Not-for-Profit Accounting and Auditing Supplement No. 3–2018

© 2018 Association of International Certified Professional Accountants. All rights reserved. 1-1

Chapter 1

Not-for-Profit Accounting and Auditing Supplement No. 3 — 2018

Introduction

This update includes the more significant accounting and auditing developments affecting the not-for-

profit industry from July 1, 2018 through September 30, 2018. Included in this update are standard

setting and project activities of the Auditing Standards Board (ASB), Accounting and Review Services

Committee (ARSC), Professional Ethics Executive Committee (PEEC), and FASB.

These developments, although believed to be complete at the date at which they were prepared for this

course material, may not cover all areas within accounting and auditing relevant to all users of this

material. Readers are encouraged to visit the AICPA’s Financial Reporting Center for additional resources,

including various “standards trackers” for the most recent standard-setting activity in the areas of

accounting and financial reporting, audit and attest, and compilation, review, and preparation.

This update may refer you to other sources of information, in which case you are strongly encouraged to

review that information if relevant to your needs.

After completing this course, you should be able to identify some of the more significant accounting and

auditing developments affecting the not-for-profit industry from July 1, 2018 through September 30,

2018.


Audit and Accounting Final and Proposed Standards

Final Standards, Interpretations, and Regulations

AICPA

Auditing Standards Board

ASB did not issue any new or revised standards or interpretations in this quarter.

Accounting and Review Services Committee

ARSC did not issue any new or revised standards or interpretations in this quarter.

Professional Ethics Executive Committee

PEEC did not issue and new or revised ethics interpretations or guidance in this quarter.

FASB

Accounting Standards Updates

Accounting Standards Update No. 2018-09, Codification Improvements

Issue date

July 2018

Background

FASB has a standing project on its agenda to address suggestions received from stakeholders on FASB

Accounting Standards Codification® (FASB ASC) and to make other incremental improvements to

generally accepted accounting principles (GAAP). This perpetual project facilitates FASB ASC updates for

technical corrections, clarifications, and other minor improvements and should eliminate the need for

periodic agenda requests for narrow and incremental items. These amendments are referred to as

Codification Improvements. The board decided that the types of issues that it will consider through this

project are changes to clarify FASB ASC or correct unintended application of guidance that is not

expected to have a significant effect on current accounting practice or create a significant administrative

cost to most entities.


The amendments in this update include items raised for FASB consideration through FASB ASC’s

feedback system that met the scope of this project, making due process necessary. An explanation of

why each amendment in this update is being made is provided in the “Amendments to the FASB

Accounting Standards Codification®” section immediately preceding the amendment.

These amendments affect a wide variety of topics in FASB ASC and apply to all reporting entities within

the scope of the affected accounting guidance. They represent changes to clarify, correct errors in, or

make minor improvements to FASB ASC. The amendments make FASB ASC easier to understand and

easier to apply by eliminating inconsistencies and providing clarifications.

Main provisions and significant changes

The board is highlighting amendments to the following guidance that certain entities may have

incorrectly or inconsistently applied:

FASB ASC 220-10, Income Statement — Reporting Comprehensive Income — Overall FASB ASC 470-50, Debt — Modifications and Extinguishments FASB ASC 480-10, Distinguishing Liabilities from Equities FASB ASC 718-740, Compensation — Stock Compensation — Income Taxes FASB ASC 805-740, Business Combinations — Income Taxes FASB ASC 815-10, Derivatives and Hedging — Overall FASB ASC 820-10, Fair Value Measurement — Overall FASB ASC 940-405, Financial Services — Brokers and Dealers — Liabilities FASB ASC 962-325, Plan Accounting — Defined Contribution Pension Plans — Investments — Other

Effective date

The transition and effective date guidance is based on the facts and circumstances of each amendment.

Some of the amendments in this update do not require transition guidance and will be effective upon

issuance of this update. However, many of the amendments in this update do have transition guidance

with effective dates for annual periods beginning after December 15, 2018, for public business entities.

Accounting Standards Update No. 2018-10, Codification Improvements to Topic 842, Leases

Issue date

July 2018

Background

On February 25, 2016, FASB issued ASU No. 2016-02, Leases (Topic 842), 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. The board has an ongoing project on its

agenda about improvements to clarify FASB ASC or to correct unintended application of guidance. Those

items generally are not expected to have a significant effect on current accounting practice or create a

significant administrative cost for most entities.

The amendments in this update are of a similar nature to the items typically addressed in FASB ASC

improvements project. However, the board decided to issue a separate update for the improvements


related to ASU No. 2016-02 to increase stakeholders’ awareness of the amendments and to expedite the

improvements.

Further, FASB did not create a transition resource group (TRG) to address the leases guidance because

many of the concepts used in FASB ASC 842 are like those currently used in FASB ASC 840, Leases.

Although a formal TRG was not created, the board and staff have been assisting stakeholders during this

transitional period by responding to inquiries received and proactively seeking feedback on potential

implementation issues that could arise as organizations implement FASB ASC 842.

