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FASB Flash Report - July 2017

Mon, 07/31/2017 - 12:00am
FASB Simplifies Accounting for Instruments with Down Rounds  Download PDF Version 
Summary The FASB recently issued ASU 2017-11[1] to simplify the accounting for certain financial instruments with down round features. This new standard will reduce income statement volatility for many companies that issue warrants and convertible instruments containing such features. It is available here, and becomes effective for public companies in 2019 and all other entities in 2020.
Details
 

Background
A down round feature is a contractual term to protect the investor in an equity-linked instrument such as a warrant or convertible debt from declines in the issuer’s share price under certain circumstances. It results in the strike price being reduced on the basis of the pricing of future equity offerings. Down rounds are common in warrants, convertible preferred shares, and convertible debt instruments issued by private companies and development-stage public companies. Under existing GAAP, a down round feature often results in liability classification for a warrant or in bifurcation of a conversion option, which is then remeasured to fair value through earnings each period. Part I of the ASU addresses the accounting for such instruments.

 
The FASB previously issued an indefinite deferral of accounting requirements in Topic 480[2] for mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. This indefinite deferral resulted in a large amount of pending guidance in Topic 480, making it difficult to read. Part II of the ASU addresses this difficulty.
 

Main Provisions
Part I of the ASU changes the classification analysis of certain equity-linked financial instruments, such as warrants and embedded conversion features, such that a down round feature is disregarded when assessing whether the instrument is indexed to an entity’s own stock under Subtopic 815-40. As a result, a down round feature—by itself—no longer requires an instrument to be remeasured at fair value through earnings each period, although all other aspects of the indexation guidance under Subtopic 815-40 continue to apply.

 
For freestanding equity-classified financial instruments, the ASU requires entities that present earnings per share (EPS) to recognize the effect of the down round feature when it is triggered, i.e., when the exercise price of the related equity-linked financial instrument is adjusted downward because of the down round feature. The amount of the EPS adjustment is determined as the difference between the fair value of the instrument immediately before and after the strike price is adjusted. That amount is recorded as a dividend and as a reduction of income available to common shareholders in basic EPS. An entity may also be required to adjust its diluted EPS calculation.
 
Convertible instruments with embedded conversion options that have down round features will be accounted for under existing specialized guidance for contingent beneficial conversion features in Subtopic 470-20,[3] including the related EPS guidance.
 
The ASU does not change the accounting for liability-classified financial instruments where classification resulted from a term or feature other than a down round feature.
 
The ASU requires entities to disclose the existence of down round features in the instruments they issue, when the down round features result in a strike price adjustment, and the amount of any such adjustment.
 
Part II of the ASU recharacterizes the indefinite deferral of certain provisions of Topic 480 (currently presented as pending content in the Codification) as a scope exception. No change in practice is expected as a result of these amendments.
  Effective Date and Transition For public business entities, the amendments in Part I of the ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of the ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
 
Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
 
The amendments should be applied on a full retrospective basis or on a modified retrospective basis through a cumulative adjustment to opening retained earnings in the year of initial application.
 
The amendments in Part II have no accounting impact and therefore do not have an associated effective date.
 
For questions related to matters discussed above, please contact:
  Gautam Goswami
National Assurance Partner   Liza Prossnitz
National Assurance Partner   Roscelle Gonzales
National Assurance Director         [1] (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception [2] Distinguishing Liabilities from Equity [3] Debt—Debt with Conversion and Other Options
 

Corporate Governance Flash Report - July 2017

Mon, 07/24/2017 - 12:00am
New SEC Chairman Clayton Sets Tone for the SEC’s Agenda Focused on Main Street Investors  
Download PDF Version

In his first public speech as SEC Chairman, Jay Clayton lays down guiding principles and several areas of focus for SEC action in the near-term to protect Main Street Investors with an eye toward furthering the SEC’s mission to facilitate capital formation.
  Summary On July 12, 2017, SEC Chairman Jay Clayton gave his first public speech to the Economic Club of New York, offering a look into his views on SEC policy-making and its effects on the U.S. economy. He began by laying out eight guiding principles for the SEC along with several highlighted areas where principles are to be put into practice, particularly in areas that affect “Main Street” investors – individuals within the general population who invest in the capital markets.
  Details Guiding Principles of the SEC
 
  1. “The SEC’s three-part mission is our touchstone”: To protect investors; to maintain fair, orderly, and efficient markets; and to facilitate capital formation.
 
  1. “Our analysis starts and ends with long-term interests of the Main Street investor”: Consideration of the impact SEC actions have on “Mr. and Ms. 401(k)” – are they benefitting, are there appropriate investment opportunities, do they have enough information to make investment decisions?
 
  1. “The SEC’s historic approach to regulations is sound”: There will not be wholesale changes to the three-pronged regulatory architecture – disclosure and materiality; rules applicable to market agents (e.g., exchanges, clearing agencies, broker-dealers, and investment advisors); and anti-fraud and enforcement.
 
  1. “Regulatory actions drive change, and change can have lasting effects”: Need to consider the cumulative impact that increased disclosure and regulatory burdens have on the notable reduction in the number of U.S.-listed public companies.
 
  1. “As markets evolve, so must the SEC”: While embracing disruptors of technology and innovation, the SEC must ensure its rules and operations address both the need to change and the cost that is borne by investors.
 
  1. “Effective rulemaking does not end with rule adoption”: Just as robust processes for obtaining public input and economic analysis are performed at the proposal and adoption stages, enacted rules require retrospective review to ensure they are functioning as intended.
 
  1. “The costs of a rule now often include the cost of demonstrating compliance”: Need to align the wording of and guidance for rules in recognition of the practical costs – e.g., those to be incurred by companies, third party advisors, and compliance solutions – with the vision of how the rules are intended by the SEC to be implemented.
 
  1. “Coordination is key”: The SEC must work closely with, between, and among all domestic and international organizations - two specific examples in which coordination is key include governance of over-the-counter derivatives and cybersecurity.
 
Principles to Practice
 
In putting these principles into practice, Chairman Clayton focused on five particular areas where he sees opportunities:
 
  1. Enforcement and Examinations: The SEC will continue to deploy significant resources to detect and deter fraud. Several areas highlighted in his speech include affinity fraud, microcap fraud, pump-and-dump scammers, those who prey on retirees, and sophisticated cyber thieves. Caution, however, was placed on the practice of punishing responsible companies who find themselves victims of cyber-crimes.
 
  1. Capital Formation: Chairman Clayton has been vocal about addressing the regulatory burdens cited by many private companies who opt to remain private. As a first step, earlier in July, the SEC expanded the JOBS Act approach by opening up the SEC’s Division of Corporate Finance non-public review process to IPO draft registration statements of larger domestic and non-U.S. companies beyond emerging growth companies (EGCs) with an eye to encouraging the prospect of selling shares in the U.S. public markets and doing so at an earlier stage in a company’s development. Another opportunity lies within Rule 3-13 of Regulation S-X which allows companies to request modifications to their financial reporting requirements if they feel certain disclosures are burdensome to generate and may not be material to the total information being made available to investors. 
 
  1. Market Structure: Promotion of action and review to ensure the equity market structure is optimal. This will include:
 
  1. A pilot program to test how adjustments to the access fee cap under Rule 610 of the Securities Exchange Act of 1934 would affect equities trading.
 
  1. Extension of the tenure of the SEC’s Equity Market Structure Advisory Committee (EMSAC), as the EMSAC’s charter is set to expire in August 2017.
 
  1. Creation of a Fixed Income Market Structure Advisory Committee, akin to EMSAC, to review and advise the SEC as to the efficiency and resiliency of the fixed income products market, as a more stable option for the increasing number of “Baby Boomer” retirees. 
 
  1. Investment Advice and Disclosures to Investors: Chairman Clayton is looking to specifically review the standards of conduct that investment professionals must follow in providing advice to Main Street investors. Focal points include:
 
  1. The Department of Labor (DOL) Fiduciary Rule came into effect in early June and expands the investment advice fiduciary definition under the Employee Retirement Income Security Act of 1974 (ERISA). There has been much debate and discussion about the potential impact of this rule. In June, Chairman Clayton requested public input on standards for conduct for investment advisers and broker-dealers to evaluate potential regulatory actions in light of current market activities and risk.
 
  1. Several initiatives are underway to improve access to meaningful investment information including proposed rulemaking to follow the SEC report issued November 2016 on modernizing and simplifying Regulation S-K disclosure rules.
 
  1. Resources to Educate Investors: Emphasis on leveraging technology to make a wealth of information available to investors and increase engagement with the SEC including providing resources to investors on how to conduct online background searches on investment professionals.
 
SEC Chairman Clayton’s full speech is accessible here. For more information and educational opportunities on these and other topics related to audit committee oversight, please visit BDO’s Center for Corporate Governance and Financial Reporting.
 
 
For more information, please contact one of the following practice leaders: 
  Paula Hamric   Amy Rojik   Jeff Jaramillo    

SEC Flash Report - July 2017

Mon, 07/24/2017 - 12:00am
SEC Staff Permits Delayed Adoption of ASC Topics 606 and 842 for Certain Public Business Entities  At the July 20th EITF meeting, Sagar Teotia, Deputy Chief Accountant in the Office of the Chief Accountant, announced that the SEC staff will not object if an entity that qualifies as a public business entity (PBE) solely because its financial statements or financial information is included in another entity’s filing with the SEC[1] adopts ASU No. 2014-09 – Revenue from Contracts with Customers (Topic 606) and ASU No. 2016-02 – Leases (Topic 842) using the effective dates applicable to private entities.
 
Examples of PBE financial statements or financial information that may reflect the adoption of the standards above using private company effective dates include:
 
  • Financial statements of an acquired business under S-X 3-05;
  • Financial statements of an equity method investee under S-X 3-09; and
  • Summarized financial information of an equity method investee under S-X 4-08(g). 
 
Consequently, entities meeting the criteria above may elect to adopt:
 
  • ASC Topic 606 for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. Previously these entities were required to adopt the standard for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
  • ASC Topic 842 for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. Previously these entities were required to adopt the standard for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
 
Such entities may still elect to adopt these standards using the public company effective dates outlined above. 
 
For questions related to matters discussed above, please contact Jeff JaramilloAdam Brown, or Paula Hamric.
    [1] Criterion (a) of the FASB Master Glossary definition of a public business entity includes other entities whose financial statements or financial information are required to be or are included in a filing with the SEC.  Further information regarding the definition of a public business entity is available here.  The announcement relates only to this type of PBE and only to the standards referenced above.  

Corporate Governance Flash Report - July 2017

Wed, 07/19/2017 - 12:00am
Reminder: SEC SAB 74 Disclosures and Controls for New Accounting Standards Download PDF Version
SEC reminds issuers:
  • To make disclosure of status of implementation of new accounting standards – with only two quarters remaining expect scrutiny of disclosures in the second and third quarter of 2017 on ASC 606 – Revenue
  • Footnote disclosure is an important aspect of adopting new GAAP – even if revenue recognition does not change on adoption, new disclosures are required
  • Controls are important and often change with new GAAP -  be prepared to demonstrate how internal control process worked to adopt new GAAP and in ongoing compliance with new GAAP
 
Summary In June 2017, the Center for Audit Quality (CAQ) released CAQ Alert No. 2017-03, SAB Topic 11.M – A Focus on Disclosures for New Accounting Standards (CAQ Alert 2017-03 or the Alert). Although CAQ Alert 2017-03 is geared toward public companies, the content may also be helpful for private companies as well.
  Details The SEC Staff Accounting Bulletin No. 74 (codified in SAB Topic 11.M), Disclosure Of The Impact That Recently Issued Accounting Standards Will Have On The Financial Statements Of The Registrant When Adopted In A Future Period (SAB 74), requires that when a recently issued accounting standard has not yet been adopted, a registrant disclose the potential effects of the future adoption in its interim and annual SEC filings. FASB Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), ASU No. 2016-02, Leases (Topic 842), and ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, all become effective over the next few years, and these new accounting standards are expected to present significant changes for many companies.
 
