Braddon Group

“Practice gratitude.”

“Be authentic.”

“Consider your story as you craft your goals.”

Not your typical soundbites from a gathering of CPAs.

When I leave an AICPA conference, I always bring home the best technical thinking in the profession and new and deepened relationships with peers across the country. This content and camaraderie is what brings me back year after year to these events.

As I gathered my thoughts after the recent AICPA Personal Financial Planning Summit, I noticed a shift in the tone of the key takeaways that I was anxious to implement in my firm. This innovative and intimate event sparked new thinking about how I – and other CPAs and planners who serve individual clients with their tax, estate, retirement, risk management and investment needs – can shape our practices for the future. Here are four challenges and some questions to consider from this year’s summit:

Understand “trust” from the client perspective.

“Trust” is a word thrown around frequently in our profession yet rarely dissected from the client perspective. David Richman helped us discover the dimensions of trust and how they impact client relationships, emphasizing that deepening the advice you provide to clients as they age enhances your relationship and level of trust.

Clients expect us to tell the truth and to develop our own thinking on key issues of the day. Are you sharing your honest perspective and thinking on the issues that most impact your clients? Or are you merely a conduit of information?

Look backwards to accomplish forward-thinking.

In a session on transformative financial planning, Dr. Robert Brooks challenged us to help clients look backwards to assess what past events have had a significant impact on their lives.

Encouraging reflection in this way accomplishes a number of things. This exercise:

• Opens up conversations about happiness, meaning and purpose,
• Creates a window into how clients respond to stress and pressure, and
• Reveals how advisors can nurture a resilient mindset with clients.

As their trusted advisor, you want to be one of the first people they call when they face major life changes – the death of a spouse, birth of a grandchild, sale of a business.

Consider, “when your clients connect the dots backwards in their own lives, would [you] be listed as a significant part of the conversation?” 

Focus on skillsets and behaviors in your leadership pipeline.

Helping team members progress from entry-level to leadership was a focus of Cheryl Holland’s.  In her framework for accomplishing this, she emphasized that developing behaviors is just as important as skill sets.

Is it best practice to develop progressive and comprehensive skills and competencies for your employees based on your firm’s strategy? Absolutely. But are you also focusing on cultivating behaviors for success with your team members? For example, to encourage her team to slow down and truly listen to clients, Cheryl teaches them the “Nine Second Rule.” By pausing and counting to nine before speaking when a client answers a question, clients are given the time and space to process and be vulnerable.

Are you teaching your employees how to listen? How to apologize properly? Do they practice gratitude?

Integrate your story into your succession plan.

Eric Hehman’s panel discussion on succession planning prompted me to reflect on my own story as I actively plan for the future of my firm.

Successful and smooth succession of your firm requires more than an understanding of the “how to” of transitioning to new leadership. In truth, we all have stories intertwined with our business. Vulnerability and openness about our personal story – including our operational, financial and emotional obstacles – are critical for both parties involved.

Are you willing to engage in an ongoing and open conversation with your successor about your goals and history as you develop and execute a successful future for your firm?

Join the dialogue.

If you, like me, are ready to reflect on some of the opportunities and challenges facing our firms, I invite you to be a part of the dialogue at the 2018 AICPA Advanced PFP Summit for an opportunity to hear from and interact with the most experienced minds in the profession. And be sure to use the resources from the AICPA’s PFP Section as you provide estate, tax, retirement, risk management and investment advice.

Lyle Benson, CPA/PFS, President and Founder of L.K. Benson & Company. Based in Baltimore, Lyle’s firm specializes in personal financial planning, tax and investment advisory services for high income individuals and families, as well as corporate executives and entrepreneurial, closely held business owners across the country. Lyle is the co-chair of the Summit Planning Committee and immediate past chair of the AICPA’s PFP Executive Committee.

Man painting image courtesy of Shutterstock.

     

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Security breaches are prevalent in today’s business environment and reports indicate that these threats are not going away any time soon. As a result, organizations need to take steps to safeguard their confidential data and other sensitive information. Smaller-sized organizations like small businesses and not-for-profit entities are particularly vulnerable. A recent study by Symantec found that 43 percent of phishing campaigns affected small businesses in 2016, a significant uptick compared to 2011 when just 18 percent of attacks targeted small businesses.