The amendments in this update include items brought to the board’s attention through those interactions

with stakeholders. The amendments affect narrow aspects of the guidance issued in the amendments in

ASU No. 2016-02 listed in the next section.


This update’s amendments fall into the following areas:

Residual value guarantees Implicit rate in lease Lessee reassessment lease classification Lessor reassessment of lease term and purchase option Variable lease payments that depend on index or rate Investment tax credits Lease term and purchase option Transition guidance for amounts previously recognized in business combinations Certain transition adjustments Transition guidance for leases previously classified as capital lease under FASB ASC 840 Transition guidance for lease modifications previously classified as direct financing or sales-type

leases under FASB ASC 840 Transition guidance for sale leaseback transactions Impairment of net investment in lease Unguaranteed residual asset Effect of initial direct costs on rate implicit in lease Failed Sale and Leaseback Transaction

Effective date

The amendments in this update affect the amendments in ASU No. 2016-02, which are not yet effective,

but for which early adoption upon issuance is permitted.

For entities that adopted FASB ASC 842 early: The amendments are effective upon issuance of this

update, and the transition requirements are the same as those in FASB ASC 842.

For entities that have not adopted FASB ASC 842 early: The effective date and transition requirements

will be the same as the effective date and transition requirements in FASB ASC 842.


Accounting Standards Update No. 2018-11, Leases (Topic 842): Targeted Improvements

Transition—Comparative reporting at adoption

Issue date

July 2018

Background

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 leases standard.

Many stakeholders inquired about the following two requirements in the new standard:

1. Comparative reporting requirements for initial adoption (transition— comparative reporting at adoption)

2. For lessors only, separating lease and non-lease components in a contract and allocating the consideration in the contract to the separate components (separating components of a contract).

Primary issues addressed in this update are as follows:

Transition — Comparative reporting at adoption Separating components of a contract


Transition — Comparative reporting at adoption

The amendments in this update provide entities with an additional (and optional) transition method to

adopt the new leases standard. Under this new transition method, an entity initially applies the new

leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening

balance of retained earnings in the period of adoption consistent with preparers’ requests. Consequently,

an entity’s reporting for the comparative periods presented in the financial statements in which it adopts

the new leases standard will continue to be in accordance with current GAAP (FASB ASC 840).

An entity that elects this additional (and optional) transition method must provide the required FASB ASC

840 disclosures for all periods that continue to be in accordance with FASB ASC 840.

The amendments do not change the existing disclosure requirements in FASB ASC 840 (for example,

they do not create interim disclosure requirements that entities previously were not required to provide).

Separating components of a contract

The amendments in this update provide lessors with a practical expedient, by class of underlying asset,

to not separate nonlease components from the associated lease component and, instead, to account for

those components as a single component if the non-lease components otherwise would be accounted


for under the new revenue guidance (FASB ASC 606, Revenue from Contracts with Customers) and both

of the following are met:

The timing and pattern of transfer of the non-lease component(s) and associated lease component are the same.

The lease component, if accounted for separately, would be classified as an operating lease.

If the non-lease component or components associated with the lease component are the predominant

component of the combined component, an entity is required to account for the combined component in

accordance with FASB ASC 606. Otherwise, the entity must account for the combined component as an

operating lease in accordance with FASB ASC 842.

An entity electing this practical expedient (including an entity that accounts for the combined component

entirely in FASB ASC 606) is required to disclose the following by class of underlying asset:

The fact that it elected the expedient Which class(es) of underlying asset the lessor made the election to The nature of the lease component and non-lease component(s) that were combined because

applying the practical expedient and any non-lease components that were not eligible for the practical expedient and, thus, not combined

The topic the entity applies to the combined component (FASB ASC 606 or FASB ASC 842).

Effective date

The amendments in this update related to separating components of a contract affect the amendments

in ASU No. 2016-02, which are not yet effective, but the guidance can be adopted early.

For entities that have not adopted FASB ASC 842 before the issuance of this update: The effective date

and transition requirements for the amendments in this update related to separating components of a

contract are the same as the effective date and transition requirements in ASU No. 2016-02.

For entities that have adopted FASB ASC 842 before the issuance of this update: The transition and

effective date of the amendments related to separating components of a contract in this update are as

follows:

The practical expedient may be elected either in the first reporting period following the issuance of this update or at the original effective date of FASB ASC 842 for that entity.

The practical expedient may be applied either retrospectively or prospectively.

All entities, including early adopters, that elect the practical expedient related to separating components

of a contract in this update must apply the expedient, by class of underlying asset, to all existing lease

transactions that qualify for the expedient at the date elected.

Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement

Issue date

August 2018


Background

FASB is issuing the amendments in this update as part of the disclosure framework project, whose

objective and primary focus are to improve the effectiveness of disclosures in the notes to financial

statements by facilitating clear communication of the information required by generally accepted

accounting principles (GAAP) that is most important to users of each entity’s financial statements.

