for non-employee share-based payments, help shape the future of the FASB technical agenda and improve consolidations guidance (VIE guidance). Most recently, he worked on the FASB’s implementation team on revenue recognition (ASC Topic 606) and lease accounting (ASC Topic 842). Prior to joining the FASB, Mike held various management positions with PricewaterhouseCoopers. He was an Audit Senior Manager, Private Company Services, in the firm’s Stamford, CT office. From 2003-2011, he also held roles of increasing responsibility in PwC’s Core Assurance divisions in Buffalo and Rochester, NY.
TEL 425.644.4800 | www.wscpa.org | [email protected] 140th Ave NE | Bellevue, WA 98005-3480
NOTES
Topic 842 Overview –Lessee AccountingWSCPAOctober 14, 2019
Michael Cheng
Partner
Scope and Scope Exceptions
2
Topic 842 does not apply to:
Leases of intangible
assets (Topic 350)
Leases of assets under construction (Topic 360)
Leases of biological assets
(Topic 905)
Leases to explore for or
use nonregenerative
resources (Topics 930 and
932)
Leases of inventory (Topic
330)
Scope: All leases, including subleases
2
Right-of-Use Model
3
A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration
Lessee Accounting – Let’s get the basics down!
Lessee Model
5
Finance lease if any of the following are met (otherwise it’s an operating lease):
Lease transfers ownership of
the underlying asset to the
lessee by the end of the lease
term
Lease grants the lessee an
option to purchase the asset that the
lessee is reasonably certain to exercise
Lease term is for a major part of the remaining economic life of the underlying
asset
PV of the lease payments and
any lease residual value guarantee not reflected in the
lease payments, equal or exceed substantially all of the asset’s
FV
Underlying asset is of such
specialized nature that it is
expected to have no
alternative use to the lessor at the end of the
lease term
Lessee Accounting Overview
6
Subsequent Measurement
Finance
Operating
Right-of-use (ROU) asset
Lease liability
Amortization expense
Interest expense
Cash paid for principal and
interest payments
Right-of-use (ROU) asset
Lease liability
Single lease expense on a straight-line basis
Cash paid for lease payments
Classification is similar to the classification in Topic 840
Recognition and measurement exemption for short-term leases
Lease Liability
Lease liability
Present value of remaining payments, using a discount rate calculated on the basis of
information available at the commencement date
ROU Asset - Operating
Lease liability
+ Unamortized initial direct costs
± Prepaid/Accrued lease payments
- Remaining balance of lease incentives received
ROU Asset
Lessee
Reassess only upon the occurrence of a significant event/change in circumstances
that is within the control of the lessee*
Lessor
Not required to reassess*
Initial Measurement
Consider all relevant factors that create an economic incentive to exercise a
renewal/purchase optionInclude if reasonably certain will exercise
Lease Term and Purchase Options
9
Subsequent Measurement
* Absent a modification
Lessee
Reassess VLPs based on an index or a rate only when the lessee remeasures the
lease liability for other reasons (e.g., change in lease term)*
Lessor
Not required to reassess*
Initial Measurement
Only include VLPs that are linked to an index or a rate or are “in-substance fixed payments”
Variable Lease Payments (VLPs)
10
Subsequent Measurement
* Absent a modification
Discount Rate
11
Reassessment
• The rate implicit in the lease, if readily determinable; otherwise the incremental borrowing rate
• Include initial direct costs of the lessor in the determination of the rate
Initial Determination
• Lessee: Reassess only when lease liability is remeasured for other reasons (e.g., change in the lease term)*
Reassessment
Private Companies and NFPs
• Discount Rate Accounting Policy Election: May use risk-free rates for measurement of all lease liabilities
Lessee – Simple Finance Lease• 5 year equipment lease entered at end of 2020
• Rent payment equals $1,000 the first year and increases $100 each year thereafter. Total payments over 5 years is $6,000
• Discount rate is 6%
• No initial direct costs recognized
• Assume this is a finance lease
12
Lessee – Simple Operating Lease• 5 year retail store lease entered at end of 2020
• Rent payment equals $1,000 the first year and increases $100 each year thereafter. Total payments over 5 years is $6,000
• Discount rate is 6%
• No initial direct costs recognized
• Assume this is an operating lease
13
• For leases with a GAAP lease term of 12 months or less
• No longer based on maximum possible term, now aligned with definition of lease term
Recognition and Measurement
Exemption
Short-Term Leases Exemption
14
• Accounting policy election of risk-free rate to measure lease liability
Recognition and Measurement Election
Risk-Free Rate Election (Nonpublic)
15
• Account for related-party leases based on legally enforceable terms and conditions of the lease
Recognition and Measurement
Related-Party Leases
16
17
Lessee Financial Statement Presentation
Balance Sheet
• ROU Assets:• Separate line item
or • Within another line
item but separate from ROU Assets from finance leases
• Lease Liability• Separate line item
or• Within another line
item but separate from lease liabilities from finance leases
Income Statement
• Income from continuing operations (operating expense)
Cash Flows
• Lease payments are operating activities
Operating Leases
18
Lessee Financial Statement Presentation
Balance Sheet
• ROU Assets:• Separate line item or • Within another line item
but separate from ROU Assets from operating leases
• Lease Liability• Separate line item or• Within another line item
but separate from lease liabilities from operating leases
Income Statement
• ROU Asset Amortizationconsistent with depreciation/amortization of similar assets
• Interest expense on lease liability consistent with other interest expense.
