Audit Risk Alert 2018/19 | General Accounting and Auditing Developments Strengthening Audit Integrity Safeguarding Financial Reporting 23574-349 Copyright © 2018 Association of International Certified Professional Accountants All rights reserved For information about the procedure for requesting permission to make copies of any part of this work, please email copyright-permission@aicpa-cima.com with your request Otherwise, requests should be written and mailed to Permissions Department, 220 Leigh Farm Road, Durham, NC 27707-8110 AAP ISBN 978-1-94830-629-4 QSJOU

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F1VC iii General Accounting and Auditing Developments — 2018/19 Notice to Readers This Audit Risk Alert (alert) replaces General Accounting and Auditing Developments—2017/18 This alert provides auditors of financial statements with an overview of recent economic, industry, technical, regulatory, and professional developments that may affect the audits and other engagements they perform Also, an entity's internal management can use this alert to address areas of audit concern This publication is an other auditing publication, as defined in AU-C section 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards.1 Other auditing publications have no authoritative status; however, they may help the auditor understand and apply generally accepted auditing standards In applying the auditing guidance included in an other auditing publication, the auditor should, using professional judgment, assess the relevance and appropriateness of such guidance to the circumstances of the audit The auditing guidance in this document has been reviewed by the AICPA Audit and Attest Standards staff and published by the AICPA and is presumed to be appropriate This document has not been approved, disapproved, or otherwise acted on by a senior technical committee of the AICPA Recognition The AICPA gratefully acknowledges those members of the Auditing Standards Board and the AICPA Technical Issues Committee who helped identify the interest areas for inclusion in this alert The AICPA also gratefully acknowledges Jeremy Dillard, Bob Green, and Manda Dinkel for their review of this publication AICPA Staff Liese Faircloth Manager Product Management and Development Feedback The Audit Risk Alert General Accounting and Auditing Developments is published annually As you encounter audit or industry issues that you believe warrant discussion in next year's alert, please feel free to share them with us Any other comments you have about the alert would also be appreciated You may email these comments to A&APublications@aicpa.org All AU-C section can be found in AICPA Professional Standards ©2018, Association of International Certified Professional Accountants ARA-GEN Table of Contents v TABLE OF CONTENTS Paragraph General Accounting and Auditing Developments — 2018/19 How This Alert Helps You Economic and Industry Developments The Current Economy Key Economic Indicators Legislative and Regulatory Developments Tax Cuts & Jobs Act Inspections of Broker-Dealer Audit and Attestation Issues and Developments The AICPA Enhancing Audit Quality Initiative Compliance With the Risk Assessment Standards Emerging Technologies: What Practitioners Need to Know Cybersecurity Auditing Standards Board Accounting and Review Services Committee Common Peer Review Findings Revenue Recognition Overview Effective or Applicability Date Overview of the New Guidance Understanding the Five-Step Process Additional Guidance Under the New Standard Transition Resource Group Latest Developments Conclusion New Leases Standard Will Change Financial Statement Presentation Issuance and Objective Applicability and Effective Date Main Provisions Lessee Accounting Lessor Accounting Sale and Leaseback Transactions Leveraged Lease Arrangements Land Easement Practical Expedient Targeted Improvements Accounting for Financial Instruments Overview Applicability and Effective Date Impairment Hedge Accounting Conclusion ©2018, Association of International Certified Professional Accountants 01-.338 01-.03 04-.08 04-.05 06-.08 09-.25 09-.11 12-.25 26-.133 26-.43 44-.55 56-69 70-.71 72-.93 94-.116 117-.133 134-.172 134-.136 137-.138 139-.141 142-.153 154-.155 156-.157 158-.171 172 173-.207 173-.174 175-.176 177-.188 189-.195 196-.200 201-.202 203 204-.206 207 208-.230 208-.209 210-.213 214-.228 229 230 Contents vi Table of Contents Paragraph General Accounting and Auditing Developments — 2018/19 — continued Other Accounting Issues and Developments Comprehensive Income Stock Compensation Disclosure Framework Defined Benefit Plan Internal-Use Software Recent Pronouncements at a Glance Recent Auditing and Attestation Pronouncements and Guidance Recent Accounting and Financial Reporting Guidance Recently Issued Technical Questions and Answers Recent AICPA Independence and Ethics Developments AICPA Conceptual Frameworks Toolkits Definition of a Client On the Horizon Auditing and Attestation Pipeline — Nonissuers Auditing and Attestation Pipeline — Issuers Accounting and Financial Reporting Pipeline Independence and Ethics Pipeline Resource Central Publications Continuing Professional Education Webcasts Member Service Center Hotlines Industry Websites Contents 231-.259 232-.234 235-.239 240-.245 246-.252 253-.259 260-.262 260 261 262 263-.272 263-.264 265-.272 273-.321 275-.284 285-.292 293-.316 317-.321 322-.338 323 324-.327 328 329 330-.337 338 ©2018, Association of International Certified Professional Accountants General Accounting and Auditing Developments — 2018/19 Audit Risk Alert 2018/19: General Accounting and Auditing Developments By AICPA and CIMA Copyright © 2018 Association of International Certified Professional Accountants How This Alert Helps You 01 This alert helps you plan and perform your audits and can be used by an entity's internal management to identify issues significant to the industry It also provides information to assist you in achieving a more robust understanding of the business, economic, and regulatory environments in which your clients operate This alert is an important tool to help you identify the risks that may result in the material misstatement of financial statements, including significant risks requiring special audit consideration For developing issues that may have a significant impact in the near future, the "On the Horizon" section provides information on these topics Refer to the full text of accounting and auditing pronouncements as well as the full text of any rules or publications that are discussed in this alert .02 It is essential that the auditor understand the meaning of audit risk and the interaction of audit risk with the objective of obtaining sufficient appropriate audit evidence Auditors obtain sufficient appropriate audit evidence on which to base their opinion by performing the following: r r Risk assessment procedures Further audit procedures that comprise the following: — Tests of controls, when required by generally accepted auditing standards (GAAS) or when the auditor has chosen to so — Substantive procedures that include tests of details and substantive analytical procedures 03 The auditor should develop an audit plan that includes the nature and extent of planned risk assessment procedures, as determined under AU-C section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement AU-C section 315 defines risk assessment procedures as "the audit procedures performed to obtain an understanding of the entity and its environment, including the entity's internal control, to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and relevant assertion levels." A relevant assertion "has a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated The determination of whether an assertion is a relevant assertion is made without regard to the effect of internal