Achieving the objective of improving the effectiveness of the notes to financial statements includes the

following:

The development of a framework that promotes consistent decisions by the board about disclosure requirements

The appropriate exercise of discretion by reporting entities

On March 4, 2014, the board issued a proposed FASB Concepts Statement, Conceptual Framework for

Financial Reporting — Chapter 8: Notes to Financial Statements, which the board finalized on August 28,

2018. The statement is intended to identify a broad range of possible information for the board’s

consideration when deciding on the disclosure requirements for a topic. From that broad set, the board

will identify a narrower set of disclosures about that topic to be required because, among other

considerations, an evaluation of whether the expected benefits of entities providing the information

justify the expected costs. The board will use the statement as part of the process for establishing

disclosure requirements in future accounting standards as well as for evaluating existing disclosure

requirements, when (and if) the board considers those requirements.

Before the statement was finalized, the board tested the concepts in the proposed statement and

improved the effectiveness of disclosure requirements on fair value measurement by using those

concepts. The amendments in this update are the result of the board’s final deliberations of the concepts

in the statement as they relate to fair value measurement disclosures.

The amendments in this update apply to all entities that are required, under existing GAAP, to make

disclosures about recurring or nonrecurring fair value measurements.

Note: Certain disclosures that are required by the amendments in this update are not required for nonpublic

entities.


The amendments in this update modify the disclosure requirements on fair value measurements in FASB

ASC 820, Fair Value Measurement, based on the concepts in the proposed Concepts Statement, including

the consideration of costs and benefits.

Removals

The following disclosure requirements were removed from FASB ASC 820:

The amount of and reasons for transfers between level 1 and level 2 of the fair value hierarchy The policy for timing of transfers between levels The valuation processes for level 3 fair value measurements


For nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring level 3 fair value measurements held at the end of the reporting period.

Modifications

The following disclosure requirements were modified in FASB ASC 820:

In lieu of a rollforward for level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of level 3 of the fair value hierarchy and purchases and issues of level 3 assets and liabilities.

For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly.

The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

Additions

The following disclosure requirements were added to FASB ASC 820; however, the disclosures are not

required for nonpublic entities:

The changes in unrealized gains and losses for the period included in other comprehensive income for recurring level 3 fair value measurements held at the end of the reporting period.

The range and weighted average of significant unobservable inputs used to develop level 3 fair value measurements.

For certain unobservable inputs, an entity may disclose other quantitative information (such as the

median or arithmetic average) in lieu of the weighted average if the entity determines that other

quantitative information would be a more reasonable and rational method to reflect the distribution of

unobservable inputs used to develop level 3 fair value measurements.

Effective date

The amendments in this update are effective for all entities for fiscal years, and interim periods within

those fiscal years, beginning after December 15, 2019.

The amendments on changes in unrealized gains and losses, the range and weighted average of

significant unobservable inputs used to develop level 3 fair value measurements, and the narrative

description of measurement uncertainty should be applied prospectively for only the most recent interim

or annual period presented in the initial fiscal year of adoption.

All other amendments should be applied retrospectively to all periods presented upon their effective date.

Early adoption is permitted upon issuance of this update.


Accounting Standards Update No. 2018-14, Compensation — Retirement Benefits — Defined Benefit Plans — General (Subtopic 715-20): Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans

Issue date

August 2018

Background

FASB is issuing the amendments in this update as part of the disclosure framework project.

Achieving the objective of improving the effectiveness of the notes to financial statements includes the

following:

The development of a framework that promotes the board’s consistent decisions about disclosure requirements

The appropriate exercise of discretion by reporting entities.

On March 4, 2014, the board issued a proposed FASB Concepts Statement, Conceptual Framework for

Financial Reporting—Chapter 8: Notes to Financial Statements, which the board finalized on August 28,

2018. The statement is intended to identify a broad range of possible information for the board to

consider when deciding on the disclosure requirements for a topic. From that intentionally broad set, the

board will identify a narrower set of disclosures about that topic to be required based on, among other

things, an evaluation of whether the benefits of entities providing the information justify the costs. The

board will use the statement as a basis for establishing disclosure requirements in future accounting

standards as well as for evaluating existing disclosure requirements. Before the statement was finalized,

the board tested the concepts in the proposed Concepts Statement and improved the effectiveness of

disclosure requirements on defined benefit pension and other postretirement plans by using those

concepts. The amendments in this update are the result of the board’s consideration of the concepts in

the statement as they relate to disclosures about defined benefit plans.

The amendments in this update apply to all employers that sponsor defined benefit pension or other

postretirement plans.


The amendments in this update modify the disclosure requirements for employers that sponsor defined

benefit pension or other postretirement plans. The following disclosure requirements are removed from

FASB ASC 715-20:

The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year.

The amount and timing of plan assets expected to be returned to the employer. The disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance

Law. 4. Related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan.

For nonpublic entities, the reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in level 3 of the fair value hierarchy. However, nonpublic entities


will be required to disclose separately the amounts of transfers into and out of level 3 of the fair value hierarchy and purchases of level 3 plan assets.