Cash Flows
• Principal repayment on lease liability in Financing Activity
• Interest payments on lease liability typically in Operating Activities
• Variable lease paymentsin Operating Activities
Finance Leases
More Advanced Lessee Topics
Identifying a Lease
Lease contracts in the scope of Topic 842
involve
An identified asset
That is explicitly or implicitly specified
Supplier has no practical ability to substitute and would not economically benefit from substituting
the asset
The right to control the use during the lease
term
Decision-making authority over the use of
the asset
The ability to obtain substantially all
economic benefits from the use of the asset
Identifying a Lease
21
Example – Fiber Optic Cable
22
Is there a Lease?
Customer enters into a 15 year contract for the right to use 3 specified fibers within a larger cable connecting Hong Kong to Tokyo.
Customer makes decisions about the use of the fibers (e.g., decides what data and how much those fibers will transport)
Supplier is responsible for repairs and maintenance.
Is there a Lease?
Customer enters into a 15 year contract with Supplier for the right to use a specified amount of capacity within a cable connecting Hong Kong to Tokyo.
Capacity is equivalent to the full use of 3 strands within a cable (the cable has 15 fibers with similar capacities).
Supplier makes decisions about the transmission of data (e.g., which fibers are used and electronic equipment used to operate the cable).
Example – Concession Space
23
Is there a Lease?
Coffee Company (Customer) enters into a contract with an airport (Supplier) to sell its goods for a 3 year period.
Contract states the amount of space required and the space may be located at any one of the several boarding areas.
Supplier has the right to change the Customer’s location at any time.
There are minimal costs to relocate the kiosk owned and operated by the Customer.
Many areas in the airport meet the space specifications.
Example - Detergent purchases
24
Is there a lease?
• Cleaning supply company sells cleaning agents and dishwashing detergent
• Pricing is extremely favorable but requires a 3 year commitment
• Annual minimum purchase requirements must be met by customer
• A high-end dishwasher is included during the 3 year term
• Professional installation is included
Example – Let’s take this a little further
25
Can you identify potential leasing arrangements?
• Pretend you work for a national restaurant chain
• Segments consist of
• casual dining,
• sports/bar concept
• fast food
Brainteaser
26
Is there a lease?
• Green office decorating and management
• Live plants
• No fuss because service provider takes care of everything (e.g., watering, pruning, etc.)
• 2 year term
Commencement Date
27
Lease Commencement Date
Starts when lessee has the right to use
the underlying asset (transfer of
control)
Timing of lease payments does not
affect the commencement
date
Example – When does a lease start?
28
Example:
Lessee signs a lease contract on 12/31/2020 for a prime location in a shopping mall
Lessor grants access to location starting on 5/1/2021
Lessee begins construction of leasehold improvements on 5/1/2021
Store is anticipated to open on 7/1/2021 when lease payments are due to the Lessor
Questions:
What is the lease commencement date?
Which date do I use to determine the discount rate?
Initial Direct Costs
Selling profit or loss: Expense IDC at lease commencement
No selling profit or loss: Include IDC in initial measurement of net investment in the lease
Recognize as an expense over the lease term on the same
basis as lease income
Include in the initial measurement of the ROU asset and amortize the costs over the lease term
Sales-Type Operating
Lessor
Lessee
IDC = only incremental costs that an entity would not have incurred if the lease had not been obtained (executed)
Finance & Operating
Include IDC in initial
measurement of net investment in
the lease
Direct Financing
Initial Direct Costs (IDC)
30
Initial Direct Costs (IDC) - Example
31
Subsequent Measurement
Costs incurred by lessee
$15,000 - External legal fees
$7,000 - Employee costs for negotiating lease terms and conditions
$20,000 - Payments made to existing tenant to obtain the lease
Question - What are the lessee’s IDCs?