Even organizations with limited resources have affordable and effective options for protecting valuable data. I recommend penetration testing, a type of cybersecurity vulnerability assessment, to my clients working in the not-for-profit sector. Many of my not-for-profit clients feel compelled to conduct cybersecurity penetration testing when they consider how accepting online donations may create vulnerabilities for not only for themselves but also for their donors. Potential donors may feel more comfortable donating online once they hear that the organization has safeguards in place to protect their information. Penetration testing is performed by an outside, third party and can be tailored to the needs, or concerns of the organizations.

Regardless of an organization’s size and area of impact, penetration testing can be a valuable tool. It can help all types of not-for-profit organizations and small businesses understand their information security vulnerabilities in a clear and concise manner.

Below are seven benefits of cybersecurity penetration testing: 

1. It is adaptable for your particular organization. Testing can suit your unique needs from external and internal-facing networks to web and mobile applications, wireless systems or a combination of these.
2. It identifies threats with several techniques. Assessments can employ a variety of methods to identify threats, including social engineering, which is used to uncover sensitive information by email phishing attempts or calls to exploit confidential information.
3. It helps satisfy compliance requirements. Regulations that need to be followed include the Payment Card Industry (PCI) Data Security Standard and the Health Insurance Portability and Accountability Act (HIPAA). Keep in mind that the HIPAA Privacy Rule may apply to practitioners in public practice with clients in the medical field. For more information on this, read this blog post.
4. It meets mandatory testing requirements. In some cases, penetration testing is mandatory. While it is always recommended, it is a required annual activity for any entity transmitting, processing or storing one million or more credit card transactions with any one card brand annually, those who have experienced a recent PCI data breach or have otherwise been requested by a credit card processor or bank.
5. It protects stored credit card data. It is also required if an entity is storing credit card data in any manner, using certain kinds of desktop payment processing, online payment processing methods or acting as a PCI service provider to a third-party.
6.  It keeps sensitive personal information safe. It can be used to help protect personally identifiable information (PII) data, such as donor and staff information. It can also help higher education institutions comply with the Family Educational Rights and Privacy Act (FERPA) and identify vulnerabilities that may expose sensitive student information.
7. It reports critical information. The reports generated should be written to meet the needs of an IT department, management, internal and external auditors and examiners. They should clearly define the scope of the testing, the methodology used and the results of the testing to make recommendations to address any findings. The reports should also be subject to a rigorous quality assurance process to ensure accuracy and completeness.

Penetration testing should be considered along with other closely related information security and compliance services, such as vulnerability scanning, information security consulting, on-site assessments and forensic investigations.

Testing also should not be a one-time occurrence. Once findings are remedied, a retesting window is important so organizations can be assured that the vulnerabilities identified are resolved.

Although no cybersecurity practice can guarantee that a breach won’t occur, strong cyber defenses, specifically penetration testing, can provide your organization with valuable protection for your data and assets.

To better understand, mitigate, plan for and respond to cybersecurity threats, visit the AICPA’s Cybersecurity Resource Center containing helpful videos, articles, whitepapers, fact sheets and CPE opportunities.

In addition, those working with or for not-for-profits may be interested in participating in the upcoming webcast Cybersecurity Pitfalls and Information Risk Management for Not-for-Profits, which is being hosted by the AICPA Not-for-Profit Section on Wednesday, February 22.

 

Frank Jakosz, CPA, Partner-in-Charge- Not-for-Profit and Higher Education Practices, Sikich LLP. Frank has more than 40 years of public accounting experience and expertise serving not-for-profit organizations. He serves on the AICPA’s Not-for-Profit Advisory Council.

 

Lock image courtesy of Shutterstock

     

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In 2014, valuation professionals responding to an American Institute of CPAs (AICPA) survey identified a 30% rise in demand for fair value for financial reporting. Specifically, the survey highlighted both fair value and intangible assets as emerging issues. This comes as no surprise given an increasingly global market rife with corporate acquisitions beyond borders. Also reported was an increase in the prevalence of complex assets such as intellectual properties, whose values cannot be calculated with complete objectivity. The growing demand for fair value – coupled with the subjectivity of valuing entities and intangibles – carry with them an obligation for the profession to protect the public interest by lending clarity, consistency and transparency to fair value practices.

Regulators urged valuation organizations to address the need for improved fair value measurement for financial reporting. As a result, the AICPA, in partnership with the American Society of Appraisers (ASA), the Royal Institution of Chartered Surveyors (RICS), the Appraisal Foundation, the International Valuation Standards Council and others developed the Certified in Entity and Intangible Valuations™ (CEIV™) credential program. The credential program helps valuation professionals protect the public interest by:

• Better defining the scope and documentation of work.
• Providing a system for quality monitoring.
• Establishing a code of ethics for credential holders.