For public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits.

The amendments in this update also clarify the disclosure requirements in paragraph 3 of FASB ASC

715-20-50, which state that the following information for defined benefit pension plans should be

disclosed:

The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs greater than plan assets

The accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs greater than plan assets.

The amendments in this update remove disclosures that no longer are considered cost beneficial, clarify

the specific requirements of disclosures, and add disclosure requirements identified as relevant.

Although narrow in scope, the amendments are considered an important part of the board’s efforts to

improve the effectiveness of disclosures in the notes to financial statements by applying concepts in the

Concepts Statement.

Effective date

The amendments in this update are effective for fiscal years ending after December 15, 2020, for public

business entities and for fiscal years ending after December 15, 2021, for all other entities.

Early adoption is permitted for all entities.

An entity should apply the amendments in this update on a retrospective basis to all periods presented.

Accounting Standards Update No. 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

Issue date

August 2018

Background

In April 2015, FASB issued ASU No. 2015-05, Intangibles — Goodwill and Other — Internal-Use Software

(Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, to help

entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting

arrangement) when the arrangement includes a software license.

If a cloud computing arrangement includes a license to internal-use software, then the software license is

accounted for by the customer in accordance with FASB ASC 350-40. That is, an intangible asset is

recognized for the software license and, to the extent that the payments attributable to the software

license are made over time, a liability also is recognized.


If a cloud computing arrangement does not include a software license, the entity should account for the

arrangement as a service contract, that is the fees associated with the hosting element (service) of the

arrangement should be expensed as incurred.

During the comment period and after the issuance of ASU No. 2015-05, several stakeholders requested

that the board provide additional guidance on the accounting for costs of implementation activities

performed in a cloud computing arrangement that is a service contract. Due to diversity in practice, the

board decided to issue this update to address this issue.

The amendments in this update on the accounting for implementation, setup, and other upfront costs

(collectively referred to as implementation costs) apply to entities that are a customer in a hosting

arrangement, as defined in the master glossary and as further amended by this update, that is a service

contract.


The amendments in this update align the requirements for capitalizing implementation costs incurred in

a hosting arrangement that is a service contract with the requirements for capitalizing implementation

costs incurred to develop or obtain internal-use software (and hosting arrangements that include an

internal-use software license).

The accounting for the service element of a hosting arrangement that is a service contract is not affected

by the amendments in this update. Accordingly, the amendments in this update require an entity

(customer) in a hosting arrangement that is a service contract to follow the guidance in FASB ASC 350-

40 to determine which implementation costs to capitalize as an asset related to the service contract and

which costs to expense.

Costs to develop or obtain internal-use software that cannot be capitalized under FASB ASC 350-40, such

as training costs and certain data conversion costs, also cannot be capitalized for a hosting arrangement

that is a service contract. Therefore, an entity (customer) in a hosting arrangement that is a service

contract determines which project stage an implementation activity relates to. Costs for implementation

activities in the application development stage are capitalized depending on the nature of the costs, while

costs incurred during the preliminary project and postimplementation stages are expensed as the

activities are performed.

The amendments in this update also require the entity (customer) to expense the capitalized

implementation costs of a hosting arrangement that is a service contract over the term of the hosting

arrangement.

The term of the hosting arrangement includes the non-cancellable period of the arrangement plus

periods covered by

an option to extend the arrangement if the customer is reasonably certain to exercise that option, an option to terminate the arrangement if the customer is reasonably certain not to exercise the

termination option, and an option to extend (or not to terminate) the arrangement in which exercise of the option is in the

control of the vendor.


The entity also is required to apply the existing impairment guidance in FASB ASC 350-40 to the

capitalized implementation costs as if the costs were long-lived assets.

The amendments in this update clarify that the capitalized implementation costs related to each module

or component of a hosting arrangement that is a service contract are also subject to the guidance in

FASB ASC 360-10 on abandonment.

The amendments in this update also require the entity to present the expense related to the capitalized

implementation costs in the same line item in the statement of income as the fees associated with the

hosting element (service) of the arrangement and classify payments for capitalized implementation

costs in the statement of cash flows in the same manner as payments made for fees associated with the

hosting element.

Effective date

The amendments in this update are effective for public business entities for fiscal years beginning after

December 15, 2019, and interim periods within those fiscal years.

For all other entities, the amendments in this update are effective for annual reporting periods beginning

after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021.

Early adoption of the amendments in this update is permitted, including adoption in any interim period,

for all entities.

The amendments in this update should be applied either retrospectively or prospectively to all

implementation costs incurred after the date of adoption.

Knowledge Check

1. Which best describes an ASU issued by FASB in the third quarter of 2018 because of the disclosure framework project?

a. Disclosure requirements for intangibles. b. Disclosure requirements for defined benefit plans. c. Disclosure requirements for cloud computing service contracts. d. Disclosure requirements for contingent liabilities.