Initial Direct Costs (IDC)
32
Subsequent Measurement
• Commissions• Payments made to an existing tenant
to incentivize that tenant to terminate its lease
Included
• General overheads• Cost to evaluate prospective lessee’s
financial condition• Costs to negotiate lease terms and
conditions• Legal fees
Excluded
Lessee – Simple Operating Lease w/ IDC
• 5 year retail store lease entered at end of 2020
• Rent payment equals $1,000 the first year and increases $100 each year thereafter. Total payments over 5 years is $6,000
• Discount rate is 6%
• $500 paid as lease commissions to leasing agent
• Assume this is an operating lease
33
Lessee – Simple Operating Lease w/ IDC
• What are the entries when the lessee is granted access to the retail location?
• What are the entries at the end of 2021 when the expense is incurred and the payment is made?
34
Example – Simple Operating Lease w/ IDC
35
End of 2020 – Transfer Control of Warehouse and Payment of Lease Commission
DR ROU Asset (3) $5,506 (Lease liability + IDC)
CR Lease Liability (2) $5,006 (PV of remaining lease payments)
CR Cash (1) $500 (IDC – lease commissions)
Example – Simple Operating Lease w/ IDC
36
End of 2021 – Lease expense and payment
DR Lease Expense (3) $1,300 (Straight-line rent expense)
DR Lease Liability (2) $1,000 (2021 lease payment)
CR Lease Liability (4) $300 (6% Interest on lease liability)
CR ROU Asset (5) $1,000 (ROU amortization)
CR Cash (1) $1,000 (2021 lease payment)
Example – Simple Operating Lease w/ IDC
37
End of 2025 – Lease expense and payment
DR Lease Expense (3) $1,300 (Straight-line rent expense)
DR Lease Liability (2) $1,400 (2025 lease payment)
CR Lease Liability (4) $79 (6% Interest on lease liability)
CR ROU Asset (5) $1,221 (ROU amortization)
CR Cash (1) $1,400 (2025 lease payment)
Unit of Account
ID Units and Allocating Consideration
39
Step 1• Identify the components - lease and non-lease
components (e.g., service)
Step 2• Measure the consideration in the contract
Step 3
• Separate and allocate the consideration in the contract between the lease and non-lease components
Step 1 - Separating Components
40
Contract
Asset A Asset B Asset C
Separate Lease Component
Separate Lease Component
Service
NonLeaseComponent
Separate Lease Components
41
• Lessee can benefit from use of the asset on its own or together with other readily available resources
• The underlying asset is neither dependent on, nor highly interrelated with, the other underlying assets in the contract.
A right to use an underlying asset is a separate lease component if both:
Rights to use two or more underlying assets may be a single lease component
Similar to the distinct guidance in Topic 606 (the new revenue recognition standard).
Incentives paid or
payable to the lessee
Other variable
payments that
depend on an index or
rate
Other fixed or in-
substance fixed
payments
Payments related to the use of
the underlying
asset
Measuring Consideration
42
Consideration in the contract
The starting point for a lessee measuring the consideration in the contract is the
defined payments relating to the underlying asset, which are then adjusted
as follows. . .
Putting it all together!
43
Allocate “Consideration in the Contract”(Lease Payments – Lease Incentives)
Lease A Lease B Service (Nonlease)
Relative Standalone Price (Maximize Observable Inputs)
*Accounting Policy Election – Lessee may elect, by class of underlying asset, not to separate nonlease components from the lease component and account for the combined components as a single lease component.
Lessee – Net Operating Lease w/ CAM (Elect to combine)
44
• 5 year retail store lease entered at end of 2020
• The contract states that the lease payment is $950, and $50 relates to CAM. Each year thereafter, the lease payment will increase by $95 and CAM charges will increase by $5. In other words, the lease payment and CAM charge will equal $1,000 the first year and increase by a total of $100 each year thereafter.
• Each year, the LE is responsible for reimbursing the LR for property taxes and insurance fees. The taxes and fees estimated to total ~$100/year
• Discount rate is 6%
• Assume this is an operating lease
• The standalone price for a similar lease and CAM is $850/yr and 150/yr, respectively, and the company believes the 85%:15% split will remain consistent for the next 5 years
• The entity elects to combine the leasing and non-leasing components
Lessee – Net Operating Lease w/ Variable Payments
45
• Step 1 – What are the components to the contract?
