Debt Issuance Costs Have a New Parking Place

If ASU 2015-03 has not already been adopted, do so for December 31, 2016 year-ends

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

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

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

debt issuance costs have a new parking place

Debt Issuance Costs

Accounting for Debt Issuance Costs

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

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

Top 10 Technology Tips for Accountants

Here are tips to make your accounting life more productive

Are you looking for technology tips for accountants? Here are ten tips that will make you more productive.

Technology tips for accountants

Ten Technology Tips for Accountants

Here are my top ten technology tips in no certain order (with links to prior blog posts).

  1. Use Skitch to create annotated screenshots.
  2. Use Office 365 to jointly create Word or Excel documents with others.
  3. Use Basecamp to manage projects (such as audits).
  4. Use Scanbot as your phone scanner.
  5. Use a Livescribe pen to take notes with audio.
  6. Use Evernote as your personal digital library.
  7. Travel light as a minimalist auditor.
  8. Use your cell phone in creative ways as an accountant.
  9. Use technology to save your life.
  10. Use technology to make your office work life more efficient.

Those are my ideas. What are yours?

Solve Accounting Problems Quickly: The Crystal Ball

You already have a crystal ball (but you may not know it)

Do you ever need to solve accounting problems quickly?

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

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

solve accounting problems

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

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

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

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

How to Account for Cash Overdrafts

Alternative presentations for negative cash balances

How should you account for cash overdrafts (also called negative cash balances) on a balance sheet and in a cash flow statement?

It is year-end and your audit client has three bank accounts at the same bank. Two of the accounts have positive balances (the first with $50,000 and the second with $200,000). The third account has a negative cash balance of $400,000. Since a net overdraft of $150,000 exists, how should we present cash in the financial statements?

Cash overdrafts

Picture Courtesy of DollarPhoto.com

Balance Sheet

In the balance sheet, show the negative cash balance as Cash Overdraft in the current liabilities. Or you can also include the amount in accounts payable.

If you are netting the three bank accounts, consider using the Cash Overdraft option. If you bury the overdraft in accounts payable, the financial statement reader may think, “there is a mistake, where is cash?” Using Cash Overdraft communicates more clearly. (The right of offset must exist in order to net bank accounts. The right of offset commonly exists for multiple bank accounts with one bank.)

Some companies have multiple bank accounts with multiple banking institutions. In such cases, the net balance of one bank might be positive and the net balance of the second bank might be negative. Then the company would reflect the positive balance as cash and the negative cash balance (of the second bank) as an overdraft.  

Suppose a company has bank accounts with two different banks and the net balance of the first bank is $1,350,000 and the net balance of the second bank is an overdraft of $5,000. Then show cash as one amount on the balance sheet ($1,345,000). The $5,000 overdraft is not material.

Cash Flow Statement

Some companies do not include cash overdrafts in the definition of cash; instead, they include the overdraft in accounts payable. Consequently, the company treats the overdraft as an operating activity (change in accounts payable). So, the company includes the overdraft as a change in a liability in the operating section of the cash flow statement. (Some accountants treat overdrafts as a financing activity, but overdrafts clear quickly. Therefore, an operating activity classification is more appropriate.)

Alternatively, include the overdraft in the definition of cash (rather than in accounts payable). In doing so, you combine the cash overdraft with other cash (that with positive balances) in the cash flow statement. The beginning and ending cash–in the cash flow statement–should include cash overdrafts.

FASB ASC 230-10-45-4 requires that the total amounts of cash and cash equivalents in the cash flow statement agree with similarly titled line items or subtotals in the balance sheet. If a cash overdraft is included in the definition of cash, the cash captions in the statement of cash flows should be revised accordingly (e.g., Cash (Cash Overdraft) at end of year).

If the balance sheet contains a positive cash balance in assets and a cash overdraft in liabilities, provide a reconciliation at the bottom of the cash flow statement (or in a disclosure). In the reconciliation, show the composition of cash (cash overdraft)–one line titled Cash, one line titled Cash Overdraft, and a total line titled Total Cash (Cash Overdraft)

One Other Consideration

If checks are created but not released by year-end, reverse the payment. Merely printing checks does not relieve payables. Payables are relieved when payment is made (checks are printed and mailed, or electronic payments are processed).

Restricted Cash

FASB recently issued a new standard dealing with how restricted cash is to be reported in the cash flow statement. Click here for more information.

Ten Most Popular CPA Scribo Blog Posts for 2016

10 most shared posts during 2016

Well, 2016 is in the books for CPA Scribo.

Here are the top ten 2016 posts (starting with number 10 and moving to number 1)–based on your social shares.