2. Which statements best describes the primary objective of ASU No. 2018-15, Intangibles — Goodwill and Other — Internal-Use Software?

a. To change an approach that treated software licensing as non-revenue generating exchange transactions.

b. To resolve inconsistent accounting for goodwill amortization of companies acquired in reverse mergers.

c. To help entities evaluate the accounting for the service element of a hosting arrangement in determining which implementation costs to capitalize.

d. To help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement that includes a software license.


Proposed Standards, Interpretations, and Regulations

AICPA

Proposed Auditing, Attestation, or Quality Control Standards

Auditing Standards Board

Proposed Statement on Standards for Attestation Engagements

Revisions to Statement on Standards for Attestation Engagements No. 18, Attestation Standards: Clarification and Recodification

Issue date

July 11, 2018

Comment Deadline

October 11, 2018

Background

In April 2016, the ASB issued SSAE No. 18, Attestation Standards: Clarification and Recodification, which

clarified the attestation standards. In completing the clarity attestation project, the ASB acknowledged

that its standards were not converged with the International Standards on Assurance Engagements

(ISAEs) mainly because ISAE 3000 (Revised) does not require the practitioner to request a written

assertion from the responsible party. The clarified standards require the practitioner to request such an

assertion to perform an examination or review engagement. Accordingly, the ASB determined that such

matters should be the subject of a follow-on ASB project to further evaluate the requirement for the

practitioner to request an assertion.

After undertaking this effort, the ASB’s Audit Issues Task Force recommended that the ASB initiate a

project to evaluate opportunities to provide practitioners additional flexibility when performing an agreed-

upon procedures engagement, including allowing the practitioner to be involved in the design of those

procedures and issue a general use report in those circumstances.

In September 2017, ARSC exposed for public comment proposed SSAE, Selected Procedures, which was

developed jointly by ARSC and the ASB.

Convergence

It is the ASB’s strategy to converge its standards with those of the International Auditing and Assurance

Standards Board (IAASB). For that reason, another objective of this proposed SSAE is to further converge

the attestation standards with ISAE 3000 (Revised), which was issued in December 2013. ISAE 3000

(Revised) is an assurance standard that addresses reasonable assurance engagements (examinations)

and limited assurance engagements (reviews). The IAASB’s assurance standards are the equivalent of

the ASB’s attestation standards for examinations and reviews. When the ASB clarified the attestation


standards in 2016, the foundation for AT-C sections 105, Concepts Common to All Attestation

Engagements; 205, Examination Engagements; and 210, Training and Proficiency of the Independent

Auditor1 was the IAASB’s exposure draft of ISAE 3000 and final ISAE 3410, Assurance Engagements on

Greenhouse Gas Emissions. Many of the paragraphs in the extant AT-C sections were converged with the

related paragraphs in the ISAE 3000 exposure draft. However, the ASB did not adopt certain aspects of

the exposure draft of ISAE 3000 at that time, for example, allowing the practitioner to perform an

examination or review engagement without having to request a written assertion from the responsible

party. In revising the attestation standards currently, the proposed SSAE provides another opportunity for

the ASB to more closely align the examination and review sections of the attestation standards with ISAE

3000 (Revised). However, to remain aligned with practitioners’ current understanding and application of

the attestation standards in the United States, certain definitions and terms included in ISAE 3000

(Revised) have not been included in the proposed SSAE (for example, the definitions of examination

engagement and limited assurance engagement remain more similar to the definitions in the extant AT-C

sections, and the term subject matter information is not used in the proposed SSAE).


This proposed SSAE, Revisions to Statement on Standards for Attestation Engagements No. 18, would

supersede AT-C sections 105, 205, 210, and AT-C section 215, Agreed-Upon Procedures Engagements.

The most significant aspects of this proposed SSAE are as follows:

It would no longer require the practitioner to request a written assertion from the responsible party when the practitioner is reporting directly on the subject matter.

It would more closely harmonize AT-C section 210 with the limited assurance provisions of International Standard on Assurance Engagements (ISAE) 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.

It would revise AT-C section 215 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 the appropriateness of the procedures and would explicitly allow the practitioner to develop, or assist in developing, the procedures, and — 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, the criteria are not available to users, or the criteria are suitable only for a limited number of users.

1 All AT-C sections can be found in AICPA Professional Standards.


The following is a summary of the most significant proposed changes to the existing attestation

standards:

Proposed changes that affect all attestation engagements

In the proposed SSAE, a written assertion from the responsible party would be required only if the

practitioner were reporting on the assertion. In engagements in which the practitioner reports directly on

the subject matter, requesting a written assertion from the responsible party would no longer be required.

The proposed SSAE requires the practitioner to include a statement in the practitioner’s report indicating

that the practitioner is independent and has fulfilled the practitioner’s other ethical responsibilities in

accordance with relevant ethical requirements related to the engagement. This new requirement aligns

with the requirement in ISAE 3000 (Revised) and is consistent with proposed revisions to the reporting

requirements in the ASB’s exposure draft Proposed Statement on Auditing Standards Forming an

Opinion and Reporting on Financial Statements.