controls." As part of obtaining the required understanding of the entity and its environment, paragraph 12 of AU-C section 315 states that the auditor should obtain an understanding of the "industry, regulatory, and other external factors, including the applicable financial reporting framework," relevant to the entity This alert assists the auditor with this aspect of the risk assessment procedures and further expands the auditor's understanding of other important considerations relevant to the audit Economic and Industry Developments The Current Economy 04 When planning an audit or review engagement, auditors need to understand the economic conditions facing the industry and marketplace in which an entity operates, as well as the effects of these conditions on the entity itself These external factors, such as interest rates, availability of credit, consumer ©2018, Association of International Certified Professional Accountants ARA-GEN 04 Audit Risk Alert confidence, overall economic expansion or contraction, inflation, and labor market conditions, are likely to have an effect on an entity's business and, therefore, its financial statements Considering the effects of external forces on an entity is part of obtaining an understanding of the entity and its environment Recognizing that economic conditions and other external factors relevant to an entity and its environment constantly change, auditors should evaluate whether changes have occurred since the previous audit that may affect their reliance on any information obtained from their previous experience with the entity These changes may affect the risks and risk assessment procedures applicable to the current year's engagement .05 During 2017 and into 2018, the U.S economy continued to recover The S&P 500 and the Dow Jones Industrial Average both reached all-time highs during 2018 The Chicago Board Options Exchange Volatility Index (VIX) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock option prices and is considered by many to be a reliable indicator of investor sentiment and market volatility and the best gauge of fear in the market The VIX was not steady during 2017 and into 2018 During that time, prices ranged from 19.85 to 9.51 The volatility shows that there is still some uncertainty; however, the smaller range of change in the index shows that investors believe the economy and market are stable Key Economic Indicators 06 The following key economic indicators reaffirm the recovery of the economy during 2017 and into 2018: gross domestic product (GDP), unemployment, and the federal fund rate The GDP measures output of goods and services by labor and property within the United States GDP increases as the economy grows and decreases as it slows According to the Bureau of Economic Analysis, real GDP increased at an annual rate of 1.8 percent in the second quarter of 2018, based on the advance estimate (first estimate) The increase in real GDP in the second quarter has been attributed to positive contributions from personal consumption expenditures, exports, federal government spending, and state and local government spending .07 According to the Bureau of Labor Statistics (BLS), from August 2017 to August 2018, the unemployment rate fluctuated between 4.4 percent and 3.9 percent During that same time period, the number of long-term unemployed (those jobless for 27 weeks or more) was steady According to the BLS, the number of people employed part-time for economic reasons decreased to 4.4 million during 2018 Together, these statistics illustrate the continued improvement in the economy .08 The Board of Governors of the Federal Reserve System (Federal Reserve) increased the target for the federal funds rate in June 2017 to 1.0 percent This was the second raise of the rate in 2017 after keeping the rate at 0.5 percent for over a year Legislative and Regulatory Developments Tax Cuts & Jobs Act 09 On December 22, 2017, President Donald Trump signed into law H.R 1, known as the Tax Cuts and Jobs Act (TCJA), which makes widespread changes to the IRC Almost all its provisions, including a lower corporate tax ARA-GEN 05 ©2018, Association of International Certified Professional Accountants General Accounting and Auditing Developments — 2018/19 rate of 21 percent and lower individual income tax rates, go into effect January 1, 2018 .10 Among the many changes to current tax law is one that permanently lowers the corporate income tax rate from 35 percent to 21 percent, effective for 2018 The Senate version lowered the rate to 20 percent but delayed its effective date until 2019, whereas the House bill originally had a 20 percent rate that would have been effective in 2018 .11 The bill also lowers the individual income tax rates through 2025 The new top rate will be 37 percent, lowered from 39.6 percent The law keeps the same number of brackets as under current law It also keeps the individual alternative minimum tax (AMT), with a higher exemption than under current law, but eliminates the corporate AMT Inspections of Broker-Dealer 12 Although engagements of broker-dealers are inspected by the PCAOB, the findings are similar to those of peer review inspections Auditors may use these findings to help ensure that they are following all the applicable guidance when performing audit and attest engagements .13 On August 20, 2018, the PCAOB released its annual inspection report, Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers During 2016, the PCAOB inspected 75 firms covering portions of 116 audit-related attestation engagements The attestation engagements comprised 27 related to compliance reports and 87 related to exemption reports This was the second annual cycle in which all audits and related attestation engagements were required to be performed in accordance with PCAOB standards and amended SEC Rule 17a-5 and the second annual cycle in which the new attestation engagements were included in the inspections .14 The report notes that independence findings were identified in four audits representing eight percent of the audits covered by the inspections in 2017 compared to 10 percent of the audits covered by the inspections in this area in 2016 Three of the four audits with independence findings in 2017 were conducted by firms that did not audit issuers .15 To give some context to the numbers, note that 3,829 broker-dealers filed audited annual financial statements with the SEC for fiscal years ended during the period from July 1, 2016 through June 30, 2017, and 475 registered public accounting firms audited broker-dealer filings for these periods Of those, 189 of the firms auditing broker-dealers also audited issuers, and 286 firms performed audits of broker-dealers and are registered with the PCAOB only because they audit nonissuer broker-dealers .16 A summary of the deficiencies follows For detailed report findings, see PCAOB Release No 2018-003, Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers, available at https://pcaobus org/inspections/documents/broker-dealer-auditor-inspection-annual-report2018.pdf .17 Findings related to failures to satisfy independence requirements were as follows: ©2018, Association of International Certified Professional Accountants ARA-GEN 17 r Audit Risk Alert Failure to Satisfy Auditor Independence Requirements The PCAOB identified independence findings in of the 48 audits selected for inspection The following further describes the identified findings: — These firms performed bookkeeping or other services related to the broker-dealer's accounting records or have prepared or assisted in the preparation of the brokerdealer's financial statements, supplemental information, or exemption reports — In another audit, the firm's independence was impaired because of an indemnification clause in the firm's engagement letter that stated that the broker-dealer