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FASB Flash Report - August 2015

Thu, 08/13/2015 - 12:00am
FASB Issues ASU to Defer the Effective Date of the New Revenue Standard
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  Summary The FASB recently issued ASU 2015-14 to defer the effective date of its new revenue recognition standard by one year. As such, it now takes effect for public entities in fiscal years beginning after December 15, 2017.  All other entities have an additional year.  However, early adoption is permitted for any entity that chooses to adopt the new standard as of the original effective date.  The ASU announcing the deferral is available here.  
  Background The new revenue recognition standard was issued in May, 2014,1 nine months later than originally expected. Since then, stakeholders have raised numerous implementation questions, some of which are likely to result in amendments to the new revenue standard. The Board has also been informed by practitioners that additional time is necessary to facilitate implementation efforts.  In light of these circumstances, the ASU provides a one-year deferral. The FASB has also indicated that stakeholders should proceed under the assumption that no further deferral will be considered, absent extraordinary circumstances.
  Main Provisions Public business entities will adopt the standard for annual reporting periods beginning after December 15, 2017, including interim periods within that year.  Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year.2
All other entities will adopt the standard for annual reporting periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019.  Early adoption is permitted as of either:
  • An annual reporting period beginning after December 15, 2016, including interim periods within that year, or
  • An annual reporting period beginning after December 15, 2016 and interim periods within annual reporting periods beginning one year after the annual period in which an entity first applies the new standard.

As part of its deliberations, the FASB considered, and ultimately decided against a two-year deferral for entities that adopt the new revenue standard retrospectively.  
On the Horizon The IASB recently voted to confirm a one year deferral of the effective date of its companion revenue recognition standard, IFRS 15. A formal amendment to that standard is expected in September, 2015.  See the IASB website for details.

For questions related to matters discussed above, please contact Ken Gee, Adam Brown or Chris Smith.

1 ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)
2 A not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and an employee benefit plan that files or furnishes financial statements with or to the SEC have the same effective date as public business entities.

BDO KNOWS: Variable Interest Entities

Wed, 08/12/2015 - 12:00am
This Variable Interest Entity Practice Aid is intended to facilitate the following decisions:
  • Is an entity in the scope of the variable interest entity consolidation model in ASC 810-10?1
  • Does the reporting enterprise (RE) hold a variable interest (VI) in an entity?
  •  Is an entity a variable interest entity (VIE)?
  •  How is the primary beneficiary (PB), if any, of a VIE identified?
  • How should the RE initially adopt the VIE consolidation guidance?
  • What is the exemption provided by ASU 2014-072, and who is eligible for it?
  • How will ASU 2015-023 change VIE consolidation guidance?
  • How should the accounts of a VIE be consolidated and presented in the consolidated financial statements of the PB?
  • When should the status of an entity as a VIE be reconsidered?
  • When should the identity of the PB be reconsidered?

FASB Flash Report - August 2015

Mon, 08/10/2015 - 12:00am
FASB Issues ASU to Simplify Financial Reporting By Employee Benefit Plans  
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  Summary The FASB recently issued ASU 2015-12 as part of its simplification initiative. The amendments (i) require fully benefit-responsive investment contracts to be measured, presented and disclosed only at contract value, not fair value; (ii) simplify the investment disclosure requirements; and (iii) provide a measurement date practical expedient for employee benefit plans. The new standard takes effect in 2016 for calendar year-end entities and is available here.
  Details Main Provisions:
The FASB recently issued ASU 2015-121 as part of its simplification initiative to reduce cost and complexity for practitioners, while preserving or enhancing the usefulness of information for financial statement users. The ASU is divided in three parts and applies to plan accounting of certain benefit plans.
Part I. Fully Benefit-Responsive Investment Contracts
The guidance in Part I of the ASU applies to reporting entities within the scope of Topics 962 (Defined Contribution Pension Plans) and 965 (Health and Welfare Benefit Plans) that classify investments as fully benefit-responsive investment contracts (e.g. guaranteed investment contracts or GICS).

Prior to the ASU, U.S. GAAP required an entity to measure fully benefit-responsive investment contracts (i) at contract value for purposes of determining the net assets of an employee benefit plan; and (ii) at fair value (measured under Topic 820) for purposes of presentation and disclosure, and to provide an adjustment to reconcile fair value to contract value on the face of the plan financial statements when those measures differed.
The ASU designates contract value as the only required measure for fully benefit-responsive investment contracts.  Contract value is considered relevant because that is the amount at which plan participants would transact.  The ASU requires entities to disclose the contract value of each type of fully benefit-responsive investment contracts (e.g. traditional, synthetic) and eliminates the following reporting requirements for fully benefit-responsive investment contracts:
  • Measurement and presentation at fair value
  • Related disclosures required by Topics 820 and 825
  • Certain disclosures under ASC 962 and ASC 965 requiring fair value calculation (e.g. average yield disclosures)
The ASU also clarifies that indirect investments in fully benefit-responsive investment contracts (e.g. stable value common or collective trusts) should not be reflected as fully benefit-responsive investment contracts and therefore those indirect investments should be reported at fair value. Generally, those funds calculate net asset value per share (NAV) or its equivalent in a manner consistent with the measurement principles of Topic 946.  Therefore they may qualify for the NAV practical expedient.  See ASU 2015-072 and BDO’s Flash Report for additional information related to the NAV practical expedient.
Part II. Plan Investment Disclosures
The guidance in Part II of the ASU applies to reporting entities that follow the requirements of Topics 960 (Defined Benefit Pension Plans), 962 (Defined Contribution Pension Plans) and 965 (Health and Welfare Benefit Plans).
Prior to the ASU, U.S. GAAP required an entity to disclose: (i) individual investments that represent 5% or more of net assets available for benefits; (ii) the net appreciation or depreciation for investments by general type; and (iii) investment information disaggregated based on nature, characteristics and risks under Topic 820.  Item (iii) was disclosed in addition to investment information disaggregated based on general type under Topics 960, 962 and 965.
To simplify the investment disclosures for employee benefit plans, the ASU:
  • Eliminates (i), (ii), and (iii) above.  Note, however, that net appreciation or depreciation in fair value of investments for the period is now required to be presented only in the aggregate.  In addition, investments (both participant-directed and nonparticipant-directed) are now required to disaggregate only by general type (e.g. registered investment companies, government securities, common collective trusts, pooled separate accounts, short-term securities, corporate bonds, common stocks, mortgages and real estate) either on the face of the financial statements or in the notes.
  • Removes the requirement to disaggregate the investments within a self-directed brokerage account. Self-directed brokerage accounts should be reported as a single type of investment.
  • Removes the requirement to include investment strategy disclosures for funds that file Form 5500 as direct filing entities when the employee benefit plan measures those investments using NAV as a practical expedient.
Part III. Measurement Date Practical Expedient
The guidance in Part III of the ASU applies to reporting entities that follow the requirements of Topics 960 (Defined Benefit Pension Plans), 962 (Defined Contribution Pension Plans) and 965 (Health and Welfare Benefit Plans) and have a fiscal year-end that does not coincide with a month-end.
The ASU permits plans to measure investments and investment-related accounts (for example, a liability for a pending trade with a broker) as of a month-end date that is closest to the plan’s fiscal year-end (the “alternative measurement date”), when the fiscal period does not coincide with a month-end.
Plans that apply the practical expedient should disclose the accounting policy election, the alternative measurement date and the amount of any contribution, distribution, and/or significant event that occurs between the alternative measurement date and the plan’s fiscal year-end. 
ASU 2015-043 provides a similar measurement date practical expedient for employers with fiscal periods that do not coincide with a month-end.  For additional information, see BDO’s Flash Report.
Effective Date and Transition:
The amendments are effective for fiscal years beginning after December 15, 2015. Early adoption is permitted for all three parts individually or in the aggregate.
Parts I and II of the ASU should be applied retrospectively, while Part III should be applied prospectively.  Only the nature and reason for the change in accounting principle is required to be disclosed in the annual period of adoption.

For questions related to matters discussed above, please contact Robert Lavenberg or Darlene Bayardo.

1 Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date
Practical Expedient.
2 Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (a consensus of the Emerging Issues Task Force).
3 Compensation—Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation.

EBP Commentator - Summer 2015

Mon, 08/10/2015 - 12:00am


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“The Buck Stops Here” – IRS Reiterates Plan Sponsor Responsibility for Documentation of Hardship Distributions and Participant Loans Loans to participants and distributions due to participant hardship are transactions commonly delegated by employee benefit plan management to third-party service providers. As service providers have increasingly streamlined their administrative processes in the increasingly paperless plan environment, the amount of documentation required by service providers supporting these transactions has been reduced, in some instances, to merely electronic certification (“e-certify”).

These streamlined administrative processes for loans and hardship distributions are coming under scrutiny by the Internal Revenue Service (IRS). The IRS has challenged the trend of service providers permitting participants to “self-certify” that they meet the applicable criteria for these loans and special early distributions and has specifically stated that the plan sponsor is responsible for the recordkeeping requirements regarding these transactions. Additionally, the sponsor may not rely on “e-certify” as sufficient evidence and should have documentation available for examination to support hardship distributions and participant loans. The IRS also indicates that a lack of electronic or paper records is a plan “qualification failure” that requires correction under the Employee Plans Compliance Resolution System (EPCRS).

Under IRS guidance, it is the responsibility of the plan sponsor to:
  • Maintain evidence of all relevant documentation for each participant loan (such as for the application and approval, the executed note receivable from participant, and repayments)
  • Document the nature of the hardship distribution (e.g., that it was a permitted distribution) even if the service provider only required the participant to “self-certify” that the hardship criteria were met.
For more details, refer to www.irs.gov/Retirement-Plans/Its-Up-to-Plan-Sponsors-to-Track-Loans-Hardship-Distributions.
    Noteworthy Changes for 2014 ERISA Annual Reports As plan sponsors gear up to prepare the Annual Return/Report of Employee Benefit Plan, Form 5500, for retirement and welfare benefit plans with a December 31, 2014 year end1, there are some significant changes to keep in mind.