SAB 74 Disclosures

U.S. generally accepted accounting principles (U.S. GAAP) requires that SAB 74 disclosures should be both qualitative and quantitative. According to the Alert, the SEC staff expects that SAB 74 disclosures will become more robust and quantitative as the new accounting standard’s effective date approaches. Therefore, the following types of SAB 74 disclosures are expected in a registrant’s financial statements in the periods, before new accounting standards are effective:
 
  • A comparison of accounting policies. Registrants should compare their current accounting policies to the expected accounting policies under the new accounting standard(s).
  • Status of implementation. The status of the process should be disclosed, including significant implementation matters not yet addressed or if the process is lagging.
  • Consideration of the effect of new footnote disclosure requirements in addition to the effect on the balance sheet and income statement. A new accounting standard may not be expected to materially affect the primary financial statements; however, it may require new significant disclosures that require significant judgments.
  • Disclosure of the quantitative impact of the new accounting standard if it can be reasonably estimated.
  • Disclosure that the expected financial statement impact of the new accounting standard cannot be reasonably estimated.
  • Qualitative disclosures. When the expected financial statement impact is not yet known by a registrant, a qualitative description of the effect of the new accounting standard on the registrant’s accounting policies should be disclosed.
Internal Control Considerations
The Alert also emphasizes that registrants, their audit committees, and auditors should discuss the status of implementation of the new accounting standard(s), including changes in internal control over financial reporting (ICFR).
  Management Responsibilities
  • Determine whether appropriate internal controls are in place to minimize risk that SAB 74 disclosure are inaccurate or incomplete.
  Audit Committee Responsibilities
  • Setting the appropriate tone and establishing oversight and review processes to ensure that management is exercising appropriate judgment and that appropriate and adequate SAB 74 disclosure controls are in place and operating effectively.
  Auditor Responsibilities
  • Obtain a sufficient understanding of ICFR and respond to identified risks regarding the controls over financial statement disclosures. As part of the audit of ICFR, auditors are required to assess the design effectiveness and to test the operating effectiveness of relevant controls, which may include controls over SAB 74 disclosures.


More on Auditor Responsibilities
The Alert highlights the expectation that auditors evaluate whether adequate SAB 74 disclosures have been included in the financial statements prior to the adoption of new accounting standards and consider reviewing SAB 74 disclosures during reviews of interim financial information. After the effective date of a new accounting standard, auditors would ordinarily inquire of management about the application of new accounting standards as part of their interim reviews. PCAOB auditing standards also require the auditor to communicate to the audit committee if concerns are identified regarding management’s expected implementation of a new accounting standard. Further, in the post-effective period, auditors are required to evaluate consistency of the financial statements with U.S. GAAP, including newly adopted accounting principles.
 
The Alert also includes an appendix that includes certain relevant SEC staff speech and public comment excerpts regarding SAB 74 disclosures for consideration.
 
For more information and educational opportunities on these and other topics related to audit committee oversight, please visit BDO’s Center for Corporate Governance and Financial Reporting.
  Adam Brown   Phillip Austin   Jan Herringer   Jeff Jaramillo  

SEC Flash Report - July 2017

Tue, 07/18/2017 - 12:00am
SEC Extends Voluntary Submission of Draft Registration Statements to All Companies The SEC’s Division of Corporation Finance (the “Division”) announced on June 29, 2017 that it will make the confidential submission process (i.e. submission of draft registration statement for nonpublic review) available to an expanded class of issuers and transactions beginning July 10, 2017 as follows: 
 
Securities Act - Initial public offerings (IPOs) and initial registrations
All companies may now submit an initial registration statement confidentially, provided the Securities Act registration statement (e.g. Form S-1), as well as the initial confidential submission and all amendments, is publicly filed with the SEC no later than 15 days prior to any road show or if there is no road show, the requested effective date of the registration statement.  Prior to this new policy, the confidential submission process for IPOs was only available to emerging growth companies (EGCs) and certain foreign private issuers.
 
Exchange Act Section 12(b) - Initial registration of a class of securities
Companies may now submit a draft Exchange Act registration statement when listing a new class of securities on a national exchange (for example, for its initial listing or registration in connection with spin-offs).  Companies must publicly file the Exchange Act registration statement (e.g. Form 10) and prior confidential submissions no later than 15 days before the anticipated effective date of the registration statement.  Prior to this new policy, the confidential submission process was only available to Securities Act IPO registration statements (e.g. Form S-1).
 
Follow-on Offerings - within one year of an IPO or Exchange Act Section 12(b) registration
Registration statements for follow-on offerings within one year of an IPO or Exchange Act 12(b) registration may also be submitted for confidential review, provided the registration statement and the initial draft submission are publicly filed at least 48 hours prior to any requested effective time and date.  The confidential review is limited to the initial submission, meaning any amendments, including changes made in response to staff comments, must be done in a public filing.
 
Other important things to note on the confidential submission process:
  • The draft registration statement must be substantially complete when submitted.  However, a company that is not an EGC may omit financial information that it reasonably believes will not be required when the registration statement is initially filed publicly. This accommodation is different from the relief provided by the FAST Act, which allows an EGC to omit information it reasonably believes will not be required at the time the registration statement becomes effective.
  • Draft registration statements are “submitted” and not “filed” with the SEC and therefore do not require signatures by officers and directors and consent of auditors and other experts.  While filed public registration statements require signatures and consents, companies do not need to go back and obtain the signatures and consents for the nonpublic submissions when those submissions are filed.
  • Companies must convey their agreement with the public filing guidelines of this announcement in a cover letter to its draft registration statement.
  • Foreign Private Issuers may elect to proceed in accordance with the new policy or those available to EGCs (if the issuer qualifies as an EGC) or follow the staff guidance in its May 30, 2012 statement.
The new policy is part of the Division’s ongoing efforts to facilitate capital formation. The confidential submission program addresses concerns some companies may have about publicly disclosing sensitive or proprietary information early in the IPO process.   It also allows companies to start its IPO process away from public attention while considering other alternatives.   
 
The copy of the staff’s announcement and FAQs can be found on the SEC’s website. 
 
For questions related to matters discussed above, please contact:
  Jeff Jaramillo
National Partner
SEC Services Practice Paula Hamric
National Assurance Partner
 

Significant Accounting & Reporting Matters Q2 2017

Fri, 07/14/2017 - 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 as well as regulatory developments. 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 Developments
  • SEC & PCAOB Highlights
  • IASB Projects
  • And more!
  Download

Initial Offerings Newsletter - Summer 2017

Wed, 07/12/2017 - 12:00am


U.S. IPO Market Rebounds Strongly in First Half of 2017  Download PDF Version

The U.S. market for initial public offerings (IPOs) has rebounded impressively in the first half of 2017, already surpassing 2016’s full year total for proceeds raised and reaching the midpoint of the year with a flurry of 8 IPO pricings in the final week of June - the busiest offering week of the year. 

After experiencing a major downturn last year, when potential offering companies stepped back from the IPO market amid high volatility and political uncertainty, offering activity (+88%), proceeds (+230%) and filings (+60%) are up dramatically year-over-year through the first six months of 2017. 

Moreover, offering activity appears to be building momentum, with the number of IPO pricings more than doubling from Q1 (25) to Q2 (52). *

Much of the turnaround can be attributed to a rising stock market with historically low volatility and promises of deregulation and tax reform from the new administration and Republican-controlled Congress that have combined to create a more welcoming economic climate. 

The positive performance of 2016 and 2017 IPOs – delivering double digit returns on average – has provided additional incentive to businesses considering an offering.
 

“Although the flurry of activity prior to the July 4 holiday break could be a sign that some companies are rushing to go public while there’s a window in the market, the steady growth in offerings – more than doubling from Q1 to Q2 - and the positive returns during the initial six months of 2017 could be a sign that the new-issue market is beginning a sustained rebound following the dramatic downturn of 2016,” said Christopher Tower, Partner in the Capital Markets Practice of BDO USA.   



 




  Industries
  A strength of the current U.S. IPO market is the wide breadth of industries represented among the offerings companies during the first half of 2017. The healthcare and technology sectors have been the leaders in offerings, but numerous other industries – energy, financial, industrial, real estate and consumer - have generated several offerings in 2017. 
  A market that enjoys broad strength in multiple industries is healthier and less likely to falter. Below is a breakdown of 2017 IPOs by sector:
 

Forecast  Although this year’s dramatic year-over-year jump in offerings, proceeds and filings is partially attributable to the depths the market reached in 2016, the momentum in pricing activity and the increased deal size has offerings and proceeds on pace to exceed the annual averages for offerings (149) and proceeds ($40.2 billion) for the past decade. 
  With market indices near all-time highs, continued low volatility and shares of newly public companies performing well, the IPO forecast for the remainder of 2017 looks bright as capital markets are largely receptive to offerings from a wide breadth of industries. Absent an unforeseen shock to the market, the pace of offerings should continue to accelerate during the second half of the year.
  At the close of Q2, the Securities and Exchange Commission announced an additional incentive to boost the number of businesses going public. Beginning July 10, all companies considering an initial public offering will be able to file their registration statements confidentially with the SEC until 15 days prior to the commencement of their roadshow, when offering businesses meet with prospective investors. 
  This is an extension of a provision of the 2012 JOBS Act that was designed to encourage companies with less than $1 billion in annual revenues to go public. The provision allows companies considering an offering to keep their financing intentions, business strategy and operating performance private while the SEC reviews their prospectus, thereby providing them with more flexibility about when to go public and more time to work out any regulatory kinks.
“The SEC’s move to extend the JOBS Act’s confidential filing provision to all offering companies appears to be the latest attempt by regulators to address a decline in U.S. IPOs. While this is certainly a welcome move to encourage more potential offerings, it also limits the time investors have to study the offering prospectus,” said Jeff Jaramillo, SEC Practice Leader for BDO USA. “The continued wide availability of private financing and the very active mergers and acquisitions market will remain major obstacles to growing the ranks of publicly traded businesses.”

While the IPO forecast for 2017 is very promising right now, the outlook can change swiftly in the very connected world we live in. Surprising political outcomes and deadly terrorist attacks in various countries during the past year have demonstrated how international news can swiftly impact U.S. markets and introduce a level of volatility that is not conducive for businesses considering a public offering.

“Despite offerings and proceeds demonstrating strong growth in 2017, the IPO market will remain well below its most recent high-water mark of 2014 when it raised more than $85 billion in proceeds,” said Ted Vaughan, Partner in the Capital Markets Practice of BDO USA. “Some of the most high-profile startups are still staying away from the public market, reflecting concerns about whether they can match the rich valuations placed on them by private investors. Thus far, the uneven performance of the Snap IPO has reinforced those concerns. Until these fears are allayed, don’t expect to see Uber, Airbnb and some of the other high-profile “unicorns” coming to market in the near term.” 
 
For more information on BDO’s Capital Markets services, please contact one of the regional leaders:
  Jeff Jaramillo
Washington, D.C.   Christopher Tower
Orange County   Lee Duran
San Diego   Ted Vaughan
Dallas   Paula Hamric
Chicago    

Initial Offerings Newsletter - Summer 2017

Wed, 07/12/2017 - 12:00am


U.S. IPO Market Rebounds Strongly in First Half of 2017  Download PDF Version

The U.S. market for initial public offerings (IPOs) has rebounded impressively in the first half of 2017, already surpassing 2016’s full year total for proceeds raised and reaching the midpoint of the year with a flurry of 8 IPO pricings in the final week of June - the busiest offering week of the year. 

After experiencing a major downturn last year, when potential offering companies stepped back from the IPO market amid high volatility and political uncertainty, offering activity (+88%), proceeds (+230%) and filings (+60%) are up dramatically year-over-year through the first six months of 2017. 