would indemnify the firm from any and all claims of the brokerdealer and third parties when there was knowing misrepresentation or concealment of information by the brokerdealer's management, regardless of the nature of the claim, including the negligence of any party .18 Deficiencies found related to the financial statement audit were as follows: r Deficiencies Related to Auditing Revenue The PCAOB identified or more deficiencies in 73 of the 112 audits selected for inspection The following further describes the identified deficiencies: ARA-GEN 18 — In 26 of the audits inspected, firms did not perform, or sufficiently perform, risk assessment procedures for revenue, which contributed to deficiencies in these firms' revenue-testing procedures — In 38 of the audits inspected, the extent of testing was insufficient for material classes of revenue transactions — In 10 of the audits inspected, firms performed substantive analytical procedures that did not provide the necessary level of assurance because the firms did not (a) develop any expectation when performing analytical procedures intended to be substantive in nature, (b) develop expectations that were sufficiently precise to identify misstatements, (c) establish that there was a plausible and predictable relationship between the current year and prior year revenue balances, (d) evaluate the reliability of the data from which the auditors' expectations were developed, (e) determine an amount of difference from the expectation that could be accepted without further investigation, (f) obtain corroboration of management's explanations for significant unexpected differences, or (g) sufficiently test controls, when the necessary level of assurance from the analytical procedures was determined based on reliance on controls ©2018, Association of International Certified Professional Accountants General Accounting and Auditing Developments — 2018/19 — In 10 of the audits inspected, firms did not perform sufficient procedures on information produced by service organizations used in the performance of audit procedures r r In of the 10 audits, firms obtained a service auditor's report but did not sufficiently evaluate the service auditor's report or consider whether the service auditor's report provided evidence about the design and operating effectiveness of the controls being relied upon In of the 10 audits, when firms used as audit evidence statements or other information that the broker-dealers obtained from their service organizations, the firms did not obtain and evaluate the service auditor's report or perform procedures to test the accuracy and completeness of the information the firms used in their audits — In 15 of the audits inspected, when auditing revenue, firms did not test the accuracy and completeness of the information produced by the broker-dealer that was used as audit evidence — In 60 of the audits inspected, firms did not perform sufficient procedures to test the relevant assertions for revenue For example, firms did not (a) evaluate whether the terms of the underlying contractual arrangements were appropriately considered in revenue recognition, (b) evaluate whether the revenue recognition criteria under FASB Accounting Standards Codification (ASC) 605, Revenue Recognition, were satisfied, (c) test the accuracy and completeness of inputs used in the calculation of revenue, (d) perform procedures to test the completeness of revenue, or (e) evaluate the effect on the financial statements of recognizing commission revenue based on settlement date rather than trade date, as required under FASB ASC 940, Financial Services—Brokers and Dealers r Deficiencies Related to Auditing Risks of Material Misstatement Due to Fraud The PCAOB identified or more deficiencies in 16 of 25 audits selected for inspection The following further describes the identified deficiencies: — In of audits, firms did not identify improper revenue recognition as a fraud risk, and there was no documentation or other persuasive evidence indicating how the firms overcame the presumption that improper revenue recognition is a fraud risk In audit, the firm performed inquiries of the CEO only and did not perform inquiries with others within the broker-dealer who were reasonably expected to be knowledgeable about potential fraud risks ©2018, Association of International Certified Professional Accountants ARA-GEN 18 68 Audit Risk Alert permitted by ERISA In addition, the proposed SAS includes a requirement to report findings from procedures performed on specific plan provisions relating to the financial statements The changes in the proposed SAS would also require certain performance requirements in addition to those in existing AUC sections Questions relating to these proposed requirements are included in the "Issues for Consideration" section in the exposure draft .279 In August 2018, the ASB voted to issue the proposed SAS Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA as a final standard The most significant changes in the final standard as compared to the proposed standard included in the exposure draft are as follows: r r r r The proposed requirement to report on specific plan provisions and include findings in the auditor's report has not been included in the final standard; instead, the auditor is required to consider whether to test specific plan provisions as part of risk assessment Reportable findings would be communicated, in writing, to management and those charged with governance in accordance with the requirements in other relevant AU-C sections An audit performed pursuant to ERISA Section 103(a)(3)(C) will no longer be referred to as a limited scope audit but as an ERISA Section 103(a)(3)(C) audit The ASB considered the nature of the restriction on the audit and believes that the special nature of such a restriction is not specifically contemplated by AU-C section 705, Modifications to the Opinion in the Independent Auditor's Report A new precondition for an ERISA Section 103(a)(3)(C) audit requires the auditor to inquire how management determined that the entity preparing and certifying the investment information is a qualified institution The ERISA Section 103(a)(3)(C) audit report does not opine on whether the financial statements are presented fairly "based on the audit and based on the use of the certification of the investment information, which we were not required to audit." Instead, the opinion in the report is based on the audit and the procedures performed relating to the certified investment information and relates to (a) whether the amounts and disclosures in the financial statements, other than those agreed to or derived from the certified investment information is presented fairly, in all material respects, in accordance with the applicable financial reporting framework, and (b) whether the information in the financial statements related to assets held by and certified by a qualified institution, agrees to or is derived from, in all material respects, the information prepared and certified by an institution that management determined meets the requirements of ERISA Section 103(a)(3)(C) .280 The effective date of all proposed auditor reporting standards, including the standard on reporting on audits of ERISA plans, will be aligned We urge all practitioners with employee benefit plan clients to stay aware of the progress of this project ARA-GEN 279 ©2018, Association of International Certified Professional Accountants General Accounting and Auditing Developments — 2018/19 69 Proposed Statement on Standards for Attestation Engagements, Revisions to Statement on Standards for Attestation Engagements No 18, Attestation Standards: Clarification and Recodification 281 On July 11, 2018, the ASB exposed for public comment a draft of proposed Statement on Standards for Attestation