Category Archives for "Accounting and Auditing"

omission of management, discussion and analysis
Mar 27

Omitting the MD&A in Governments

By Charles Hall | Auditing , Local Governments

Omitting the MD&A in governments is not common, but it does occur.

According to AU-C 730, the auditor’s report on the financial statements should include an other-matter paragraph that refers to the required supplementary information (RSI). In governmental financial statements, the management, discussion, and analysis (MD&A) is considered RSI. Though the MD&A is “required” supplementary information, governments can–strangely enough–exclude it from the financial statements.

Omitting the MD&A

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Omitting the MD&A – Effect on an Audit Opinion

If the required supplementary information is omitted, the auditor should include an other-matter paragraph in the opinion such as the following:

Management has omitted the management, discussion, and analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.

Notice the omission of the MD&A does not affect the opinion rendered (in other words, it does not result in a modified report).

RSI Audit Standard

AU-C 730 is the audit standard for required supplementary information. Click here for an overview of the supplementary information audit standards. The former supplementary information standards were SASs 118, 119 and 120; those standards are now–under the Clarity Standards–AU-C sections 720, 725, and 730.

Omitting the MD&A – Effect on a Compilation Report

The MD&A is sometimes omitted in financial statements subject to a compilation report. 

In compilation reports, the relevant language when omitting the MD&A is as follows:

Management has omitted the management, discussion and analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board which considers it to be an essential part of financial reporting and for placing the basic financial statements in an appropriate operational, economic, or historical context. 

loan guarantee
Mar 17

Do Loan Guarantees Create Liabilities?

By Charles Hall | Accounting

Can a loan guarantees create liabilities that go on the balance sheet of the guarantor?


loan guarantee

Recording Loan Guarantees

FASB 5 (now ASC 450) has been with us for some time. It states that a company should record a contingent liability if two things occur:

  1. The liability is subject to estimation (you can calculate it)
  2. It is probable that the liability will be paid

ASC 450 addresses these contingent liabilities.

FIN 45 (now ASC 460) was issued in the early 2000s to clarify that some loan guarantees create liabilities–even when there is no loan default. ASC 460 deals with noncontingent liabilities. And it’s the noncontingent piece that confuses everyone (including me). So let’s first take a look at noncontingent liabilities.

Noncontingent Liability

ABC Co. guarantees a $2,000,000 loan of XYZ Co. (an unrelated entity); in exchange, XYZ agrees to pay a fee of $50,000.

Should ABC Co. record a liability for the guarantee? Yes.

What’s the entry?

                                                         Dr.                 Cr.

Accounts Receivable                $50,000

Guarantee Liability                                           $50,000

The standard allows the guarantor to use the guarantee fee as a practical expedient to valuing the loan guarantee.

What if there is no guarantee fee? For instance, let’s say ABC Co. guarantees a loan for Sidewalk Safety Nonprofit, Inc. This guarantee is provided to the nonprofit free of charge. How would ABC Co. record this guarantee?

First ABC Co. would need to determine the value of the guarantee. If Sidewalk Safety’s interest rate is 8% without the guarantee, but now it’s 4%, then you can compute the differential using present value calculations. Let’s say the result is $40,000, what is the entry?

                                                                       Dr.                Cr.

Guarantee Expense (Contribution)      $40,000

Guarantee Liability                                                       $40,000

Guarantee of Related Party Debt

What if the loan guarantee is for an entity owned by the same parties? If the guarantee is on the debt of a related entity under common control, ASC 460-10-25-1 exempts the guarantor from the requirement to record the guarantee liability.

Next, we’ll see how to relieve the guarantee liability.

Guarantee Liability – In Subsequent Periods

After inception, the fair value liability (for both examples above) is taken to income as the guarantor is released from risk; the liability is to be adjusted to fair value at the period end.

ASC 460 does not provide detailed guidance as to how the guarantor’s initial liability should be measured after its initial recognition. Depending on the nature of the guarantee, the guarantor’s release from risk is recognized with an increase to earnings using one of three methods:

  1. Systematic and rational
  2. Deferring until expiration or settlement of the guarantee
  3. Remeasurement at fair value (for guarantees accounted for as derivatives)

You now know how to account for the noncontingent liability, but what if the guaranteed party defaults on the loan. Now the guarantor needs to record the loan as a liability.

Contingent Liability

For example, what if Sidewalk Safety defaults on the loan? Then ABC Co. needs to book a liability for the remaining debt. Sidewalk Safety’s default triggers ASC 450.

This is the contingent piece of the equation (for which no amount is typically recorded at the inception of the guarantee). Upon Sidewalk Safety’s default, the debt amount is subject to estimation and payment is probable. ABC Co. is on the hook for the remaining debt.

Solo Accountant or Partnership
Mar 07

Solo Accountant or a Partnership: Which is Best?

By Charles Hall | Accounting and Auditing

Solo accountant or partnership. Which is best? Today we tackle this question.

We all live with fear, but accountants have their own variety. I think back on my college years and the wondering about how my life and career would unfold. And I wanted—really wanted—to see the future, but could not. 

At twenty-one, I would have given a prince’s sum for a crystal ball. But even if the seer’s tool existed, I had no money. So I ventured out, hands extended in darkness, hoping things would go well. And why did I desire to know the future? To avoid mistakes. To lessen my fear. But mistakes—not crystal balls—are how you learn.

Through the years, my career evolved blandly, though with a few jerks and screams (I had a brain tumor; shortly after that, my son has born with cystic fibrosis). But, overall, my work life has unfolded—like most—day by day.

