Category Archives for "Accounting and Auditing"

Books I am Reading as a CPA
Dec 08

Books I am Reading

By Charles Hall | Accounting and Auditing

Thankfully, I've had a wee bit more time in December. And when time avails itself, I read. Maybe you have a few hours as well. If so, consider these books that I am currently reading. 

Atomic Habits

James Clear

Mr. Clear provides easy steps to develop good habits and helpful actions to stop bad habits. Want to lose weight, learn to play the guitar, increase your exercise regimen? You can if you apply the insights in this book. Click below.

Make It Stick

Peter Brown, Henry Roediger, Mark McDaniel

If you're like me you learn something, and then, because you have to learn so many other things, you forget the first. Then when you need the information (in your brain), it's not there. This book provides practical ways to learn and retain the information you need--even as a CPA. Click the book to see it on Amazon.

The Coaching Habit

Michael Bungay Stanier

Do you have employees that you desire to make better? Do you try to coach them but without result? They hear you, but no change occurs. The subtitle to this book says it all: Say Less, Ask More & Change the Way You Lead Forever. Stanier provides some very simple questions that I have been using--and they work! Click the book below to review it on Amazon.

The Hidden Christmas

Tim Keller

Does the Christmas season leave you hollow? I just finished this read and absolutely loved it. Keller provides new insights into the Reason for the Season. One of the best Christmas books I have read. Click below to check it out on Amazon.

Jayber Crow 

Wendell Berry

My wife turned me onto this one. Jayber Crow, twice orphaned, makes his way through life. As I've listened to this story (I have it on Audible), it has stirred long-forgotten episodes from my childhood. Like me many years ago, he runs away from himself and then returns home. He becomes the real Jayber Crow--again. (The Audible version is wonderful.)

The Rise of Robots

Martin Ford

Ford provides insights into the changing world we live in. Might there be robots in your CPA firm or your home. I think so. And they may come sooner than you think. Ford provides a well written summary--even I understand it--of how the robots are coming. 

restricted cash
Dec 05

The Skinny on ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash

By Charles Hall | Auditing

FASB issued ASU 2016-18, Statement of Cash Flows, in November 2016. This standard changes the way restricted cash is shown in cash flow statements.

The standard is effective in 2019 for calendar year-end private companies. Early adoption is permitted

Here’s the skinny on the new standard. (To download the slidedeck, click here. The video below was created before I changed the name of my blog from CPA Scribo to CPA Hall Talk, but the information is current.)

 

changes in VIE accounting
Nov 30

ASU 2018-17: A VIEry Good Gift from FASB

By Charles Hall | Accounting

It's time for another change to VIE accounting! 

The variable interest entity (VIE) considerations just got much easier. FASB is—with ASU 2018-17—providing another get-out-of-jail-free card to private companies.

changes in VIE accounting

When FASB originally issued its variable interest entity guidance many years ago, it created a thorny issue for private companies—one almost incomprehensible to anyone but a seasoned CPA. FASB required companies to consider whether entities under common control should be consolidated, even if the reporting entity did not own a majority of the voting stock. While FASB’s intent was noble (it was addressing issues that arose from Enron’s use of special purpose entities), it created one of the most difficult accounting standards ever. In the ensuing years, private companies begged for relief. The first leg of that relief came with the issuance of ASU 2014-07 (more in a moment); the second leg of that relief comes now with ASU 2018-17. 

The original VIE guidance issued in the early 2000s required reporting entities to consolidate related companies if certain conditions were met. For example, if reporting entity rented real estate from a commonly owned company, then consolidation might be required. This original guidance applied to both public and private companies. Public companies tend to have the muscle and knowledge to make these complicated evaluations. Not so for private companies. That’s why private companies asked for relief. 

First, FASB had issued ASU 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. That standard allowed reporting entities, when specified conditions were met, to not consolidate lessee companies. A private company could elect to not apply variable interest entity guidance to a lessor entity if those specified conditions were met. 

