Lisa Openshaw, CPA Todd Desjardins, CPA, CFE Financial Services Group IMPLEMENTING THE NEW COSO FRAMEWORK AND HOW FASB CHANGES AFFECT YOUR FINANCIAL STATEMENTS berrydunn.com
OBJECTIVES FOR TODAY ON COSO 2013 Framework What s Different and What s the Same? 17 Principles What Should You Be Doing Now? 2
COSO FRAMEWORK Comparison of 1992 to 2013 WHAT IS NOT CHANGING... Core definition of internal control Three categories of objectives and five components of internal control Each of the five components of internal control are required for effective internal control Important role of judgment in designing, implementing and conducting internal control, and in assessing its effectiveness WHAT IS CHANGING... Changes in business and operating environments considered Operations and reporting objectives expanded Fundamental concepts underlying five components articulated as principles Additional approaches and examples relevant to operations, compliance, and non-financial reporting objectives added coso.org/documents/cosooutreachdeckmay2013.pptx
ARTICULATED 17 PRINCIPLES Control Environment Risk Assessment Control Activities Information & Communication 1. Demonstrates commitment to integrity and ethical values 2. Exercises oversight responsibility 3. Establishes structure, authority, and responsibility 4. Demonstrates commitment to competence 5. Enforces accountability 6. Specifies suitable objectives 7. Identifies and analyzes risk 8. Assesses fraud risk 9. Identifies and analyzes significant change 10. Selects and develops control activities 11. Selects and develops general controls over technology 12. Deploys through policies and procedures 13. Uses relevant information 14. Communicates internally 15. Communicates externally Monitoring Activities 16. Conducts ongoing and/or separate evaluations 17. Evaluates and communicates deficiencies coso.org/documents/cosooutreachdeckmay2013.pptx
SIGNIFICANT CHANGES IN 2013 COSO FRAMEWORK Enhanced risk assessments Fraud risk considerations Information technology Outsourced service providers 5
BENEFITS GAINED AND COSTS AVOIDED Reporting Improve internal control over financial reporting Avoid adverse effects of costly material weaknesses or frauds Reduced regulatory risk from SEC and PCAOB 6
BENEFITS GAINED AND COSTS AVOIDED Operations Provides BOD and AC helpful and necessary discipline to address always increasing operational risks Management tool to efficiently define, implement, and monitor controls 7
BENEFITS GAINED AND COSTS AVOIDED Compliance Manage compliance with third-party vendors Manage compliance with global security and privacy regulations 8
WHERE SHOULD WE BE NOW? Readiness assessment timeline Understand and educate Perform initial mapping, including consideration of overall risk assessment, OSPs, etc. Develop remediation plan and bridge any gaps Remediate and conduct pre-implementation testing by 3 rd quarter Needs to be implemented by 12/15/14 9
OPPORTUNITIES Objectively re-evaluate current documentation fresh look! Conduct a robust gap analysis may result in efficiencies! Applying an integrated approach to internal control encompassing reporting, operations, and compliance may lessen complexity! 10
RECENT ACCOUNTING PRONOUNCEMENTS FASB Accounting Standards Updates (ASU) No. 2014-01 Investments Equity Method and Joint Ventures (Topic 323), Accounting for Investments in Qualified Affordable Housing Projects No. 2014-02 Intangibles Goodwill and Other (Topic 350), Accounting for Goodwill No. 2014-04 Receivables Troubled Debt Restructurings by Creditors (Subtopic 310-40), Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure 11
QUALIFIED AFFORDABLE HOUSING PROJECTS ASU 2014-01: Accounting for Investments in Qualified Affordable Housing Projects Why FASB Issued this ASU Who is Affected by the Amendments in this ASU Main Provisions Effective Date (annual periods beginning after 12/15/2014 and early adoption is permitted) Example Calculation 12
QUALIFIED AFFORDABLE HOUSING PROJECTS FASBs Decision to Provide an Alternative Current GAAP may elect to use effective yield method if certain conditions met Feedback received conditions are overly restrictive and thus prevent the use of effective yield method If effective yield method not used, then the equity or cost method was used 13
QUALIFIED AFFORDABLE HOUSING PROJECTS The Who and the How All amendments apply if entities elect to use the proportional amortization method For those entities not meeting the conditions or electing not to use the proportional amortization method, only disclosure related amendments apply Nature of its investments in qualified affordable housing projects The effect of the measurement of its investment and the related tax credits on its financial position and results of operations 14