Establishing scope-of-work parameters and documentation levels was one of the first steps in creating the supporting infrastructure for the CEIV credential program. These parameters and guidance are presented in a new performance framework and its related applications. The framework promotes a level of documentation that allows an experienced professional not involved with the engagement to review and understand the significant analyses of inputs and outputs and how they support the final conclusion of value. This will help clients, auditors and others understand the quantitative analyses in the final valuation report. More importantly, it will increase understanding of the qualitative analyses that support the conclusion of value.

So why is this important?

Quantitative and qualitative inputs are used by every valuation professional in every valuation engagement.  Quantitative inputs are typically mechanical in nature. While they still require an appropriate level of documentation to ensure proper support of the findings, they tend to need less explanation and support than qualitative inputs. By comparison, valuation professionals commonly base qualitative inputs on their expert judgment. This is where the valuation professional can bring the most value to a client; however, qualitative inputs, when not well documented, rely on the valuation professional to explain or support them should questions arise.  For example, a valuation professional may choose a 6% discount rate when an 8% discount rate could also be reasonable. If the justification for choosing the 6% discount rate is undocumented and the valuation professional is unavailable to answer questions regarding this decision (e.g., changed firms, retired, etc.), others are left to interpret the rationale. This can have unintended and harmful consequences.

It’s important for valuation professionals to recognize that documenting the reasonableness of an assumption is analogous to the saying “an ounce of prevention is worth a pound of cure.” The CEIV performance framework is a solution to the documentation dilemma for various assets and liabilities.

The credential program also protects the public interest by establishing a quality monitoring system. The valuation profession has forms of quality control interspersed throughout its procedures, but until now, there’s been no single oversight process. Those who understand the importance of uniformity, expectations and enforcement will value the CEIV quality control process, which requires credential holders to submit to an annual, proactive engagement-level Quality Monitoring Program. The program’s goal is to ensure that high-quality valuations are performed in accordance with the new performance framework.

Knowing that CEIV credential holders are held to high expectations and strict rules will strengthen public trust and regulator confidence.

Lastly, many professions have a code of ethics as part of its quality control process. Valuation professionals who obtain the CEIV credential through the AICPA must adhere to the AICPA Code of Professional Conduct. Similar to the quality monitoring process, the code of ethics requirement provides confidence to regulators and to the market that the CEIV designees are performing quality valuations while upholding high professional standards.

In today’s rapidly changing international marketplace, the demand for fair value measurement increases as entities and intangibles grow in complexity. The AICPA’s CEIV credential program improves market confidence and brings a higher level of professionalism and accountability to those committed to enhancing audit quality, consistency and transparency in fair value measurements for financial reporting purposes. Learn more.  

Eva Simpson, CPA, CGMA, Senior Technical Manager – Forensic and Valuation Services, Public Accounting, Association of International Certified Professional Accountants.

Glasses image courtesy of Shutterstock.

     

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You may soon be MOONed by your hospital. Beginning March 8, 2017, hospitals must now provide patients with the standard Medicare Outpatient Observation Notice (MOON).

When a Medicare beneficiary is admitted to a hospital as an inpatient most of the cost of the stay is paid under Part A, which covers the cost of a hospital stay. In 2017, the only cost the beneficiary must pay for stays of 60 days or fewer is the $1,316 deductible.

Most beneficiaries do not realize that they can also be admitted to a hospital as an outpatient. Your status as an outpatient has nothing to do with where you receive care or the type of care received. You may not even be aware of your status. You can be admitted to the hospital, be assigned a room and receive services as if you were an inpatient, all the while having been admitted as an outpatient by your doctor. Observation status gives the doctor time to decide if he or she should write an order to admit you into the hospital as an inpatient.

So, if the care received is no different why should you be concerned? While costs of an inpatient stay at the hospital are paid by Part A, the costs of the stay as an outpatient are paid by Part B. This likely means a dramatic difference in your out-of-pocket costs.