Then, on October 31, 2018, FASB issued Accounting Standards Update (ASU) 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. ASU 2018-17 expands the provisions in ASU 2014-07, permitting the accounting alternative to include all private company common control arrangements (see criteria below). 

The New Alternative

Using 2018-17, a legal entity need not be evaluated by a private company (reporting entity) under the VIE model if all of the following are true: 

  1. The reporting entity and the legal entity are under common control. 

  1. The reporting entity and the legal entity are not under common control of a public business entity. 

  1. The legal entity under common control is not a public business entity. 

  1. The reporting entity does not directly or indirectly have a controlling financial interest in the legal entity when considering the voting interest model (see ASC 810-10-05; under the voting interest model, the usual condition for a controlling financial interest is ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity). 

The Alternative is an Election

Applying this accounting alternative is an accounting policy election. If the election is made, then the private company must apply the criteria above to all legal entities. If, for example, a reporting entity has consolidated companies A and B due to VIE considerations, the election must be applied to both entities. 

Combined Financial Statements (Still an Option)

If a private company reporting entity makes the alternative election, it can still create combined financial statements for entities under common control. For example, if a reporting entity consolidates companies A and B under the prior VIE guidance, it might no longer do so after the election. Nevertheless, the reporting entity could issue combined financial statements. The reporting entity might, for example, issue combined financial statements for the reporting entity and company B (and exclude company A). See ASC 810-10-55-1B. 

Entities that Can’t Use the Alternative

The entities that can’t use the VIE alternative (under ASU 2018-17) include: 

  • Public business entities 

  • Not-for-profit entities 

  • Employee benefit plans (within the scope of ASC 960, 962, and 965) 

Required Disclosures

A private company that makes the election to use the alternative is required to include information about the relationship of the entities. Those disclosures include (see 810-10-50-2AG, 810-10-50-2AH and 810-10-50-2AI for complete list of disclosures): 

  1. The nature and risks as a result of the reporting entity’s involvement with the legal entity under common control 
  2. How a reporting entity’s involvement with the legal entity under common control affects: 
    • Financial position 
    • Financial performance 
    • Cash flows 
  3. The carrying amounts and classification of the assets and liabilities in the reporting entity’s statement of financial position as a result of its involvement with the legal entity under common control 
  4. The reporting entity’s maximum exposure to loss based on its relationship with the legal entity under common control (if not quantifiable, then that fact should be disclosed) 
  5. If the maximum exposure to loss exceeds the carrying amount of the assets and liabilities, that information is to be disclosed (including the terms of the arrangements) 

Effective Dates 

For entities other than private companies, the amendments in ASU 2018-17 are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments in this Update are effective for a private company for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. All entities are required to apply the amendments in this Update retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented.  

Early adoption is permitted. 

Auditing Equity
Nov 27

Auditing Equity: The Why and How Guide

By Charles Hall | Auditing

Auditing equity is easy, until it’s not. 

Auditing equity is usually one of the easiest parts of an audit. For some equity accounts, you agree the year-end balances to the prior year ending balance, and you’re done. For instance paid-in-capital seldom changes. Often, the only changes in equity are from current year profits and owner distributions. And testing those equity additions and reductions in equity takes only minutes.

Nevertheless, auditing equity can be challenging, especially for businesses that desire to attract investors. Such companies offer complicated equity instruments. Why? The desire to attract cash without giving away (too much) power. And this balancing act can lead to complex equity instruments.  

Regardless of whether a company’s equity is easy to audit or not, below I show you how to focus on important equity issues.

Auditing Equity

Auditing Equity — An Overview

In this post, we will cover the following:

  • Primary equity assertions
  • Equity walkthroughs
  • Equity-related fraud and errors
  • Directional risk for equity
  • Primary risks for equity
  • Common equity control deficiencies
  • Risk of material misstatement for equity
  • Substantive procedures for equity
  • Common equity work papers
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