Engagements (SSAE) No 18, Revisions to Statement on Standards for Attestation Engagements No 18, Attestation Standards: Clarification and Recodification .282 The proposed standard, if issued as a final standard, would result in several significant changes to the attestation standards The most significant aspects of the proposed SSAE include the following: r r r No longer require the practitioner to request a written assertion from the responsible party when the practitioner is reporting directly on the subject matter or performing an agreed-upon procedures engagement More closely harmonize AT-C section 210 with the limited assurance provisions of International Standard on Assurance Engagements 3000 (Revised), Assurance Engagements Other Than Audits and Reviews of Historical Financial Information, including changing the term review engagement to limited assurance engagement The proposed revisions to AT-C section 210 more explicitly describe the types of procedures a practitioner may perform in a limited assurance engagement These procedures are much the same as the procedures a practitioner may perform in an examination engagement, except that the nature, timing, and extent of those procedures are tailored to a limited assurance engagement Finally, the proposed revisions to AT-C section 210 would require that the practitioner's report include an informative summary of the work performed as a basis for the practitioner's conclusion Revise the agreed-upon procedures section by — no longer requiring that all the parties to the engagement (the engaging party, the responsible party [where applicable], and users of the practitioner's report) agree to the procedures to be performed and take responsibility for their sufficiency Instead, the proposed revision would require that the engaging party acknowledge, prior to the issuance of the report, the appropriateness of the procedures for the intended purpose of the engagement, and would explicitly allow the practitioner to develop, or assist in developing, the procedures — allowing the practitioner to issue a general use report, unless the procedures are prescribed and the practitioner is precluded from designing or performing additional procedures, or the criteria are not available to users or are suitable only for a limited number of users .283 The proposal would supersede AT-C sections 105, 210, and 215 The proposed revisions to AT-C sections 105, 210, and 215 were developed with the support and input of ARSC The proposed revisions to AT-C section 215 were developed by the ASB and ARSC as a joint project ©2018, Association of International Certified Professional Accountants ARA-GEN 283 70 Audit Risk Alert 284 The exposure draft is available at www.aicpa.org/content/dam/aicpa/ research/exposuredrafts/accountingandauditing/downloadabledocuments/ 20180711a-ed-ssae-18-revisions.pdf Auditing and Attestation Pipeline — Issuers Using the Work of a Specialist 285 The PCAOB is proposing amendments to its standards for using the work of specialists, under which two existing standards would be amended and a third existing standard would be retitled and replaced with an updated standard In the PCAOB's view, the proposed amendments would further investor protection by strengthening the requirements for evaluating the work of a company's employed or engaged specialist and applying a risk-based supervisory approach to both auditor-employed and auditor-engaged specialists .286 Companies across many industries use specialists to assist in developing accounting estimates in their financial statements Companies may also use specialists to interpret laws, regulations, and contracts or to evaluate the characteristics of certain physical assets Those companies may use a variety of specialists, including, among others, actuaries, appraisers, other valuation specialists, legal specialists, environmental engineers, and petroleum engineers Auditors often use the work of these companies' specialists as audit evidence Additionally, auditors might use the work of auditors' specialists to assist in their evaluation of significant accounts and disclosures, including accounting estimates in those accounts and disclosures .287 Accounting estimates are also becoming more prevalent and more significant as financial reporting frameworks continue to evolve and require greater use of estimates, including those based on fair value measurements As a result, the use of the work of specialists continues to increase in both frequency and significance If a specialist's work is not properly overseen or evaluated by the auditor, there may be heightened risk that the auditor's work will not be sufficient to detect a material misstatement in accounting estimates .288 Under current PCAOB standards, auditor-employed specialists are subject to supervision under AS 1201, Supervision of the Audit Engagement,5 and auditors' responsibilities with respect to other specialists (employed or engaged by the company or engaged by the auditor) are primarily set forth in AS 1210, Using the Work of a Specialist As a result, requirements that apply to auditor-employed specialists differ from the requirements that apply to auditor-engaged specialists, though both serve similar roles in helping auditors obtain and evaluate audit evidence In addition, AS 1210 imposes the same auditor responsibilities with respect to both a company's specialist and an auditorengaged specialist, even though those specialists have fundamentally different roles (for example, the company uses the work of its specialist in the preparation of the financial statements) .289 Observations from PCAOB oversight activities indicate that there is substantial diversity in practice regarding the use of the work of specialists, such as how auditors use employed or engaged specialists and what procedures auditors perform to evaluate the work of companies' specialists Moreover, PCAOB inspections staff continues to observe deficiencies related to All AS sections can be found in PCAOB Standards and Related Rules ARA-GEN 284 ©2018, Association of International Certified Professional Accountants General Accounting and Auditing Developments — 2018/19 71 auditors' use of specialists' work, such as failures to evaluate the assumptions of company specialists in fair value measurements or failures to consider contradictory evidence or issues raised by an auditor's specialist .290 The PCAOB is proposing to amend AS 1105, Audit Evidence, to add a new appendix that addresses using the work of a company's specialist as audit evidence, based on the risk-based approach of the risk assessment standards The PCAOB also is proposing to amend AS 1201 to add a new appendix on supervising the work of auditor-employed specialists and to replace AS 1210 with proposed AS 1210, which would set forth requirements for using the work of auditor-engaged specialists .291 The proposal is intended to strengthen PCAOB auditing standards in the following respects: r r Strengthen requirements for evaluating the work of a company's specialist Apply a risk-based approach to supervising and evaluating the work of both auditor-employed and auditor-engaged specialists .292 The PCAOB has observed that, in many cases, auditors use the work of a specialist to test or assist in testing the company's process to develop an accounting estimate or developing an independent expectation of an accounting estimate In a companion release, the PCAOB is proposing to replace its existing standards on auditing accounting estimates and fair value measurements with a single standard Proposed AS 2501, Auditing Accounting Estimates, Including Fair Value Measurements, sets forth a uniform, risk-based approach designed to strengthen and enhance the requirements for auditing accounting estimates In the estimates release, the PCAOB is proposing to