If you are classified as an outpatient while staying at the hospital, here is what happens:

• If you did not elect to participate in Part B (recall that Part B is elective, Part A is not) all hospital costs incurred as an outpatient will be your responsibility.
• If you elected to participate in Part B, 20% of the cost of your hospital stay will be your responsibility, unless you purchased coverage under a Medicare Supplement plan.
• Most hospitals do not allow you to use the Part D prescription drug plan while in the hospital. The hospital will provide the drugs, and you will be charged the full balance on the hospital bill. In this case, you are paying the hospital for the drugs and then are responsible for requesting reimbursement from your drug plan. Good luck with that!
• Admittance as an outpatient does not count toward the minimum three consecutive inpatient days necessary for Medicare to pay for a subsequent stay in a skilled nursing facility (SNF). For Medicare to pay for a SNF stay, the stay must be preceded by three inpatient days at a hospital. If you enter the SNF after three days in observation status, Medicare Part A will not pay for the SNF stay. Many Medicare beneficiaries have been unpleasantly surprised to find that they are responsible for the cost of the SNF stay, which can easily total thousands of dollars, as a result of their outpatient status. If you do not meet the 3-day rule, the SNF must inform you that Medicare will not pay for your stay by providing you with an Advance Beneficiary Notice of Non-Coverage (ABN) which you must sign. Absent the ABN, you will not be responsible for the costs of the SNF stay.

Medicare pays for only a limited stay in a SNF.

During a benefit period, Medicare will pay for 100% of the cost of a SNF stay for up to 20 days and for the next 80 days pay for the full cost minus a daily copayment ($164.50 in 2017). For Medicare to pay for a SNF stay, the stay must be preceded by three inpatient days at a hospital. If there is a break of more than 30 days in skilled care, you need a new 3-day hospital stay to qualify for additional SNF care. A “benefit period” ends 60 consecutive days in which you have not been in a hospital or in a SNF. A new benefit period will begin following another 3-day minimum inpatient stay in a hospital.

What should you expect if you are MOONed (given a standard Medicare Outpatient Observation Notice) by your hospital?

Per the Center for Medicare Advocacy hospitals will be required “…to provide oral and written notification to patients who are classified as outpatients or observation status patients for more than 24 hours. Notice of non-inpatient status must be provided within 36 hours.”

A standard notice has been issued by the Centers for Medicare & Medicaid Services (CMS) for use by all hospitals. After listing your name and patient number, the notice will provide the reason you are receiving observation services and why you are not classified as an inpatient. The consequences of your status are explained including:

• Payment for care costs under Medicare Part B rather than Part A.
• Impact on your Part D prescription drug costs.
• Impact on the 3-day minimum inpatient stay requirement for payment for any subsequent SNF stay.

For any hospital stays before March 8, 2017, make sure you ask your doctor if you are being admitted as an inpatient or an outpatient. If you are being admitted as an outpatient, ask for the reason and if there is any way you can be admitted as an inpatient.

Note that the 3-day rule only covers SNF. If you are released to a facility for specific care – such as a rehabilitation hospital – Medicare will provide coverage under a separate set of rules. Finally, if you are in a Medicare Advantage plan (typically an HMO or PPO) the rules regarding a stay in the SNF are different – make sure you check with your plan to understand its particular rules.

For more in-depth information on Medicare planning and how to help clients plan for healthcare expenses, you can read The CPA’s Guide to Financing Retirement Healthcare. 

James Sullivan, CPA/PFS, MedicareAware. Jim has been a personal financial planner for almost 30 years. His practice focuses on clients who are chronically ill and their families. He has written over 70 articles on planning and paying for health care in retirement. He has also authored several books, including The CPA’s Guide to Financing Retirement Healthcare, and can be reached at jim@medicareaware.com.

Signing medical form image courtesy of Shutterstock.

     

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In our first blog post of this series, we looked at three typical examples of elder financial abuse and some of the reasons why seniors are attractive targets. Helping safeguard your clients from financial abuse as they age, or experience a serious health problem, is one of the most important and meaningful things you can do for them.  In this article, we will delve deeper into types and signs of financial elder abuse, and ways to prevent it before it starts.

A growing target

The senior population is growing in the United States, and advances in healthcare generally mean that people are living longer: according to U.S. Census projections, in 2050, the population aged 65 and over is projected to be 83.7 million, almost double from 2012. The population 85 years and over will double by 2036 and then triple by 2049. Baby boomers are largely responsible for this increase, as they began turning 65 in 2011.