Moreover, offering activity appears to be building momentum, with the number of IPO pricings more than doubling from Q1 (25) to Q2 (52). *

Much of the turnaround can be attributed to a rising stock market with historically low volatility and promises of deregulation and tax reform from the new administration and Republican-controlled Congress that have combined to create a more welcoming economic climate. 

The positive performance of 2016 and 2017 IPOs – delivering double digit returns on average – has provided additional incentive to businesses considering an offering.
 

“Although the flurry of activity prior to the July 4 holiday break could be a sign that some companies are rushing to go public while there’s a window in the market, the steady growth in offerings – more than doubling from Q1 to Q2 - and the positive returns during the initial six months of 2017 could be a sign that the new-issue market is beginning a sustained rebound following the dramatic downturn of 2016,” said Christopher Tower, Partner in the Capital Markets Practice of BDO USA.   



 




  Industries
  A strength of the current U.S. IPO market is the wide breadth of industries represented among the offerings companies during the first half of 2017. The healthcare and technology sectors have been the leaders in offerings, but numerous other industries – energy, financial, industrial, real estate and consumer - have generated several offerings in 2017. 
  A market that enjoys broad strength in multiple industries is healthier and less likely to falter. Below is a breakdown of 2017 IPOs by sector:
 

Forecast  Although this year’s dramatic year-over-year jump in offerings, proceeds and filings is partially attributable to the depths the market reached in 2016, the momentum in pricing activity and the increased deal size has offerings and proceeds on pace to exceed the annual averages for offerings (149) and proceeds ($40.2 billion) for the past decade. 
  With market indices near all-time highs, continued low volatility and shares of newly public companies performing well, the IPO forecast for the remainder of 2017 looks bright as capital markets are largely receptive to offerings from a wide breadth of industries. Absent an unforeseen shock to the market, the pace of offerings should continue to accelerate during the second half of the year.
  At the close of Q2, the Securities and Exchange Commission announced an additional incentive to boost the number of businesses going public. Beginning July 10, all companies considering an initial public offering will be able to file their registration statements confidentially with the SEC until 15 days prior to the commencement of their roadshow, when offering businesses meet with prospective investors. 
  This is an extension of a provision of the 2012 JOBS Act that was designed to encourage companies with less than $1 billion in annual revenues to go public. The provision allows companies considering an offering to keep their financing intentions, business strategy and operating performance private while the SEC reviews their prospectus, thereby providing them with more flexibility about when to go public and more time to work out any regulatory kinks.
“The SEC’s move to extend the JOBS Act’s confidential filing provision to all offering companies appears to be the latest attempt by regulators to address a decline in U.S. IPOs. While this is certainly a welcome move to encourage more potential offerings, it also limits the time investors have to study the offering prospectus,” said Jeff Jaramillo, SEC Practice Leader for BDO USA. “The continued wide availability of private financing and the very active mergers and acquisitions market will remain major obstacles to growing the ranks of publicly traded businesses.”

While the IPO forecast for 2017 is very promising right now, the outlook can change swiftly in the very connected world we live in. Surprising political outcomes and deadly terrorist attacks in various countries during the past year have demonstrated how international news can swiftly impact U.S. markets and introduce a level of volatility that is not conducive for businesses considering a public offering.

“Despite offerings and proceeds demonstrating strong growth in 2017, the IPO market will remain well below its most recent high-water mark of 2014 when it raised more than $85 billion in proceeds,” said Ted Vaughan, Partner in the Capital Markets Practice of BDO USA. “Some of the most high-profile startups are still staying away from the public market, reflecting concerns about whether they can match the rich valuations placed on them by private investors. Thus far, the uneven performance of the Snap IPO has reinforced those concerns. Until these fears are allayed, don’t expect to see Uber, Airbnb and some of the other high-profile “unicorns” coming to market in the near term.” 
 
For more information on BDO’s Capital Markets services, please contact one of the regional leaders:
  Jeff Jaramillo
Washington, D.C.   Christopher Tower
Orange County   Lee Duran
San Diego   Ted Vaughan
Dallas   Paula Hamric
Chicago    

BDO Comment Letter - Government Auditing Standards, 2017 Exposure Draft

Wed, 07/12/2017 - 12:00am
Government Auditing Standards, 2017 Exposure Draft

BDO supports the GAO's efforts to update the Government Auditing Standards (Yellow Book) to reflect the major developments in the auditing, accountability, and financial management professions.
  Download

BDO Knows: FASB - June 2017

Thu, 06/29/2017 - 12:00am


On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606), which provided new guidance for recognizing revenue for contracts with customers and is poised to change the way restaurant franchisors recognize their revenue.  

Under current revenue guidance, a franchisor would recognize the revenue from the initial franchise fee upon evidence of completion of all initial obligations (e.g., training, site selection). Generally, the opening of the store was the best indication that these obligations had been satisfied. The royalty, of course, is recognized as the restaurant's sales took place over the period the restaurant's operation.

However, ASC 606 indicates that the franchise right is a distinct performance obligation that transfers over time and, therefore, any portion of the initial franchise fee that is allocated to the franchise right should be recognized over the course of the contract term. This conclusion results from the fact that the franchise license derives its value from the past and ongoing activities of the franchisor, such as branding and marketing activities. There is no change to accounting for the royalty fees; they will continue to be recognized as the related sales occur.

Although in most cases the upfront franchise fee (and, by extension, any area development fees) will now generally be recognized over the term of the franchise license, the new standard retains the requirement to defer any broker fees paid in relation to entering into the franchise license, and requires them to be amortized generally over the same period.  

For a more in-depth understanding of the new standard and the impacts it will have on restaurant franchisors, franchisees and owners/operators, download our newsletter below.
Download Newsletter
 
For questions related to matters discussed above, please contact: 
  Angela Newell
National Assurance Partner   Jay Duke 
Managing Partner and Leader of BDO's National Franchise Practice    Dustin Minton 
Assurance Partner and Co-Leader of BDO's National Restaurant Practice   Alan Stevens 
Assurance Partner

Corporate Governance Flash Report - June 2017

Fri, 06/16/2017 - 12:00am
PCAOB Adopts New Standard to Enhance the Auditor’s Report; Proposes New Standard Regarding Auditing Accounting Estimates; and Proposes Amendments Regarding Auditor’s Use of Specialists


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Summary On June 1, 2017 the Public Company Accounting Oversight Board (PCAOB) adopted a new auditor reporting standard, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, and related amendments to certain other PCAOB standards, to enhance the auditor’s report by requiring communication of additional information about the audit, including communication of critical audit matters.
 
The PCAOB also proposed for public comment a new auditing standard, Auditing Accounting Estimates, Including Fair Value Measurements, along with related amendments, to enhance the requirements applicable to auditing accounting estimates, including fair value measurements. In addition, the PCAOB proposed amendments to strengthen requirements regarding when auditors use the work of specialists in an audit.
 
The following summarizes the requirements included within the adopted standard, as well as the proposed standard and the proposed amendments.
Details Adopted AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, and Related Amendments  

The new standard and related amendments retain the pass/fail opinion in the existing auditor’s report, but significantly changes the existing auditor’s report through the following requirements:
 
  • The new standard requires the auditor to communicate in the auditor’s report any critical audit matters (CAMs) arising from the audit, or state that the auditor determined that there were no CAMs. CAMs are matters that were communicated or required to be communicated to the audit committee, and that (1) relate to accounts or disclosures that are material to the financial statements, and (2) involve especially challenging, subjective, or complex auditor judgment.
  • The auditor’s report will include disclosure of the auditor’s tenure, i.e., the year in which the auditor began serving consecutively as the company’s auditor.
  • The auditor’s report will also include a statement that the auditor is required to be independent.
  • The phrase, “whether due to error or fraud,” will be included in the auditor’s report in describing the auditor’s responsibility under PCAOB standards to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements.
  • The opinion will appear in the first section of the auditor’s report, and section titles will be added to the report.
  • The auditor’s report will be addressed to the company’s shareholders and board of directors or equivalents (additional addressees are also permitted).
 
The communication of each CAM in the auditor’s report will include:
  • identification of the CAM;
  • a description of the principal considerations that led the auditor to determine that the matter was a CAM;
  • a description of how the CAM was addressed during the audit; and
  • a reference to the applicable financial statement accounts or disclosures.
 

Source: Adapted from PCAOB Release No. 2017-001
  Observations Source of CAMs: The source of CAMs will be drawn from matters required to be communicated to the audit committee, even if not actually communicated, and matters actually communicated (even if not required). As such, the first filter used to determine the population of possible CAMs recognizes the audit committee’s oversight of the audit, such that the CAMs are to be drawn from matters communicated or required to be communicated to the audit committee. The second filter to be applied considers whether the accounts or disclosures are material to the financial statements or involve especially challenging, subjective or complex auditor judgment.
 
Materiality: The materiality component of the definition of CAMs pertains to accounts or disclosures that are material to the financial statements.  The PCAOB concluded that the concept of materiality was essential to ensure the CAMs communicated were appropriately balanced such that the need to make the auditor’s report more informative and useful for investors was not overshadowed by the inclusion of numerous immaterial matters that could cloud the importance of those items deemed to enhance the communicative value of the auditor’s report.  
 
"Relates to" clarifies that the CAM could be an element of an account or disclosure and does not necessarily need to correspond to the entire account or disclosure in the financial statements. The standard includes several examples of how this might apply:
  • The auditor's evaluation of the company's goodwill impairment assessment could be a CAM if goodwill was material to the financial statements, even if there was no impairment; it would relate to goodwill recorded on the balance sheet and the disclosure in the notes to the financial statements about the company's impairment policy and goodwill.
  • A CAM may not necessarily relate to a single account or disclosure but could have a pervasive effect on the financial statements or relate to many accounts or disclosures. E.g., the auditor's evaluation of the company's ability to continue as a going concern could also represent a CAM depending on the circumstances of a particular audit.
  • A matter that does not relate to accounts or disclosures that are material to the financial statements cannot be a CAM. E.g., a potential loss contingency that was communicated to the audit committee, but that was determined to be remote and was not recorded in the financial statements or otherwise disclosed would not meet the definition of a CAM. Similarly, the determination that there is a significant deficiency (SD) in ICFR, in and of itself, cannot be a CAM. However, a SD could be among the principal considerations that led the auditor to determine that a matter is a CAM. The final standard indicates that while the auditor is required to describe the principle considerations that led the auditor to determine that the matter is a CAM and how the overall matter was addressed, it is not necessary for the auditor’s description to use terminology from other auditing standards, such as “significant deficiency” within the broader context of a CAM.
 
CAM Determination: The determination of CAMs remains principles-based and the final standard does not specify any items that would always constitute CAMs. For example, all matters determined to be “significant risks” under PCAOB standards may not be determined to be CAMs. The auditor must determine, in the context of the specific audit, that a matter involved especially “challenging, subjective, or complex auditor judgment.” Refer to factors outlined in Figure 1.
 
The final standard requires the auditor to communicate CAMs arising for only the current audit period, though the auditor would not be precluded from including CAMs for prior periods. The PCAOB indicates that it would expect that in most audits the auditor will determine that at least one matter would be considered a CAM. However, there may be circumstances whereby the auditor determines there are no CAMs to disclose in the current period. In this case, a statement to that effect must be included within the auditor’s report.
 
Disclosure of How CAMs Were Addressed in the Audit: The final standard includes required introductory language to include within the auditor’s opinion to refer to the communication of CAMs. Furthermore, the final standard does not prescribe an approach for the how an auditor is to describe within the auditor’s report how the CAMs were addressed during the audit. This approach was meant to provide flexibility in how CAMs may be addressed by the auditor, bearing in mind the purpose of a CAM is to provide information about the audit of the company’s financial statements that will be useful to investors and other stakeholders. In communicating CAMs, the auditor is not to imply that he/she is providing a separate opinion on them or on the accounts or disclosures to which they relate. It is also not appropriate for the auditor to use language that could call into question his/her opinion on the financial statements, taken as a whole. Additionally, when describing CAMs, the auditor is not expected to provide information about the company that has not been made publicly available by the company unless such information is necessary to describe the principal considerations that led the auditor to determine that a matter is a CAM or how the matter was addressed in the audit.
 