retitle and replace AS 2501, Auditing Accounting Estimates, and supersede AS 2502, Auditing Fair Value Measurements and Disclosures, and AS 2503, Auditing Derivative Instruments, Hedging Activities, and Investments in Securities Proposed AS 2501 would also include a special topics appendix that addresses certain matters relevant to auditing the fair value of financial instruments, including the use of pricing information from third parties as audit evidence Certain provisions of the proposed amendments in this release include references to the proposed auditing standard presented in the estimates release in order to illustrate how the proposed requirements in the two releases would work together Accounting and Financial Reporting Pipeline Leases 293 On February 25, 2016, FASB issued ASU No 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions FASB has been assisting stakeholders with implementation questions and issues as organizations prepare to adopt the new lease requirements During this process, stakeholders have inquired about the following two requirements Comparative Reporting for Initial Adoption 294 Comparative reporting at adoption requires entities to adopt the new lease requirements using a modified retrospective transition method An entity initially applies the new lease requirements at the beginning of the earliest ©2018, Association of International Certified Professional Accountants ARA-GEN 294 72 Audit Risk Alert period presented in the financial statements (January 1, 2017, for calendaryear-end public business entities that adopt the new lease requirements on January 1, 2019), which means that lessees must recognize lease assets and liabilities on the balance sheet for all leases, and must provide the new and enhanced disclosures, for each period presented (including comparative periods) .295 FASB took this approach, in part, to allow entities to adopt the new lease requirements in a cost-effective manner with relatively limited changes to systems However, as entities have started to implement the new lease requirements, many preparers have encountered unanticipated costs and complexities associated with the modified retrospective transition method, particularly the comparative period reporting requirements, and have asked for an additional (and optional) transition method for transitioning to the new lease requirements This ASU would allow another transition method in addition to the existing requirements to transition to the new lease standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption Separating Lease and Non-Lease Components in a Contract and Allocating the Consideration in the Contract to the Separate Components 296 The new lease guidance requires an entity to separate lease components from non-lease components (for example, maintenance services or other activities that transfer a good or service to the customer) in a contract so that they may be accounted for under various FASB ASC topics That is, the lease components are accounted for in accordance with the new lease requirements, but the entity would account for the non-lease components in accordance with other topics (for example, FASB ASC 606) The consideration in the contract is allocated to the lease and non-lease components on a relative standalone price basis (for lessees) or in accordance with the allocation guidance in the new revenue standard (for lessors) The new lease guidance also provides lessees with a practical expedient, by class of underlying assets, to not separate non-lease and related lease components If a lessee makes that accounting policy election, it is required to account for the non-lease components together with the related lease component as a single lease component and to provide certain disclosures Lessors are not afforded a similar practical expedient .297 This proposed update addresses stakeholders' concerns about the requirement for lessors to separate components of a contract by providing lessors with a similar practical expedient, by class of underlying assets, to not separate non-lease components from the related lease components However, the lessor practical expedient would be limited to circumstances in which both (a) the timing and pattern of revenue recognition are the same for the non-lease component(s) and the related lease component, and (b) the combined single lease component would be classified as an operating lease .298 The amendments in this proposed update related to transition relief on comparative reporting at adoption would affect all entities with lease contracts that choose the transition option, whereas the amendments in this proposed update related to separating components of a contract would affect only lessors whose lease contracts qualify for the practical expedient ARA-GEN 295 ©2018, Association of International Certified Professional Accountants General Accounting and Auditing Developments — 2018/19 73 Transition — Comparative Reporting at Adoption 299 This proposed ASU would provide entities with an additional (and optional) transition method to adopt the new lease requirements by allowing entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption consistent with the request by preparers Consequently, an entity's reporting for the comparative periods presented in the financial statements in which the entity adopts the new lease requirements would continue to be in accordance with current GAAP (FASB ASC 840), including disclosures Separating Components of a Contract 300 This proposed ASU would provide lessors with a practical expedient, by class of underlying assets, to not separate non-lease components from the related lease components and, instead, to account for those components as a single lease component, if both of the following conditions are met: r r The timing and pattern of revenue recognition for the non-lease component(s) and related lease component are the same The combined single lease component would be classified as an operating lease .301 A lessor electing this proposed practical expedient would be required to disclose the class or classes of underlying assets for which it has elected the practical expedient and the nature of the non-lease components included within the single lease component Derivatives and Hedging 302 In February 2018, FASB released for exposure proposed ASU Derivatives & Hedging (Topic 815): Inclusion of the Overnight Index Swap (OIS) Rate Based on the Secured Overnight Financing Rate (SOFR) as a Benchmark Interest Rate for Hedge Accounting Purposes .303 FASB ASC 815, Derivatives and Hedging, provides guidance on the risks associated with financial assets or liabilities that are permitted to be hedged Those risks include, among others r r r changes in fair values or cash flows of existing or forecasted issuances, purchases of fixed-rate financial assets, and liabilities attributable to the designated benchmark interest rate (referred to as interest rate risk) .304 In the United States, eligible benchmark interest rates are the interest rates on direct Treasury obligations of the U.S government (UST), the London Interbank Offered Rate (LIBOR) swap rate, the Overnight Index Swap (OIS) rate based on the Fed Funds Effective Rate, and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate Because of concerns about the sustainability of LIBOR, the Federal Reserve Board and the Federal Reserve Bank of New York (Fed) are leading an effort to introduce an alternative reference rate in the United States In 2014, the Fed convened the Alternative Reference Rates Committee (ARR Committee), made up of a consortium of major financial institutions and other market participants, to identify a suitable alternative to LIBOR that is more firmly based on transactions in ©2018, Association of International Certified Professional Accountants ARA-GEN 304 74 Audit