These increases in the elderly population will, unfortunately, be accompanied by commensurate increases in financial abuse. For your clients’ sake, it’s important that you educate them about the reality of these risks. Most clients think, “That cannot happen to me.” Many clients believe wrongly that their wealth, education or family ties preclude abuse from affecting them. But those factors provide little assurance. Once the client is educated about the risks, practitioners can more easily assess the risk of abuse to a particular client, the signs when it occurs, and most importantly, how to handle the scenario once abuse has been identified.

What is financial elder abuse?

The National Committee for the Prevention of Elder Abuse (NCPEA) defines financial elder abuse as “The illegal or improper use of an older person’s funds, property or resources.” The annual cost can be as high as $36 billion, according to Consumer Reports.

Abusers can be anyone and the abuse can take many forms including:

• Taking money or property
• Forging an older person’s signature
• Getting them to sign a deed, will or power of attorney
• Outright theft
• Promising care in return for money or property, or taking money or property and threatening to leave the person alone if they tell anyone.

Scams, cons and frauds of almost infinite variety affect aging clients.

According to the National Institute of Justice, common types of fraud include phony magazine subscriptions, prize scams, donations to nonexistent charities and retrieval of personal financial information under false pretenses.

Signs of abuse

The best way to stop elder financial abuse is before it starts. Knowing the signs of elder financial abuse can help.

The National Committee for the Prevention of Elder Abuse (NCPEA) notes the following may be indicators of elder financial abuse and should raise red flags for further investigation:

• Withdrawals from bank accounts or transfers between accounts that the older person cannot explain
• Bank statements and canceled checks no longer come to the elder’s home
• New “best friends”
• Unusual and unreasonable favoritism of one family member over all others
• Legal documents, such as powers of attorney, which the older person didn’t understand at the time he or she signed them
• Unusual activity in the older person’s bank accounts including large, unexplained withdrawals, frequent transfers between accounts or ATM withdrawals
• Suspicious signatures on checks or other documents
• Implausible explanations given about the elderly person’s finances by the elder or the caregiver
• The elder is unaware of or does not understand financial arrangements that have been made for him or her

Prevention

According the National Adult Protective Services Association, the rate of financial exploitation is extremely high, with 1 in 20 older adults indicating some form of perceived financial mistreatment occurring in the recent past. However, only 1 in 44 cases of elder financial abuse is ever reported.

As your clients’ trusted adviser, one of the most valuable and essential services you can offer is to help prevent financial abuse.  The first step is educating yourself about the types of elder financial abuse and the many varieties of scams and frauds that target seniors. Keep the lines of communication open with your clients and their family members, and keep your eyes open for any signs of financial abuse.

Discuss incorporating a set of checks and balances into clients’ financial planning, estate planning documents, and legal and other transactions. Guide your clients to simplify financial matters including consolidating accounts into a single institution where feasible, automating banking, and having electronic bank statements go to more than one person. Simplification and consolidation makes it easier for designated persons to monitor and safeguard finances. Simplification makes it easier for a client with declining capabilities to monitor his or her own finances.

Get to know and team with your clients’ attorneys, insurance consultants and other advisors. Look at the financial institution your clients do business with to determine if they are “elder friendly.” Some have devoted more resources to these issues than others. The U.S. Consumer Financial Protection Bureau recently issued an advisory report for financial institutions on preventing elder financial abuse that includes recommendations such as offering age-friendly services.

Help your clients understand that a mere power of attorney may be insufficient to protect them from abuse, and that they should plan more broadly by building in safeguards. For example, a CPA or another person acting as a monitor could receive financial documents. Consider the use of joint fiduciaries or a formal monitor position built into the financial power of attorney.

An alternative to relying on a power of attorney as the primary document is instead to focus on a funded revocable trust to better protect your client. A banking institution or trust company can serve as a trustee or co-trustee. This will make it easier for the corporate trustee to step in to assist the consumer in an emergency. Suggest integrating an independent care manager provision into the trust to perform a quarterly assessment and issue a written report to the corporate trustee, as well as to a key friend or family member (or perhaps the trust protector). As a CPA, you can have yourself named as that monitor.

The AICPA’s Personal Financial Planning Section along with the FVS Section will be offering a webcast February 27 on how practitioners can protect clients from financial fraud and abuse. We will continue the discussion in the final part of this three-part series, where we’ll look at how CPAs can make the elderly less inviting targets, and review legislation intended to protect seniors from elder financial abuse.