The standard indicates that the amount of documentation required in the auditor’s report could vary significantly from audit to audit based on the circumstances specific to the audit. The auditor will further be required to provide a draft of the auditor’s report to and discuss it with the audit committee prior to release of the auditor’s report. 
 
Auditor Tenure: Rather than including auditor tenure in the new PCAOB Form AP, the PCAOB is requiring auditors to include such information within the auditor’s report since it is the primary vehicle by which the auditor communicates with investors. Inclusion of auditor tenure within the auditor’s report is meant to provide investors with timely and readily available information. In response to concerns by commenters that communication of auditor tenure is more appropriately made as a form of a company disclosure, and should not be included within the auditor’s report, the PCAOB acknowledged that the SEC may in the future determine that auditor tenure should be disclosed elsewhere in addition to or instead of in the auditor’s report and at that time the PCAOB would work with the SEC to appropriately coordinate requirements.
   Effective Date and Applicability The PCAOB adopted a phased approach to effectiveness for the new standard and amendments, to provide accounting firms, companies, and audit committees more time to prepare for implementation of the CAM requirements, which are expected to require more effort to implement than the other improvements to the auditor’s report. Subject to approval by the SEC, the final standard and amendments will take effect as follows:
  New Auditor Reporting Provisions
  Effective Date Report format, tenure, and other information
  Audits for fiscal years ending on or after December 15, 2017
  Communication of CAMs for audits of large accelerated filers
  Audits for fiscal years ending on or after June 30, 2019
  Communication of CAMs for audits of all other companies
  Audits for fiscal years ending on or after December 15, 2020
   
The adopted standard generally applies to audits conducted under PCAOB standards; however, communication of CAMs is not required for audits of emerging growth companies; brokers and dealers; investment companies other than business development companies; and employee stock purchase, savings, and similar plans. Auditors of these entities may choose to voluntarily include CAMs in the audit report. However, the other requirements of the final standard will apply to these audits.
 
The PCAOB Release adopting AS 3101 and related amendments can be accessed here.
 
Additionally, the PCAOB has developed a fact sheet on the adopted standard, which may be helpful in understanding the main provisions of the standard, accessible here.

Proposed AS 2501, Auditing Accounting Estimates, Including Fair Value Measurements, and Related Amendments  

This proposed standard replaces three existing auditing standards: AS 2501, Auditing Accounting Estimates, AS 2502, Auditing Fair Value Measurements and Disclosures, and AS 2503, Auditing Derivative Instruments, Hedging Activities, and Investments in Securities. The proposed single standard also includes a special topics appendix that addresses auditing the fair value of financial instruments, including the use of information from pricing services.
 
The proposed single standard would strengthen existing requirements by:
  • Prompting auditors to devote more attention to addressing potential management bias in accounting estimates, while emphasizing the importance of professional skepticism;
  • Extending certain key requirements in the extant standard on auditing fair value measurements to all accounting estimates in significant accounts and disclosures, to reflect a uniform approach to substantive testing;
  • Prompting auditors to focus on estimates with a greater risk of material misstatement;
  • Providing specific requirements to address certain unique aspects of auditing fair values of financial instruments, including the use of pricing sources (e.g., pricing services and brokers or dealers); and
  • Updating other requirements for auditing accounting estimates to provide clarity and specificity

The proposed standard can be accessed here and a fact sheet that summarizes the main provisions of the proposed standard can be accessed here.
 
Comments regarding the proposed standard and related amendments to other PCAOB standards are due August 30, 2017 and may be submitted via the PCAOB’s website, as indicated in the proposal document.

Proposed Amendments to Auditing Standards for Auditor’s Use of the Work of Specialists
 
These proposed amendments apply a risk-based supervisory approach to both auditor-employed and auditor-engaged specialists, as well as strengthen requirements for evaluating the work of a company’s specialist. Under this proposal, the PCAOB amends two extant standards: AS 1105, Audit Evidence, and AS 1201, Supervision of the Audit Engagement. AS 1105 would be amended to add a new appendix that addresses using the work of a company’s specialist as audit evidence, based on the risk-based approach of the risk assessment standards. AS 1201 would be amended to add a new appendix on supervising the work of auditor-employed specialists. The proposal also would replace extant AS 1210, Using the Work of a Specialist, and retitle it to Using the Work of an Auditor-Engaged Specialist, to set forth requirements for using the work of auditor-engaged specialists.  
 
The proposed amendments can be accessed here and a fact sheet that summarizes the main provisions of the proposed amendments can be accessed here.
 
Comments regarding the proposed amendments to other PCAOB standards are due August 30, 2017 and may be submitted via the PCAOB’s website, as indicated in the proposal document.
  Conclusion and Next Steps We encourage you to review the PCAOB publications cited above and engage your auditors in conversation about the PCAOB’s new standard and its other proposals. BDO will be announcing and offering related learning opportunities to our clients and contacts. For further insights and resources, refer to BDO’s Center for Corporate Governance and Financial Reporting
 
For questions related to matters discussed above, please contact: 
  Jan Herringer
National Assurance Partner   Patricia Bottomly
National Assurance Partner

EBP Commentator - Spring 2017

Fri, 06/16/2017 - 12:00am



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Utilizing Data Analytics for Employee Benefit Plans  Contributed by Kirstie Tiernan
 
Data Analytics. The phrase brings to mind words like Big Data, Business intelligence, Analyze, Predictive Models, and Visualize. In this article, Kirstie Tiernan, a Forensic Technology Services Director with BDO’s Consulting Group, introduces the concept of using data analytics (commonly defined as the use of techniques and processes to extract, categorize and analyze data) as a tool for plan sponsors and discusses some of the key considerations that are the building blocks to understanding and using data analytics successfully.
 
The applications of data analytics to employee benefit plans (EBPs) are potentially endless. Imagine a large participant population with manual data entry of 401(k) deferrals that are performed by many payroll analysts. To internally test that the deferrals were input correctly, you could run a comparison of the data set of deferral changes (from the record-keeper) to the payroll data. As those familiar with administering plans know, EBPs can be prone to operational errors, which must be corrected by the sponsor. Finding these errors timely can reduce the sponsor’s cost of correction.
 
There is often a significant gap between the possibilities of what can be done with data and what a plan sponsor can realistically execute. Limitations on resources, time, budget, and software are all common factors that keep companies from taking full advantage of data analytics. Important keys to using data analytics include: start small, identify projects with clearly attainable objectives (to help obtain “buy-in” from others within the company), and build an environment that makes it easy to progressively add in additional datasets and analytics.
 
What Data Do You Have?
One of the first things to consider is what data is available. A company may have a human resources information system, payroll system, time and expenses system, email, social media datasets, etc. that hosts data pertaining to the employee benefit plan. Depending on the nature of the desired analytics, public records, market intelligence, industry benchmarking data, Twitter feeds, and general online chatter may also be relevant. It is important to map out the available data sources and to understand both the “owners” of the data and access to each dataset. An assessment of what is available and the effort needed to obtain the data on a regular basis is crucial to planning an effective analytics strategy.
 
What Tools Do You Have (Or Need)?
Does the company already use certain tools that plan management could utilize throughout the analytics program? SQL Server and Oracle are large database tools that most companies have in place behind their ERP systems. Other tools that are used often include statistical tools like R or SAS or analysis tools like IDEA or ACL. Visualization is also a very important consideration because it doesn’t matter how much work is done if it can’t be explained simply and succinctly. Tableau, Qlik, and MicroStrategy are some of the more popular tools out there for visualization and are generally considered fairly easy to use. Of course, Excel charts are also a basic (albeit minimum) option. For companies with access to programmers and developers, we typically recommend using SQL Server and Tableau, which are a good combination of analysis tools. If no developer resources are available, ACL/IDEA/Excel can be used.
 
What Data Do You Need To Analyze?
The crucial question with analytics is what story to tell. The easiest place to start is with the most manual set of tasks. Identify what manual tasks are performed by the plan sponsor. Rather than spending the time manually pulling data and then extracting, updating, combining, formatting, and charting it, consider using an analytic that will pull the data together from multiple systems and also target and focus the analysis so that the review of false positives is limited.
 
One caution with the incorporation of analytics is to be careful so as not to add unnecessarily to the workload. Incorporating several reports for the plan committee or the plan auditor to consider by using analytics is only beneficial if it reduces the work elsewhere or provides such an additional value to the review that it is worth the additional time and effort. For example, we assisted a plan sponsor who had incorrectly calculated 401(k) contributions which resulted in the need to go back and review all 401(k) contribution requests. The majority of these requests were handled in emails back and forth with the human resources department. The plan sponsor provided several Outlook email files that were processed through a document management tool using search term reports which reduced the potential universe of approximately 46,000 emails to approximately 6,000 emails. Utilizing email threading to review only the strings of emails that were non-duplicated, the number of emails to be reviewed was further decreased to 3,000. The remaining emails were reviewed for the pertinent information. By running the search terms and email threading, the desired information was obtained while only reviewing 6.8% of the total document universe.
 
How Do You Ensure the Data Analysis Process Adds Value?
Before going through the steps of pulling together data, running the analytics, and automating a process, a suggested first step is to think about how the analytic can be modified to drive value and consider the primary intended goal(s) of the process. For example, before analyzing participant accounts for anomalies, consider what potential issues can be identified and corrected. Likewise, identifying plan vendors with weekend payments may be an interesting exercise, but flagging vendors with duplicate payments where funds could be recovered would be a goal that adds real value.
 
We also often use analytics during our forensic investigations by identifying patterns and trends across years and systems of data. One particular investigation related to a potential fraud in a defined benefit plan. Using visualizations made it much easier to see that one employee received significantly higher payments over years of time compared to the payment activity of other participants. Benefit payments were broken down between type, such as beneficiary, lump sum, and retirement annuity payments. Using these categories, paired with the employees’ years of service, spotlighted unusual activity based on averages. While these visual charts did not identify fraud, they summarized the data in a way where we could focus our interviews and forensic review in an efficient manner. This example also highlights that, while analytics may not always provide a clear-cut answer, it can be an effective tool to focus and drive the right questions.
 
AICPA ASB Proposes Standard on Auditor Reporting on ERISA Financial Statements Contributed by Darlene Bayardo
 
In an effort to improve the communicative value and relevance of the auditor’s report, the AICPA’s Auditing Standards Board (ASB) has issued the exposure draft, Proposed Statement on Auditing Standards (SAS), Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA (Exposure Draft).
 
The Exposure Draft would considerably transform the way EBP audits are performed and reported. Significant proposed changes include, but are not limited to, the following:
  • Procedures to be performed for specific plan provisions relating to financial statements areas, irrespective of the risk of material misstatement
  • Requirement to report findings from procedures performed on specific plan provisions relating to the financial statements (either included in the auditor’s report on the ERISA plan financial statements or issued as a separate report), other than when clearly inconsequential
  • Incremental requirements regarding the engagement acceptance and written representations
  • Additional procedures and considerations relating to the Form 5500 filing (as the auditor’s report is attached to such filing)
  • Proposed new reporting model for audits of ERISA plans that, among other things, changes the form and content of the auditor’s report when management imposes a limitation on the scope of the audit, as permitted by ERISA (limited scope audit)
  • Changes to the form and content of the auditor’s report for an unmodified opinion
  • Expanded descriptions of management’s responsibilities
  • Expanded reporting on the ERISA supplemental schedules
  • Required emphasis-of-matter paragraphs
 
The proposed SAS would be codified as AU-C section 703 in AICPA Professional Standards and would apply to audits of single employer, multiple employer, and multiemployer plans subject to ERISA. It would be effective for audits of financial statements for periods ending on or after December 15, 2018.
 
