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April 2012 AICPA Non-Profit SAS

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Non-Profit: April 2012 Brief on Recent AICPA Pronouncements

The following Statements on Accounting Standards (SAS) are excerpted from the AICPA Audit Risk Alert for Not-for-Profit entities 2012:

(SAS) No. 118, Other Information in Documents Containing Audited Financial Statements, (February 2010) addresses the auditor’s responsibility relative to other information in documents containing audited financial statements and the auditor’s report. For an NFP organization, this includes the client’s annual report and those reports issued to governmental agencies. This SAS, establishes the requirement for the auditor to read the other information of which the auditor is aware because the credibility of the audited financial statements may be undermined by material inconsistencies between the audited financial statements and other information. This SAS is effective for audits of financial statements for periods beginning on or after December 15, 2010. Early application is permitted.

SAS No. 119, Supplementary Information in Relation to the Financial Statements as a Whole, (February 2010) addresses the auditor’s responsibility when engaged to report on whether supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole. For NFPs, this typically includes consolidating schedules and those that may have an organizational purpose but excludes required supplementary information (RSI) that is considered necessary for the financial statements to be fairly presented in accordance with the applicable financial reporting framework. An example of supplementary information that would be included under this SAS would be the "Schedule of Expenditures of Federal Awards" in the financial statements of an NFP that falls under U.S Office of Management and Budget Circular A-133, Audits of States, Local Governments and Non-Profit Organizations. Such information may be presented in a document containing the audited financial statements or separate from the financial statements. This SAS is effective for audits of financial statements for periods beginning on or after December 15, 2010. Early application is permitted.

SAS No. 120, Required Supplementary Information, (February 2010) addresses the auditor’s responsibility with respect to RSI. The SAS defines RSI as information that a designated accounting standard setter requires to accompany an entity’s basic financial statements. For an NFP, this would include the information that a designated accounting standard setter considers to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. The SAS modified the auditor’s reporting responsibilities. Previously, the auditor was only required to report on RSI in certain circumstances. Under SAS No. 120, the auditor should always report on RSI in an explanatory paragraph following the opinion paragraph. The auditor is required to perform specified procedures in order to describe in the auditor’s report whether RSI is presented and communicate therein when some or all of the RSI has not been presented in accordance with guidelines established by a designated accounting standard setter or when the auditor has identified material modifications that should be made to the RSI for it to be in accordance with guidelines established by the designated accounting standard setter. This SAS is effective for audits of financial statements for periods beginning on or after December 15, 2010. Early application is permitted.

SAS No. 121 Revised Applicability of Statement on Auditing Standards No. 100, Interim Financial Information (February 2011). The purpose of this amendment is to revise paragraph .05 of Statement on Auditing Standards (SAS) No. 100, Interim Financial Information, as amended, such that the SAS would be applicable when the accountant audited the entity’s latest annual financial statements, and the appointment of another accountant to audit the current year financial statements is not effective prior to the beginning of the period covered by the review. This amendment is effective for interim reviews of interim financial information for periods beginning after December 15, 2011. Early application is permitted.

With the release of SAS Nos. 122–125, the ASB has substantially completed its project to redraft all the auditing sections in Codification of Statements on Auditing Standards. The issuance of the clarified standards reflects the ASB’s established clarity drafting conventions designed to make the standards easier to read, understand, and apply. Among other improvements, generally accepted auditing standards (GAAS) now specify more clearly the objectives of the auditor and the requirements with which the auditor has to comply when conducting an audit in accordance with GAAS. The clarified standards generally will be effective for audits of financial statements for periods ending on or after December 15, 2012.

SAS No. 122, Statements on Auditing Standards: Clarification and Recodification (October 2011). This SAS contains 39 clarified SASs and recodifies the AU section numbers (using the new AU-C designation), as designated by SAS Nos. 1–121.

SAS No. 123, Omnibus Statement on Auditing Standards (October 2011). This SAS contains amendments to SAS Nos. 117–118 and the following AU-C sections within SAS No. 122: 200, 230, 260, 705, and 915 (AICPA, Professional Standards).