Form 8955-SSA Mandatory Electronic Filing
Electronic filing has, to date, been optional. However, sponsors required to file a W-2 or 1099 electronically for a year that includes the first day of the plan year, are  now required to file the 2014 filing of Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits, electronically as well.
It is important to note that, should the sponsor fail to comply with the mandatory electronic filing requirement, the form is considered not filed, even if a paper return is submitted. Plan sponsors who miss this step and thus fail to timely file an annual Form 8955-SSA could face IRS-assessed penalties of $1 for each reportable participant for each day the failure to file the Form 8955-SSA continues, up to a maximum of $5,000 per participant. All plan sponsors entering the DOL’s Delinquent Filers Voluntary Compliance program for late Form 5500s can, within 30 days of entering DFVC, file a paper copy of the Form 8955-SSA with the IRS to avoid the IRS penalties. See IRS Notice 2014-35. The DOL does not have any penalties associated with Form 8955-SSA.

Form 5500 - Signature and Date, Active Participants Information, and Multiple-Employer Plan Information
There have been updates made to Form 5500 instructions for "Signature and Date," which now caution the filer to check the filing status in EFAST2. EFAST2 sends a notification (usually within 20 minutes of submission) that the return/report is ready to be processed. If the filer is not notified that the submission was successfully received and is ready to be processed, the problem will need to be corrected to avoid being deemed a “non-filer” subject to penalties from the Department of Labor (DOL), IRS, and/or Pension Benefit Guaranty Corporation (PBGC).

If the filer receives notification that shows the status as "Processing Stopped" or “Unprocessable," it is possible that the submission was not sent with a valid electronic signature. It is therefore critical to look closely at the Filing Status and the specific error messages applicable to the transmitted filing to help determine the specific problem to be corrected.

A new question that appears on Form 5500, Line 6a(1), asks what is the "total number of active participants at the beginning of the plan year?" While this question may seem very similar to Line 5 (“total number of participants at the beginning of the plan year"), these questions are actually asking for two different counts. Line 5 also includes participants that are retired or separated from service still receiving benefits under the plan whereas Line 6a(1) excludes those participants. For retirement plans, the difference between the count for Line 5 and Line 6a(1) is the former employees entitled to future benefits, while for health care plans the difference would be retirees receiving benefits or other former employees who have elected COBRA.

Additionally, the check box for "Multiple-Employer Plans"2 in Part I of the Form 5500 now indicates that multiple-employer pension plans and multiple-employer welfare plans filing the Form 5500 must include an attachment that:
  • Lists each participating employer in the plan during the plan year, identified by name and employer identification number (EIN)
  • Includes a good-faith estimate of each employer's percentage of the total contributions (including employer and participant contributions) made by all participating employers during the year
The sponsor will need to complete as many entries as needed to report all applicable employers. Multiple-employer welfare plans that are not required to file financial statements with their annual report are required to include only a list of participating employers with the corresponding EIN and Plan Numbers in the “Multiple-Employer Plan Participating Employer Information” attachment submitted with their filing.

Form 5500 - Schedule H, Schedule MB and Schedule SB

According to the expanded instructions for Schedule H Line 1c(13), a qualifying registered investment company must be registered under the Investment Company Act of 1940, including mutual funds (legally known as open-end companies), closed-end funds (legally known as closed-end companies), and UITs (legally known as unit investment trusts).

Similarly, a new Line 4f has been added to Schedule MB, which requires the filer to provide information on plans in critical status regarding the year the plan is projected to emerge from critical status, or, if the rehabilitation plan is based on forestalling possible insolvency, the year in which plan insolvency is expected.

For each type of participant (active, retired, or terminated vested), Line 3 of Schedule SB now states that the funding targets (vested and total) need to be reported separately for each. Additionally, Line 11b has been split into two parts:
  • The first providing the calculation based on the prior year's effective interest rate
  • The second providing the calculation based on the prior year's actual return
Refer to the instructions if the valuation date for the prior plan year was not the first day of the plan year. Line 15 instructions have been expanded to address situations in which the Adjusted Funding Target Attainment Percentage (AFTAP) was not certified for the plan year, while Line 27 has been revised to reflect changes under the Cooperative and Small Employer Charity Pension Flexibility Act of 2014. 

Form 5500 - Form M-1 Compliance Information

In general, Multiple Employer Welfare Arrangements (MEWAs) are arrangements that offer health and other benefits to the employees of two or more different employers (including self-employed individuals). If plans are determined by the Secretary of Labor to be collectively bargained, then they are exempt from filing Form M-1. Plans claiming this exception without a determination from the DOL are considered Entities Claiming Exception (ECEs) and have special filing requirements (covered in more detail below). Additionally, all MEWAs that are employee welfare benefit plans under ERISA are now subject to the Form 5500 annual report, notwithstanding the general Form 5500 filing exceptions.

For 2013, the Form M-1 compliance information was required to be filed as a Form 5500 attachment. However, it now appears on the Form 5500 as three new questions: 11a, 11b and 11c. These new lines only apply to welfare benefit plans and ask if the plan is in compliance with M-1 filing requirements. The separately filed Form M-1 is now used to report the required information concerning a MEWA and any ECE.
Form M-1 Electronic Filing by MEWA and ECE Separate from the Form 5500
While most of the changes may seem minor, the Form M-1 is substantively different from previous years and now requires filers to include custodial and financial information relating to the MEWA or ECE.
The Form M-1 must be filed no later than March 1 following any calendar year for which a filing is required. There is a one-time extension that can be filed and should automatically be granted. The new rules do, however, impose stricter 30-day filing deadlines for MEWA registration and ECE origination and special filing events. In addition to the annual reports, for the first three years from origination, MEWAs and ECEs must now file 30 days prior to operating in any state or within 30 days of knowingly expanding operations in an additional state, experiencing a merger, a participant increase of 50 percent or greater, or a material change.

Regarding the filing of annual reports for ERISA plans, there is much truth in the old adage that claims “the devil is in the details.” Even seemingly minor mistakes or failure to comply with requirements can be costly. Therefore, keeping up to date on reporting changes can help mitigate the risk of filing incorrectly and exposure to undue scrutiny by the enforcement agencies and/or costly penalties.
Legislative Action to Defund the DOL “Conflict-of-Interest” Fiduciary Rule The Department of Labor’s proposed fiduciary rule that was discussed in our Winter 2015 edition is still under review (with a public hearing expected in mid-August), but its ability to affect change should it be enacted has been threatened by recent riders attached to U.S. Senate and House of Representative appropriations bills. For instance, the House rider stipulates that no monies from the Act may be used to “finalize, implement, administer or enforce the proposed Definition of the term “Fiduciary” under the proposed regulation.

These attempts to essentially “defund” the fiduciary rule are the latest in continued opposition to the rule, based on two key concerns: First, changing what constitutes a “fiduciary” potentially exposes service providers (financial advisers and brokers) to litigation from which they were previously immune. Secondly (and probably most significantly), the rule affects how and how much financial advisers and brokers would be compensated.

Although the appropriation bills have the support of Republicans (who control both houses of Congress), both President Obama and DOL Secretary Thomas Perez have spoken out staunchly in support of the fiduciary rule and both bills may be vetoed by the President. Stay tuned for continuing developments.
IRS Revisions for Plan Corrections under EPCRS In two separate pronouncements, the IRS recently issued revisions to the EPCRS, as set forth in Revenue Procedure 2013-12, in an effort to make the permitted methods for correcting errors in the administration of tax-qualified retirement plans more taxpayer-friendly.
The first revisions were outlined in Revenue Procedure 2015-27, which is generally effective July 1, 2015. However, plan sponsors may elect to apply these new provisions on or after March 27, 2015. Some of the more significant corrections affected by Revenue Procedure 2015-27 include the following:
  • Overpayment of benefits to participants –The IRS has clarified that EPCRS does not require that a plan demand return of a participant overpayment due to the plan in every case.
  • Excess contributions to participant accounts – The IRS will now allow self-correction of excess contributions, even if such failure occurs repeatedly, as long as the correction occurs within 9 ½ months after the end of the plan year.
  • User fees charged for plans under Revenue Procedure 2013-12 – The IRS has reduced the user fees originally outlined in Revenue Procedure 2013-12 that apply to plan submissions for the following two corrections: (1) a failure to satisfy the minimum distribution requirements under IRC Section 401(a)(9), and (2) compliance with the requirements of IRC Section 72(p) in making loans to plan participants depending upon the number of affected participants.
A second set of revisions was announced shortly thereafter in Revenue Procedure 2015-28, effective April 2, 2015. This Revenue Procedure revises Revenue Procedure 2013-12 with regard to the following corrections:
  • Failure to timely implement salary withholding otherwise required under an automatic contribution feature of the plan – The IRS no longer requires this failure to be corrected through a Qualified Non Elective Contribution (QNEC) equal to 50% of the participant’s “missed deferral opportunity” under the automatic arrangement if the failure does not extend beyond the end of the 9 ½ month period after the end of the plan year of the failure and certain other requirements are met. Currently this correction method is only available for such errors occurring prior to December 31, 2020.
  • Failure to correctly implement a participant’s salary deferral election – The IRS has reduced the “correction payment” required of the plan sponsor seeking to correct this type of failure, depending on how quickly the failure is corrected by the plan sponsor. If certain conditions are met, no QNEC is required if corrections are made within three months of the failure. The QNEC is reduced to 25% of the participant’s “missed deferral opportunity” if made generally by the end of the second plan year following the year of failure (and possibly a longer time period, under certain circumstances).
In making corrections easier for plans adopting automatic contribution provisions, the IRS is encouraging employers to adopt plans with these automatic contribution features despite implementation errors often occurring in such plans. By expanding the types of correction options available under EPCRS, the IRS is attempting to incentivize plan sponsors to detect and correct these types of plan operational failures as soon as possible.
    Evaluating Sponsor Fiduciary Responsibilities “Fiduciary Responsibility” has been getting a lot of attention in the press, which emphasizes the need for plan sponsors to periodically re-evaluate their responsibilities, as set forth by the Employee Retirement Income Security Act (ERISA). Some questions for consideration by the plan sponsor include the following:
  • Has plan management adequately identified those who would be considered fiduciaries to the plan both inside the organization and outside (e.g., third parties)?  Do these individuals within the organization know who they are and what their responsibilities entail?  Do new fiduciaries to the plan receive adequate training? One resource is the Meeting Your Fiduciary Responsibilities guide, which is provided by the DOL. For an e-copy, go to http://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html.
  • How does plan management maintain proper oversight of the plan and its operations? For instance, is there a regular meeting by a plan oversight board? Does the board maintain minutes and ensure completion of key tasks determined and/or assigned by the board?
  • How does plan management monitor the plan’s investments and fees? Fees charged to the plan and participants as well as the investment options from which participants may select are two of the top fiduciary issues in the EBP industry.
  • Does plan management utilize an investment adviser? Are the adviser’s recommendations carefully considered by those charged with oversight of the plan and any decisions documented carefully? Is there a current investment policy statement adhered to by both the investment manager and plan management? Would plan management’s processes and decisions in the areas of fees and investments stand up under scrutiny, such as from a DOL/IRS audit or a participant lawsuit?
  • When there are issues with the plan’s operations, has plan management used competent legal counsel specialized in ERISA matters, as needed? Are plan operational issues corrected timely and appropriately? Mistakes happen with even the best-run plans so having an appropriate process in place to address plan errors (and prevent reoccurrences) is essential.
Reductions in IRS Determination Letter Program In late July, the IRS announced significant modifications to its determination letter program for employee benefit plans. Key changes include:
  • As of July 21, 2015 (and effective through December 31, 2016), no off-cycle determination letter applications are accepted, except for certain new plans and terminating plans.
  • As of January 1, 2017, 5-year, staggered amendment cycles for individually designed plans will be eliminated. Determination letters will only be issued at plan inception and termination.
There is a transition rule applicable to plans currently on the 5-year amendment cycle. The IRS has also announced a request for comments regarding these changes that may be submitted until October 1, 2015. For further details, see http://www.irs.gov/pub/irs-drop/a-15-19.pdf.
May 2015 AICPA Employee Benefit Plans Conference Returning keynote speaker Phyllis Borzi (Assistant Secretary of Labor, U.S. Department of Labor Employee Benefit Security Administration (EBSA)) addressed the DOL’s recently released report assessing the quality of employee benefit plan audits by CPA firms of all sizes. She expressed concern over the findings and indicated the DOL is considering various enforcement options available to reverse the unacceptably high deficiency rate of approximately 40 percent. More information and a copy of the report can be found on the DOL website. Ms. Borzi also spoke regarding the DOL’s fiduciary rules (see discussion in Winter 2015 edition as well as the update in this edition). In a continuation of her remarks at the 2014 conference, Ms. Borzi championed the concept of “lifetime income” (such as from an annuity) as a potential solution for making participant savings last through retirement.