Risk Alert a robust market In June 2017, the ARR Committee announced that it identified a broad Treasury repurchase agreement (repo) financing rate referred to as the Secured Overnight Financing Rate (SOFR) as its preferred alternative reference rate SOFR is a volume-weighted median spot interest rate that will be calculated daily based on overnight transactions from the prior day's trading activity in specified segments of the U.S Treasury repo market .305 During the hedge accounting project that led to the issuance of ASU No 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, the Fed requested that the OIS rate based on SOFR be considered eligible as a U.S benchmark interest rate for purposes of applying hedge accounting under FASB ASC 815 Similar to the Fed Funds Effective OIS rate, the OIS rate based on SOFR will be a swap rate based on the underlying overnight SOFR rate The Fed has indicated that including the OIS rate based on SOFR as a benchmark rate for hedge accounting purposes would be helpful in facilitating broader use of the underlying SOFR rate in the marketplace .306 This proposed ASU would affect all entities that elect to apply hedge accounting to benchmark interest rate hedges under FASB ASC 815 .307 This proposed ASU would permit use of the OIS rate based on SOFR as a U.S benchmark interest rate for hedge accounting purposes under FASB ASC 815 in addition to UST, the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate, and the SIFMA Municipal Swap Rate .308 This proposed update would add the OIS rate based on SOFR as a fifth U.S benchmark interest rate Including the OIS rate based on SOFR as a benchmark rate for hedge accounting purposes is intended to help entities avoid the potential cost and complexity associated with using different cash flows and discount rates to measure the hedged item and the hedging instrument, which enable entities to appropriately depict risk management strategies FASB believes that including the OIS rate based on SOFR as an eligible benchmark interest rate during the early stages of the marketplace transition will provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes Collaborative Arrangements 309 In April 2018, FASB issued for exposure ASU Collaborative Arrangement (Topic 808): Targeted Improvements A collaborative arrangement, as defined in FASB ASC 808, Collaborative Arrangements, is a contractual arrangement under which two or more parties actively participate in a joint operating activity and are exposed to significant risks and rewards that depend on the activity's commercial success .310 FASB ASC 808 does not provide comprehensive recognition or measurement guidance for collaborative arrangements; rather, the accounting for those arrangements is often based on an analogy to other accounting literature or an accounting policy election Some entities apply revenue guidance directly or by analogy to all or a portion of their arrangements, whereas others apply a different accounting method as an accounting policy .311 Different approaches result in diversity in practice on how entities account for transactions based on their view of the economics of the ARA-GEN 305 ©2018, Association of International Certified Professional Accountants General Accounting and Auditing Developments — 2018/19 75 collaborative arrangement The lack of guidance for collaborative arrangements has resulted in diversity in practice for more than a decade It was exacerbated by the issuance of ASU No 2014-09, which raised new questions about the interaction between FASB ASC 808 and FASB ASC 606 Certain aspects of ASU No 2014-09 have resulted in uncertainty about the effect of the revenue standard on the accounting for collaborative arrangements, and stakeholders indicated that it is unclear whether FASB ASC 606 could be applied to certain transactions in collaborative arrangements .312 FASB is issuing this proposed update to clarify the interaction between FASB ASC 808 and 606 This proposed update would affect all entities that have collaborative arrangements .313 The proposed update would make targeted improvements to GAAP for collaborative arrangements as follows: r r r Add unit-of-account guidance in FASB ASC 808 to align with the guidance in FASB ASC 606 (that is, a distinct good or service) limited to when an entity is assessing the scope of FASB ASC 606 Clarify that certain transactions between collaborative participants should be accounted for as revenue under FASB ASC 606 when the collaborative participant is a customer in the context of the unit of account — In these situations, all the guidance in FASB ASC 606 should be applied, including recognition, measurement, presentation, and disclosure requirements Clarify that in a transaction that is not directly related to sales to third parties, presenting the transaction as revenue would be precluded if the collaborative participant counterparty is not a customer .314 The proposed update would provide guidance on whether certain transactions between collaborative participants should be accounted for as revenue in accordance with the guidance in FASB ASC 606 The proposed amendments also would provide more comparability in the presentation of revenue for certain transactions between collaborative participants .315 Before the issuance of FASB ASC 606, stakeholders indicated that revenue from collaborative arrangements may have included (a) revenue that was recognized in accordance with FASB ASC 605, (b) revenue that was recognized through analogy to the guidance in FASB ASC 605, and (c) revenue that was recognized through the application of a policy election The proposed amendments would improve comparability by permitting revenue presentation only for transactions in collaborative arrangements not directly related to sales to third parties that are recognized in accordance with FASB ASC 606 .316 The board is not proposing any changes to the requirements for transactions directly related to sales to third parties Independence and Ethics Pipeline Proposed Nonattest Services Revision 317 PEEC proposed revisions to the "Independence Rule" (ET sec 1.200) in the "Nonattest Services" interpretation (ET sec 1.295) of the AICPA code ©2018, Association of International Certified Professional Accountants ARA-GEN 317 76 Audit Risk Alert that applies when a member performs information systems services to an attest client If adopted, the proposed interpretation, "Information System Services," would replace the current "Information Systems Design, Implementation, or Integration" interpretation (ET sec 1.295.145) .318 The main provisions in the proposal include the following: r r r r r Defines financial information system as an information system that aggregates source data underlying the financial statements or generates information that is significant to the financial statements or financial processes as a whole Distinguishes systems-related services based on whether they relate to a financial information system (as defined), with rules applicable to financial information systems being more stringent to protect against self-review threats to independence Would allow a member to design or develop a template that performs a discrete function (for example, depreciation calculation) in a financial information system if the template does not perform an activity that, if performed directly by the member, would impair independence Describes the various types of implementation services related to commercial (pre-packaged) off-the-shelf financial information system software, that is, installation, configuration, data translation, interfacing, or customization services, and their impact on independence Clarifies the kinds of system and network maintenance, support, or monitoring services members may perform postimplementation on an information system, and that taking