• Leasing component – retail store lease
• Nonleasing component - common area maint.
• Not a component at all- property taxes are not a component.
• The lessee doesn’t benefit.
• Don’t worry - EVERYTHING will be considered as a leasing component due to election.
• Step 2 - What is total consideration in the contract?
• $6,000 which are the fixed payments
• The variable payments is not included for allocation
• Step 3 - How do I allocate?
• Everything goes to the leasing component because of election
Lessee – Net Operating Lease w/ CAM (Elect to combine)
46
Straight
LineVariable Total Beg Int. (6%) Payment End Beg Amort. Ending
[a] [b] [c] =[a]‐[b]
2020 ‐ ‐ ‐ ‐ ‐ ‐ (5,006) ‐ 0 5,006
2021 1,200 94 1,294 (5,006) (300) 1,000 (4,306) 5,006 (900) 4,106
2022 1,200 97 1,297 (4,306) (258) 1,100 (3,465) 4,106 (942) 3,165
2023 1,200 101 1,301 (3,465) (208) 1,200 (2,472) 3,165 (992) 2,172
2024 1,200 103 1,303 (2,472) (148) 1,300 (1,321) 2,172 (1,052) 1,121
2025 1,200 105 1,305 (1,321) (79) 1,400 0 1,121 (1,121) 0
6,000 6,000
Year
Lease Cost Lease Liability Right of Use Asset
Lessee – Net Operating Lease w/ CAM (Elect to Combine)
47
End of 2020 – Transfer Control of Building and establish lease liability and ROU asset
What are the entries?
48
Lessee – Net Operating Lease w/CAM (Elect to Combine)
End of 2021 – Fixed lease expense and payment
What are the entries?
End of 2021 – Variable lease expense and payment
What are the entries?
Lessee Disclosures
- The objective of the disclosure requirements is to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
- A lessee and a lessor should consider the level of detail necessary to satisfy the disclosure objective.
Disclosures
50
Overall Disclosure Objective
- - Information about:
- - The nature of leases
- Leases that have not yet commenced but that create significant rights and obligations for the lessee
- Significant assumptions and judgments made in applying the requirements of the leases standard
- The main terms and conditions of any sale and leaseback transactions.
- Whether an accounting policy election was made for the short-term lease exemption.
Lessee Disclosures
51
Qualitative Disclosure Requirements
- Finance lease expense, segregated between amortization of ROU assets and interest on lease liabilities
- Operating lease cost
- Short-term lease cost, excluding expenses relating to leases with a lease term of one month or less
- Variable lease cost
- Sublease income
- Gains and losses arising from sale and leaseback transactions
Lessee Disclosures
52
Quantitative Disclosure Requirements
- Separately for Finance and Operating leases:
- Cash paid for amounts included in lease liabilities, segregated between operating and financing cash flows
- Lease liabilities arising from obtaining ROU assets
- Weighted-average remaining lease term as of the reporting date
- Weighted-average discount rate for leases as of the reporting date
- Lease payments maturity analysis (similar to that in Topic 840 disclosures)
Lessee Disclosures
53
Quantitative Disclosure Requirements
What else do you probably need to know?