Conference sessions addressed key accounting and auditing pronouncements/guidance applicable for the 2015 plan audit season:
  • Statement on Auditing Standard No. 128, Using the Work of Internal Auditors (AU-C 610)
  • Accounting Standards Update No. 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting
  • PCAOB Auditing Standard No. 17, Auditing Supplemental Information Accompanying Audited Financial Statements
  • New AICPA independence rules regarding non-attest services and new PCAOB guidance regarding prohibited financial statement preparation services

Several sessions focused on a better understanding of alternative and hard-to-value investments held by the plan. These types of investments are becoming more prevalent even in smaller plans due to the on-going search for higher investment returns in a low interest-rate environment.

A key conference theme was the various activities ongoing within plans. Plan activities discussed included:
  • Plan mergers and consolidations
  • Increased number of plans requiring an audit for the first time
  • Changes (including declines) in plan sponsor contributions
  • Changes in investment option mix, which in some instances (as noted above) means using higher risk (but potentially higher return) investments
  • Increased availability of annuities as an option for defined contribution plans (as Ms. Borzi noted, annuities may be an attractive option for participants nearing retirement)
  • Pension plan de-risking activities for defined benefit plans
As 2015 is relatively quiet for new accounting pronouncements, it would be a good year for plan management to focus on preventive plan maintenance, such as reviewing plan practices and control processes, ensuring that there have been no issues with recently implemented pronouncements, etc. For additional plan maintenance suggestions, refer to the checklists provided by the IRS.

It would also be a good time to consider the effect of implementation for upcoming effective accounting changes, such as for the pending change to eliminate disclosures for investments where net asset value (or NAV) is used as the “practical expedient” (Accounting Standards Update No. 2015-07, Disclosures for Investments in Certain Entities that Calculate NAV per Share [or Its Equivalent]; www.fasb.org/cs/ContentServer?pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176165981889) and the amendments in ASU 2015-12 (www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176166228978) related to the employee benefit plan simplification initiative released by the Financial Accounting Standards Board (FASB) on July 31, 2015.
BDO Webinar Series for Plan Sponsors Fiduciary Gridiron – How to Succeed on the Field is a four-part webinar series focusing on a variety of fiduciary responsibilities and topics for plan management, regardless of plan size.

Part One – Selecting Your Retirement Plan Team was held on May 21, 2015. This webinar focused on who is a fiduciary and the different types of service providers available to fiduciaries. If you missed this webinar, we encourage you to listen to the recording available at https://university.learnlive.com/login.aspx?brandingid=1272&ref=/CourseDesc.aspx?course_id=507306.

Part Two – Kicking Off the Season is the next webinar in this series that will discuss Investment Policy Statements, latest trends in plan design, and monitoring of plans by the DOL and IRS. It will be held on August 20, 2015 at 12:30 pm EST. To register, use the following link: https://www.bdo.com/events/fiduciary-gridiron-how-to-succeed-on-the-field-aug.
Where We’ve Been AICPA Employee Benefit Plans Conference
In May, members of our National Employee Benefit Audit Group participated in the American Institute of Certified Public Accountants (AICPA) Employee Benefit Plans Conference held in National Harbor, Maryland.

Society for Human Resource Management (SHRM) Annual Conference and Exposition
If you attended the SHRM Annual Conference & Exposition, held in Las Vegas, Nevada, June 28-July 1, 2015, we hope you came by our booth to say hello. We enjoyed again being part of the world’s largest HR event! We are continuing to grow our involvement with SHRM and appreciate having the opportunity to interact with HR professionals who are innovators in their field.
    Contact Bob Lavenberg
Assurance Partner
National Partner In Charge of Employee Benefit Plan Audit Quality
(215) 636-5576 / rlavenberg@bdo.com
  Contributors Darlene Bayardo
Chelsea Smith Brantley
Beth Lee Garner
Barbara Hale (Retired)
Don Hughes
Bob Lavenberg
Joanne Szupka
Joan Vines
1 The due date for Form 5500 is the last day of the 7th month following the plan’s year end. Therefore, for plans ending December 31, 2014, the Form 5500 and related forms are due July 31, 2015. An automatic extension of 2 ½ months may be requested by filing a Form 5558 prior to the Form 5500’s original due date.

2 Do not check this box if the employers maintaining the plan are members of the same controlled group.

BDO Comment Letter - Auditor's Use of the Work of Specialists

Thu, 08/06/2015 - 12:00am
PCAOB Staff Consultation Paper: The Auditor’s Use of the Work of Specialists

BDO supports the Board's consideration of amendments to extant PCAOB standards to clarify the way in which auditors use the work of specialists and provides recommendations for the Board's deliberation.  

Corporate Governance Flash Report - August 2015

Wed, 08/05/2015 - 12:00am
PCAOB Audit Quality Indicators and SEC Audit Committee Disclosure Fact Sheets for Audit Committees

Download the PDF Version

Summary The Center for Audit Quality (the CAQ) is issuing two fact sheets to encourage and aid stakeholders, particularly audit committees, in providing their comments to the PCAOB and the SEC on their respective recent concept releases: Next Steps Each of the concept releases cited above contain background information and commentary along with various questions posed to stakeholders that are designed to inform the PCAOB and SEC, respectively, as they move forward with their audit quality and transparency initiatives. Within the fact sheets, the CAQ highlights specific areas of particular importance within each of the concept releases for consideration. We encourage you to review the fact sheets along with other information, including BDO’s recent PCAOB Alert and SEC Alert, highlighting each of the above releases, and consider commenting on these significant projects.

Please note, in addition to many other areas for consideration, the SEC concept release references the PCAOB’s AQI release and asks whether it would be appropriate for the audit committee to provide disclosure around the discussion of AQIs. The SEC Concept Release on Audit Committee Disclosures also references other pending regulatory projects, including the PCAOB’s Proposed Auditing Standards on the Auditor’s Report and the Auditor’s Responsibilities Regarding Other Information and Related Amendments and Supplemental Request for Comment: Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form and specifically requests comments on  whether disclosure of the lead engagement partner’s name and audit firm tenure might be appropriate by the audit committee. In an effort to avoid confusion, the CAQ intentionally did not highlight within the Fact Sheets any of these policy issues that are cross-referenced in the various regulatory projects.
The PCAOB’s AQI concept release is available here. The SEC’s Audit Committee Disclosures concept release is available here.
For additional audit committee tools and resources, visit BDO’s Board Governance page at: https://www.bdo.com/services/assurance/board-governance/overview. For questions related to matters discussed above, please contact Amy Rojik.

BDO Comment Letter - Equity Method and Joint Ventures

Mon, 08/03/2015 - 12:00am
Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Equity Method of
Accounting (File Reference No. 2015-280) (“the ED”)

BDO agrees with simplifying the equity method of accounting where possible, but recommends certain changes before finalizing the proposal.