Proposed changes that affect examination and review engagements

In all examination and limited assurance engagements, the proposed SSAE would require the practitioner

to request a representation from the appropriate party (either the engaging party or, if different, the

responsible party) about whether the subject matter has been measured or evaluated against the criteria

and, if so, the results of that measurement or evaluation. Because the practitioner may perform some or

all the measurement or evaluation of the subject matter against the criteria, the appropriate party may or

may not have performed any such measurement or evaluation, depending on the engagement

circumstances.

To report on management’s assertion, the proposed SSAE requires the practitioner to use professional

judgment in determining whether the appropriate party has a reasonable basis for making its assertion.

Consistent with ISAE 3000, application guidance has been added to AT-C sections 205 and 210 to

indicate that a practitioner may issue a report that contains only the minimum required report elements

or issue a report that expands on or supplements those elements, for example, a report that contains

details about the terms of the engagement, the applicable criteria being used, findings relating to

particular aspects of the engagement, details of the qualifications and experience of the practitioner and

others involved with the engagement, a description of the procedures the practitioner performed, and, in

some cases, recommendations.

Proposed changes that affect only examination engagements

The proposed SSAE revises paragraph .A64 of AT-C section 205, which indicates that failure by the

responsible party to provide one or more written representations results in a scope limitation sufficient to

preclude an unmodified opinion. The proposed SSAE would permit the practitioner to use professional

judgment in determining whether sufficient appropriate evidence about the matter addressed by that

representation has been obtained by performing other procedures.


The proposed SSAE would also revise paragraph .54 of extant AT-C section 205 to say that if the

appropriate party does not provide the requested representations, and the matter is not resolved to the

practitioner’s satisfaction, the practitioner should determine the possible effect on the opinion in the

practitioner’s report. This approach would be consistent with AU-C section 580, Written Representations,

when the engaging party and the responsible party are the same and would also converge with ISAE

3000 (Revised) when the engaging party and responsible party are different parties.

Proposed changes that affect only review engagements

This proposed change is intended to help differentiate review engagements performed under AR-C

section 90, Review Engagements, and AU-C section 930, Interim Financial Statements2, from those

performed under the attestation standards. The proposed revision more appropriately describes the

nature and extent of the work that may be necessary to obtain limited assurance when the subject

matter is nonfinancial.

The proposed SSAE more closely harmonizes AT-C section 210 with the limited assurance provisions of

ISAE 3000 (Revised) by more explicitly describing the types of procedures a practitioner may perform to

obtain limited assurance. With respect to some subject matters, the performance of analytical

procedures may not be sufficient or practical; therefore, the nature of the procedures that a practitioner

may perform in a limited assurance engagement could be similar to those performed in an examination

engagement. In line with that change, the proposed SSAE no longer states that limited assurance

procedures (formerly, review procedures) generally are limited to inquiry and analytical procedures.

To assist intended users in understanding the basis for the practitioner’s conclusion, the proposed SSAE

requires the practitioner to provide an informative summary of the procedures the practitioner performed

in the limited assurance engagement. This is consistent with the reporting requirements of ISAE 3000

(Revised).

The proposed SSAE revises the extant requirement for the practitioner to withdraw from the engagement

when misstatements of the subject matter are both material and pervasive to allow the practitioner to

express an adverse conclusion when the practitioner, having obtained sufficient appropriate evidence,

concludes that the subject matter is materially and pervasively misstated.

Proposed changes that affect only agreed-upon procedures engagements

The proposed SSAE allows the practitioner, the engaging party, or any other party to develop the

procedures. The practitioner would be required to obtain from the engaging party, prior to the issuance of

the practitioner’s report, a written acknowledgment that the procedures performed are appropriate for the

intended purpose of the engagement—but would not be required to obtain acknowledgment about the

sufficiency of the procedures. If the practitioner is unable to obtain that acknowledgment, the practitioner

would be required to withdraw from the engagement.

The proposed SSAE would no longer require the practitioner to restrict the use of all agreed-upon

procedures reports to the specified parties that assume responsibility for the sufficiency of the

2 All AR-C sections are found in AICPA Professional Standards.


procedures. The requirement to restrict the use of the report would apply only if the practitioner is

precluded from designing or performing additional procedures, the criteria are not available to users, or

the criteria are appropriate only for a limited number of users. Like the reporting under AT-C sections 205

and 210, a practitioner would have the option of restricting the use of the report to certain parties.

In addition, conforming changes are proposed to AT-C sections 305, Prospective Financial Information;

310, Reporting on Pro Forma Financial Information; 315, Compliance Attestation; and 320, Reporting on an

Examination of Controls at a Service Organization Relevant to User Entities' Internal Control Over Financial

Reporting, to reflect the provisions of this proposed SSAE, if issued as a final SSAE. Those conforming

changes are presented as an exhibit to this proposed SSAE. The conforming changes reflect the

elimination of the requirement for the practitioner to request a written assertion, except for engagements

performed under AT-C section 320, which, by the nature of the service, requires an assertion as well as

certain other changes to align with the proposed revisions in this proposed SSAE.