It is highly recommended that plan sponsors, service providers and auditors provide comments directly to the ASB. The ASB identified 9 specific issues within the Exposure Draft in which feedback is requested. Comments are most helpful when they refer to specific paragraphs in the Exposure Draft, include reasons for the comments, and where appropriate, make specific suggestions for any proposed changes. It is also helpful to provide comments on areas in which the respondent is in agreement with the proposals. The comment deadline is August 21, 2017.
 
The Exposure Draft is available here.
 
FASB Updates Presentation of Employee Benefit Plan Interest in a Master Trust Contributed by Darlene Bayardo 
 
ASU 2017-06, Employee Benefit Plan Master Trust Reporting, amends the presentation and disclosure requirements for an EBP interest in a master trust. The amendments apply to EBPs within the scope of Accounting Standards Codification (ASC) 960, Plan Accounting – Defined Benefit Pensions Plans, ASC 962, Plan Accounting – Defined Contribution Pension Plans, and ASC 965, Plan Accounting – Health and Welfare Benefit Plans.
 
A master trust is a trust for which a regulated financial institution (i.e., a bank, trust company, or similar financial institution that is regulated, supervised, and subject to periodic examination by a state or federal agency) serves as a trustee or custodian and in which assets of more than one EBP sponsored by a single employer or by a group of employers under common control are held. Under the ASU:
 
  • An EBP with an interest in a master trust will be required to present its interest in the master trust and the change in its interest in that master trust as single line items in the statement of net assets available for benefits and the statement of changes in net assets available for benefits, respectively.
  • An EBP with an undivided (proportionate) interest in a master trust will continue to disclose its percentage interest in the master trust.
  • An EBP with a divided interest in a master trust will disclose the dollar amount of its interest in specific investments held by the master trust, rather than its percentage interest in the master trust itself.
  • An EBP will also disclose a master trust’s other asset and liability balances and the dollar amount of the plan’s interest in each of those balances.
  • Health and welfare plans’ investment disclosures for 401(h) account assets have been eliminated. Instead, the plan financials will disclose the name of the defined benefit pension plan which includes such investment disclosures.
 
The amendments in ASU 2017-06 are effective for fiscal years beginning after December 15, 2018, and should be applied retrospectively. Early adoption is permitted.
 
Updates to Retirement Plan Correction Procedures Contributed by Kimberly Flett 
 
The Internal Revenue Service (IRS) released Revenue Procedure (Rev. Proc.) 2016-51 updates to the Employee Plans Compliance Resolution System (EPCRS) in September 2016 replacing Rev. Proc. 2013-12. While the Rev. Proc. makes small, clarifying updates, it does not significantly change EPCRS’s substantive provisions. It incorporates changes described in Rev. Proc. 2015-27 and Rev. Proc. 2015-28. A summary of the key changes include:
 
  • Under Rev. Proc. 2016-37 the requirement to submit a determination letter application when correcting qualification failures that includes a plan amendment no longer applies.
  • Fees associated with the Voluntary Correction Program (VCP) are now considered user fees and are no longer detailed in the EPCRS revenue procedure. For VCP submissions made after 2016, refer to the annual Employee Plans user fees noted in Rev. Proc. 2017-4 to determine the current VCP user fees.
  • The availability of the IRS Self-Correction Program (SCP) for significant failures has been modified to provide that, for qualified individually designed plans, a determination letter need not be current to satisfy the Favorable Letter requirement.
  • Under the IRS Audit Closing Agreement Program (Audit CAP), a reasonable sanction is no longer a negotiated percentage of the maximum payment amount (MPA). Instead, the sanction will be based on a review of the specific facts and circumstances; the MPA amount is now just one of the factors to be considered. Generally, the sanctions will not be less than the fees associated with VCP. The IRS has a new approach to determining applicable sanctions for any late amender failures discovered during an IRS review of a determination letter application.
 
The Rev. Proc. was effective January 1, 2017; the provisions could not be applied by plan sponsors before that date.
 
Use of Forfeitures in Safe Harbor 401(k) and 403(b) Plans Contributed by Kimberly Flett 
 
In January 2017, the IRS issued a proposed regulation under which forfeitures may now be utilized to fund Qualified Non-Elective Contributions (QNECs) and Qualified Matching Contributions (QMACs), including ADP safe harbor matching and non-elective contributions (fully vested sources) at the time the amounts are funded[1]. Previously, forfeiture amounts could only be applied to sources of funding subject to a vesting schedule, such as matching and/or profit sharing contributions. Additionally, certain pre-approved plan documents included language prohibiting the use of forfeitures to fund safe harbor contributions. The limitations imposed by the funding source requirements and plan document stipulations created administrative challenges for plan sponsors attempting to appropriately apply forfeitures to select funding sources. The proposed regulation significantly impacts the use of forfeitures for safe harbor 401(k) plans and 403(b) plans and is anticipated to be a help to administrators of 403(b) plans that utilize fully-vested funding options since the proposed regulation will provide more viable funding options.
 
Even though the regulation is proposed, it may be relied upon. While this does not permit a retroactive application to the 2016 plan year, forfeitures may be applied to current 2017 funding, such as matching contributions.
 
Substantiation of Hardship Distributions Contributed by Mary Espinosa 
 
The IRS recently issued two memorandums to its employee plan examiners indicating it is permissible for 401(k) and 403(b) plan sponsors and their service providers to rely on participants’ written summaries describing their financial hardships when processing hardship withdrawals from plans that apply safe harbor event rules.
 
A hardship distribution must be made on account of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need. Types of hardship distributions that generally fall under the safe-harbor standards include unpaid medical expenses, purchase of a primary residence, payment of tuition, payments necessary to prevent eviction, funeral expenses, and certain expenses to repair damage to the primary residence. Substantiation that a requested hardship distribution is for one of the above reasons is required to determine that the distribution is based on an immediate and heavy financial need.
 
The IRS memorandums allow plans that apply the safe harbor standards’ rules to rely on a participant-provided summary of the financial hardship, provided that certain information is included in the summary. The plan sponsor or service provider must provide the participant with a notification containing certain information about the distribution. If certain requirements are met, the plan sponsor does not need to obtain source documents from the participant, on the condition that the participant agrees to retain and provide source documents upon request. If the distribution process is outsourced to a service provider, then the service provider will provide the plan sponsor, at least annually, a summary of the hardship withdrawals during the year or provide access to the summary information.
 
These memorandums are expected to assist plan administrators by providing insight and guidance as to what an IRS examiner may request upon audit and therefore what information should be obtained and maintained related to hardship withdrawals. As a best practice, we recommend plan sponsors review the plan’s controls and procedures surrounding hardship distributions. The sponsors should also verify whether hardship distributions are permissible under the plan document and discuss with service providers the roles and responsibilities of each party in the hardship distribution process, including providing the required notifications to participants.  
Our EBP Center of Excellence is dedicated to assisting plan sponsors in addressing their various EBP needs. For more information on BDO’s EBP services, please contact a member of our practice leadership:
  Beth Lee Garner
National Practice Leader      Luanne MacNicol, Grand Rapids
Central EBP Regional Leader   Darlene Bayardo
National Assurance   Wendy Schmitz, Charlotte
Atlantic EBP Regional Leader   Mary Espinosa, Orange County
West EBP Regional Leader   Joanne Szupka, Philadelphia
Northeast EBP Regional Leader   Jody Hillenbrand, San Antonio
Southwest EBP Regional Leade   Jam Yap, Atlanta
Southeast EBP Regional Leader     [1] QNECs and QMACS are special discretionary contributions allowed in the plan document that are contributed to employees, using specific formulas, as a method of correcting testing failures. However, since these contributions are 100% vested and are non-forfeitable at the time they are allocated to participant accounts, this previously meant that forfeitures could not be used to fund those types of contributions.

BDO Comment Letter - Improvements to Nonemployee Share-Based Payment Accounting

Fri, 06/09/2017 - 12:00am
Proposed Accounting Standards Update, Improvements to Nonemployee Share-Based
Payment Accounting (File Reference No. 2017-220)

BDO supports the proposal to combine the employee and nonemployee stock comp guidance. However, we recommend several changes to the final standard.

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2017 Approach to Audit Quality

Fri, 06/02/2017 - 12:00am
 



As the financial markets and global nature of business change, BDO’s internal approach to audit quality focuses on the following key external factors:

 
  • Business and regulatory environments in which we and our clients operate
  • Accounting and reporting complexities
  • Oversight of those charged with governance
  • Expectations of investors and other stakeholders
  • Market competition
  • Innovation and sustainability needs that support capital market

With these external factors in mind, BDO employs an Audit Quality Framework based on five elements of internal focus (“pillars”) unique to BDO’s CLIMB strategy. Each element enables us to assess, prioritize, and adjust our investments of resources toward the most impactful activities to enhance the quality of the services we provide. Additionally, such focus furthers our ability to help define the future of the auditing profession in adapting to the changing landscape affecting our clients.
 


The following explores certain activities undertaken in 2017 and those being planned for years beyond that build upon activities and processes described in our 2016 Report.


Our Response to Audit Quality - A Deeper Dive Click or tap an image below to learn more about our response to Audit Quality. 



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"Despite a dynamic business and political environment marked by post-election speculation as to the impact on the financial reporting regulatory environment and global markets, BDO is keeping our focus. We continue to promote a strategy committed to the delivery of high quality audits that meet the public’s demand for compliance, transparency, and integrity of the financial statements on which we opine."

Wayne Berson
Chief Executive Officer of BDO USA, LLP and Chairman of the Global Board of Directors of BDO International Ltd.
Read More from our CEO  

Leadership

Tue, 05/30/2017 - 12:00am
BDO employs an Audit Quality Framework based on five elements of internal focus (“pillars”) unique to BDO’s CLIMB strategy. Leadership is one of the five elements discussed in our 2017 Approach to Audit Quality report
 

"Exemplifying strong leadership is fundamental at BDO. It is only through articulating a clear vision and setting priorities that we can inspire our professional staff to innovate, embrace accountability and promote audit quality."

Christopher D. Tower
Managing Partner of Audit Quality and Professional Practice, BDO USA, LLP
 
BDO’s leaders have formally adopted the business discipline of “essentialism”2  – a concept that has been put into practice by many of the most innovative companies. Essentialism means doing the things that matter most to the organization. For us, essentialism translates into a relentless pursuit of audit quality. Using this lens, our leaders have re-designed our corporate governance structure to further accountability, emphasize risk management, encourage collaboration among our teams, and focus on the 
most critical client service activities.  
Tone of Our Leaders In our 2016 Pulse Survey3, we asked our professionals how they viewed our leaders’ tone and their communications about audit quality. 



These, along with other data points from our Pulse Survey, provide us with important feedback that can be used to help assess and continually improve the effectiveness of our quality initiatives and related communications. 
Promoting Accountability and Leadership BDO has established oversight and collaborative structures for the Assurance and Tax business lines through a Managing Partner (MP) role in each of our six geographic regions who is responsible for:
  • Strategy and operations for Assurance and Core Tax business lines
  • Oversight of Assurance and Core Tax profit-and-loss statements
  • Integration, growth, expansion, increased profitability, and recruitment 
  • Implementing CLIMB and industry strategies

These six MPs play a key role in overseeing the Regional Managing Partners (RMPs), who continue to separately oversee the regional Assurance and Core Tax practices. The two business line RMPs in each region report to a MP, while Office Managing Partners (OMPs) for Assurance and Core Tax report to their respective business line RMP. An additional focus of the MP role is to provide oversight of our key industries, with a MP overseeing the national leader for one or more industry groups. This struture promotes collaboration and a holistic approach to governance. The counsel and mentorship of the MPs, combined with a keen focus on managing risk, further supports and drives audit quality.



Oversight of the quality of our Assurance practice is led by the Managing Partner of Audit Quality and Professional Practice - Christoper Tower. Christopher is a member of the Executive Team, providing a clear, consistent, and direct line of communication to our Chief Executive Officer. A recent experienced direct hire Managing Partner of Auditing, Phillip Austin, leads our team of National Assurance professionals in the ongoing improvement of the design and transformation of our audit methodologies, approaches, and techniques. Chris Smith, formerly National Accounting & Auditing Professional Practice Leader of BDO USA, was named the new Global Head of Audit & Accounting for BDO International in 2016. These leadership changes focus our efforts on audit quality, while helping our leadership share best practices among the BDO International member firms. 