FASB Flash Report - July 2015

Wed, 07/29/2015 - 12:00am
FASB Issues ASU to Simplify the Measurement of Inventory  Download the PDF Version  
Summary The FASB recently issued ASU 2015-111 as part of its simplification initiative. The amendments require inventory within the scope of the ASU to be measured using the lower of cost and net realizable value.  The changes apply to all types of inventory, except those measured using LIFO or the retail inventory method. The new standard takes effect in 2017 for calendar year-end entities and is available here.
  Detail Main Provisions:
Under the new guidance, the subsequent measurement of inventory depends on the cost method used:
  • Inventory measured using any method other than last-in, first-out (LIFO) or the retail inventory method (within the scope of the ASU)
  • Inventory measured using LIFO or the retail inventory method (excluded from the scope of the ASU)
The ASU amends some of the other guidance in Topic 330 to more clearly articulate the requirements for the measurement and disclosure of inventory. However, those amendments are not intended to result in any changes to current practice.
Inventory within the scope of the ASU (e.g. FIFO or average cost) should be measured at the lower of cost and net realizable value.  Net realizable value is defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
Prior to the ASU, U.S. GAAP required an entity to measure inventory at the lower of cost or market.  Market is measured using replacement cost unless it is above net realizable value (commonly referred to as “ceiling”) or below net realizable value less an approximately normal profit margin (commonly referred to as “floor”).  For inventory within its scope, the ASU eliminates the notions of replacement cost and NRV less a normal profit margin, which is intended to simplify the accounting for inventory.
Inventory excluded from the scope of the ASU (i.e., LIFO or the retail inventory method) will continue to be measured at the lower of cost or market.  That is, there is no change to current practice in these circumstances.
Effective Date and Transition:
The amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an interim or annual reporting period.
The amendments in this Update should be applied prospectively.  If an entity has previously written down inventory (within the scope of the ASU) below its cost, that reduced amount is considered the cost upon adoption.
Upon adoption, the change from the lower of cost or market to the lower of cost and net realizable value for inventory within the scope of the ASU will be accounted for as a change in accounting principle.  Only the nature and reason for the change in accounting principle is required to be disclosed in the first interim and annual period of adoption.

For questions related to matters discussed above, please contact Adam Brown, Gautam Goswami or Chris Smith.

1 Inventory (Topic 330): Simplifying the Measurement of Inventory

Significant Accounting & Reporting Matters Q2 2015

Mon, 07/13/2015 - 12:00am
Issued on a quarterly basis, the Significant Accounting and Reporting Matters Guide provides a brief digest of final and proposed financial accounting standards. This guide is designed to help audit committees, boards and financial executives keep up to date on the latest corporate governance and financial reporting developments.

Highlights include:
  • FASB Issues Narrow-Scope Amendments and Proposals to Simplify GAAP
  • FASB and IASB Propose Amendments to Revenue Standard
  • SEC Proposes Pay vs. Performance Rules
  • PCAOB Seeks Feedback on Various Matters
  • IASB Proposes Changes to Conceptual Framework

SEC Flash Report - July 2015

Fri, 07/10/2015 - 12:00am
SEC Proposes Rules Requiring Clawback of Executive Compensation Download the PDF Version

On July 1, 2015, the Securities and Exchange Commission proposed a rule which would require national securities exchanges to establish standards for listed companies that would require the clawback of erroneous executive compensation. The rule would implement provisions mandated by Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  These standards would force listed companies to establish and enforce policies that require executives to pay back certain incentive-based compensation that was erroneously awarded. Proposed Rule 10D-1 would substantially increase the existing requirements covering recovery of executive compensation in Section 304 of the Sarbanes-Oxley Act, which requires the CEO and CFO to reimburse an issuer for certain compensation when an accounting restatement which resulted from misconduct occurred during the preceding twelve months. 
The clawback provisions of Rule 10D-1 would require a listed company, upon restating its financial statements, to calculate the difference between the amount of incentive-based compensation awarded to an executive and the amount that would have been awarded had the financial statements properly reflected the restated amounts.  This calculation would be performed for the three fiscal years prior to the date that a restatement was required.  The excess amount that was erroneously awarded would be recovered from both current and former executives of the listed company.  The population of “executives” from which recovery would be required is broader than under the Sarbanes-Oxley Act and includes any person who performs policy-making functions for the company.  For example, roles such as the company’s president, principal financial officer, principal accounting officer, and any vice-president in charge of a principal business unit, division or function would be included in the definition of an executive. The proposal takes a “no fault” approach. There is no consideration of whether there was any misconduct by an executive or whether an executive had responsibility for the erroneous financial statements.
Incentive-based compensation subject to recovery includes compensation that was determined based upon the attainment of financial reporting measures.  Financial reporting measures are those based upon accounting principles used in preparing the financial statements, any measures derived from that financial information, stock price, and Total Shareholder Return (TSR).  Other compensation, such as compensation based upon continued employment and compensation awarded at the discretion of the board of directors, would be excluded from this provision.  A company would be required to make a reasonable estimate of the effect of the erroneous accounting on the stock price and TSR.
A company that does not adopt a policy for the recovery of erroneously awarded incentive-based compensation, enforce the policy, and comply with the disclosure provisions of the rule would be subject to delisting.
  Other Highlights of the Proposed Rules
  • Proposed Rule 10D-1 would apply to all listed companies, except for certain registered investment companies that do not provide incentive-based compensation to their employees.  Smaller reporting companies, emerging growth companies, and foreign private issuers (“FPIs”) would all be subject to the new listing standards.
  • A company would have the discretion to not enforce the recovery of incentive-based compensation only if the costs related to the recovery are expected to exceed the amount to be recovered or, for FPIs, if the recovery violates home country laws.
  • Executives could not be indemnified.
  • Other proposed rule changes would require companies to disclose their recovery policies and how they have applied them. The recovery policy will be filed as an exhibit to the annual report.  Additional disclosures would be required in annual reports and proxy statements when a restatement occurred or there is a continuing outstanding balance of excess incentive-based compensation that has not been recovered.  These additional disclosures include:
    • Date of restatement
    • If restatement is subject to recovery
    • Amount of the excess balance to be recovered
    • Amount remaining outstanding
    • How estimates of stock price and TSR were calculated
    • Name of individual for which the Company chose not to pursue collection
    • Name of individual that hasn’t paid within 180 days
  • The disclosure will be block tagged in an interactive data format using eXtensible Business Reporting Language, or XBRL.
  • Following the publication of the adopted version of Rule 10D-1, the exchanges would have 90 days to file their proposed listing rules and those listing rules would be required to become effective within one year of the date Rule 10D-1 is published.  The recovery policy for each listed company must be adopted within 60 days after the exchange’s rule becomes effective.  All excess incentive-based compensation received by current and former executives on or after the effective date of Rule 10D-1 would be subject to recovery.
The proposing release is available here.  Comments on the proposed rules should be provided within 60 days after the proposing release is published in the Federal Register.

For questions related to matters discussed above, please contact Jeff Lenz or Brandon Landas.

Audit Flash Report - July 2015

Tue, 07/07/2015 - 12:00am
PCAOB Issues Proposals to Improve Transparency and Provide Insight into Audit Quality Download the PDF Version

At the PCAOB’s open meeting, held on June 30, 2015, the PCAOB announced plans for the release of two documents for public comment related to improving transparency and providing insight into audit quality. 
  Improving Transparency through Disclosure The PCAOB has issued a Supplemental Request for Comment: Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form to solicit public feedback on an alternative to its 2013 reproposed rule “Improving Transparency Through Disclosure of Engagement Partner and Certain Other Participants in Audits” to require auditors to disclose the name of the engagement partner and information about certain other participants in the audit on a new PCAOB form: Form AP, Auditor Reporting of Certain Audit Participants ("Form AP") rather than disclosing such information within the auditor’s report. Information filed on Form AP would be available in a searchable database on the PCAOB’s website. In addition to filing Form AP, audit firms could also voluntarily provide similar disclosures in the auditor’s report. A fact sheet on the proposal is accessible here.
The PCAOB has proposed making requirements effective for auditor’s reports issued or reissued on or after June 30, 2016, or three months after approval of the requirements by the SEC, whichever occurs later.
This supplemental request for comment should be read in conjunction with the 2013 Release, which describes the proposal to mandate disclosure in the auditor's report. The comment period on the supplemental request for comment ends August 31, 2015.
On July 1, 2015, the SEC released Concept Release 33-9862 Possible Revisions to Audit Committee Disclosures as part of its own comprehensive review of audit committee reporting requirements that explores a number of ideas around how audit committee disclosures could be made more robust and more useful to shareholders and others who rely on them. The release further focuses on the auditor committee’s reporting of its process for overseeing the independent auditor, including whether the audit committee would disclose what the tenure of the audit firm is and who the engagement partner is. Refer to the related BDO Alert for further information.
  Audit Quality Indicators The PCAOB has also issued a Concept Release on Audit Quality Indicators. Within the 35-page release and 26-page appendix, the PCAOB has identified 28 potential quantitative audit quality indicators (AQIs) at both the firm and engagement level that are intended to provide additional information about whether audit work being performed is being conducted by the appropriate individuals with the requisite experience, skills, resources, and tools. The potential AQIs represent the following areas:
  Audit Professionals - measures relating to those performing the audit as to their:
  • Availability
  • Competence
  • Focus (e.g., allocation of audit hours to phases of the audit)
Audit Process - measures relating to an audit firm’s:
  • Tone at the top and leadership
  • Incentives
  • Independence
  • Infrastructure
  • Record of monitoring and remediation (e.g., internal quality review results)
Audit Results - measures relating to:
  • Financial statements
  • Internal control over financial reporting
  • Going concern reporting
  • Communications between auditors and the audit committee
  • Enforcement and litigation

The PCOAB’s potential AQIs are not intended to result in a comprehensive firm-wide scorecard but rather may provide benchmarks for comparison and a basis for more informed discussions between stakeholders, such as audit committees, and auditors. It is the intention of the PCAOB, based on public comment, to further reduce the number of AQIs to a more manageable and effective number for consideration in a future proposal.
In addition to the AQIs themselves, the PCAOB is seeking comments on how AQIs may best be used to promote audit quality and their potential availability and value to audit committees, audit firms, investors, and regulators, as well as other users (e.g., company management, the business press, academics, and the general public). The concept release further considers how such AQI data may be obtained and distributed, whether use of AQIs should be voluntary or mandatory, the scope of audits and firms that may be subject to AQI reporting, and the possibility of phasing-in steps toward AQI reporting and use.
A fact sheet on the concept release is accessible here. The comment period ends September 28, 2015. The PCAOB intends to convene a public roundtable in the fall of 2015 for further discussion.
The Center for Audit Quality (CAQ) is currently completing its own audit quality indicator project being conducted with accounting firms and audit committees and is currently hosting several audit committee roundtables in the U.S. and abroad to finalize their recommendations in this area. Refer to the related BDO Alert for further information.
To listen to a podcast of the PCAOB’s June 30 open meeting discussing both of the initiatives outlined above, refer here.
  Next Steps Both the PCAOB’s project related to transparency through disclosure and its project on AQIs are aimed, at least in part, at further focusing auditors' behavior on increasing their sense of accountability and providing greater transparency into what they do and the results of their actions. We encourage audit committees to explore the resources cited in this practice aid and determine how such proposed guidance may benefit your organizations and your relationships with your auditors or whether there are further considerations to be incorporated to achieve stated goals. For additional audit committee tools and resources, visit BDO’s Board Governance page.
For questions related to matters discussed above, please contact Amy Rojik.