Effective date

If issued as final, the proposed revised AT-C sections would be effective for examinations, limited

assurance, and agreed-upon procedures reports dated on or after May 1, 2020.

Early implementation would not be permitted.

Accounting and Review Services Committee

ARSC did not propose any new or revised standards or interpretations during this quarter.

Professional Ethics Executive Committee

PEEC did not propose any new or revised standards or interpretations during this quarter.

FASB

Proposed ASU

Codification Improvements to Topic 326, Financial Instruments ― Credit Losses

Issue date

August 20, 2018

Comment deadline

September 19, 2018

Background

On June 16, 2016, FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss model

for the impairment of financial assets measured at amortized cost basis. That model replaces the


probable, incurred loss model for those assets. Through that update, the board added FASB ASC 326 and

made several consequential amendments to FASB ASC.

The board has an ongoing project on its agenda for improving FASB ASC or correcting its unintended

application. Those items generally are not expected to have a significant effect on current accounting

practice or to create a significant administrative cost for most entities.

The amendments in this proposed update are of a similar nature to the items typically addressed in the

project on FASB ASC improvements. However, the board decided to issue a separate proposed update

for improvements related to ASU No. 2016-13 to increase stakeholders’ awareness of the proposed

amendments to scope and transition and effective date requirements and to expedite the improvements.

The amendments in this proposed update include items brought to the board’s attention by stakeholders.

The proposed amendments would align the implementation date for nonpublic entities’ annual financial

statements with the implementation date for their interim financial statements and would clarify the

scope of the guidance in the amendments in ASU No. 2016-13.


Issue 1: Transition and effective date for nonpublic business entities

The amendments in ASU No. 2016-13 are effective for nonpublic business entities for fiscal years

beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15,

2021. The transition guidance in paragraph 1(c) of FASB ASC 326-10-65 requires an entity to make a

cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting

period in which the amendments are effective. Stakeholders raised questions about whether it was the

board’s intent to require nonpublic business entities to effectively adopt the amendments as of January

1, 2021, because of the cumulative-effect adjustment as of that date, and whether it was the board’s

intent to require the same effective date for nonpublic business entities and public business entities that

do not meet the definition of an SEC filer.

The proposed amendments would mitigate transition complexity by requiring that for nonpublic business

entities the amendments in ASU No. 2016-13 are effective for fiscal years beginning after December 15,

2021, including interim periods within those fiscal years.

Issue 2: Operating lease receivables

The scope of FASB ASC 326-20, Financial Instruments — Credit Losses — Measured at Amortized Cost,

includes financial assets measured at amortized cost basis, including net investments in leases arising

from sales-type and direct financing leases. The scope does not specifically include receivables arising

from operating leases. Stakeholders raised questions about whether operating lease receivables would

be included within the scope of FASB ASC 326-20 because they appear to meet the definition of a

financing receivable measured at amortized cost basis. The proposed amendment would clarify that

receivables arising from operating leases are not within the scope of FASB ASC 326-20. Instead,


impairment of receivables arising from operating leases should be accounted for in accordance with

paragraphs 12–13 of FASB ASC 842-30-25.

Effective date

The effective date and transition requirements for the amendments in this proposed update would be the

same as the effective dates and transition requirements in ASU No. 2016-13.

Proposed ASU

Leases (Topic 842) Narrow-Scope Improvements for Lessors

Issue date

August 13, 2018

Comment deadline

September 12, 2018

Background

On February 25, 2016, FASB issued ASU No. 2016-02, Leases (Topic 842), 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.

Since the issuance of ASU No. 2016-02, lessor stakeholders have informed the board about certain

issues that they are experiencing on the following when applying FASB ASC 842:

Sales taxes and other similar taxes collected from lessees Certain lessor costs paid directly by lessees Recognition of variable payments for contracts with lease and nonlease components.

Sales taxes and other similar taxes collected from lessees

The guidance in FASB ASC 842 requires lessors to analyze sales taxes and other similar taxes on a

jurisdiction-by-jurisdiction basis to determine whether those taxes are the primary obligation of the lessor

as owner of the underlying asset being leased or whether those taxes are collected by the lessor on

behalf of third parties:

When sales (or other similar) tax is collected from a lessee on behalf of third parties, a lessor would exclude that amount from (lease) revenue.

When the lessor is primarily obligated for payment of the tax, the lessor would include that amount in (lease) revenue and costs.

Lessor stakeholders observed that evaluating whether sales taxes and other similar taxes are collected

on behalf of third parties would be costly and complex because of the number of jurisdictions and the

variation of, and changes in, tax laws among those jurisdictions. Those lessor stakeholders also

observed that users of financial statements would be provided with limited financial reporting benefits

because the net effect of recording those taxes would be zero in the income statement. They also noted

that the Board provided stakeholders with relief for a similar requirement in the new revenue guidance in


the amendments in ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-

Scope Improvements and Practical Expedients, whereby an entity can make an accounting policy election

to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction

price.