CPA Scribo

Picture from AdobeStock.com

Top 10 CPA Scribo Posts

 

10. Assessing Audit Control Risk at High (and Saving Time)

9. Getting More Done with My Favorite Accountant’s Device

8. How Honest People Steal

7. A List of Online Resources for CPAs

6. How to Add Value to Audits

5. How to Steal by Double Paying a Vendor

4. 25 Ways Fraud Happens

3. How $16 Million was Stolen from a Bakery

2. Seven Deadly Audit Sins

and drum roll…..

1.  Why Should Auditors Perform Audit Walkthroughs

Your Ideas for 2017

If you have an accounting or auditing idea that you’d like for me to address in 2017, please let me know–post a comment. Thanks.

My 10 Most Popular Blog Posts

In the last year, CPA-Scribo.com has been visited over 75,000 times. (I never dreamed this would happen.) Thank you!

In light of this milestone, I thought I’d share my top 10 list. So here goes.

Below are the top ten most popular posts (starting with number 10 and working down to number 1).

10. The Power of Story in Teaching CPAs

9. Seven Deadly (Audit) Sins

8. FRF for SMEs – The Lowdown

7. Evernote for CPAs

6. An Auditor’s Cell Phone

5. Five Disbursement Fraud Tests

4. SSARS 21 – The Lowdown

3. Local Government Internal Controls – A List

2. Audit Lessons from a Brain Tumor

and drum-roll………..

1. Simple Compilation Reporting – Tax Basis, Substantially All Disclosures Omitted

Your responses to some of these posts have surprised me. I almost did not post Audit Lessons from a Brain Tumor, thinking no one would be interested. And who would have thought a post about compilation reporting would be number one?

Some of you (like Armando Balbin and Jim Ulvog at Attestationupdate.com) have been steady at my side, encouraging me to press on. I appreciate the friendships I have made thus far and look forward to getting to know others of you as we continue on CPA-Scribo.com.

Click my About page link (if you’d like to know more about my journey as a CPA and what this blog is about). If you have suggestions for making CPA-Scribo.com better or if you have ideas for future posts, please share those below. Thanks.

Using Two Capitalization Thresholds for Greater Efficiency

Should governments use two different capitalization thresholds, one for infrastructure and another for all other capital assets?

Asphalt crew

Courtesy of iStockphoto.com

It is common for governments to use a single capitalization threshold of $5,000 for all capital asset purchases. This threshold encompasses, for example, purchases of equipment and road construction. But does it make sense to capitalize road work costing $22,000 or $34,000 or $38,000? Most small road, bridge, or other infrastructure expenses are better treated as non-capitalizable expenses.

So doesn’t it make sense to create a second capitalization threshold for infrastructure expenses? I think a minimum of $25,000 would work for smaller governments and a much larger amount–say $100,000–would be appropriate for mid-sized governments. Larger governments (such as states) could use an even higher number.

The second higher threshold will yield greater efficiency in recording capital assets. And since infrastructure is less likely to be stolen, it makes sense to implement a second capitalization amount. (Moveable capital assets require greater accountability [since they can be stolen]–so the lower threshold for these assets is advisable.)

Keep in mind the capital asset threshold is an accounting policy. Governmental accounting standards provide no required dollar amounts, so this is a judgment call. If you make a change, consider whether your governing body should approve it.

GFOA Capitalization Guidelines

The Government Finance Officers Association (GFOA) recommends that state and local governments consider the following guidelines in establishing capitalization thresholds:

  • Potentially capitalizable items should only be capitalized only if they have an estimated useful life of at least two years following the date of acquisition;
  • Capitalization thresholds are best applied to individual items rather than to groups of similar items (e.g., desks and tables), unless the effect of doing so would be to eliminate a significant portion of total capital assets (e.g., books of a library district);
  • In no case should a government establish a capitalization threshold of less than $5,000 for any individual item;
  • In establishing capitalization thresholds, governments that are recipients of federal awards should be aware of federal requirements that prevent the use of capitalization thresholds in excess of certain specified maximum amounts for purposes of federal reimbursement; and
  • Governments should exercise control over potentially capitalizable items that fall under the operative capitalization threshold.

Trick or Treat? GASB 68 — The New Pension Standard

GASB 68 (Accounting and Financial Reporting for Pensions) has eaten GASB 27–RIP.

The magic date when the Great Pumpkin–the net pension liability–will rise out of the footnotes and land on the statement of net position is quickly approaching (year-ends of June 30, 2015). Instead of saying, “It’s the Great Pumpkin Charlie Brown!” we’ll be saying, “It’s the Great Debt Charlie Brown!” ARRG.