54
Lease Allocation Guidance – Very Complex
Impairment Model for ROU Assets
Sale Leaseback Accounting
Modification Accounting
Reassessment Accounting
Transition and Effective Date
Transition Approach and Practical Expedients
56
Package of practical expedients:
Modified Retrospective Earliest Period Presented OR Date of Adoption
Definition
May elect to use hindsight for lease term (lease renewals and purchase options) & Easements
Classification Initial Direct Costs
Existing leveraged leases were grandfathered
Package of practical expedients:
Lessee Transition
57
Existing Capital Leases Existing Operating Leases
Recognizethe lease liability
Measured at the carrying amount of the capital lease obligation under Topic 840
Measured at the PV of the remaining rental payments plus any amounts the lessee expects to pay to satisfy a RVG (UnderTopic 840);
Discount rate determined at transition point rather than leasecommencement
Recognize the ROU asset
Measured at the carrying amount of the capital lease asset under Topic 840; Qualified unamortized IDCs not included under Topic 840 should be subsumed into ROU asset
Should equal the lease liability, adjusted for any prepaid or accrued rent, lease incentives, or qualified unamortized IDCs
Effective Date
58
• Fiscal years beginning after December 15, 2018, including interim periods within those fiscal years
Public Companies*
• Fiscal years beginning after December 15, 2019 and interim periods beginning after December 15, 2020
All Other Organizations
• Permitted for all organizations
Early Application
* “Public Companies” refers to the following: (1) public business entities, (2) a not-for-profit entity that 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, and (3) an employee benefit plan that files or furnishes statements with or to the SEC
Intro to Lessee Modifications
Lease Modifications
60
If the lease modification grants the lessee:
An additional ROU, andThe increase in lease
payments commensurate with standalone price
Separate Contract:
Not a Separate Contract:
Lessor: • Topic 842 provides specific guidance for the effect of modifications
depending on the initial and post-modification classification of the lease
Lease Modifications (continued)
61
Lessee:Remeasure the lease liability, and if the changes resulted from
Not a Separate Contract:
an increase in lease term, additional ROU, or change
in consideration, then
a decrease in scope of the lease, then
Adjust ROU asset Recognize Gain/Loss
Topic 842 provides specific guidance on accounting for modifications depending on the nature of the modification (e.g., extension/ reduction of lease term, change in consideration, right to use additional underlying asset)
FASB Example 15 - ModificationFact Pattern:
• Original - Lessee enters into 10 year lease for 10,000 sqft
• Modification:
• Beginning of Year 6, the lease is modified to include an additional 10,000 sqftfor the remainder of the 5 years
• Increase in lease payments for the additional 10,000 sqft is commensurate with market rate
Question:
• How do I account for this modification?
62
FASB Example 15 – New ContractFact Pattern:
• Original - Lessee enters into 10 year lease for 10,000 sqft
• Modification:
• Beginning of Year 6, the lease is modified to include an additional 10,000 sqftfor the remainder of the 5 years
• Increase in lease payments for the additional 10,000 sqft is commensurate with market rate
Question:
• How do I account for this modification?
63
Answer:
• This is a new contract because there is (1) and increase in ROU and (2) increase in lease payments is commensurate with market rates
FASB Example 16 – Term Change
Fact Pattern:
• Original :
• Lessee enters into 10 year lease for 10,000 sqft
• Lease payment equal 100,000 per year
• Original IBR is 6%
• Modification:
• ROU Asset and Lease Liability balance is 421,236 at modification date
• Beginning of Year 6 (i.e., 5 years later), the lease is extended for another 5 years (i.e., 15 years in total)
• Lease payments are now 110,000 for the remaining 10 years
• IBR at modification is 7%
Question:
• Does the modification change the scope of the ROU asset? In other words does the lessee control more or less space?
• How do I account for this modification?
64
FASB Example 16 – Term Change
65
Accounts
ROU Asset
Liability
Pre-mod Balance
421,236
421,236
Adjust
351,358
351,358
Post-Mod Balance
772,594
772,594
• Not a separate contract.
• Remeasure liability based on remaining payments at new IBR
• The adjustment required to remeasure liability will be offset to ROU Asset
• There is no gain or loss
FASB Example 18 – Decrease in ROU Scope
Fact Pattern:
• Original:
• 10 year lease for 10,000 sqft
• Lease payment equals 100,000 per year and increase 5% each year thereafter
• IBR at lease inception was 6%
• Modification:
• ROU Asset is 514,436 and Lease Liability is 590,767 right before modification
• Beginning of Year 6, the lease is modified to reduce leased space from 10,000 sqft to 5000 sqft
• No change in remaining lease term
• Lease payment is decreased to 68,000 and then to increase 5% each year thereafter
• IBR at modification date is 7%
• Remeasured liability of lease payments at 7% IBR is 306,098
Question:
• Does the modification change the scope of the ROU asset? In other words does the lessee control more or less space?
• How do I account for this modification?66
Lease Modifications (continued)
67
Lessee:Remeasure the lease liability, and if the changes resulted from
Not a Separate Contract:
an increase in lease term, additional ROU, or change
in consideration, then
a decrease in scope of the lease, then
Adjust ROU asset Recognize Gain/Loss
Topic 842 provides specific guidance on accounting for modifications depending on the nature of the modification (e.g., extension/ reduction of lease term, change in consideration, right to use additional underlying asset)
FASB Example 18 – Liability Approach
68
Accounts
ROU Asset
Liability
Pre-mod Balance
514,436
(590,767)
Adjust both by -48.1%
(247,887.88)
284,669.00
(36,781.12)
Post-Mod Balance
266,548
(306,098)
Gain
FASB Example 18 – ROU Approach
69
Accounts
ROU Asset
Liability
Pre-mod Balance
514,436
(590,767)
Adjust both by -50%
(257,218)
295,833
(38,165)
Adjusted Balance
257,218
(295,384)
Plug Adj
10,714
(10,714)
Post Mod Balance
267,932
(306,098)
Gain
Consolidations – ASU 2018-17Focus on Private Company Accounting Alternative
70
Legal Entity?