The amendments in this proposed update related to

sales taxes and other similar taxes collected from lessees would affect all lessors that elect the accounting policy election.

certain lessor costs paid directly by lessees on behalf of the lessor would affect all lessor entities that have lease contracts that require lessees to pay certain costs on behalf of a lessor.

recognition of variable payments for contracts with lease and nonlease components would affect all lessor entities with variable payments that partially relate to a nonlease component.

The amendments in this proposed update would provide an accounting policy election for lessors like

that provided in ASU No. 2016-12. A lessor may incur various costs in its role as a lessor or as owner of

the underlying asset. A requirement for the lessee to pay those costs, whether directly to a third party on

behalf of the lessor or as a reimbursement to the lessor, does not transfer a good or service to the lessee

separately from the right to use the underlying asset. The new leases guidance requires a lessor to report

those amounts as revenue and expenses. Lessor stakeholders observed that reporting lessor costs paid

by lessees directly to third parties on behalf of the lessor would be costly and complex, and, perhaps, not

possible, in some situations.

Main provisions

Sales taxes and other similar taxes collected from lessees

The amendments in this proposed update would permit lessors, as an accounting policy election, to not

evaluate whether certain sales taxes and other similar taxes are costs of the lessor (as described in

paragraph 30(b) of FASB ASC 842-10-15) or costs of the lessee. Instead, lessors would account for those

amounts as if they were costs of the lessee. Consequently, a lessor making this election would exclude

from the consideration in the contract and from variable payments not included in the consideration in

the contract all collections from lessees of taxes within the scope of the election and would provide

certain disclosures.

Certain lessor costs paid directly by lessees

The amendments in this proposed update would require lessors to exclude those costs from variable

payments, and, therefore, from variable (lease) revenue, when the amount of those costs is not readily

determinable by the lessor.

Recognition of variable payments for contracts with lease and Nonlease components

The amendments in this proposed update would require lessors to allocate (rather than recognize as

currently required) certain variable payments to the lease and nonlease components when the changes

in facts and circumstances on which the variable payment is based occur. After the allocation, the


amount of variable payments allocated to the lease component would be recognized as income in profit

or loss in accordance with FASB ASC 842, while the amount of variable payments allocated to nonlease

components would be recognized in accordance with other topics, such as FASB ASC 606.

Transition and effective date

The amendments in this proposed update would amend ASU No. 2016-02, which are not yet effective but

can be early adopted.

The effective date and transition requirements for the amendments in this proposed update for entities

that have not adopted ASU No. 2016-02 by the time this proposed update is finalized would be the same

as the effective date and transition requirements in ASU No. 2016-02.

The board will determine the effective date and transition of this proposed update for entities that have

adopted ASU No. 2016-02 before the issuance of this proposed update after it considers stakeholders’

feedback on this proposed update.

Knowledge Check

3. Which change to FASB ASC did FASB propose in the third quarter of 2018 due to stakeholder feedback?

a. Improvement of the standards on measuring credit losses on financial instruments. b. Goodwill impairment testing when a company acquires another entity. c. Comparative reporting for a company’s initial adoption of the new leases standard. d. Interest capitalization during long-term construction projects.

NFP3 GS-0418-0A

NOT-FOR-PROFIT ACCOUNTING AND AUDITING

SUPPLEMENT NO. 3 — 2018

Solutions

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© 2018 Association of International Certified Professional Accountants. All rights reserved. Solutions 1

Solutions

Chapter 1

Knowledge check solutions

1.

a. Incorrect. FASB did not issue an ASU in the third quarter to address disclosure requirements for intangibles as a result of the disclosure framework project.

b. Correct. The amendments in FASB ASU No. 2018-14 modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.

c. Incorrect. FASB did not issue an ASU in the third quarter to address disclosure requirements for cloud computing services contracts as a result of the board’s disclosure framework project.

d. Incorrect. FASB did not issue an ASU in the third quarter to address disclosure requirements for contingent liabilities as a result of the disclosure framework project.

2.

a. Incorrect. ASU No. 2018-15 does not address goodwill amortization in that context.

b. Incorrect. The primary objective of ASU No. 2018-15 was not to resolve an inconsistency in practice in that context.

c. Incorrect. ASU No. 2018-15 specifically states that it does not change the application of GAAP in determining which implementation costs to capitalize.

d. Correct. The new ASU primarily assists entities in accounting for fees from customers in a cloud computing arrangement that involves the licensing of software.

3.

a. Correct. Based on stakeholder feedback, FASB proposed certain improvements to the standard on measuring credit losses on financial instruments.

b. Incorrect. FASB did not address this issue with a proposed ASU in the third quarter of 2018.

c. Incorrect. FASB did not address this issue during the third quarter of 2018.

d. Incorrect. Interest capitalization on construction projects was not addressed in the third quarter in a proposed ASU by FASB.

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