on the responsibility for an ongoing function, process, or activity would impair independence (The proposal provides examples of services that would or would not impair independence.) Proposed Interpretation of the AICPA Code of Professional Conduct Disclosing Client Information in Connection With a Quality Review 319 In June 2018, PEEC released an exposure draft, Disclosing Client Information in Connection with a Quality Review, which would expand the instances in which members may disclose confidential client information without first obtaining specific consent from the client whose engagement is subject to review, to include tax practice quality reviews Currently, the AICPA code allows certain exceptions to the "Confidential Client Information Rule" (ET sec 1.700.001), including when a member's firm is undergoing a review of its professional practice under the AICPA, state CPA society, or board of accountancy authorization (for example, peer review) An interpretation of that rule permits another exception to the rule when a review is performed in conjunction with a prospective purchase, sale, or merger of all or part of a member's practice This proposal would give similar treatment to review of a member's tax practice, a "quality review," including voluntary tax practice reviews as described in the AICPA Tax Practice Quality Control Guide At minimum, members should comply with the requirements of Treasury Regulation 7216, which allows disclosure of confidential client information without specific consent if it is provided or obtained in connection with a quality or peer review .320 The exemption for quality reviews, as proposed, would be conditioned on the member meeting certain requirements: ARA-GEN 318 ©2018, Association of International Certified Professional Accountants r r General Accounting and Auditing Developments — 2018/19 77 The member complies with requirements of Treasury Regulation 301.7216-2(p) related to disclosures of tax information If the member determines that threats have not been sufficiently reduced to an acceptable level, the member should apply additional safeguards, for example, by executing a written confidentiality agreement with the peer reviewer or de-identifying tax return information provided to the reviewer so that the client's name and personal information are not visible .321 The member performing the review should not use to his or her advantage any confidential client information that comes to his or her attention as a result of the review and should also refer to Treasury Regulation 301.72162(p) for further guidance Resource Central 322 The following are various resources that practitioners may find useful Publications 323 Practitioners may find the following publications useful Visit www.aicpastore.com and choose the format best for you — print, ebook, or online Although the most current editions available at the date of writing of this alert are subsequently identified, you will want the newest edition available at the time of purchase: r r r r r r r r Audit Guide Analytical Procedures (2017) (product no AUDANP17HI [paperback], AAGANP17E [ebook], or WAN-XX [online]) Audit Guide Special Considerations in Auditing Financial Instruments (2016) (product no AAGAFI16P [paperback], AAGAFI16E [ebook], or AAGAFIO [online]) Guide Preparation, Compilation, and Review Engagements (2018) (product no AAGCRV17P [paperback], AAGCRV17E [ebook], or WRC-XX [online]) Audit Guide Assessing and Responding to Audit Risk in a Financial Statement Audit (2016) (product no AAGARR16P [paperback], AAGARR16E [ebook], or WRA-XX [online]) Audit Guide Audit Sampling (2017) (product no AAGSAM17P [paperback], AAGSAM17E [ebook], or WAS-XX [online]) Audit Guide Revenue Recognition (2016) (product no AAGREV16P [paperback] or WAR-XX [online]) Attestation Guide Reporting on an Entity's Cybersecurity Risk Management Program and Controls (2017) (product no AAGCYB17P [paperback], AAGCYB17E [ebook], or AAGCYBO [online]) Internal Control — Integrated Framework: Executive Summary, Framework and Appendices, and Illustrative Tools for Assessing Effectiveness of a System of Internal Control (3 volume set) (product no 990025P [paperback], 990025E [ebook], ACOSO2O [online]) ©2018, Association of International Certified Professional Accountants ARA-GEN 323 78 r r r r r Audit Risk Alert U.S GAAP Financial Statements — Best Practices in Presentation and Disclosure (formerly Accounting Trends & Techniques) (product no ATTATT18P [paperback] or ABPPDO [online]) Audit and Accounting Manual (2017) (product no AAMAAM18P [paperback] or WAM-XX [online]) The Auditor's Report: Comprehensive Guidance and Examples (product no APAARMO [online]) The Engagement Letter: Best Practices and Examples (product no APAEGLO [online]) Audit Risk Alert Understanding the Responsibilities of Auditors for Audits of Group Financial Statements (product no ARAGRP13P [paperback], ARAGRP13E [ebook]) Continuing Professional Education 324 The AICPA offers a number of continuing professional education (CPE) courses that are valuable to CPAs working in public practice and industry, including the following: r r r r r r r r ARA-GEN 324 Annual Accounting and Auditing Workshop (product no 736194) Whether you are in industry or public practice, this course keeps you current and informed and shows you how to apply the most recent standards IFRS Certificate Program (product no 159770) Using a scenariobased series of courses with audio, video, and interactive exercises and case studies, this program will guide you through the concepts of each area of IFRS Internal Control and COSO Essentials for Financial Managers, Accountants, and Auditors (product no 731909 [text] or 159825 [on-demand]) This course will provide you with a solid understanding of systems and control documentation at the significant process level U.S GAAP: Review for Business and Industry (product no 163972 [on-demand]) Comprehensive coverage of recent FASB and IASB pronouncements geared to the specific interests of the CPA in corporate management Specialized Forensic Accounting Certificate (product no 167110) Composed of required education and the respective Certified in Financial Forensics (CFF) credential's Specialized Forensics Knowledge exam, this certificate program was developed to assist you in customizing your professional development goals SOC for Cybersecurity Certificate Program (product no 162260) This certificate will enable you to understand how to perform SOC for Cybersecurity attestation examinations using the AICPA's new cybersecurity risk management reporting framework Cybersecurity Advisory Service Certificate Program (product no 162250) Learn how you can help your clients navigate threats by becoming a trusted business adviser for their organization's cybersecurity risk management programs Blockchain Fundamentals for Accounting and Finance Professionals Certificate (product no WCBLCF18003B) This certificate offers a foundation toward becoming a strategic business partner within your organization and with your clients ©2018, Association of International Certified Professional Accountants General Accounting and Auditing Developments — 2018/19 79 325 Visit www.aicpastore.com for a complete list of CPE courses Online CPE 326 CPExpress, offered exclusively through www.aicpastore.com, is the AICPA's flagship online learning product Divided into 1-credit and 2-credit courses that are available 24 hours a day, days a week, CPExpress offers hundreds of hours of learning in a wide variety of topics Subscriptions are available at www.aicpastore.com/ast/main/cpa2biz_primary/prdovr∼pcbyf-xx/pc-byf-xx.jsp (product no BYF-XX) Some topics of special interest may include the following: r r r r r r r r r Accounting and Auditing Update Small Business Accounting and Auditing Update Fair Value Accounting Accounting for