Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.
Recently I listened to the AICPA Governmental Audit Quality Center (GAQC) webcast titled: Uniform Guidance for Federal Awards: Auditor Planning Considerations for the New Single Audit Rules.
The presenters, Diane Edelstein, Mandy Nelson, and Mary Foelster, did a great job in providing helpful information. I made a few summary notes that are presented below; the notes are not intended to be comprehensive. The GAQC archived the presentation on their website.
Applicability of Uniform Guidance
Here’s a summary of when the new guidance is applicable.
Type of Entity
Must implement policies and procedures by issuing regulations to be effective December 26, 2014 (accomplished with the issuance of the Joint Interim Final Rule)
Implement the new administrative requirements and cost principles for all new Federal awards made after December 26, 2014, and to additional funding related to existing awards ("increments") made after that date
Audit requirements are effective for fiscal years beginning on or after December 26, 2014 (early implementation not permitted)
GASB 63 and 65 provide guidance regarding deferred outflows and inflows in governments. This article provides an overview of those standards.
Statement No. 63 – Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position
Statement No. 65 – Items Previously Reported as Assets and Liabilities
What are the effective dates for Statements 63 and 65?
GASBS 63 is effective for periods beginning after December 15, 2011; earlier application encouraged
GASBS 65 is effective for periods beginning after December 15, 2012; earlier application encouraged
It is best to implement GASBS 63 and 65 at the same time.
What is the purpose of these changes?
To put it succinctly, GASB is using one of its conceptual statements (specifically Concepts Statement 4) to make revisions to reporting requirements (to include deferred outflows and deferred inflows).
Prior to GASBS 63 and 65, debit balances were reported on the statement of net position (balance sheet) as assets; similarly, all non-equity credits were reported as liabilities. The new standards add deferred outflows and deferred inflows to the mix.
All debit balances in the statement of net position will be reported as:
Assets represent present service capacity to the government; deferred outflows (e.g., prepaid bond insurance) represent the consumption of net position applicable to future reporting periods.
Liabilities represent amounts to be paid; however, some amounts previously reported as liabilities (e.g., deferred property taxes) involve no future payment. Consequently, with the implementation of GASB 63, all non-equity credits in the statement of net position will be reported as:
The difference in liabilities and deferred inflows is primarily resources that are going out and resources that are coming in. Liabilities normally represent a future surrender of resources; deferred inflows do not.
What are the main points of GASB 63?
This statement distinguishes assets from deferred outflows of resources and liabilities from deferred inflows of resources.
Additionally, many of your financial statement titles (e.g., Statement of Net Position), categories (e.g., Assets and Deferred Outflows of Resources), and notes will change. Net Assets will now be labeled Net Position.
The five elements of the statement of net position are:
Deferred Outflows of Resources
Deferred Inflows of Resources
The three categories of net position are:
Net Investment in Capital Assets
Note – The requirement to change to a statement of net position (rather than a statement of net assets) – a GASBS 63 change – occurs one year earlier than the requirements of GASBS 65; you are required to change the term net assets to net position even though you may not have any deferred outflows or inflows until GASBS 65 is implemented – possibly a year later. Again it is easier to simply implement both GASBS 63 and 65 at the same time (both can be early adopted).
What are the main points of GASB 65?
It identifies the specific items to be categorized as deferred inflows and deferred outflows.
It clarifies the effect of deferred inflows and deferred outflows on the major fund determination.
It limits the use of the term deferred in financial statements.
What are some examples of specific items to be categorized as deferred inflows and deferred outflows?
The gain or loss from current or advance refundings of debt (the gain or loss will no longer be netted with the related debt but will be shown separately as a deferred outflow or a deferred inflow)
Prepaid insurance related to the issuance of debt
Property taxes received or accrued prior to the period in which they will be used
How should debt issuance costs be treated?
Debt issuance costs should be expensed when incurred. GASB concluded that debt issuance costs do not relate to future periods, and, therefore, should be expensed.
If your government has debt issuance costs (recorded as assets), you will need to remove them as you implement these standards (using a prior period adjustment).
How should cash advances related to expenditure-driven grants be recorded?
Cash advances from expenditure-driven grants should be recorded as unearned revenue (a liability). The key eligibility requirement for an expenditure-driven grant is the use of funds (which does not occur until funds are spent). Any grant funds received prior to meeting eligibility requirements will be shown as a liability. It is improper to use the word deferred for this line item; for example, deferred revenue is not appropriate. The more appropriate title is unearned revenue.
How do these standards affect the determination of major funds?