Risk management is essential to providing assurance services and maintaining audit quality. BDO’s risk management process comprises:



Protecting sensitive client information is an extremely high priority for us, and we understand the importance of guarding against potential cybersecurity threats. Our Chief Information Security Officer (CISO) oversees our cybersecurity program and infrastructure. The CISO is responsible for identifying, evaluating, reporting, and mitigating information security incidents and security risks in compliance with firm policies and regulatory requirements. In addition, the CISO leads the effort to deepen and broaden cybersecurity awareness and risk management across the entire firm. This new role was assumed by Tom Walch, who reports to both BDO’s Chief Information Officer Russ Ahlers and Chief Compliance & Ethics Officer John Lucas.  

"A leadership structure that holds professionals accountable for high quality performance underscores our commitment to audit quality."

Stephen Ferrara
Chief Operating Officer, BDO USA, LLP
Modeling Leadership through Education and Tools BDO’s Board of Directors and members of our Executive Team participated in a Governance Fellowship credentialing training program, led by the National Association of Corporate Directors (NACD). Following this, the board committed to a continuing education program to ensure current and future board members remain abreast of leading governance practices. This program complements our existing experienced professional leadership skills and succession planning training.

Building off our work on essentialism, BDO licensed the Indiggo Leadership Platform4 and has rolled out the cloud-based solution to all professionals at the manager level and above. This platform helps our leaders ensure they are addressing their most important professional priorities and makes them accountable for their time. BDO also recently announced a strategic alliance to provide this platform externally to our clients and contacts. 
Independence in Fact and Appearance The value of audited information is contingent on the integrity and objectivity of the BDO professionals who perform the audit and should never be diminished by profit pressures or conflicts of interest. That is why, under the direction of our National Independence Group, we continue to make significant investments in investment-monitoring systems. Specifically, we have implemented new tracking software to assist professionals in complying with independence rules regarding their personal investments. The “BDO Investment Tracking System” (BITS) alerts professionals and the firm when personal investment holdings may present independence problems for the firm.

While the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) require this type of software only for firms that audit 500 or more public issuers, BDO has voluntarily implemented the software. BITS has enhanced the firm’s independence activities and complements our existing independence check process, independence confirmations, and independence audits.

As part of the BDO International Limited (BDO International) global network of firms, we have implemented systems to provide reasonable assurance that we adhere to independence requirements on an international level.  
 

"Independence is the cornerstone of our profession. Developing and maintaining safeguards to ensure independence, and demanding that our professionals demonstrate independence in both fact and appearance helps support the integrity of the capital markets system"

Lisa Snyder 
(Incoming) National Director of Independence (former AICPA Senior Director of Professional Ethics)
2 Essentialism: The Disciplined Pursuit of Doing Less, by Greg McKeown, who is commonly recognized as the originator of the essentialism movement.
3 Pulse is BDO’s internal survey, which allows our staff to provide confidential feedback on the firm’s program, initiatives, and strategies. 
4 For more information, refer to indiggolead.com.

Innovation

Tue, 05/30/2017 - 12:00am
BDO employs an Audit Quality Framework based on five elements of internal focus (“pillars”) unique to BDO’s CLIMB strategy. Innovation is one of the five elements discussed in our 2017 Approach to Audit Quality report

At BDO, innovation has taken on special significance: It is central to our strategic plan for all of our business lines, particularly for our Assurance practice. 
Transfer of Knowledge between National Assurance Professionals and the Practice Innovation in learning is an ongoing audit quality endeavor. We continue to expand our professional education offerings using a variety of formats:  

   

We continue to build on our public company expertise through implementing a foundational and ongoing training curriculum focused on the requirements applicable to auditing public companies. These programs, along with applied experience, are being combined to create an ongoing formal Issuer Certification Program. Monitored by our National Learning group, the Issuer Certification Program will support engagement teams and the practice in aligning a balance of skilled resources to each SEC Issuer audit.

Rules and regulations regarding “new GAAP” have our clients assessing internal capabilities, financial and operational systems, and overall financial reporting and disclosure controls. The two most broad-reaching and impactful standards soon to be effective are the Financial Accounting Standards Board’s (FASB) Revenue from Contracts with Customers (ASC 606) and Leases (ASC 842). To address the changes in accounting and disclosures these standards require, we have embarked on a significant educational and thought leadership campaign to ensure both our professionals and our clients understand and can address and comply with the standards’ requirements. This effort includes webinars, in-person trainings, tools, publications, and alerts. 

Our technical advisory professionals, each with significant accounting and industry experience, are dedicated to our Accounting and Reporting Advisory Services practice. In 2016, we formed a strategic alliance with CoStar Real Estate Manager to assist companies in analyzing and classifying real estate, equipment, and other leased assets as they prepare for the impact of the new lease accounting standard. Through this alliance, we can introduce our clients to CoStar’s leading technology solution, Lease Manager SAAS, which will help them to:
  • Calculate the impact on their balance sheets from implementing ASC 842 
  • Perform classification tests 
  • Develop and apply amortization schedules 
  • Process journal entries 
  • Integrate with their general ledger systems 

In light of “new GAAP,” changing public company regulations and rules, and various industry-specific developments, we are making investments in, and adjustments to, the methods and tools we use to conduct our audits, as well as our training, protocols, and policies. 
  Spotlight - Accounting Research and Advisory Services Increased regulations and accounting rules can cause a sense of constraint and confusion for companies. BDO has created a dedicated senior advisory team to assist clients with: 
  • Financial reporting considerations
  • Evaluation of complex accounting and reporting issues
  • Implementation of new accounting standards such as revenue recognition and leases
  • Evaluation of, and accounting for, new business transactions such as business combinations, debt modifications, discontinued operations, and stock compensation
  • Pre-clearance and comment letters

Optimizing Our Audits and Managing Risk In order to improve our audits, we are investing in a scalable, multi-disciplinary U.S.-based Business Service Center (BSC). Opened in late 2016, the BSC will aid the firm in optimizing operations and change the way we allocate our resources so that we remain focused on risk and professional development. The BSC will execute and handle many of the firm’s standard and routine operational and transactional tasks from a centralized domestic location. This will allow BDO engagement staff to focus on higher-value, client-centric activities that better align with their skills and support their growth and that of the firm. The continued rollout of the BSC will be in the form of a phased pilot through 2018. It will begin with certain of our non-issuer clients, to refine practices and tasks across business lines. The BSC will be comprised of BDO USA employees and overseen by BDO USA leadership.   

Addressing the risk of cyber threats remains a key priority for our firm, as well as for our clients. We have recruited highly experienced professionals from industry with backgrounds in cyber and information security, litigation, and related disciplines, who are working collaboratively across our business lines to educate and advise our clients as they navigate the cyber landscape. We have also developed a proprietary BDO Cyber Risk Assessment Tool that we provide to clients to help them identify and tackle areas for improvement within their cyber risk management systems. In offering this tool, we are mindful of our obligation to remain independent in appearance and fact and have set “bright lines” that delineate the services we can and cannot provide for our private and public audit clients. 

BDO is playing an active role in support of the audit profession’s efforts to develop a standard approach to examining organizations’ cyber risk management programs. We are providing key professionals to work with the Center for Audit Quality (CAQ) and the American Institute of Certified Public Accountants’ (AICPA) ASEC Cybersecurity Working Group, which are in the final stages of issuing cybersecurity attestation standards and guidance. 

Accounting for income taxes and the accompanying tax provision is another area that continues to present challenges for our clients. In response, our National Assurance team has identified eight dedicated professionals, including a seasoned partner, to lead the firm’s “ASC 740” group. The group works directly with engagement teams, consulting on income tax accounting and disclosure matters. 
  Spotlight - BDO Audit Methodology and APT BDO employs a proprietary global audit methodology that enables our engagement teams to conduct consistent risk-based audits, both domestically and internationally, with maximum efficiency and minimal disruption to our clients’ operations and people. 

Our audit software and documentation tool, APT, is an essential part of our audit methodology. Our professionals use it to devise proper audit procedures and testing based on applicable U.S. auditing standards, as well as to factor in engagement- and industry-specific facts and circumstances. APT is designed to support large, complex engagements, yet it can be scaled for smaller, less complex audits. This helps our engagement teams focus on risk and audit execution, and has resulted in more-informed choices regarding alternative audit strategies and the types of testing.
Industry Specialization We are organized around 13 primary industries to better serve our clients. We use a cross-discipline approach, with practice support from all business lines. Leadership structure, operational standards, and processes have been put in place to support this approach and allow the industry groups to easily engage experienced professionals from around the country, across specialty services and practices, as well as through BDO International and BDO Alliance USA member firms.5 



Our professionals specialize in particular industries beginning early in their careers. To support this specialization and provide them with more in-depth knowledge of the business issues impacting their clients, we create industry-specific education opportunities. We have also built industry-specific content and compliance strategies into our audit methodology and audit process tool, APT. This includes industry-specific testing strategies, risk supplements, working paper guides, and required communications to those charged with corporate governance. As a result, our engagement teams are able to provide a higher-quality audit with greater efficiency.
Harnessing the Power of Data As the audit of the future emerges, it is important to find new ways of looking at issues--and bringing together information from disparate sources to portray an accurate business picture is one way of doing this. At BDO, we have deployed a global tool we call BDO Advantage that our engagement teams use to analyze specific and larger sets of data and visually depict anomalies and trends. This tool, which is packaged with audit techniques for using data analytics and custom training on data extraction, is included in our continuous learning curriculum. Our current BDO methodology is being formally aligned with these techniques, and guidance will be finalized in 2017.

We are also investing in several custom applications that are designed to reduce engagement time and allow auditors to directly record results of procedures performed on their mobile devices. They can then have the information downloaded securely into the working papers contained within APT.

These are just a few of the notable ways that our firm is designing solutions to address change and complexity in our audits. There will always be more work to be done. To ensure we continue to keep pace, we have assembled cross-functional and diverse teams of professionals to explore innovative techniques and participate in internal competitions to develop solutions and approaches for a broad spectrum of issues.
 

"All highly technical industries need to adapt or they will be left behind. Continually re-imagining and investing in the design and execution of our audits keeps us relevant and ahead of the changing tides."

Brian Miller
National Director of Data Analytics

5 BDO Alliance USA is one of the largest associations of independent accounting, consulting, and professional service firms.

Market Prominence

Tue, 05/30/2017 - 12:00am
BDO employs an Audit Quality Framework based on five elements of internal focus (“pillars”) unique to BDO’s CLIMB strategy. Market Prominence is one of the five elements discussed in our 2017 Approach to Audit Quality report

Achieving and maintaining market prominence for BDO means being true to our promise of being a leader for exceptional client service worldwide. We are accomplishing this by procuring top-level talent, expanding our services, and furthering our geographic reach, as well as by working with external organizations to bolster the audit profession and by offering continuing education to those charged with governance of  the organizations we serve. 



Broadly Serving Global and Domestic Clients Being part of an extensive global network of firms provides our engagement teams with access to deep knowledge of international and jurisdictional reporting complexities. With over 67,000 employees, operating in more than 1,400 offices across 158 countries, the Member Firms of BDO International comprise one of the five largest global networks of public accounting, tax, and advisory firms. As the largest member firm in the network, BDO USA contributes significant technical resources that benefit the entire network. 

In the U.S., our National Assurance Global Offerings and Support Services team provides accounting and reporting technical support to BDO USA and BDO International member firms serving clients with global operations who require assistance with various International Financial Reporting Services (IFRS) and U.S. GAAP matters, SEC filings, and cross-border transactions. These services are further complemented by cross-business-line specialty tax practices that assist with complex international tax issues and global expatriate services.  