Goodwill and Other Intangibles Uncertainty in Income Taxes Revenue Recognition Fraud and the Financial Statement Audit Public Company Update SEC Reporting 327 To register for individual courses or to learn more, visit www aicpastore.com Webcasts 328 Stay current on new developments and earn CPE credit right from your desktop AICPA webcasts are high-quality CPE programs that bring you the latest topics from the profession's leading experts Broadcast live, they allow you to interact with the presenters and join in the discussion If you cannot make the live event, each webcast is archived and available for viewing For additional details on available webcasts, please visit www.aicpastore.com/ ast/aicpa_cpa2biz_nav/responsive_top_nav/webcasts.jsp Member Service Center 329 To order AICPA products, receive information about AICPA activities, and get help with your membership questions, call the AICPA Service Operations Center at 888.777.7077 Hotlines Accounting and Auditing Technical Hotline 330 Do you have a complex technical question about GAAP, other comprehensive bases of accounting, or other technical matters? If so, use the AICPA's Accounting and Auditing Technical Hotline AICPA staff will research your question and call you back with the answer The hotline is available from a.m to p.m ET on weekdays You can reach the Technical Hotline at 877.242.7212 or online at www.aicpa.org/research/technicalhotline.html .331 Members can also email questions to aahotline@aicpa.org Additionally, members can submit questions by completing a technical inquiry form found on the same website ©2018, Association of International Certified Professional Accountants ARA-GEN 331 80 Audit Risk Alert Ethics Hotline 332 In addition to the Technical Hotline, the AICPA also offers an Ethics Hotline Members of the AICPA's Professional Ethics Team answer inquiries concerning independence and other behavioral issues related to the application of the AICPA code You can reach the Ethics Hotline at 888.777.7077 (select on your phone's keypad, followed by 1) or by email at ethics@aicpa.org Center for Plain English Accounting 333 The Center for Plain English Accounting (CPEA) is a service available to Private Companies Practice Section (PCPS) member firms It provides expertise and resources in a straightforward and clear style Written responses to technical inquiries, webcasts on hot topics, and monthly A&A reports and alerts help practitioners understand and implement authoritative professional literature when they are auditing, reviewing, preparing, and compiling financial statements To join the CPEA and take advantage of these valuable resources, visit the CPEA website at www.aicpa.org/interestareas/ centerforplainenglishaccounting.html AICPA Online Professional Library: Accounting and Auditing Literature 334 The AICPA has created your core accounting and auditing library online The AICPA Online Professional Library is now customizable to suit your preferences or your firm's needs You can sign up for access to the entire library Get access — anytime, anywhere — to FASB ASC; the AICPA's latest Professional Standards, Technical Questions and Answers, Audit and Accounting Guides, Audit Risk Alerts, Best Practices in Presentation and Disclosure; and more To subscribe to this essential online service for accounting professionals, visit www.aicpastore.com Financial Reporting Center of AICPA.org 335 CPAs face unprecedented changes in financial reporting As such, the AICPA has created the Financial Reporting Center to support you in the execution of high-quality financial reporting This center provides exclusive memberonly resources for the entire financial reporting process and can be accessed at www.aicpa.org/frc .336 The Financial Reporting Center provides timely and relevant news, guidance, and examples supporting the financial reporting process You will find resources for accounting, preparing financial statements, and performing various types of engagements, including compilation and review, audit and attest, and assurance and advisory .337 For example, the Financial Reporting Center offers a section dedicated to the FASB revenue recognition standard For the latest resources available to help you implement the revenue recognition standard, visit the "Revenue Recognition" page at www.aicpa.org/interestareas/frc/accountingfinancial reporting/revenuerecognition/pages/default.aspx Industry Websites 338 The internet covers a vast amount of information that may be valuable to auditors, including current industry trends and developments Some of the more relevant sites for auditors include those shown in the following table: ARA-GEN 332 ©2018, Association of International Certified Professional Accountants General Accounting and Auditing Developments — 2018/19 Website Name Content Website Summaries of recent auditing and other professional standards, as well as other AICPA activities www.aicpa.org AICPA Financial Reporting Executive Committee (formerly known as the Accounting Standards Executive Committee) Summaries of recently issued guides, white papers, and technical questions and answers containing financial, accounting, and reporting recommendations, among other things www.aicpa.org/ interestareas/frc/ accountingfinancial reporting/pages/ finrec.aspx AICPA Accounting and Review Services Committee Summaries of preparation, review, and compilation standards and interpretations www.aicpa.org/ research/standards/ compilationreview /arsc/pages/default aspx Committee of Sponsoring Organizations of the Treadway Commission Information about the committee and the internal control framework developed by the committee www.coso.org Moody's Analytics Source for analyses, data, www.economy.com forecasts, and information on the U.S and world economies The Federal Reserve Board Source of key interest rates www.federalreserve gov Financial Accounting Standards Board (FASB) Summaries of recent accounting pronouncements and other FASB activities www.fasb.org International Accounting Standards Board Summaries of International Financial Reporting Standards and International Accounting Standards www.ifrs.org AICPA www.aicpastore.com www.ifrs.com Summaries of International Auditing and Assurance Standards International Standards on Auditing Board www.iaasb.org International Federation of Accountants www.ifac.org Information on standard-setting activities in the international arena 81 (continued) ©2018, Association of International Certified Professional Accountants ARA-GEN 338 82 Audit Risk Alert Website Name Content Website Private Company Council Information on the initiative to further improve FASB's standards-setting process to consider needs of private companies and their constituents of financial reporting www.accounting foundation.org/jsp/ foundation/page/ fafsectionpage&cid= 1176158985794 PCAOB Information on accounting and auditing activities of the PCAOB and other matters www.pcaob.org SEC Information on current SEC rulemaking and the Electronic Data Gathering, Analysis, and Retrieval database www.sec.gov USA.gov Portal through which all government agencies can be accessed www.usa.gov ARA-GEN 338 ©2018, Association of International Certified Professional Accountants ... Certified Professional Accountants General Accounting and Auditing Developments — 2018/19 Audit Risk Alert 2018/19: General Accounting and Auditing Developments By AICPA and CIMA Copyright © 2018 Association... Green, and Manda Dinkel for their review of this publication AICPA Staff Liese Faircloth Manager Product Management and Development Feedback The Audit Risk Alert General Accounting and Auditing Developments. .. Developments — 2018/19 Notice to Readers This Audit Risk Alert (alert) replaces General Accounting and Auditing Developments 2017/18 This alert provides auditors of financial statements with an overview