QUALIFIED AFFORDABLE HOUSING PROJECTS Main Provisions Effective yield method will no longer be used prospectively Certain conditions must be met to qualify for the proportional amortization method Probable that tax credits will be available No ability to exercise significant influence over the limited liability entity Projected benefits are from tax credits and other tax benefits Projected yield based on CF from tax credits and other tax benefits is positive Limited liability investor and liability is limited to capital investment Accounting policy decision 15
QUALIFIED AFFORDABLE HOUSING PROJECTS Example - Information based on example in ASU 2014-01 Accounting for Investments in Qualified Affordable Housing Projects Comparison of Methods Proportional Amortization Equity Cost Tax Credits Net and Other Net Net Income Net Net Income Year Investment Tax Benefits Investment Effect Investment Effect 1 $ 90,909 $ 1,818 $ 92,727 $ 3,636 $ 90,000 $ 2,000 2 81,818 1,818 85,455 3,636 80,000 2,000 3 72,727 1,818 78,182 3,636 70,000 2,000 4 63,636 1,818 70,909 3,636 60,000 2,000 5 54,545 1,818 63,636 3,636 50,000 2,000 6 45,455 1,818 56,364 3,636 40,000 2,000 7 36,364 1,818 49,091 3,636 30,000 2,000 8 27,273 1,818 41,818 3,636 20,000 2,000 9 18,182 1,818 34,545 3,636 10,000 2,000 10 9,091 1,818 27,273 3,636-2,000 11 6,667 485 20,000 (4,364) - - 12 4,242 485 12,727 (4,364) - - 13 1,818 485 5,455 (4,364) - - 14-364 - (3,273) - - 15 - - - - - - $ 20,000 $ 20,000 $ 20,000 16
ACCOUNTING FOR GOODWILL (A CONSENSUS OF THE PCC) ASU No. 2014-02 (Accounting for Goodwill) Setting the Stage Current GAAP Requires goodwill of a reporting unit be tested for impairment at least annually or more frequently if certain conditions exist. Qualitative assessment or proceed to Step 1 of the impairment test The costs outweigh the benefits Most users/readers disregard goodwill and related impairment losses 17
ACCOUNTING FOR GOODWILL (A CONSENSUS OF THE PCC) What is the Big Change? Entities electing the accounting alternative Amortize goodwill over 10 years on a straight-line basis, or less than 10 years if another useful life is appropriate Make an accounting policy election to test goodwill for impairment at the entity level or reporting unit level Impairment test if a triggering event occurs 18
ACCOUNTING FOR GOODWILL (A CONSENSUS OF THE PCC) Disclosures Disclosures required under this alternative are similar to existing GAAP NOT required to present changes in goodwill in a tabular reconciliation Detailed disclosures include Additions to goodwill amount assigned to goodwill in total and by major business combination Additions to goodwill - weighted average amortization period in total Gross carrying amount of goodwill, accum. amortization, and accum. impairment loss Aggregate amortization expense for the period Description of impairment loss, the amount and where the impairment loss is recorded in the income statement 19
ACCOUNTING FOR GOODWILL (A CONSENSUS OF THE PCC) Applicability of this ASU Applies to all entities except for public businesses or not-for-profit entities Related subsequent measurement, derecognition, other presentation matters, and disclosure requirements apply Applies to goodwill existing at the beginning of the annual period in which it is elected and to new goodwill recognized 20
ACCOUNTING FOR GOODWILL (A CONSENSUS OF THE PCC) Effective Date If elected, applied prospectively to goodwill existing as of the beginning of the period of adoption and new goodwill recognized in annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Early application is permitted 21
RECLASSIFICATION OF RESIDENTIAL MORTGAGE LOANS IN FORECLOSURE ASU 2014-04 Considered a Clarifying Update GAAP indicates a creditor should reclassify a collateralized mortgage loan such that the loan be derecognized and the collateral asset recognized when it determines that there has been in substance a repossession or foreclosure by the creditor, that is the creditor receives physical possession. The issue the language bolded and italicized above 22
RECLASSIFICATION OF RESIDENTIAL MORTGAGE LOANS IN FORECLOSURE The Clarification Physical possession occurs upon either: Creditor obtaining legal title to the RRE property upon completion of foreclosure, or The borrower conveying all interest in the RRE property to the creditor through completion of a deed in lieu of foreclosure or similar legal agreement. 23
RECLASSIFICATION OF RESIDENTIAL MORTGAGE LOANS IN FORECLOSURE Disclosures This Amendment requires interim and annual disclosures of both: Amount of foreclosed RRE property held by the creditor, and Recorded investment in consumer mortgage loans collateralized by RRE property that are in the process of foreclosure 24
RECLASSIFICATION OF RESIDENTIAL MORTGAGE LOANS IN FORECLOSURE Effective Date Effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014 (1 st quarter 2015) Effective for nonpublic entities for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015 Early adoption is permitted 25
INTERESTED IN MORE? Contact Lisa Openshaw or Todd Desjardins, Senior Managers in BerryDunn s Financial Services Group, to learn more. lopenshaw@berrydunn.com tdesjardins@berrydunn.com Website berrydunn.com Blog berrydunn.com/firmfooting 26