To further professional knowledge on a global scale, our international secondment program offers eligible candidates the opportunity to live and work abroad – to submerse themselves in the business culture and share knowledge of U.S. GAAP and individual country GAAP. We currently have over 60 professionals on an inbound exchange at BDO USA and 25 professionals on an outbound exchange to BDO International member firms that in total represent approximately 25 different countries. 

Our BDO Alliance USA is among the industry’s largest associations of accounting, consulting, and professional service firms. With more than 400 independent Alliance firm locations in nearly every U.S. state, BDO offers a unique leverage model to our clients and the clients of our Alliance CPA firms and Business Resource Network (BRN) members. As a part of BDO Alliance USA, CPA member firms are top-tier local and regional practices, typically with certain areas of focus that expand upon the geographic depth and reach of BDO offices. The BRN consists of more than 70 independent firms providing a wide range of professional services other than accounting, including technology services, risk management advisory, industry-specific services, property/facility solutions, logistics, and shared services. Through this broader network, we can leverage the unique knowledge and experiences of our diverse professionals to improve the quality of our audits.

To complement the organic growth of our firm and provide additional sources for experienced talent, we continue our expansion and acquisition strategy of highly reputable professional firms, in whole or in part. During 2016 and into 2017, we completed seven major expansions, extending the breadth and depth of industry and service offerings, and adding over 480 experienced professionals and 70 partners to the BDO family in the past 18 months. Each of these transactions goes through rigorous due diligence, which helps us identify how incoming resources will improve our existing practices and capabilities. With our expanded network of professionals, we have been able to focus on certain unique aspects of auditing non-issuer companies and improve audit effectiveness and efficiency for these entities. Legacy firm technical and practice professionals provide integration support to expansion professionals, ensuring consistently high levels of service delivery and audit quality to clients both during and after the transition to BDO. 


BDO Centers of Excellence Our goal is to work only with those clients that we can serve and serve with excellence. It is essential that we understand their capabilities, their resources, and their businesses. At the same time, we believe it is our responsibility to offer our clients access to many of the same educational resources we provide to our professionals. That is why in 2016 we launched The BDO Center for Corporate Governance and Financial Reporting, a dynamic resource for boards of directors, those charged with governance, financial executives, and reporting staff. Through the Center, BDO provides timely alerts, publications, practice aids, surveys, and tools. In addition, we make available an evolving curriculum of both live and archived primers on governance issues, as well as more in-depth examinations of governance, accounting, auditing, reporting, and regulatory matters. 

Recognizing that many of our smaller and mid-sized public company clients may face resource constraints, we are structuring our thought leadership and education with that in mind. We are furthering the Center’s reach through participation in a variety of external and in-person board and financial executive forums, including sponsoring the annual Small Cap Directors’ Forum during the NACD’s Global Board Leaders’ Summit in 2017. Throughout 2017, we will continue to host hands-on governance workshops for boards of directors and audit committees to complement other regional and local in-person events we offer to the financial executives of our clients and contacts.

In support of two of our larger industry practices, we have established centers of excellence focused on the needs and issues of our Healthcare and Nonprofit client base. In addition, the majority of our industry groups provide regular commentary, thought leadership, and programming though our BDO Insights and Events sites. 
Contributions to the Audit Profession and Regulatory Matters Our participation in regulatory and standard-setting discussions is extensive, involving engagement at the highest levels across a wide range of bodies and groups, both domestically and internationally. Several of our partners have been members or advisors to the AICPA, the Emerging Issues Task Force (EITF), the Auditing Standards Board (ASB), and the SEC. Several of our partners have previously worked for the Internal Revenue Service (IRS), the SEC, and the FASB, while many of our professionals have served in leadership roles--as senior advisors or as members--of key organizations in the accounting profession, and many others are active members of the AICPA and state CPA societies.

BDO is an active participant of the Center for Audit Quality (CAQ) across a variety of initiatives designed to reinforce the integrity of our capital market system. Our CEO serves on the CAQ’s governing board, while many of our other partners participate in a variety of CAQ initiatives, including a broad range of accounting, auditing and reporting events and creating guidance and tools to aid such key stakeholders as investors, audit committees, academics, and management.  

Organizations in which BDO professionals actively participate include:
  • AICPA CPE Exam Task Force
  • AICPA International Practice Task Force
  • AICPA Financial Reporting Executive Committee (FinREC)
  • AICPA National Peer Review Committee and Review Board
  • AIPCA Professional Ethics Executive Committee (PEEC)
  • AICPA Technical Standards Subcommittee
  • Auditing Standards Board
  • CAQ Governing Board
  • CAQ Professional Practice Executive Committee
  • CAQ SEC Regulations Committee
  • CAQ Talent Steering Committee 
  • FASB Emerging Issues Task Force
  • Financial Accounting Standards Advisory 
  • Committee (FASAC)
  • Global Auditors Investor Dialogue
  • PCAOB Standing Advisory Group
  • Revenue Recognition Transition Advisory Group
 

"The audit becomes more challenging each year with new regulations and directives that must be understood and implemented by public corporations. BDO’s continual efforts to reach out and engage audit committees, along with the full board, to help educate in this ever-changing environment is much welcomed and highly appreciated by our directors."

David Beatson
Chief Executive Office, Ascent Advisors, LLC, and Audit Committee Chair of PFSweb and Board Member of Descartes Systems Group, ATL Partners, and Chair of Pilot Freight Services

"Participating as a panelist during BDO’s recent regulatory board forum expanded my perspective on a variety of accounting and reporting topics for which I and my fellow board members are accountable. The ever changing landscape impacting public companies requires continuous education, the type of education that BDO is stepping up to provide for its clients."

L. Melvin Cooper 
Audit Committee Member - Flotek Industries; Par Pacific Holdings, Inc.; and SAExploration Holdings, Inc. and Senior Vice President and Chief Financial Officer of Forbes Energy Services Ltd.

"Corporate governance isn’t one size fits all. Small-cap boards of directors face resolutely unique challenges, which require differentiated continuing education. BDO’s unrivaled focus on small-cap boardroom excellence directly benefits the constituency its clients care most about — their shareholders."

Adam J. Epstein
Founder of Third Creek Advisors & author of The Perfect Corporate Board: A Handbook for Mastering the Unique Challenges of Small-Cap Companies

Best in Class

Tue, 05/30/2017 - 12:00am
BDO employs an Audit Quality Framework based on five elements of internal focus (“pillars”) unique to BDO’s CLIMB strategy. Best in Class is one of the five elements discussed in our 2017 Approach to Audit Quality report

Being best in class means continuing to exceed aggressive performance goals for high-quality audits in order to support and bolster the integrity of capital markets. Achieving sustainable quality requires us to make decisions and investments and be proactive in how we deliver services.
Investing in Technical Knowledge  We continue to invest in our National Assurance Department to keep pace with our growing client base and their expanded needs: 
  • Assurance professional staff overall has increased by 53% since 2013.
  • National Assurance Department has increased to over 80 professionals, including over 30 partners. The group is geographically distributed among our practice offices and provides real-time assistance to our practice professionals on an approximate one to 35 person basis.
  • Our Audit Quality Team now comprises six partners and nine professionals, with approximately half of this group having recent and extensive prior experience as PCAOB inspection staff.
  • The National Assurance Department is further supported by a network of approximately 30 professionals serving as either Assistant Regional Technical Directors (ARTDs) or Audit Quality Directors (AQDs). These individuals dedicate a minimum of 600 hours per year in support of audit quality initiatives, including accounting and audit methodology consultations.


Growth and Engagement of Our Audit Quality Professional Staff In 2016, we created the AQD network, which is composed of experienced senior managers, directors, and partners who contribute approximately 25% of their expected annual work hours (totalling approximately 12,000 hours) to various audit quality initiatives. This helps us drive audit quality throughout the firm. The AQDs are under the direct supervision of National Assurance and report to local Regional Technical Directors (RTDs). AQDs focus on specific audit-related subject matters when supporting our engagement teams; while RTDs with inclusion of AQDs, consult on more complex matters. The AQD network complements the Audit Quality Network (AQN) of local office senior associates through partners, who disseminate communications and guidance on technical topics more deeply throughout our offices and solicit feedback at the office level to share with our National Assurance practice. We intend to further expand the AQD network in the summer of 2017.

The RTDs help maintain the firm’s standards of technical competence and provide technical support to their assigned offices. RTDs take a proactive approach to risk management and work directly with engagement partners on client acceptance and continuance, identification of audit risks, and audit execution. 

BDO also offers two-year rotations for client-facing professionals (managers through directors) with the National Accounting, SEC, Audit, and Tax departments. The goals of this program include:
  • Develop future Assurance and Tax office practice leaders
  • Increase technical expertise and bolster audit quality in the local offices by having individuals work in the National departments and then return to their local offices
  • Increase the resources available in the National departments to provide improved support to the office practices

BDO offers a second shorter-term (three to four months) rotational option for professionals (experienced staff through directors): participating in projects that are focused on enhancing training and audit quality control activities. Over the past three years, we have had over 30 professionals participate in either a short- or long-term secondments. 
National Accounting & Assurance Department and Audit Quality Professionals  Our National A&A department is structured to serve our engagement teams through traditional accounting and auditing functional support complemented by readily available technical resources across a variety of specialty practice areas:

Client Acceptance and Continuance Our policies and procedures provide the firm with reasonable assurance that we will undertake or continue only those engagements where the firm: (1) has the competencies to perform the engagement and has the capabilities, including time and resources, to do so; (2) can comply with legal and ethical requirements; and (3) has considered the risks associated with providing professional services in particular circumstances, including the integrity of the client. As such, we have revised our client acceptance process to take into account additional factors, including: (1) an evaluation of the workload and industry experience of the lead engagement manager and senior manager, in addition to partners who were previously being evaluated in this regard; and (2) the results of an additional layer of review and approval from our National Risk Management Partner in certain instances relating to partner and EQCR assignments.
Inspections Both internal and external inspections are integral to our firm’s approach to audit quality. They help to identify areas for improvement, as well as underlying causal factors. Where necessary, we develop action plans to ensure our engagement teams receive and apply relevant audit knowledge and experience to execute a high-quality audit.
Internal Inspections  A review team of partners, directors, senior managers and managers with the appropriate technical knowledge and industry experience conduct a formal inspection of the firm’s assurance practice under the direction of the National Director of Assurance Quality Control. A risk-based selection of partners is made each year for whom engagements are then chosen for review. A partner may be selected for inspection in any given year, and generally partners will be subject to review at least once every three years. These reviews are conducted to:
  • Determine the quality of work performed
  • Confirm that our work complies with professional standards and firm policies and procedures 
  • Monitor the effectiveness of remedial actions 

The team reviews, on a sample basis, the working papers and reports of each selected assurance engagement. The firm’s inspection program also includes a review of compliance with our quality control policies and procedures in other areas, including ethics, client acceptance and continuance, consultations, human resources, and other matters. These reviews involve focus group sessions with professional staff to ensure the firm’s quality control procedures are properly understood.

As part of BDO’s Quality Matters Process, National Assurance analyzes causes of negative quality events, including deficiencies identified for inspected engagements, and develops specific remedial actions to address the causes identified. Depending upon the nature of the causes identified, the remedial actions could be engagement specific or more systemic. Remedial actions are then monitored by National Assurance for effectiveness. 

During 2016, we internally inspected 114 audit engagements--25 issuer clients and 89 non-issuer clients--across 84% of our Assurance practice offices. This represents approximately 5% of the firm’s total assurance hours, inclusive of engagements from recent expansions.