Assets should be combined with deferred outflows of resources and liabilities should be combined with deferred inflows of resources for purposes of determining which elements meet the criteria for major fund determination.
What are the requirements for Yellow Book continuing professional education (CPE)?
Below we will address (1) who is subject to the Yellow Book CPE requirements and (2) what CPE classes satisfy those requirements.
First realize there are two rules:
The 80-hour rule (every two years)
The 24-hour rule (every two years)
Then you must answer:
Who is subject to each rule?
What classes qualify for each rule?
The 24 Hour Rule – Who is Subject?
The answer: each auditor performing work on a Yellow Book audit; if as an auditor you work on the engagement, you are subject to this rule. If your audit report contains a Yellow Book report (usually located just after the notes to the financial statements), then that engagement is subject to generally accepted government auditing standards (GAGAS).
The 80-Hour Rule – Who is Subject?
The answer: Auditors who are involved in any amount of:
1. Planning, 2. Directing, or 3. Reporting on GAGAS assignments and 4. Those auditors who are not involved in those activities but charge 20 percent or more of their time annually to GAGAS assignments.
I interpret 1., 2. and 3. as mainly partners, managers, and in-charges. 4. relates to staff who support the audit.
So a staff person that does not meet the criteria in 4., but still works on a Yellow Book engagement must still satisfy the 24-hour rule (but not the 80-hour rule).
What Classes Qualify?
The Yellow Book states, “Determining what subjects are appropriate for individual auditors to satisfy both the 80-hour and the 24-hour requirements is a matter of professional judgment to be exercised by auditors in consultation with appropriate officials in their audit organizations.”
First we see that there is judgment in what qualifies (no bright yellow lines). But there are differences in the 80-hour rule and the 24-hour rule; otherwise, there would be only one category.
The 80-Hour Rule – Classes that Qualify
The 80-hour rule is broad (encompassing any CPE that enhances the auditor’s professional proficiency); so, for example, CPE classes about writing skills or using Excel would qualify. (Taxation CPE usually does not qualify unless the class addresses audit-related issues. For example, a 1040 tax class does not qualify.)
For those subject to the 80 hour rule, at least 20 hours of CPE should be taken in each year of the two-year period; a total of 80 hours is to be taken in the two-year period.
The 24-Hour Rule – Classes that Qualify
Each auditor performing work under GAGAS should complete, every 2 years, at least 24 hours of CPE that directly relates to government auditing, the government environment, or the specific or unique environment in which the audited entity operates.
The 24-hour rule is specific to: (1) Government auditing, (2) The government environment or (3) To the specific or unique environment in which the audited entity operates.
Classes directly related to standards used in governmental auditing qualify; since GAGAS incorporates the AICPA statements on auditing standards (SASs) for field work and reporting, then audit classes that include a study of the SASs as they relate to the audit of your governmental entity would qualify. The same is true of pronouncements issued by the FASB. Single Audit classes also obviously qualify.
CPE dealing with Governmental Accounting Standards (GASB pronouncements) will qualify for the 24-hour rule since the class focuses on accounting standards in the government environment.
If you audit a county or a city, then most any CPE dealing with GASB pronouncements or governmental issues (e.g., sales taxes) will satisfy the 24-hour rule; also classes dealing with compliance with laws and regulations qualify.
Classes addressing economic conditions, fiscal trends, and pressures facing the governmental entity qualify.
Specific or Unique Environment in Which the Audited Entity Operates
Suppose you audit electric membership corporations (EMCs) subject to the Yellow Book; a CPE class about electrical supply grids qualifies. Or if you audit banks subject to Yellow Book requirements (e.g., FHA loans), then a CPE class dealing with lending qualifies. These classes address issues in the unique environment in which the audited entity operates.
An audit organization can adopt a standard 2-year period for all of its auditors to simplify administration of the CPE requirements.
Auditors are not allowed to carry over hours taken in excess of the 24-hour or 80-hour rule to the next reporting period.
Proration of Hours for New-Hires (or Those Newly Assigned to a Yellow Book Audit)
You will prorate the hourly requirements based on the remaining 6-month intervals in your two-year reporting period. For example, you hire someone on May 1, 2013 and your two-year cycle ends December 31, 2013. There is only one remaining 6-month period. If you are subject to the 24 hour rule, then you will multiply 25% (one six-month period divided by the four six-month periods in the two-year cycle) times 24 to compute the hours required: 6 hours.
Click here for the April 2005 GAO publication: Government Auditing Standards, Guidance on GAGAS Requirements for Continuing Professional Education.