Martin Shenkman, CPA, MBA, PFS, AEP, JD, Shenkman Law. Martin is the founder of Shenkman Law, where he focuses on estate and tax planning. He is the author of more than 42 books and 1,000 articles, and is a quoted expert on tax matters. His work appears in well-known publications, including The Wall Street Journal and The New York Times. Martin is also known for his active charitable work, which has been profiled in Forbes. See his blog post at www.shenkmanlaw.com. 

James Sullivan, CPA/PFS, MedicareAware. Jim has been a personal financial planner for almost 30 years. His practice focuses on clients who are chronically ill and their families. He has written several books including one on Medicare for the AICPA and over 70 articles on planning and paying for health care in retirement. He can be reached at jim@medicareaware.com.

Randal Wolverton, CFE, CPA, CFF, Association of Certified Fraud Examiners. Randal is a retired FBI Special agent, after 28 years of services.  Randal developed and provided training relating to fraud detection, investigation and prevention to numerous law enforcement agencies, college undergraduate and graduate programs, auditors, accountants in private practice and other professional organization and is past chairman of the AICPA Fraud Task Force. Wolverton currently provides forensic accounting services as a Sole Practitioner. 

Advising seniors image courtesy of Shutterstock.

     

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The parallels between sailing and audit quality came to mind recently when I was speaking with a practitioner who is passionate about sailing. His comments about his enthusiasm for sailing reminded me of the profession’s passion and ongoing commitment to quality.

When sailors go to sea, they depend on their ships to get them to their destinations quickly and safely, conquering instability, uncertain weather conditions and unexpected obstacles along the way. In many ways, they place the same faith in their vessels as CPAs place in their firms. CPAs rely on the firms they’ve built to achieve their goals – to help them serve their clients and business communities, uphold the public interest and create thriving workplaces – as they navigate the many challenges of a fast-changing and increasingly complex environment. In both cases, a strong discipline and commitment to quality is critical to success.

Prepare for All Weather

Just as builders take steps to assure ships are built to withstand rough weather, CPAs take steps to give their firms a strong foundation that serve them well no matter what issues they encounter. Quality is promoted throughout each stage of an auditor’s journey— from their time as a student, preparing for the CPA exam, to their time as a professional, through experience and professional development.

The Institute’s 6-Point Plan to Improve Audits, issued in May 2015, examines each stage where we can better prepare for uncertain weather, and charts out profession-wide steps to batten down the hatches. For example:

• Beginning in April 2017, a new version of the CPA exam will increase assessment of higher-order skills such as critical thinking, problem solving and analytical ability – essential skills for auditors.
• Experienced auditors interested in performing audits in highly specialized areas, such as single audits and employee benefit plans, now have access to more targeted training, including Single Audit and Employee Benefit Plan certificate programs that will differentiate them and allow them to demonstrate their competence and commitment to quality.

These are just two examples of our progress since 2015. Information on these and other projects tied to quality can be found in the AICPA’s new Enhancing Audit Quality Initiative, Highlights and Progress 2016 report.

Make Sure the Firm Is Shipshape

I’m told sailors must continually assess the integrity and efficacy of their equipment. Likewise, CPAs must continually assess the integrity and efficacy of their quality control systems to make sure they’re maintaining the expected level of excellence. In the CPA’s case, that assessment is done through the firm’s monitoring and internal inspection programs, and the Institute’s Peer Review Program.

The progress report provides an overview of new quality-control tools, resources and training that we’ve developed to help firms establish and maintain effective quality-control systems, including model documents outlining quality control suggested practices for sole practitioners and small firms and a free, robust online toolkit designed to invigorate firms’ focus on quality in their practices. 

We’ve also made significant changes to the peer review program to more effectively monitor practice, including better deficiency detection and remediation, particularly in complex, high risk and regulated industries.

Get Ready for Smooth Sailing

Is your ship watertight and stable? The AICPA Enhancing Audit Quality initiative is dedicated to driving the kind of continuous improvement and evolution that will help firms retain their strong reputation, thereby reinforcing the credibility of the CPA designation.

Sue Coffey, CPA, CGMA, Executive Vice President – Public Practice, AICPA.

Sailing image courtesy of Shutterstock

     

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On January 28, nearly one-fifth of the world’s population will begin the 15-day celebration of Chinese New Year. The holiday, also known as the Spring Festival, sets the tone for the year ahead and is a time for family members to reunite and share joy in successes, prosperity and good health. As the world’s borders become increasingly blurred, you may find that you have friends, colleagues or clients who observe the holiday.