Results of inspections, as well as results of focus group discussions, are used to improve communications, training, and tools for our audit professionals.
Quality Assurance Reviews BDO USA, LLP is subject to periodic Quality Assurance Reviews (QARs) on behalf of BDO International. The objective of these QARs is to provide assurance that BDO member firms adhere to, and comply with, applicable professional standards, as well as BDO International’s standards. QARs are carried out by a team of dedicated reviewers who go through a special training process. QARs cover the major services supplied by the member firm, as well as the member firm’s overall quality and risk management framework. Member firms undergo these international reviews on a rotational basis. We passed our most recent review, which took place in May 2014. Our next scheduled QAR will take place in September 2017.
External Inspections  PCAOB Inspections

As a firm that conducts more than 100 issuer audit engagements, we are subject to annual inspection by the PCAOB. The PCAOB’s reports on inspections of registered public accounting firms consist of two parts:
  • Part I–Public Portion: This section reports findings relating to specific audit engagements in which audit deficiencies may affect a firm’s ability to support its audit opinion. In addressing these findings, a firm takes appropriate remedial actions, including possible additional documentation or audit procedures, and/or in some cases, revising its report. Key findings in BDO’s 2014 and 2015 inspection reports align with findings across the profession and center primarily on testing of internal controls over financial reporting, management’s estimates, sampling, inventory, and journal entries.
  • Part II–Non-Public Portion: This portion includes the PCAOB’s observations relating to a firm’s audit performance and quality controls where improvements are recommended. In evaluating a firm’s quality controls, the PCAOB assesses the following areas as part of that inspection:
    • Management structure and processes, including tone at the top
    • Practices for partner management, including allocation of partner resources and partner evaluation, compensation, admission, and disciplinary actions
    • Policies and procedures for considering and addressing the risks involved in accepting and retaining clients
    • Processes related to the firm’s use of audit work that the firm’s foreign affiliates perform on the foreign operations of the firm’s U.S. issuer audit clients
    • The firm’s processes for monitoring audit performance, including processes for identifying and assessing indicators of deficiencies in audit performance, independence policies and procedures, and processes for responding to weaknesses in quality control.

In November 2015, the PCAOB made public portions of Part II of our 2011 and 2012 PCAOB inspection.

We consider the PCAOB inspection process to be a valuable component of our firm’s overall approach to enhancing audit quality. We therefore take the inspection comments with the utmost seriousness, giving them prompt consideration. We have made, and continue to make, significant enhancements to our audit quality process, including investments in appropriate resources, tools, training, and communication, as well as in the design of specific action plans and monitoring of such plans. We are confident that these improvements are addressing matters raised in the inspection reports. We expect our increased diligence and attention to audit quality on our current year-end audits will lead to further improvement in 2017.

Peer Review

As a member of the AICPA, we are also subject to triennial external peer reviews of the portion of our auditing practice applicable to non-SEC issuers. Our peer review in 2015 concluded that the system of quality for the firm’s accounting and auditing practice applicable to non-SEC issuers was suitably designed, and the firm had complied with its own quality guidelines. The peer review also concluded the system provided the firm with reasonable assurance of performing and reporting in conformity with applicable professional standards in all material respects. Firms can receive a rating of pass, pass with deficiency(ies), or fail. Our firm received a rating of pass. The peer review report and the related AICPA Acceptance Letter can be found here. Our next Peer Review will take place in 2018.

As a result of both the internal and external inspection processes, we have significantly increased and formalized protocols around audit quality. We have placed significant emphasis on improving activities from how, who, and when we conduct our internal inspections to how findings are remediated, monitored, and used to inform our evaluation of policies, procedures, and tools. In 2016, we bifurcated our internal inspection teams and implemented differing inspection methodologies for our private company and issuer clients. For private companies, we applied a holistic approach where we inspected engagement file compliance. For issuer clients, we applied a focused area approach, where a deep dive was taken into audit methodology, documentation, and compliance with current regulatory views. With respect to our issuer clients we utilized Audit Quality Team members, specifically those who were former PCAOB inspection staff, to review and to track progress, including completion and review of remedial actions. This process helped to inform our overall causal analysis of identified deficiencies, implementing corrective actions, as well as searching for undetected quality issues which benefit our entire organization. Such actions aligned with the evaluation and remediation actions undertaken by our firm with respect to external inspection findings noted by the PCAOB. In addition, we specifically assigned individuals to the inspection teams, based on experience and other factors, to further distinguish between issuers and private companies and provided focused training for our inspectors. 
Coaching In 2014, we began to formalize and build upon our focused coaching program, which promotes learning and on-the-job training and, where applicable, ensures effective implementation of engagement-specific remedial actions of Assurance partners and staff through all key phases of the audit. In addition, the observations from a coach’s review of work papers and direct interactions with engagement teams provides us with valuable information on best practices and potential new remedial actions, as well as timely feedback regarding necessary revisions to existing guidance, practice aids, and templates. This program has been further enhanced with additional Risk Assessment Coaching performed by members of the Audit Quality Team, AQDs, and RTDs. This aspect of the coaching program is designed to:
  • Achieve earlier performance of effective risk assessment procedures 
  • Improve the design of audit responses to identified risks, including assessing the sufficiency of the issuer’s controls in such areas 
  • Improve the design of targeted substantive audit procedures on audits that are likely more complex and have more stringent requirements than those performed for non-accelerated filers and non-issuer clients  

Monitoring In 2015, we first introduced our Audit Milestone Program to provide benchmarks for:
  • Timing of issuer audit procedures
  • Distribution of audit hours over the course of the audit cycle
  • Engagement partner and Engagement Quality Control Review (EQCR) partner hours 

This program is designed to promote timelier and more effective planning and risk assessment procedures by improving the sequencing of audit work and coordinating with management in areas identified as having significant risks. 

Behavior of our professionals, including maintaining the appropriate level of skepticism and embracing accountability, is critical to fostering a high quality audit environment. In 2016, we implemented a transparent Partner Performance Management process that links the balance of a partner’s positive and negative quality events to his or her annual performance evaluation. If appropriate, positive or negative adjustments to partner compensation will be made. 
This builds upon our Quality Matters Process, introduced in 2015, as corrective action and monitoring program at the engagement level to address audit issues identified during various inspections. The firm has also implemented an annual partner workload assessment process to evaluate the workload of all engagement partners, EQCR partners, and directors serving in the partner role on non-issuer engagements. 
Communications and Consulting In 2016, we strengthened communications regarding our audits and internal policies. Our Chief Executive Officer, Chief Operating Officer, and our Managing Partner of Audit Quality and Professional Practice distributed a series of messages to partners and professionals focused on the firm’s audit quality, risk management, and accountability improvement initiatives. These communications emphasized that audit quality is our top priority. We expect these messages to continue and cascade to regional and local leadership.

We have restructured our mandatory engagement team planning discussions to require timelier and more specified audit procedures and responses to identified significant risks. In addition, our consultation process now includes a consultation log (electronic database) in which all consultations with our National office are tracked, reviewed, and approved. This will give us better control over the consistency and effectiveness of our consultation process. 

For issuer engagements, we have implemented mandatory pre-issuance engagement team discussions. Such discussions ensure that the engagement team has properly re-evaluated the nature, timing, and extent of tests of controls and substantive procedures in areas containing significant risks 
of material misstatements, significant estimates, or areas of significant judgment. This process allows our engagement teams to sufficiently support audit opinions on the financial statements and internal controls over financial reporting, if applicable. 

Finally, to accompany the launch of our 2016 Audit Quality Report, we built an audit quality website. The site has since been transformed into an interactive vehicle that clients and contacts, as well as our professionals, can use to explore the ways in which our firm is enhancing audit quality.
 

"Elevating the role of oversight within our auditing practice is helping shape the future of BDO. Through our Audit Quality Framework and our revised governance structure, we are leading our Assurance practice to new heights. We have created a multi-faceted approach to audit quality that includes our Audit Quality professionals, procurement of experienced talent, focused coaching, our leadership platform, and countless other integrated initiatives. These will help us prevent negative quality events from occurring and lay the groundwork for our teams to deliver the highest quality service."

Christopher D. Tower
Managing Partner of Audit Quality and Professional Practice, BDO USA, LLP


Read More Closing Remarks

 

Closing Remarks by Managing Partner of Audit Quality and Professional Practice

Tue, 05/30/2017 - 12:00am
Disruptors Viewed as a Good Thing – Keeping Us Alert, Sharp and Focused Elevating the role of oversight within our auditing practice is helping shape the future of BDO. Through our Audit Quality Framework and our revised governance structure, we are leading our Assurance practice to new heights. We have created a multi-faceted approach to audit quality that includes our Audit Quality professionals, procurement of experienced talent, focused coaching, our leadership platform, and countless other integrated initiatives. These will help us prevent negative quality events from occurring and lay the groundwork for our teams to deliver the highest quality service. 

Our success will be measured by our ability to anticipate and respond to disruptive market forces. Each of our professionals is committed to remaining alert, sharp, and focused on any developments that may challenge our ability to deliver high-quality audits. As we continue to adapt our Audit Quality Framework and make the right investments in our teams, culture, innovation, and knowledge-building, we will better prepare our professionals to be proactive and responsive to the needs of our clients. 

Our CLIMB strategic framework, our performance management system, engagement-level monitoring, and effective communications are all promoting the development of accountable leaders at all levels of our firm. Our concerted efforts beginning at the national office level and continuing down to our local office Audit Quality Networks are expanding our consultative resources and improving our ability to respond to ever-evolving financial reporting and industry-specific matters.

As one of the largest accounting and auditing networks in the U.S and the world, we take our role within the profession seriously. We continue to encourage our professionals to make contributions that enhance the audit process by improving efficiency, minimizing risk, and increasing transparency. 

Our approach to audit quality harnesses the full spectrum our audit capabilities. We are pleased to provide this report and share the details of our approach with our valued stakeholders. 

Christopher D. Tower
Managing Partner of Audit Quality and Professional Practice, BDO USA, LLP

FASB Flash Report - May 2017

Tue, 05/30/2017 - 12:00am
FASB Clarifies Accounting for Service Concession Arrangements Download PDF Version
Summary The FASB recently issued ASU 2017-10[1] to clarify that the grantor in a service concession arrangement is the operating entity’s customer for purposes of revenue recognition. The ASU is available here, and becomes effective generally in conjunction with an entity’s adoption of the new revenue standard in Topic 606. 
Background Topic 853[2] defines a service concession arrangement as being between a public–sector grantor and an operating entity, whereby the operating entity operates the grantor’s infrastructure (e.g., airports, roads, bridges, tunnels, prisons, hospitals) for a specified period of time. For such arrangements within the scope of Topic 853, the operating entity should not account for the infrastructure as a lease or as property, plant, and equipment, but should apply other relevant guidance. For example, an operating entity should account for revenue relating to construction, upgrade, or operation services in accordance with the revenue recognition guidance. However, Topic 853 currently does not address how an operating entity should determine its customer in such an arrangement, for example, the owner of a toll road or the drivers who use it. This omission has led to diversity in practice.
  Main Provisions ASU 2017-10 amends Topic 853 to clarify that when applying Topic 606,[3] an operating entity in a service concession arrangement should consider the grantor to be its customer for the services it provides in all cases. This includes the construction of the infrastructure, if any, as well as operating services.
 
The FASB ultimately concluded the operating entity is acting as the grantor’s service provider to operate and maintain the infrastructure, which is controlled by the grantor, and the only parties to the executed service concession arrangement are the grantor and the operating entity.
  Effective Date and Transition The effective date of ASU 2017-10 depends on whether an entity has already adopted Topic 606:
 
  • For an entity that has not adopted Topic 606 before the issuance of this ASU, the effective date and transition requirements for the amendments generally are the same as the effective date and transition requirements for Topic 606. An entity may apply this ASU earlier, including within an interim period, even though the entity has not yet adopted Topic 606, but specific transition requirements apply.
  • For an entity that has adopted Topic 606 before the issuance of this ASU, the effective date of the amendments is as follows:
    1. For a public business entity[4] the amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
    2. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.
 
For questions related to matters discussed above, please contact:
  Adam Brown
National Director of Accounting    Angela Newell
National Assurance Partner   [1] Determining the Customer of the Operation Services [2] Service Concession Arrangements [3] Revenue from Contracts with Customers [4] Including 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 Securities and Exchange Commission.

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