SEC Flash Report - July 2015

Tue, 07/07/2015 - 12:00am
SEC Issues Concept Release Seeking Comment on Possible Revisions to Audit Committee Disclosures
Download the PDF Version
Summary On July 1, 2015, the Securities and Exchange Commission issued Concept Release 33-9862 Possible Revisions to Audit Committee Disclosures to seek public comment regarding audit committee reporting requirements, with a focus on enhancing the audit committee’s reporting of its process for overseeing the independent auditor.
The concept release is in response to views that the SEC’s existing disclosure rules for this area perhaps have not kept pace with the evolving role and responsibilities of audit committees and may not result in disclosures about audit committees and their activities that are sufficient to help investors understand and evaluate audit committee performance, which may in turn inform investors’ investment or voting decisions.
Some of the more significant potential changes to reporting requirements being considered include:
  Audit Committee's Oversight of the Auditor
  • Whether additional information regarding communications between the audit committee and the auditor should be provided (e.g., about the considerations and actions the audit committee has taken with respect to the qualitative discussion about the nature and timing of required communications)
  • Whether the audit committee should disclose how frequently they meet with the auditor
  • Whether a discussion was held related to the auditor’s internal quality review and most recent PCAOB inspection report and the nature of such discussion
  • Whether and how the audit committee assesses, promotes and reinforces the auditor’s objectivity and professional skepticism
  Audit Committee’s Process for Appointing or Retaining the Auditor
  • How the audit committee assesses the qualifications of the audit firm and key participants in the audit, including the auditor’s independence, objectivity, and audit quality and its rationale for and role in the selection or retention of the auditor
  • Whether the results of shareholder votes played a role in hiring the auditor
  • How the audit committee discusses the auditor’s quality controls and reactions to regulatory inspections
  Qualifications of the Audit Firm and Certain Members of the Engagement Team Selected by the Audit Committee
  • Whether the audit committee should disclose the name of the engagement partner and other key members of the audit engagement team and the audit committee’s role in the selection process
  • Whether the audit committee should disclosure the auditor’s tenure (i.e., number of years the auditor has audited the company) and its view on the relationship of tenure to audit quality
  • Whether the audit committee should disclose other firms involved in the audit (e.g., affiliated and/or nonaffiliated firms, or third-party advisors and specialists that conduct portions of the audit work)
  Location of the Audit Committee Disclosure in SEC Filings
  • Whether investors would benefit from audit committee disclosures being presented in one location, versus in the various places in which they are provided currently
  Smaller Reporting Companies and Emerging Growth Companies (EGCs)
  • Whether current audit committee disclosure requirements should be changed or modified for smaller reporting companies and EGCs
  Other Considerations
  • Whether additional disclosures being considered should be mandatory or should they remain voluntary

Comments are due by September 8, 2015.
On June 30, 2015, the Public Company Accounting Oversight Board (PCAOB) furthered its agenda for improving transparency and providing insight related to audit quality by releasing a Supplemental Request for Comment: Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form along with a Concept Release on Audit Quality Indicators. Refer to the related BDO Alert for further information.
For qusetions related to matters discussed above, please contact Jeffrey Lenz or Amy Rojik.

BDO Comment Letter - Simplifying the Accounting for Measurement-Period Adjustments

Mon, 07/06/2015 - 12:00am
Simplifying the Accounting for Measurement-Period Adjustments (Topic 805) (File Reference No. 2015-260)

BDO supports the proposal to simplify the accounting for measurement period adjustments.

2015 BDO IPO Halftime Report

Mon, 07/06/2015 - 12:00am

U.S. IPOs to Maintain Pace Over Remainder of Year Availability of Private Funding Leading to Less Offerings
Download the PDF Version

Initial public offerings (IPOs) on U.S. exchanges finished the first half of the year with a flurry of activity. In fact, the 33 offerings that priced in June represent the highest number of deals since July of last year. Yet, despite this strong finish, the number of U.S. IPOs and proceeds raised through six months are down significantly when compared to 2014.*

According to the 2015 BDO IPO Halftime Report, a survey of capital markets executives at leading investment banks, IPO activity on U.S. exchanges during the second half of the year should mirror the first six months of 2015. A majority (54%) of bankers predict IPO activity will remain at the same level as the first half of the year. Just over a quarter (26%) anticipate the pace of U.S. IPO activity will increase in the second half of 2015, while one-fifth (20%) forecast a decrease in offering activity. Overall, capital market executives are predicting virtually no net change (under 1%) in the number of U.S. IPOs during the second half of the year.

Bankers anticipate these offerings will average just $174 million in size for the remainder of 2015, approximately the same as the first half of the year. This projects to less than $36 billion in total IPO proceeds on U.S. exchanges in 2015, the lowest level of proceeds since 2009 when the market was still reeling from the financial crisis.

"It was almost inevitable that the 2015 U.S. IPO market was going to experience a slowing of growth given the impressive increases achieved in 2013 and 2014, however the drop-off in offerings this year has been significant. While there are always multiple contributing factors for such a dramatic change, the capital markets community clearly believes the wide availability of private financing at favorable valuations is playing the leading role," said Brian Eccleston, a partner in the Capital Markets Practice at BDO USA. "If this access to private funding continues, bankers believe it will lead to fewer IPOs moving forward. Certainly, this is a trend that bears watching."
  Private Financings Postpone IPOs When compared to 2014, when 275 IPOs generated more than $85 billion in proceeds*, the number and size of U.S. IPOs have dropped considerably this year. A majority (56%) of capital markets executives believe the widespread availability of private funding at attractive valuations is the main factor in the dramatic drop in the number of initial public offerings (IPOs) on U.S. exchanges in 2015 when compared to 2014. A cooling stock market (22%), fewer offerings from private equity firms (14%) and the collapse of oil prices (8%) are cited as the main factor by much smaller proportions of the bankers.

When asked about the impact of companies putting off their IPOs due to the availability of late-stage financing in the private sector, a majority (61%) of the bankers feel it will lead to fewer offerings going forward, while more than a quarter (29%) predict it will result in better IPOs in the future. Two-thirds (66%) of the capital markets executives believe the recent trend of mutual fund companies investing in popular, private technology businesses is a further disincentive to companies considering an IPO.

  Smaller Offerings In addition to the drop in the number of IPOs, the size of the average offering – even absent last year’s massive Alibaba offering - has decreased significantly in 2015. A large proportion of the capital markets community (41%) attribute the smaller average deal size to fewer large deals coming from private equity firms who have already exited many of their more mature businesses. Other factors cited by the bankers for the smaller sized offerings are increased investor risk tolerance for smaller offering businesses (32%) and valuation pressures forcing offering businesses to cut prices (21%). Only 6 percent attribute the decreased size to the JOBS Act encouraging smaller businesses to go public.

Moving forward, capital markets executives anticipate that the size of the average IPO in the second half of the year will be $174 million, approximately the same as the first half.

"In any individual year, IPO proceeds can be greatly inflated by one or two major offerings. However, even if you removed the massive Alibaba offering from last year’s figures, the size of the average U.S. IPO has still decreased significantly in 2015," said Lee Duran, a partner and Private Equity Practice Leader at BDO USA. "Private equity and venture capital firms were the source of many mature, larger offerings over the past two years and it will take time for them to replenish their portfolios. In addition to depleted portfolios, with M&A activity at an all-time high, PE firms currently have a very attractive alternative to the traditional IPO exit strategy."
  IPO Threats In reflecting upon the greatest threat to a healthy U.S. IPO market during the remainder of 2015, almost 4 in 10 (39%) of the I-bankers cite the Federal Reserve paring back monetary stimulus, while more than one-third (35%) identify global political and financial instability. Other threats cited were financial instability in Europe (16%), the weakening Chinese economy (8%) and a continued drop in oil prices (2%).

"The healthcare and biotech sectors have been driving U.S. IPO activity for three years now and there are no indications this will change in the near future. Although better than two-thirds of the bankers project more technology offerings in the remainder of the year, this isn’t a bold prediction given the low number of tech IPOs during the initial six months of the year," said Ted Vaughan, a partner in the Capital Markets Practice of BDO USA. "No industry has been impacted more by the availability of private financing than technology. As long as these sources of private funding remain available and at favorable valuations, IPOs from the tech sector will trail their historical numbers."
  Industry Forecast For the third consecutive year, the healthcare sector is leading all industries in the number of U.S. IPOs. Moving forward, investment bankers predict more healthcare offerings (63%) during the second half of the year and an even greater proportion forecast an increase in IPOs from the technology (67%) and biotech (66%) sectors. No other vertical has a majority of the bankers anticipating an increase in deals during the remainder of the year.