Scope Exception?
Variable Interest?
Variable Interest Entity?
First… A Recap of VIEs
71
Primary Beneficiary
Related Party Tie-breaker?
Does VIE Guidance Apply?
Who has Controlling Financial Interest?
What’s the problem? - Engine Co. Example
72
OWNER
Car Co.
100% Equity
100% Equity
Purchases90% of Engines Produced
Engine Co.
• Engine Co. has insufficient equity (Equity = 5% of funding)• Industry standard for sufficient equity is 20%
• Loan to Engine Co. represents 15% of funding• Engine Co financed remaining 80% with Bank ABC• Car Co. makes significant decisions • Arms-length pricing
$15k Loan
Another common example…
73
OWNER
Operating Co.
100% Equity
100% Equity
Leases Factory from Lease Co.Lease Co
• Operating Company leases a factory from Lease Co.• Lease Co’s only asset is the factory
• Lease Co financed the purchase of the factory through a mortgage
Lease Payments
Consolidations: Private Company Alternative
74
Policy Election not to apply VIE Guidance to Entities Under Common Control
Criteria to Qualify
• Private company and legal entity under common control• Common control parent is not a PBE• Legal Entity is not a PBE• Don’t have a majority of the voting interest in the Legal Entity
Required Disclosures to under involvement and exposure to legal entity under common control
Accounting Alternative for Leasing Arrangements under common control (ASU 2014-07) Superseded
Combined statements still permitted if entities are under common control
In addition to existing related party disclosures, disclose the following:
a) Nature and risks associated with legal entity under common control.
b) How does legal entity affect the reporting entity’s balance sheet, financial performance, and cash flows.
c) Assets and liabilities on the reporting entity’s balance sheet resulting from its involvement with the legal entity
d) The reporting entity’s maximum exposure to loss related to the legal entity.
e) If the entity’s maximum exposure to loss exceeds assets and liabilities as described in (c), the reporting entity shall provide information to allow users of financial statements to understand the excess exposure. Consider both explicit and implicit arrangements
Consolidations – Private Company Disclosures
75
Calendar-Year End Private Companies -> 2021
Early adoption permitted
Effective Date
76
Leasing arrangements under common control
What do I recognize and measure under Topic 842
What about leasehold improvements?
How does this interact with the Topic 842
77
Michael ChengNational Professional Practice Partner
Michael ChengNational Professional Practice [email protected]
Direct Phone: 404.573.4538
1230 Peachtree Street NESuite 1500Atlanta, GA 30309
Mike Cheng joined Frazier & Deeter in 2019 as the Partner who oversees the firm’s professional practices related to accounting and audit. As part of his role, Mike specializes in assisting clients with complex accounting and financial reporting issues. Mike currently serves on AICPA’s PCPS Technical Issues Committee
Prior to joining Frazier & Deeter, Mike was a Senior Project Manager at the Financial Accounting Standards Board (FASB). In addition to serving as the Private Company Council Coordinator, Mike led projects to: simplify the accounting for nonemployee share-based payments, help shape the future of the FASB technical agenda and improve consolidations guidance (VIE guidance). Most recently, Mike worked on the FASB’s implementation team on revenue recognition (ASC Topic 606) and lease accounting (ASC Topic 842).
Prior to joining the FASB, Mike was an Audit Senior Manager at PricewaterhouseCoopers (PwC).
Mike earned his Bachelor of Science degree in Accounting with a concentration in Finance from Binghamton University in Binghamton, New York.
Accounting & Auditing Conference October 14, 2019
Finding Fraud in an Audit
Nancy Pasternack, Foster School or Business, University of Washington
Auditing to find fraud is difficult business. It is no easy task to determine if financial information is purposefully manipulated. An auditor needs a good balance of skills to examine not only data and numbers, but also the people behind those numbers. We will explore how auditing to find fraud involves a specialized approach and methodology to determine if fraud exists. We will discuss how to use various investigative techniques such as data analysis, interviewing, and risk assessment to increase the likelihood of finding fraud during an audit. TAKEAWAYS: Recognize the characteristics of organizations in which fraud is likely to occur. Identify the people who may be involved in a fraud. Scope and conduct an efficient audit that includes examining for fraud.