SAS No. 124, Financial Statements Prepared in Accordance With a Financial Reporting Framework Generally Accepted in Another Country (October 2011). SAS 124 supersedes the requirements and guidance in SAS No. 51, Reporting on Financial Statements Prepared for Use in Other Countries. This statement requires the auditor, in instances when a report that is to be used in the United States was prepared in accordance with a financial reporting framework generally accepted in another country, to include an emphasis-of-matter paragraph to highlight the foreign financial reporting framework but permits the auditor to express an unqualified opinion.

SAS No. 125, Alert That Restricts the Use of the Auditor’s Written Communication (December 2011) This SAS supersedes SAS No. 87, Restricting the Use of an Auditor’s Report. This statement includes a requirement to include language that restricts the use of the auditor’s written communication when the subject matter is based on (1) measurement or disclosure criteria that are determined by the auditor to be suitable for limited users who have understanding of criteria, (2) measurement or disclosure criteria that are available only to specified parties, or (3) identification of matters that are not the primary objective of the engagement (by-product report). This SAS has specific requirements for audit engagements issued under Government Auditing Standards. The statement modifies guidance pertaining to single combined reports in that language is only required for restricted use reports, not those for general use. Lastly, this SAS does not require an auditor to consider informing a client that restricted use reports are not intended for distribution to non-specified parties.

Group Audits - As part of the Clarity Project, certain concepts have been aligned with International Accounting Standards (IAS). One key change relates to group audits. Group audits involve the audit of group financial statements. AU-C section 600, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors), expands previous guidance related to using the work of other auditors to encompass audits of group financial statements. The new standard introduces a number of new terms, concepts, and requirements related to group audits that will significantly affect current practice. Because the new standard is much broader than previous guidance and is effective for audits of group financial statements for periods ending on or after December 15, 2012, it is important for auditors to fully understand the requirements of the new standard well in advance of its effective date. The new Audit Risk Alert Understanding the Responsibilities of Auditors for Audits of Group Financial Statements summarizes the new standard and provides implementation guidance for the auditor of the group financial statements. However, auditors will need to read the new standard and the application material in their entirety to fully understand the new standard and its effect on current practice.

Service Organizations - Many NFPs use service organizations (such as bank trustees, payroll processing companies, or benefit plan administrators) to process transactions. Often, SAS No. 70 type 2 reports were obtained and used by the auditor to reduce the amount of substantive testing required. These reports were prepared by service auditors based on guidance in SAS No. 70, Service Organizations. The guidance for service auditors previously included in AU section 324 has been moved to the attestation standards in AT section 801, Reporting on Controls at a Service Organization (AICPA, Professional Standards). Effective for periods ending on or after June 15, 2011, reports issued by service auditors are now prepared in accordance with Statement on Standards for Attestation Engagements (SSAE) No. 16, Reporting on Controls at a Service Organization.

Recent Accounting Standards Updates (ASU) The following is a list of recently issued ASUs:

ASU No. 2011-12 (December 2011) Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05

ASU No. 2011-11 (December 2011) Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities

ASU No. 2011-10 (December 2011) Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate—a Scope Clarification (a consensus of the FASB Emerging Issues Task Force

ASU No. 2011-09 (September 2011) Compensation—Retirement Benefits—Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan

ASU No. 2011-08 (September 2011) Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment

ASU No. 2011-07 (July 2011) Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities (a consensus of the FASB Emerging Issues Task Force)

ASU No. 2011-06 (July 2011) Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers (a consensus of the FASB Emerging Issues Task Force)

ASU No. 2011-05 (June 2010) Comprehensive Income (Topic 220): Presentation of Comprehensive Income

ASU No. 2011-04 (May 2011) Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs

ASU No. 2011-03 (April 2011) Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements

ASU No. 2011-02 (April 2011) Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring

If you are interested in further information or discussion about any of the pronouncements, please contact:

Harry DeVerter, Managing Partner, at 215- 979-8802; or Karen Vento, Partner, at 215-797-8813.

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