As 2015 gets under way, CPAs need to be aware of several accounting standards becoming effective: Statement on Standards for Accounting and Review Services No. 21 (SSARS 21) and three private company accounting standard elections. SSARS 21 covers compilation and review engagements, and the three private company accounting standards involve leasing arrangements, accounting for goodwill, and interest rate swaps.
SSARS 21 was approved August 2014 with the final standard released in October 2014. It is the result of the AICPA Accounting and Review Services Committee’s (ARSC) clarity project for revising all existing compilation and review standards.
SSARS 21 is effective for engagements on financial statements for periods ending on or after Dec. 15, 2015. Early implementation is permitted.
Before covering what is changing, note that AR-C Section 60, General Principles for Engagements Performed in Accordance with Statements on Standards for Accounting and Review Services, contains the general guidance for compilation and review engagements. It is substantially equivalent to existing standards. In addition, AR-C Section 90, Review of Financial Statements, remains largely unchanged from existing guidance on review engagements. However, a few changes do affect review engagements, as discussed later in this article.
A new AR section was added: AR-C Section 70, Preparation of Financial Statements. In addition, AR-C Section 80, Compilation Engagements, was revised to differentiate the new “preparation” engagements from compilation engagements.
AR-C Section 70 establishes a new engagement service – the preparation engagement – under SSARS. It is applicable when an accountant in public practice is engaged to prepare financial statements without being engaged to perform an audit, review, or compilation.
The preparation engagement is a nonattest service (though still governed by SSARS), does not include an accountant’s report, and does not require determination about a practitioner’s independence. The AICPA Peer Review Board has issued an exposure document that proposes that engagements performed under AR-C Section 70 would be excluded from the scope of peer review.
Because a preparation engagement is considered a SSARS engagement, it is subject to the general principles of AR-C Section 60 and AR-C Section 70. Practitioners performing preparation engagements should do the following:
- Perform acceptance and continuance of client relationships procedures.
- Obtain an engagement letter that includes the terms of the engagement and signatures of the accountant and a client representative, acknowledges management’s responsibilities, and says that the financial statements will not be accompanied by a report and no assurance will be provided.
- Obtain an understanding of the client’s financial reporting framework and significant accounting policies.
- Ensure that a version of the statement (in the form of a legend) “no assurance is provided” is included on each page of the financial statements, including related notes.
The standard includes the following variations of the “no assurance is provided” statement:
- “No assurance is provided on these financial statements.”
- “These financial statements have not been subjected to an audit or review or compilation engagement, and no assurance is provided on them.”
If the practitioner is unable to include a statement on each page of the financial statements, the CPA should issue either a disclaimer that makes clear that no assurance is provided or perform a compilation engagement in accordance with AR-C Section 80.
If the CPA prepares financial statements that omit the disclosures required by the applicable financial reporting framework, the omission must be disclosed on the face of the financial statements or in a note to the financial statements.
AR-C Section 70 does not apply when a CPA has been engaged to perform an audit, review, or compilation of the financial statements.
With regard to the revised AR-C Section 80, these standards apply when an accountant is hired to perform a compilation engagement. The language in existing standards that require compliance with the compilation standards when an accountant “submits financial statements” has been removed.
So, to make things clear, the objective of the compilation engagement is to apply accounting and financial reporting expertise to assist management in the presentation of financial statements and report in accordance with the standard, while the objective of the preparation engagement is to prepare financial statements pursuant to a specified financial reporting framework. The main difference being that management has engaged the accountant to perform a compilation engagement and the accountant will issue a report. Compilation procedures require the CPA to read the financial statements and consider whether the statements appear to be appropriate in form and free from obvious material misstatements, making the compilation a “read and report” engagement.
Compilation engagements remain a nonassurance engagement, though the CPA needs to consider independence standards and compilation engagements remain subject to peer review.
The rewrite of the compilation standards eliminates the “restricted for management’s use only” option previously provided in the standards for compilation engagements without a practitioner’s compilation report.
Finally, there are changes that affect review and compilation engagements as provided for in AR-C Section 90, Review of Financial Statements, and AR-C Section 80, Compilation Engagements. In both sections the requirements for agreement on engagement terms include that the engagement letter should be signed by the accountant and the client.
In addition, the accountant’s reports have been rewritten, affecting all future compilation and review reports.
Private Company Reporting
Privately held companies are generally held to the same reporting standards – GAAP – as publicly traded companies, but it has become increasingly difficult for these companies to keep up with the ever-changing financial reporting landscape. In fact, most users of private company financial statements do not need, or are not interested in, many disclosures and reporting requirements.
The Private Company Council (PCC) and Financial Accounting Standards Board (FASB) have been working together to decide whether and when alternatives within GAAP are warranted for privately held companies. As of Oct. 31, 2014, the FASB has endorsed three Accounting Standards Update (ASU) exceptions within GAAP that privately held companies may elect. ASU 2014-07, Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements
– This alternative provides privately held companies with the option to not consolidate certain real estate entities into the financial statements of the related operating entity if certain conditions are met:
- The private company lessee (reporting entity) and the lessor entity are under common control.
- The private company lessee has a lease arrangement with the lessor.
- Substantially all activities between the private company lessee and the lessor are related to leasing activities (including supporting leasing activities) between those two entities.
- If the private company lessee explicitly guarantees or provides collateral for any obligation of the lessor entity related to the asset leased by the private company, then the principal amount of the obligation at inception of such guarantee or collateral arrangement must not exceed the value of the asset leased by the private company from the lessor entity.
ASU 2014-07 is effective beginning in 2015 for calendar-year-end companies, and early implementation is permitted for financial statements that have not yet been made available for issuance. This accounting alternative should be applied retrospectively to all periods presented, except when the reporting entity has an equity interest in the variable interest entities and retains such interest.
ASU 2014-02, Accounting for Goodwill – The application of existing accounting rules related to goodwill have been too complex and costly to apply, so goodwill tends to remain unchanged on balance sheets year over year. ASU 2014-02 allows privately held companies to amortize goodwill over a period of 10 years, or less, if it can be demonstrated that another useful life is more appropriate. Other highlights of ASU 2014-02 include the following:
- Impairment testing is only performed by a triggering event.
- Impairment is measured using a single-step test, which compares the fair value to the carrying amount.
- A reporting entity can elect to test for impairment at an entitywide level or a reporting-unit level; whichever accounting policy the reporting entity chooses would only occur upon a triggering event.
ASU 2014-02 is effective beginning in 2015 for calendar-year-end companies, and early implementation is permitted for financial statements that have not yet been made available for issuance. However, the accounting alternative and amortization of goodwill should be applied prospectively to financial statements as of the beginning of the period of adoption. Brian J. Sharkey Sr., CPA, is director of audit and accounting at Kreischer Miller in Horsham. He can be reached at firstname.lastname@example.org.
ASU 2014-03, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach – This alternative allows privately held companies to use a simplified evaluation to determine no ineffectiveness for qualifying interest rate swap agreements and record the swap at settlement value, as opposed to fair value.
ASU 2014-03 is effective in 2015, and is to be applied to financial statements using either a full retrospective or a modified retrospective approach.
When considering the implementation of private company alternatives, keep in mind the future implications of applying these alternatives. If an entity intends on issuing an initial public offering or may be purchased by a publicly owned entity in the foreseeable future, it may be best to not apply these accounting alternatives. These alternatives may provide short-term cost savings and less complexity, but it could turn out that the future time and effort to unwind the accounting policies may outweigh the benefit of using them.
Sheila A. Border, CPA, is a quality control manager at Elko & Associates in Media. She can be reached at email@example.com.