My First Job

In the early days of my first job, I realized how little I knew, though I had a masters degree in accounting. Like a new golfer, I felt—and looked—awkward. My college professors trained me well, but I was still a duffer. I muddled my way through the first year, little realizing how much I was learning—and not understanding my firm was doing me a favor. They were paying me to learn. (You only get this perspective—later—when you are an employer.)

Solo Accountant or Partnership
One year into public accounting, the lights came on.
I finally hit shots like a real accountant. I finally felt normal. I finally moved more naturally. But after three years in my junior role, another firm came calling, asking me to move. They offered more money and more opportunity, so I ventured out.

My Second Job

My second job was more of an apprenticeship. My boss mentored and trained me. He allowed me to assume responsibility. I think you could say this is where I came into my own. But even though I liked my boss, we had disagreements. He promised one thing but delivered another. I found myself doing most of the work with no movement to the promised position. My boss was a good man, but at age 68, it was obvious, he had no desire to retire (though that was the agreement).

So, I left with no job. (I know. Not smart, huh?) This was quite scary, especially when you have two children and a wife at home—in other words, no other income. What did I do? I hung my shingle. 

Solo Accountant

In those years, I had my greatest joys and fears. To go from nothing to something was like climbing a mountain. And I am not the adventuresome type. In the early days, there was no cash flow—and I mean none. I recall, like a scene from a Charles Dickens’ story, nights of soup and bread. And much of the time, I had this deep sense of fear. Nevertheless, I survived and—at times—even thrived.  

The joy of owning my own firm came in the freedom to come and go as I pleased, to do what I wanted—and when I wanted. But freedom comes with baggage. Namely, overhead, unsteady cash flows, and legal exposure. Even so, the freedom to make my own decisions was a breath of fresh air. If I wanted to pursue a new strategy, I did so. If I wanted to leave work early, I left. If I wanted to buy a new computer, I bought it. No committees. No boss. No one was telling me what I could or could not do. It was nice.

But in working alone, I learned a few things about myself. I love freedom, but I hate fear. I also found that I am more productive in a group environment. Why? Accountability. Additionally, I discovered I need more wisdom than I (alone) possess. As much as I hate to admit it (call it pride), I need a group of people. 


So, for most of my career, partnerships have been my work environment of choice. I like steady paychecks. I enjoy having answers to my questions just down the hallway.

The wisdom of partnerships is a beautiful thing. The Bible provides this word: 

Plans fail for lack of counsel, but with any advisors, they succeed. Proverbs 15:22

I can’t count the times I have seen problems surface—seemingly—with no answer, but then, in a partnership meeting, ideas, disagreements, thoughts are tossed around. And in the end, there is an answer. Creative, wise, sound.

Multiple perspectives meld together to provide insight, a wisdom much greater than my own. But submission is necessary to be a part of a partnership. And I think that’s hard for most people, including me. And while I desire to do as I please, the power of the group is real. People working together often achieve what individuals cannot.   

Solo Accountant or Partnership – Which Do You Prefer?

So, which is best? Solo Accountant or partnership?

In the end, the decision to work alone or in a group is a personal decision based on our own bents. Some people work better by themselves and want freedom more than anything. I get that. Others find success in a partnership. So which are you? One who likes to work alone or one who loves a group? What makes you the way you are?

For additional insights, check out my post: What I Wish I had Known About Public Accounting.

Debt issuance cost
Mar 05

Debt Issuance Costs: New Parking Place

By Charles Hall | Accounting

Debt issuance costs have a new parking place. For some time now, such costs were booked as a deferred charge (an asset). Now, these cost will be netted with the related debt

This change is required by Accounting Standards Update No. 2015-03, Interest – Imputation of Interest, Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30).

If you have not already done so, you need to adopt this standard for years ending December 31, 2016. This is a change in accounting principle.

Debt issuance cost

Accounting for Debt Issuance Costs

ASU 2015-03 (ASC 835-30) states the following (bold emphasis mine):

To simplify the presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.

(This article addresses accounting for nongovernmental entities. Debt issuance costs for governments are expensed as incurred.)

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Accounting problem
Feb 28

How to Solve Accounting Problems Quickly

By Charles Hall | Accounting

Do you ever need to solve accounting problems quickly?

I often hear the words, “Hey Charles, I’ve got a quick question,” and they launch into their issue, hopeful I can look into my crystal ball and give them an answer. As it turns out, I do have one. I keep it on my desktop. You probably have one too.

Most CPAs, when confronted with an accounting Gordian Knot, begin their quest to cut through the problem with their mighty sword–the GAAP Guide. Ah, an excellent choice for sure, but is it the best place to start? Or how about the granddaddy of them all? The FASB Codification. Another fine choice, but it’s an 800-pound gorilla. So where’s the best place to start? The crystal ball.

Accounting problem

And what is the crystal ball? It’s your disclosure checklist.

You say, “but it’s just a laundry list of accounting requirements.” Yes, but it’s a great pointer (to answers).

To solve accounting problems quickly, do a word search in your disclosure checklist. My checklist is in Word, so I use the find feature (click control, find) to locate a keyword. Try to use a unique word where possible–such as noninterest or contingent. You may have to click next a few times to locate the relevant text. Once you find the relevant text, the pathway to your solution lies before you: the checklist provides you with the applicable FASB Codification ASC section (e.g., 850-10-50-5). You can key the number in the FASB Codification or your research library to find your answer.

Now you can provide a quick answer to that difficult question (and look like a genius). When your peers ask, “How did you find the answer so quickly?” Tell them, “My crystal ball.”