  Source of IPOs When asked to identify the primary source of IPOs in the second half of the year, just under one-third (32%) of capital market executives cite private equity firms, while more than a quarter (27%) identify venture capital portfolios. Spinoffs and divestitures (22%) and owner-managed, privately held businesses (19%) are the other sources identified by the bankers.
  Global IPO Market Share Through the first six months of 2015, U.S. exchanges narrowly trailed China in proceeds raised from initial public offerings. Only one-third (33%) of investment bankers anticipate U.S. exchanges increasing their current share of the global IPO market during the second half of the year. A majority (53%) predict the U.S. will maintain its current share of global proceeds during the remainder of the year, while 13 percent believe the U.S. share will decline in the second half of 2015.
  JOBS Act Capital markets executives are narrowly divided on how the three-year old JOBS Act has impacted the U.S. market for initial public offerings (IPOs). Although only a slight majority (51%) of the bankers believe the Act has had a positive impact on the number of businesses going public, this represents a major attitude change from two years ago when only 14% of the bankers thought the new Act was having a positive impact on offerings.

When asked if the JOBS Act was the most prominent reason for the large increase in U.S. IPOs in 2013 and 2014, just under one-quarter (24%) of the capital markets community agreed. Given the numerous factors that contributed to the strong IPO growth in recent years – including a red hot stock market – this is a sizable percentage to identify the JOBS Act as the primary factor.

A majority (54%) of capital markets executives believe the lack of transparency brought about by the JOBS Act’s confidential filing process has had a negative impact on their ability to advise clients on their offerings due to a lack of information on potential competitors for investor dollars. In fact, more than two-thirds (69%) of bankers are in favor of the SEC providing confidential filing data on an aggregate and anonymous basis in order to provide increased visibility of the IPO pipeline.

The JOBS Act allows emerging businesses to provide less information and fewer financial disclosures in their IPO documents and subsequent filings. At the time of the its enactment, some critics predicted the reduced disclosures would have a negative impact on the pricings of these IPOs, but three years later most bankers (59%) do not believe that it has.

Another criticism of the JOBS Act, when it was introduced, was that the rollback of regulatory requirements for newly public businesses could open the door to market manipulation and fraud. Today, less than half (48%) of capital markets executives believe the rollback of regulatory requirements has increased the chances of scandals at these businesses, and only 9 percent describe the increased risk as substantial.

"When it was first enacted there was much anticipation that the JOBS Act would stimulate the U.S. IPO market by easing the regulatory hurdles for smaller, emerging growth companies. When the new law did not produce an immediate increase – and bankers were unable to see the growing IPO pipeline due to the Act’s confidential filing provision – capital markets executives were truly underwhelmed by the Act’s impact in 2013," said Chris Smith, a partner in the Capital Markets Practice at BDO USA. "Two years later, a much larger percentage of the capital markets community is acknowledging the positive impact of the JOBS Act on offering activity, with almost one-quarter citing it as the primary factor in the strong growth in IPO activity in 2013 and 2014."
For more information on BDO's Capital Markets services, please contact one of the regional leaders below:

Jay Duke


Chris Smith
Los Angeles

  Lee Duran
San Diego   Christopher Tower
Orange County   Brian Eccleston 
New York  

Ted Vaughan

* Renaissance Capital is the source of all historical data related to number and size of U.S. IPOs

BDO Comment Letter - Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing

Tue, 06/30/2015 - 12:00am
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (File Reference No. 2015-250) (“the ED”)

BDO supports the proposed clarifications about performance obligations and licenses, but recommends certain enhancements in the final standard.

BDO Comment Letter - Recognition of Breakage for Certain Prepaid Stored-Value Cards

Mon, 06/29/2015 - 12:00am
Recognition of Breakage for Certain Prepaid Stored-Value Cards (Subtopic 405-20) (File Reference No. EITF-15B)

BDO supports recognizing breakage revenue for certain prepaid cards, but recommends clarifying the scope of which cards are included in the final standard.

FASB Flash Report - June 2015

Mon, 06/22/2015 - 12:00am
Accounting Alert: FASB Issued Exposure Draft of Accounting Proposals Intended to Simplify and Improve the Accounting for Share-Based Payments
Download the PDF version

On June 8, 2015, the Financial Accounting Standards Board (“FASB” or “Board”) issued an Exposure Draft (“ED”) containing a proposed Accounting Standards Update (“ASU”) to amend ASC Topic 718, Compensation – Stock Compensation. The ED is the culmination of the FASB’s share-based payments accounting simplification project initiated in 2014.

The tax accounting for share-based payments is one of the most complex areas in current U.S. Generally Accepted Accounting Principles (“GAAP”). Some requirements of the current model have led to unintended consequences and significant compliance costs. These proposals are designed to simplify the accounting, reduce compliance costs, and improve the decision-usefulness of information presented in financial statements.

The ED has six proposals which apply to all entities and two proposals which apply only to non-public entities. They cover several aspects of the accounting for share-based payments including income tax accounting, award classification, cash flow presentation, accounting for withholding taxes paid with shares, forfeitures, an award’s expected term, and a measurement option. These proposals represent significant steps toward simplifying and improving certain pretax and tax accounting requirements of the current model and are expected to have a broad-reaching effect on both private and public companies of all industries.

The following six proposals apply to all entities:

1. Accounting for Income Taxes upon Vesting or Settlement of Share-Based Payments

The proposal requires (a) the recognition of all tax effects (i.e., excess benefits or windfalls and shortfalls) related to share-based payments in income tax expense, and (b) the elimination of off-balance sheet accounting for net operating losses (“NOLs”) stemming from windfall tax benefits – i.e., excess benefits would be recognized even when they do not reduce income tax payable in the current period (off balance sheet NOLs existing on the effective date would be recorded on the balance sheet  and assessed for realization to determine whether a valuation allowance is required). 

Under the current model, the tax benefit on the tax return that exceeds the tax benefit recognized in the financial statements (referred to as a “windfall tax benefit” or “excess tax benefit”) is recognized within additional paid-in capital (“APIC”) rather than in earnings.1 Further, an entity cannot recognize an excess tax benefit until the tax deduction from vesting or settlement actually reduces taxes payable on the entity’s income tax return. This “delayed-recognition” requirement leads to an off balance sheet accounting and tracking of net operating losses (“NOLs”) stemming from excess tax benefits. Moreover, under the current model, entities must track an “APIC pool” specific to tax deductions from share-based payments accumulated since the adoption of the accounting requirements of Topic 718 to ensure that their “APIC pool” has a positive balance sufficient to absorb any “shortfalls,” or the excess of tax benefit recognized in earnings over the tax benefit actually realized on the tax return. Excess tax benefits increase the “APIC pool” (i.e., credits to APIC) and shortfalls reduce the APIC pool (i.e., debits to APIC), unless the APIC pool is zero, leading to recognition of shortfalls as income tax expense.   
2.  Cash Flow Presentation of Windfall Tax Benefits
The proposal requires excess tax benefits to be shown within operating activities. This proposal is consistent with the decision to eliminate equity accounting for all tax effects related to share-based payments and instead require recognition of the tax effects in income tax expense.
Under the current model, excess tax benefits that reduce the amount of income taxes a company will pay on its tax return are required to be presented as a cash inflow from financing activities and a cash outflow from operating activities.
3. Accounting for Share Award Forfeitures

The proposal requires electing an entity-wide accounting policy to either estimate forfeitures (i.e., current GAAP) or account for forfeitures as they occur. The accounting policy election would only apply to awards with service conditions; awards with performance conditions would still be assessed at each reporting date to determine whether it is probable that the performance condition will be achieved. Estimation of forfeitures would still be required when (a) accounting for an award modification, and (b) accounting for a replacement award in a business combination. An accounting policy election to account for forfeitures when they occur would result in reversing compensation costs previously recognized when an award is forfeited before the completion of the requisite service period (the reversal is recognized in the period the award is forfeited). Dividends paid while an option is outstanding which do not have to be paid back upon forfeiture would be reclassified to compensation cost in the period in which the forfeiture occurs (i.e., they would result in a charge).  
Under the current model, entities are required to estimate the number of share-based payment forfeitures (awards that will not vest) when determining the amount of compensation cost to be recognized over the vesting period (i.e., the accrual of compensation costs is based on the estimated number of awards that will vest). Companies are then required to revise their estimates based on actual results (e.g., previously recognized compensation cost is reversed upon award forfeiture). This procedure can be complex and time consuming (and thus costly).
4. Minimum Statutory Tax Withholding Requirements
The proposal requires that a partial cash-settlement for withholding tax up to the maximum individual statutory withholding tax rate (in the applicable jurisdictions) would not by itself require liability-classification. That is, states that a statutory obligation to withhold tax on an employee’s behalf would not cause liability classification if the amount withheld does not or cannot exceed the employee’s maximum individual statutory rate in a given jurisdiction. The FASB observed that a single “maximum” statutory rate for a given jurisdiction would need to be determined and not a “maximum” rate per individual in a given jurisdiction.  The maximum individual statutory tax rates would be based on rates required by the relevant tax authority (or authorities, for example, federal, state, and local) and provided in tax law, regulations, or the authority’s administrative practice. 
The classification of a share-based payment is significant because it determines whether the award’s grant-date fair value is fixed (equity classification) or is subject to periodic fair value adjustments recognized through earnings (liability classification). Today’s accounting requires liability classification of an award with a repurchase provision such as net-settlement payment if tax in excess of the minimum statutory requirement is withheld, or may be withheld at the employee’s discretion. 
5. Cash Flow Presentation of Employee Payroll Taxes When Shares are Withheld by Entity to Pay Minimum Statutory Withholding Tax
The proposal requires that tax “paid” with shares withheld by the entity to cover the cash equivalent of the employee’s tax be classified as cash flow from a financing activity rather than from an operating activity. That is, the “withholding” represents an in-substance treasury stock transaction.
Under current accounting, a liability for employee payroll taxes on employee stock compensation is generally considered an operating expense included in cash flows from operations. However, diversity in practice emerged when shares are withheld to pay the employee’s portion of payroll taxes (including minimum income tax) and some entities reclassify the credit from APIC to payroll tax liability and there is no expense recognition.   
The Board’s decision to require presentation of an employee’s tax paid by the entity with shares withheld from the employee only covers the portion of taxes effectively paid for with shares. This presentation does not extend to any other portion of payroll taxes which the entity must withhold and remit to the relevant taxing authority.