Nancy Pasternack has 20 years of experience performing audits and investigations. Currently she is developing and delivering the Fraud Examination course for the Accounting program at University of Washington. Previously she worked with Amazon Finance and Operations reviewing internal controls across all parts of the organization. Prior to that she was with KPMG Forensic, serving in the Washington, D.C., New Jersey/New York, and Seattle offices. She also completed a three-year national rotational assignment with the KPMG Business School where she developed and managed the global learning curricula for Forensic, Leadership and Governance, Risk and Compliance. She joined the investigative team at KPMG Forensic after serving as the Education Director for the Association of Certified Fraud Examiners in Austin, Texas. She is the past President of the Oregon Chapter of the ACFE, and served on the Steering Committee for the AICPA Fraud and Litigation Support Conference. She has taught extensively on various economic crime topics for many associations and universities. During her years in public accounting she led external and internal audit teams, conducted numerous financial investigations, performed complex data analysis, developed internal control systems, designed internal audit programs, and deployed numerous corporate training programs. Over the years, she has worked in government, private industry, Big 4, as well as local accounting firms.
TEL 425.644.4800 | www.wscpa.org | [email protected] 140th Ave NE | Bellevue, WA 98005-3480
NOTES
WSCPA 2019Finding Fraud in an
AuditNancy Pasternack, CPA, CIA, CFE
Overview
O MindsetO Fraud SkillsO Legal ConsiderationsO ScopingO Data AnalysisO Electronic EvidenceO InterviewingO Prevention
Definitions
O Audit – Internal and ExternalO Compliance and Operational
O Fraud Investigation/ExaminationO Detection, Prevention, Response
O Forensic Accounting
O Governing bodies:O Institute of Internal AuditorsO Association of Certified Fraud Examiners
Fraud Mindset
O Inquisitive and analyticalO Ask the What if…?sO Flexibility to work with many personalitiesO Work in other people’s spacesO Learn transaction flows - Cradle to graveO Risk assessmentsO Internal control assessments and testingO Analytical minds – Patterns, trends,
expectations
Fraud SkillsO Creative auditing skills
O Think of the obscure with heightened scrutinyO Risk assess via fraud triangle – rationalization,
incentive/pressure, opportunityO Legal concepts and rules – HR, chain of custodyO Forensic technology – testing full populations
such as journal entriesO PsychologyO Accounting rules (GAAP)
O Specialized industries such as banking would require money laundering knowledge
O Multi-disciplinary – technical and soft skills
Legal Considerations in Fraud
O Collection of evidenceO Preservation of evidenceO Chain of custodyO Giving testimonyO Rules of evidence, criminal and civil
procedureO Expert vs. fact witnessO Employee rights – attorney present, in
custody, privacy and property issues
ScopingAudit Fraud Investigation
O Sampling of many transactions
O Testing related to specific deliverable such as financial statements or supply chain efficiency
O Continuous auditing
O Full coverage of limited transactions – time period, person of interest
O Email and keyword searches
O Also continuous monitioring
Electronic Evidence and ToolsO Financial records
O DisbursementsO Payroll O Journal entries
O EmailsO Review softwareO Key word searches
O Internet searches:O Social mediaO Public records search such as Lexis-Nexus
Data AnalysisO Fraud analytics in audits and financial reportingO Predictive analyticsO Performance indicatorsO Preparing data
O Joining files and comparing transactionsO Specific searches:
O Round dollar amountsO Gaps in sequencesO Odd/unusual data such as Invoice #12345O Extract certain vendors, employees, etc.O Specialized tests - Benford’s Analysis
Types of Financial Analysis
O Relational AnalysisO Vertical AnalysisO Horizontal AnalysisO Ratio AnalysisO EPS vs promised returns
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Vertical and Horizontal Analysis of Income Statement Fluctuations
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INCOME STATEMENT
Change % Change
Net Sales 250,000 100% 450,000 100% 200,000 80%Cost of Goods Sold 125,000 50% 300,000 67% 175,000 140%Gross Margin 125,000 50% 150,000 33% 25,000 20%Operating Expenses Selling Expenses 50,000 20% 75,000 17% 25,000 50% Administrative Expenses 60,000 24% 100,000 22% 40,000 67%Net Income 15,000 6% (25,000) -6% (40,000) -267%
Vertical Analysis Horizontal Analysis
Year One Year Two
Vertical and Horizontal Analysis of Balance Sheet Fluctuations
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BALANCE SHEET
Change % ChangeAssets Current Assets Cash 45,000 14% 15,000 4% (30,000) -67% Accts Receivable 150,000 45% 200,000 47% 50,000 33% Inventory 75,000 23% 150,000 35% 75,000 100% Fixed Assets (net) 60,000 18% 60,000 14% - 0%Total 330,000 100% 425,000 100% 95,000 29%
Acc'ts Payable 95,000 29% 215,000 51% 120,000 126%Long-term Debt 60,000 18% 60,000 14% - 0%Stockholder's Equity Common Stock 25,000 8% 25,000 6% - 0% Paid-in Capital 75,000 23% 75,000 18% - 0% Retained Earnings 75,000 23% 50,000 12% (25,000) -33%Total 330,000 100% 425,000 100% 95,000 29%
Year One Year Two
Vertical Analysis Horizontal Analysis
Ratio AnalysisO ACFE Top 9
O Focused on accounts and transactions with higher instances of fraud – Current ratio, turnovers, debt to equity, etc.