Courtesy of iStockphoto.com

Courtesy of iStockphoto.com

GASB 27 was a kind spook, allowing governments to bury pension liabilities in the notes. As long as public entities paid the “annually required contribution–ARC,” no liabilities were recognized on the statement of net position. But this is all changing. We have a new beast: the net pension liability–NPL, which will be recognized on the statement of net position. And, of course, as liabilities increase, equities (net positions) decrease. One saving grace: modified accrual accounting; governmental funds will not record the NPL, but the pension liability will appear on full accrual statements (i.e., government-wide statements and enterprise funds).

Under GASB 27, the ARC was treated as the funding amount. No longer. GASB 68 divorces funding from the pension expense.

So what is net pension liability?

It is the portion of the present value of projected benefit payments to be provided through the pension plan to current active and inactive employees that is attributed to those employees’ past periods of service, less the amount of the pension plan’s fiduciary net position.

In simple terms, it’s the computed debt less assets set aside for future payments.

What journal entry will be made to record the NPL?

Initial Entry to Record Pension Liability

AccountDr.Cr.
Net Position (Equity)XXXX
Net Pension LiabilityXXXX

Additionally, if the government previously recorded a net pension obligation (the result of the ARC not being paid), then this liability will also be removed (debited) as you record the NPL.

More Volatility

Governments will experience more volatility in their pension expenses since smoothing techniques are no longer used. Keep in mind that funding can (and I expect will be) fairly level. The pension expense is not intended to establish funding amounts. As a consequence, cash paid to fund the pension plan may remain fairly stable while the pension expense swings widely. Changes in the market value of pension plan investments will be felt more abruptly as they impact pension expense.

Changes Included in Current Pension Expense

Statement 68 requires that most changes in the net pension liability be included in pension expense in the period of the change. For example, changes in the total pension liability resulting from current-period service cost, interest on the total pension liability, and changes of benefit terms are required to be included in pension expense immediately. Projected earnings on the pension plan’s investments also are required to be included in the determination of pension expense immediately.

Changes Included in Current and Future Pension Expense

The effects of certain other changes in the net pension liability are required to be included in pension expense over the current and future periods. Changes in the net pension liability not included in pension expense are required to be reported as deferred outflows of resources or deferred inflows of resources related to pensions.

The effects on the total pension liability of (1) changes of economic and demographic assumptions or of other inputs and (2) differences between expected and actual experience are required to be included in pension expense in a systematic and rational manner over a closed period equal to the average of the expected remaining service lives of all employees that are provided with benefits through the pension plan (active employees and inactive employees), beginning with the current period.

The effect on the net pension liability of differences between the projected earnings on pension plan investments and actual experience with regard to those earnings is required to be included in pension expense in a systematic and rational manner over a closed period of five years, beginning with the current period.

Trick or Treat

When Charlie Brown would go Trick or Treating, he’d say, “I got a rock.” Governments, after knocking on the GASB 68 door, may feel the same way. Those entities that have not properly funded their pension plans will see sizable hits to their net position. Worse yet, a poorly funded plan is required to use a lower discount rate which increases the net pension liability.

If your government has debt covenants, it would be wise to consider the potential effects of these changes now.

Audits: Going Concern Issues

What are the current audit requirements for going concern issues?

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Here are the two main points to remember:

  1. If substantial doubt about continued existence is present, the auditor has several issues to address including an addition to the auditor’s report and additional communications in the representation and governance letters.
  2. FASB has proposed a standard that, if passed, will require certain going concern disclosures; at present, U.S. GAAP provides no guidance about going concern disclosures.

Going Concern

SAS 126, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, was effective for years ending on or after December 15, 2012, and is the most recent audit guidance. Based on the standard, the auditor should evaluate and conclude, based on audit evidence obtained, whether substantial doubt exists about the reporting entity’s ability to continue as a going concern for a reasonable period of time.

Reasonable Period of Time

 

How does the standard define a “reasonable period of time”?

 

A period of time not to exceed one year beyond the date of the financial statements being audited.

 

 

If substantial doubt exists, what are the considerations for the audit?

  1. Additional auditor’s report language
  2. Additional disclosures
  3. Additional representation letter language
  4. Additional communications to those charged with governance
  5. Additional work paper documentation

1. Additional Auditor’s Report Language

If the auditor concludes that substantial doubt exists, an emphasis-of-matter paragraph should be added to the auditor’s report such as:

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Emphasis of Matter Regarding Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note X to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note X. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect this matter.

The words “substantial doubt” and “going concern” must be used in the paragraph, and conditional language should not be used in addressing the “substantial doubt” conclusion.

2. Additional Disclosures

Consider whether sufficient disclosure has been made about the condition of the company and the plans of management.

The Financial Accounting Standards Board is presently reviewing a proposed standard (ASU 2013-300) that would require certain going concern disclosures.