Show your appreciation for their culture by familiarizing yourself with the meaning and traditions of Chinese New Year. In this video, Irene Teng, Managing Director of Europe, Africa and Asia – Management Accounting, with the Association of International Certified Professional Accountants, highlights some of the customs and shares quick tips on how to greet clients and colleagues during the holiday. You can also learn more here.

For all who celebrate, we wish you a very Happy Chinese New Year!

 

     

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The Big 3 Accounting Standards Updates (ASUs) ─ ASU 2014-09, Revenue from Contracts with Customers, ASU 2016-02, Leases, and ASU 2016-13, Financial Instruments – Credit Losses ─  from the Financial Accounting Standards Board pose significant challenges for CPAs. And, as their effective dates loom near, more and more practitioners are coming to realize the substantial level of work involved in applying these standards.

The Center for Plain English Accounting, the AICPA’s national A&A resource center, is receiving and answering quite a few inquiries about how to apply these standards. We recently celebrated our third anniversary of providing our members with valuable guidance on a wide array of accounting, financial reporting, auditing, compilation, review and preparation topics. Recently, we have been especially focused on providing our members with in-depth and practical implementation guidance on the new revenue recognition, leases, and credit loss standards. Below are three implementation questions and answers that we’ve selected to share with you.

1. REVENUE RECOGNITION: How will the new revenue recognition guidance change the percentage-of-completion accounting method used today?

ASU 2014-09 supersedes and replaces the existing percentage-of-completion accounting method, however entities can still recognize revenue over time. Entities will need to establish that their contracts meet certain criteria in order to recognize revenue over the life of the contract.  If an entity qualifies for recognition of revenue over the life of the contract, revenue recognition is likely to be similar to the percentage-of-completion accounting method. Contracts must meet one of three criteria in order to qualify for recognition of revenue over the life of the contract, as follows:

• Customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs their obligations under the contract. An important question to ask related to this is whether another entity would need to substantially re-perform the work the entity has completed to date if that other entity were to fulfill the remaining obligation to the customer.
• Entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced (for example, remodeling a home).
• Entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.

Most entities with long-term contracts will be applying the second or third criteria in order to qualify for recognition of revenue over the life of the contract.  Entities who construct an asset on the property of the customer, like a construction contractor, would appear likely to meet the second criterion. However, for those who do not perform on the property of the customer, the third criterion will be significant. This criterion requires that an entity has an enforceable right for performance completed to date. This concept is different than a progress payment since a progress payment may or may not be equal to performance completed to date. Progress payments also could be refundable, depending on the terms of the contract. The enforceability of right for performance completed to date will require a legal determination based on the governing jurisdiction and potentially could require changes to contract language.

2. LEASES: How are related party leases accounted for under the new lease standard?

ASU 2016-02 makes a significant change to the way related party leases are accounted for. Under existing GAAP, related party leases are accounted for based on the substance of the lease. Under the new standard, related party leases will be accounted for on the basis of the legally enforceable terms and conditions of the lease.

Some may conclude that leases between related parties under common control do not have legally enforceable terms and conditions and therefore a de facto scope exception in ASU 2016-02 exists for such leases. The CPEA does not agree with that conclusion. We believe that leases between related parties under common control do get enforced in a variety of settings, such as in divorce proceedings, bankruptcies and in minority shareholder disputes.

The bottom line is that the accounting for related party leases is changing and will present challenges, requiring the exercise of professional judgment in assessing the legally enforceable terms and conditions and the accounting for such leases.

3. CREDIT LOSSES: Does the new current expected credit loss model eliminate individual loan impairment assessments?

Not necessarily. ASU 2016-13 requires an entity to measure expected credit losses of financial assets on a collective (pool) basis when similar risk characteristic(s) exist. The pooling for credit loss measurement should be consistent with the entity’s policies for monitoring credit risk. If part of an entity’s policies for monitoring credit risk is to consider certain creditors individually then an entity would make those individual credit loss assessments under ASU 2016-13.

Practitioners will need help understanding and applying the revenue recognition, leases and credit loss standards. The Center for Plain English Accounting is here to help. We provide our members with written responses to technical inquiries, monthly technical reports, and access to eight two-hour webinars a year. Ensure your firm is ready to handle the Big 3 ASUs by joining the Center for Plain English Accounting.

Bob Durak, Director – Center for Plain English Accounting, American Institute of CPAs.

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