O Operations focused measurements and ratios O Focused on sustainability of operations and core
business – cash flow to income, free cash flow
O Professor Beneish’s Analysis O Focused on predicting likelihood of manipulated
financial statements
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Operations Focused Measurements and Ratios
O Excess Cash Margin - Gauging earnings growth that is greater than operating cash flow growth. Divide OCF and OE by revenue in order to determine if they are both growing at the same rate as revenue.
O Cash Flow to Income -This ratio relates to the difference between cash provided by operations and income from operations. Divide operating cash flow by income from operations after nonrecurring items such as gains have been removed.
O Cash Interest Coverage Ratio - This ratio reveals the entity’s ability to cover interest payments with cash coming into the company. Cash flow from operating activities plus interest and tax divided by interest expense.
O Free cash flow – cash from operations minus cash from investing
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Professor Beneish’s AnalysisO Model to distinguish manipulated from non-
manipulated reportingO Focus is on inflation of revenues, deflation of
expenses and bloating of assetsO Primary characteristic of manipulators is high growth
prior to periods of manipulationO Analyzed known manipulated financials against other
companies in the same industry O Result was 1) mean index and 2) on average,
manipulators have significantly larger increases in days sales in receivables, greater deterioration of gross margins and asset quality, higher growth, and larger accruals
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InterviewsAudit Fraud Investigation
O Eliciting informationO Standard subjects
and questions –compliance oriented
O Witness vs. SuspectsO Bullseye
O EmotionalO PsychologyO Verbal and Non-verbal
behaviorO Attorneys may be
presentO Rooms could be
stacked with people
Communication in Interviews
O Generally Truthful BehaviorO Direct answersO Spontaneous answersO Attentive and interested O Non-verbally engagedO Verbal and non-verbal consistency
Verbal Deception
O Failure to answer the questionO Failure to deny (How could I?)O Repeating the questionO Overly specific answersO Inappropriate level of concernO Detour statements – (As I said…) O AttackO Truth in the lie
Verbal Deception
O Qualified responsesO Limiting qualifiers
O Basically, Sort of, Not really, Maybe, Possibly
O Enhancing qualifiersO Honestly, to be perfectly honest, to tell you the
truth
O Invoke religion (I swear to god)O Selective memory (to the best of my knowledge)O Failure to understand a simple term or question
Example Responses
O “I unequivocally and without any reservations totally deny all the allegations about sexual contact.” Alan Dershowicz, Professor Harvard Law
O “I am absolutely, 100 percent not guilty.” OJ Simpson
O “She was not choked. She was not punched.” Pastor Creflo Dollar
Example Responses
O “I’m very comfortable saying nobody did it as far as I know.” Tom Brady
O “ I barely knew the man and why would I kill him?” John McAfee
O “In my heart, I know I did not do these alleged disgusting acts.” Jerry Sandusky
Fraud Prevention Programs
• Setting “tone at the top”
• Anonymous reporting/hotline
• Code of conduct• Positive environment• Hiring and promoting good people
• Continuous education and training
• Fair and balanced discipline
• Identify and measure fraud risks
• Implement & monitor internal control
• Strong & independent audit committee
• Effective internal audit & use of technology
• Independent external audit
• Cross group collaboration