U.S. GAAP presently provides no going concern disclosure guidance. (Perform a word search of a disclosure checklist and you will see no FASB references for going concern issues; all going concern disclosures are the result of auditing standards.)

FASB updated its Going Concern project information on April 1, 2014; the website says the Board is pursuing an approach that would “require disclosures when there is substantial doubt similar to disclosures provided today under existing auditing standards.” The website goes on to say, “the assessment period for substantial doubt would be one year from the date the financial statements are issued (or, for nonpublic entities, the date financial statements are available for issuance).” Note that this assessment period is different from the one required by SAS 126 (i.e., a period of time not to exceed one year beyond the date of the financial statements); remember, however, the FASB standard is still subject to deliberation and may change.

3. Additional Representation Letter Language

Written representations should be obtained from management regarding:

  • The plans that are intended to mitigate the adverse effects of conditions or events that indicate there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time and the likelihood that those plans can be effectively implemented, and
  • Whether the financial statements disclose all the matters of which management is aware that are relevant to the entity’s ability to continue as a going concern, including principal conditions or events and management’s plans

4. Additional Communications to Those Charged with Governance

The following should be included in the auditor’s communication to those charged with governance:

  • The nature of the conditions or events identified
  • The possible effect on the financial statements and the adequacy of related disclosures in the financial statements
  • The effects on the auditor’s report

5. Additional Work Paper Documentation

The auditor should document the following:

  • The conditions or events that led the auditor to believe that there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time.
  • The elements of management’s plans that the auditor considered to be particularly significant to overcoming the adverse effects of the conditions or events.
  • The audit procedures performed to evaluate the significant elements of management’s plans and evidence obtained.
  • The auditor’s conclusion as to whether substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time remains or is alleviated. If substantial doubt remains, the auditor also should document the possible effects of the conditions or events on the financial statements and the adequacy of the related disclosures. If substantial doubt is alleviated, the auditor also should document the auditor’s conclusion as to the need for, and, if applicable, the adequacy of, disclosure of the principal conditions or events that initially caused the auditor to believe there was substantial doubt.
  • The auditor’s conclusion with respect to the effects on the auditor’s report.

Going Concern in Compilations and Reviews

Though this post is about going concern issues in audits, let me briefly say that an emphasis-of-matter paragraph pertaining to going concern can be added to compilation or review reports but is not required. See my previous post.

FASB Guidance Issued Subsequent to This Post 

In August 2014, FASB issued its new going concern guidance; click here to see the related post.

Foot-Wedges, Amen Corner and the Green Jacket

I am sitting here watching the Masters and thinking of the lessons I learned as a high school golfer (that’s me below, second from left)–important nuggets of wisdom the game gave me. They apply equally as well to the game we play: Accounting.

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Play the Ball as It Lies

No foot wedges.

The tendency in golf and life is to give ourselves an unfair advantage (also called fudging). We nudge the ball to a favorable location when no one is looking. The problem: We say we are a five handicap, but we are a twelve. And because we lie, we never pay the price to truly be a five. So we remain mediocre. Excellence is a product of honesty.

Always Applaud Your Opponent

We tell our kids to be a good sport and, meanwhile, we verbally trash–of course, not in their presence–our competitors. Speak well of those in your field. When you see your competitors do well, tell them. Give them a fist pump and smile. We are known by our words and never more so than when we speak of those with whom we compete.

Go with Mo

Realize, especially if you are young, success will come and go. When momentum (Mo) is your friend, roll with it. Ride it. Enjoy it.

But when failure comes (and it will), remember, “a better shot is coming.” See yourself as moving on, learning from the experience, and succeeding again. Focusing on the next good shot will enable you to leave your last shot–and, yes, to strike the ball well. Click. Don’t you love that sound?

Amen Corner is Key

Augusta has a pivotal set of holes called Amen Corner: a place where you sweat a lot and pray, more. It is here you win or lose. (I just watched Jordan Spieth hit his ball in the water on 12.) Identifying your strategic set of holes is important. And your caddie (those who counsel you) will never be more important. Take time to listen and reflect. Then trust your swing.

Be an Ambassador of the Game (Profession)

Arnold Palmer has always been a hero of mine. Not just because he was a winner on the tour, but because he honored the game, working unselfishly even after he left his playing days. He gives his time to the game and those associated with it–because of his affection for both.

The Green Jacket

Being a native-born Georgia boy, I take pride in the excellence of the Masters. A crowning moment each spring is the awarding of the Green Jacket. On this last day of the Masters, I hope it is you who will be wearing green (along with Bubba Watson–a graduate of my alma mater, the University of Georgia–Go DAWGS!).