 6.  Classification of Awards with Repurchase Features

The proposal requires an assessment of whether a contingent repurchase event is probable of occurring before the employee bears the risks and rewards of equity share ownership for a reasonable period of time (a period of six months or more). This probability assessment would be required regardless of whether such event is within or outside of the employee’s control. Equity classification would be required when it is not probable that the contingent event will occur before the employee bears the risks and rewards from equity share ownership for a reasonable period of time. That is, settlement of an award for cash or other assets is not probable.

Currently, guidance differs regarding the assessment of repurchase features in stock awards (for example, puts and calls) depending on whether a contingency is within or outside of the employee’s control.

The following two proposals only apply to non-public entities:

1. Expected Term of Awards – Practical Expedient

The proposal permits nonpublic companies to elect a practical expedient to estimate the expected term for all awards having service or performance conditions. If elected, it would apply to all qualifying awards.  The expected term would be the midpoint between the vesting date and the contractual term for qualifying awards with a service condition; if vesting is conditioned upon satisfying a performance condition, an assessment would be made at grant date to determine whether it is probable that the performance condition would be achieved. If it is probable, the expected term would be the midpoint between the requisite service period and the contractual term; otherwise, the contractual term would be an appropriate estimate as it is more likely that the award would remain outstanding for the entire contractual term. The practical expedient would not apply to awards with a market condition.   

Under current rules, all entities are required to estimate the period of time that a share based award will remain outstanding, which for a private entity may be complex.  
2. Intrinsic Value Election for Liability Classified Awards

The proposal would provide a one-time election for nonpublic companies to switch from a fair value measurement of liability-classified awards to an intrinsic value measurement. The election would be made as of the effective date of this proposal without the need for the entity to evaluate whether the change in accounting policy is preferable.  

Under current rules, private entities which did not elect upon initial adoption of Topic 718 to use intrinsic value to measure liability classified awards must use fair value measurement.

Effective Date, Transition Requirements, and Disclosures

The Board did not set an effective date for the proposals and it intends to consider feedback to be obtained through the comment period in making this decision.

Generally, the proposed amendments which affect recognition and measurement would be transitioned in through a cumulative-effect adjustment to equity as of the beginning of the annual period in which the guidance is effective. The proposal to account for the excess tax benefits and tax deficiencies through income tax expense, as well as the practical expedient for estimating the expected term would be transitioned in on a prospective basis. The proposals related to the statement of cash flows classification would be applied retrospectively for all prior periods presented in the financial statements.

Certain disclosures would be required at transition, including the nature and reason for the change in accounting principle and quantitative information of the cumulative effect on retained earnings or additional paid in capital. 

Comment Period

Comments on the proposed ASU are requested by August 14, 2015.

For questions related to matters discussed above, please contact Yosef Barbut, Adam Brown or Patricia Bottomly.

1 Recognition of an excess tax benefit in equity is required when the benefit results from fair value appreciation of the entity’s underlying stock occurring from the measurement date for accounting to the measurement date for tax. Excess tax benefits stemming from other reasons are recognized in income tax expense. ASC 718-740-45-2.

SEC Flash Report - June 2015

Wed, 06/17/2015 - 12:00am
SEC Adopts Amendments to Regulation A Download the PDF version

On March 25, the Securities and Exchange Commission unanimously approved amendments to Regulation A. The amendments, known as “Regulation A+,” were required by Section 401 of the JOBS Act. They are intended to increase access to capital for smaller companies by modernizing Regulation A and expanding it to provide a streamlined process by which a private company can offer and sell up to $50 million of securities in a twelve-month period. The adopting release, No. 33-9741, is available here. The amendments take effect on June 19.
Regulation A allows private companies to make small public offerings without having to register them with the SEC. Instead, the offering document must be reviewed and “qualified” by the SEC staff. Regulation A offerings have historically been subject to state-level registration and qualification requirements as well. Previously, Regulation A permitted offerings of up to $5 million of securities in a twelve-month period. Very few offerings have been made pursuant to Regulation A. A U.S. Government Accountability Office study identified the costs and complexity of state law compliance as one of the reasons for this.
The amendments are intended to enhance the usefulness of Regulation A by increasing the amount of securities that can be offered in a twelve-month period to $50 million and streamlining the offering process by preempting state-level registration and qualification requirements if certain requirements are met.
Regulation A is available to U.S. and Canadian issuers that are not Exchange Act registrants. There are several other eligibility restrictions and rules governing the offering process and the amounts of securities that can be sold to various categories of investors in various scenarios.
The amendments created two tiers of offerings:
  • Tier 1 – A modernized version of the historical Regulation A, Tier 1 permits offerings of up to $20 million in a twelve-month period. State securities regulators will continue their current role in Tier 1 offerings.
  • Tier 2 – This new tier permits offerings of up to $50 million in a twelve-month period. State securities law requirements are preempted for these offerings.
Because Tier 2 offerings may generally involve larger dollar amounts and less state regulation, they are subject to more stringent requirements than Tier 1 offerings. Generally, the offering process and the ongoing reporting required after a Tier 2 offering are essentially scaled down versions of the offering and ongoing reporting processes used during and after registered offerings. This flash report provides a brief and general overview of Regulation A’s revised financial reporting requirements.
Offering Circulars
Offering circulars must comply with the information requirements of revised Form 1-A, which requires the following:
  • Offering circulars must contain two years of annual financial statements for the issuer and its predecessors. The financial statements must comply with U.S. GAAP or, for Canadian companies, IFRS as issued by the IASB; however, they need not comply with the incremental requirements of Regulation S-X. Financial statements must be updated every six months after they become nine months old. For example, an issuer with a December 31, 2014 year-end would need to provide comparative half year financial statements for the six months ended June 30, 2015 if its offering circular is filed or qualified after September 30, 2015. Similarly, that issuer would need to provide 2015 annual financial statements if its offering circular is filed or qualified after March 31, 2016.
  • Offering circulars must contain financial statements of certain other entities (businesses and real estate operations acquired or to be acquired, guarantors and collateral entities (but not equity method investees)) and pro forma information.
  • For new accounting standards that apply to both public and non-public business entities, an issuer may elect to delay complying with the standards until the dates non-public business entities must apply them, similar to the approach emerging growth companies may use. However, issuers in Regulation A offerings are considered public business entities, so they are not eligible to use alternative accounting standards available only to non-public business entities.
  • Offering circulars must be filed via the SEC’s EDGAR system. Exhibits providing data in XBRL format are not required.
  • Issuers may submit offering circulars to the SEC staff for review on a confidential basis before they are filed publicly, similar to the process used in registered offerings by emerging growth companies.
The audit requirements for the historical financial statements discussed above vary depending on whether the offering is a Tier 1 or a Tier 2 offering.
  • In Tier 1 offerings, the financial statements must be audited only if an audit has been obtained for another purpose. Such audits may be performed (a) in accordance with U.S. GAAS or PCAOB standards, (b) by auditors who are not registered with the PCAOB, and (c) by auditors who are independent pursuant to either AICPA or SEC independence standards.
  • In Tier 2 offerings, the financial statements must be audited. Similar to the audit requirements for Tier 1 offerings, such audits may be performed in accordance with U.S. GAAS or PCAOB standards and by auditors who are not registered with the PCAOB. In contrast, the auditors’ report must comply with Article 2 of Regulation S-X and the auditor must meet the SEC’s independence standards.
Ongoing Reporting
The only subsequent reporting required of an issuer that has conducted a Tier 1 offering is to file a new Form 1-Z. This report is due 30 days after termination or completion of the offering and provides information about the results of the offering (e.g., number of securities sold, proceeds, etc.).
An issuer that has conducted a Tier 2 offering must file the following reports on an ongoing basis:
  • Annual reports on new Form 1-K – Form 1-K is due no later than 120 days after year-end. The report must contain two years of issuer audited financial statements and audited financial statements of guarantors and collateral entities. The audit requirements are the same as discussed above for a Tier 2 offering.
  • Semiannual reports on new Form 1-SA – Form 1-SA is due no later than 90 days after the end of the first half of an issuer’s fiscal year. The report must contain financial statements similar to those in a Form 10-Q, except only year to date financial statements are required (i.e., no quarterly financial statements are required) and the financial statements are not required to be reviewed.
  • Current reports on new Form 1-U – Similar to Form 8-K, Form 1-U requires reporting of significant current events and is due four business days after a reportable event occurs. The types of events to be reported are similar to Form 8-K, but the threshold for reporting acquisitions and divestitures is much higher and no historical or pro forma financial statements are required.
  • Similar to the requirements for offering circulars, ongoing reports must be filed via the SEC’s EDGAR system, exhibits providing data in XBRL format are not required, and the financial statements may not be prepared using alternative accounting standards available only to non-public business entities.
Issuers in Tier 2 offerings also use Form 1-Z, but generally for a different purpose than that for which Tier 1 issuers use it. An issuer in a Tier 2 offering uses this form to notify the SEC when its reporting obligations have terminated and it will stop ongoing reporting.

For questions related to matters discussed above, please contact Jeffrey Lenz or Wendy Hambleton.

SEC Flash Report - June 2015

Wed, 06/17/2015 - 12:00am
SEC Proposes Pay Vs. Performance Disclosures Download the PDF version

On April 29, 2015, the Securities and Exchange Commission proposed rules which would implement requirements mandated by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed rules would require registrants to disclose in a clear manner the relationship between executive compensation actually paid and the financial performance of the registrant. The proposed rules are intended to help shareholders to be better informed when they vote to elect directors and in connection with advisory votes on executive compensation.
Proposed Item 402(v) of Regulation S-K would require registrants to provide a table comparing the (i) executive compensation actually paid to the named executive officers for whom disclosure is currently required in the Summary Compensation Table (SCT); (ii) Total Shareholder Return (TSR) for the registrant and; (iii) TSR for the selected peer group.

Pay Versus Performance


SCT Total for Principal Executive Officer
(b) Compensation Actually Paid to PEO
(c) Average SCT Total for non-PEO Named Executive Officers
(d) Average Compensation Actually Paid to non-PEO Named Executive Officers
(e) Total TSR
(f) Peer Group TSR
Executive compensation actually paid is to be different than the total compensation reported in the SCT. Executive compensation actually paid is total compensation as reported in the SCT for the year (i) less the change in the actuarial present value of pension benefits, (ii) less the grant-date value of any stock and option awards granted during the year that are subject to vesting, (iii) plus the actuarially determined service cost for services rendered during the applicable year, and (iv) plus the value at the vesting date of stock and option awards that vested during that year. The executive compensation would be presented separately for the PEO and as an average for the remaining named executive officers identified in the table.
TSR would use the definition included in Item 201(e) of Regulation S-K (i.e., dividends plus or minus change in share price) and TSR for the selected peer group would use the peer group identified by the company in its stock performance graph or in its CD&A.
Using the values presented in the table, proposed Item 402(v) would require the registrant to describe (1) the relationship between the executive compensation actually paid and registrant TSR, and (2) the relationship between registrant TSR and peer group TSR. Such disclosures would follow the table and could be presented as a narrative, graphically, or a combination of the two.
Other Highlights of the Proposed Rules
  • The proposed disclosure would be required in proxy or information statements in which executive compensation disclosure is required.
  • The proposed rules would apply to all reporting companies except for foreign private issuers, registered investment companies and emerging growth companies.
  • The disclosure would be required for the last three fiscal years for smaller reporting companies and last five fiscal years for any other registrants.  Smaller reporting companies would not be required to present a peer group TSR.
  • The disclosure will be tagged in an interactive data format using eXtensible Business Reporting Language, or XBRL. Tagging would be phased in for smaller reporting companies, so that they would not be required to comply with the tagging requirement until the third annual filing in which the pay-versus-performance disclosure is provided.
  • The phase-in period is as follows:  Smaller reporting companies would initially provide the information for two years, adding an additional year in their subsequent annual proxy or information statement that requires this disclosure. Other registrants would be required to provide the information for three years in the first proxy or information statement in which they provide the disclosure, adding another year of disclosure in each of the two subsequent annual proxy statements that require this disclosure.
The proposing release is available here.  Comments on the proposed rules should be provided by July 6, 2015.

 For questions related to matters discussed above, please contact Jeffrey Lenz or Roscelle Gonzales.

An Offering from BDO’s Corporate Governance and Financial Reporting Center

Tue, 06/09/2015 - 12:00am

PCAOB Audit Committee Dialogue and Other Resources Click here to download a PDF version

As part of its focus to engage stakeholders in improving the quality of corporate governance and in response to requests from public company audit committees, the Public Company Accounting Oversight Board (PCAOB) is finding new ways to share insights from its oversight activities.

In May 2015, the PCAOB introduced a new digital outreach communication vehicle to audit committees - the “Audit Committee Dialogue.” This first communication, in what is expected to be a series, highlights insights from PCAOB inspections of public company auditing firms, specifically discussing recurring areas of concern and emerging risks related to merger & acquisition activity, falling [fluctuating] oil prices, and undistributed foreign earnings. For each of these areas, the PCAOB has included several targeted questions audit committees may want to consider asking their auditors. Additionally, these targeted questions may also be helpful in in discussions with company management, in particular as they relate to emerging risk areas.
  BDO Insight: While the PCAOB’s guidance is primarily focused on questions to be posed to external auditors, audit committees may consider customizing such questions to be posed, as appropriate, to both management and the internal auditors to enhance the audit committees’ understanding of their company’s financial reporting processes, controls and related risks prior to directing such questions to the external auditors.

The following is a summary of the areas identified by the PCAOB and the related questions audit committees may ask their auditors. Refer to the PCAOB Dialogue for the complete communication.
  Key Recurring Areas of Concern   Questions Audit Committee May Pose to Auditors Auditing internal controls over financial reporting (ICFR)
  • What are the points within the company’s critical systems processes where material misstatements could occur? How has the audit plan addressed the risks of material misstatement at those points? How will your auditor determine whether controls over those points operate at a level of precision that would prevent or detect and correct a potential material misstatement?
  • What is your auditor’s approach to evaluating the company’s controls over financial reporting for significant unusual transactions or events, such as the acquisition of assets and assumption of liabilities in a business combination, divestitures, and major litigation claims?
  • If the company enters into a significant unusual transaction during the year, how will your auditor adjust the audit plan, including the plan for testing ICFR related to the transaction? For example, how would the company’s acquisition of a significant enterprise during the third quarter affect the audit plan for the year? How might your auditor’s materiality assumptions change? Would the audit plan focus on different systems and controls than originally planned? How would your auditor test controls over the systems used to generate information for recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree? How would the ICFR of the acquired company be considered? Asking about the effectiveness of controls before such transactions and events occur will signal to your auditor that preparedness is a priority, as well as asking similar questions about new systems and processes.
  • If the company or your auditor has identified a potential material weakness or significant deficiency in internal control, what has been done to probe the accuracy of its description? Could the identified control deficiency be broader than initially described? Could it be an indication of a deficiency in another component of internal control?
Assessing and responding to  risks of material misstatement (RMM)
  • Which audit areas are designated by your auditor as having significant risks of material misstatement and what audit procedures are planned to address those risks?
  • In your auditor’s view, how have the areas of significant RMM changed since the prior year? What new risks has your auditor identified? What is your auditor’s process to make sure that it identifies new or changing RMM and tailors the audit plan appropriately? How is the engagement partner involved?
  • How does your auditor’s audit plan address the varied risks in a multi-location environment? If your auditor assumes that controls are uniform across multiple locations, how does your auditor support that assumption?
  • If the company has operations in countries that are experiencing political instability, how has your auditor identified and addressed the specific risks that might result from such a circumstance? Or, if some of the company’s products are approaching technological obsolescence due to competitive new products, you might ask how your auditor plans to address the risks of inventory obsolescence.
Auditing accounting estimates, including fair value measurements and disclosures
  • What does your auditor do to obtain a thorough understanding of the assumptions and methods the company used to develop critical estimates, including fair value measurements?
  • What is your auditor’s approach to auditing critical accounting estimates, such as allowances for loan losses, inventory reserves, and tax-related estimates?
  • How has your auditor assessed whether management has identified all separable intangible assets that, while not included in the financial statements, must nevertheless be valued in connection with assessing goodwill for possible impairment (e.g., customer-related intangibles and in-process research and development)? Has your auditor considered contrary information that suggests the existence of such assets that management has not identified?
  • Will your engagement team use its firm’s in-house valuation specialists? If so, how are the specialists integrated into the engagement team?
Referred work in cross- border audits
  • How does the engagement partner assess the quality of the audit work performed in other jurisdictions? Were the firms that participate in the audit recently inspected by the PCAOB? If yes, what does the engagement partner know about the results?
  • How does your auditor review the work? Does your auditor visit other countries to review the audit work done there? What steps does your auditor take to make sure that the work is performed by persons who understand PCAOB standards and U.S. GAAP and financial reporting requirements?
  • As part of planning the audit, does your auditor consider performing additional steps if the referred work is in an area that has recently been the subject of a significant number of PCAOB inspection findings on your auditor?
  New Risks the PCAOB is Monitoring   Questions Audit Committee May Pose to Auditors Increase in mergers & acquisitions
  • Does your auditor have the expertise necessary to address the audit issues that may arise from the reporting requirements related to business combinations as well as other effects of a business combination that may bear on financial reporting, such as the effects on segment reporting? If not, how will your auditor obtain or develop that expertise?
Falling [fluctuating]  oil prices
  • Have declining oil prices been identified as a risk factor and changed your auditor’s approach to testing related accounting estimates? Will your auditor require different evidence to support any assumptions and estimation methods used by the company that may depend on a certain level of oil prices?
  • How might the estimated effects of falling oil prices be factored into estimates of the company’s future undiscounted net cash inflows used in the assessments of possible impairments of long-lived assets? How might those effects affect the possible need for recording or adjusting a deferred tax valuation account?
  • Does the decline in oil prices create a need to disclose certain significant risks and uncertainties in the financial statements? Do oil price movements subsequent to year-end represent a subsequent event that requires disclosure in the company’s financial statements?
Undistributed foreign earnings
  • What is the nature and extent of audit evidence gathered by your auditor related to management’s assertions about indefinite reinvestment? Is there contrary evidence? If so, how did your auditor consider the contrary evidence?
  • Has your auditor considered whether the company’s MD&A disclosure, including disclosure regarding liquidity and capital resources, is consistent with, or contradicts, management’s indefinite reinvestment assertion?
Maintaining audit quality while growing other business
  • Has your engagement team been affected by any changes in the firm’s business model? Has the engagement team lost key auditors or specialists to other lines of business? How are you ensuring that the quality of the audit team will remain high over time?

The Audit Committee Dialogue is one of several tools issued in recent years by the PCAOB in recognition that the audit committee plays a significant role in ensuring audit quality and as a means to enhance constructive engagement with audit committees in areas of common interest, including independence, objectivity, professional skepticism, and audit quality. Other information aimed at assisting audit committees with their oversight of the audit and financial reporting processes are listed below and a full list of resources is available from the PCAOB’s Information for Audit Committees website.
  • Audit Quality Indicators – presentation, discussion, and briefing paper
  • Information for Audit Committees About the PCAOB Inspection Process
  • Observations Related to the Implementation of the Auditing Standard on Engagement Quality Review
  • The Quality Control Remediation Process
  • Staff Audit Practice Alerts (e.g., 10, 11, 12, and 13)
  • Auditing Standard No. 16, Communications with Audit Committees
The important role of the audit committee in overseeing the integrity of an organization’s financial statement reporting process continues to evolve. We encourage you to explore the resources cited in this practice aid as you carry out your duties on behalf of the boards and companies that you serve. For additional audit committee tools and resources, visit BDO’s Board Governance page.

For questions related to matters discussed above, please contact Amy Rojik.