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ACCOUNTING AND SEC HEADLINES:
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Interest Rate Reform – IASB Issues Phase 2 of Interest Rate Benchmark Reform

The International Accounting Standards Board (IASB) has issued amendments to International Financial Reporting Standards (IFRS), Interest Rate Benchmark Reform—Phase 2. The Phase 2 benchmark reform amendments finalize the IASB response to the ongoing reform of inter-bank offered rates (IBOR) and other interest rate benchmarks by issuing a package of amendments to IFRS Standards. The amendments are aimed at helping companies to provide investors with useful information about the effects of the reform on those companies’ financial statements.

These amendments complement those issued in 2019 and focus on the effects on financial statements when a company replaces the old interest rate benchmark with an alternative benchmark rate as a result of the reform.

The Phase 2 benchmark reform amends IFRS 9, Financial Instruments; IAS 39, Financial Instruments: Recognition and Measurement; IFRS 7, Financial Instruments: Disclosures; IFRS 4, Insurance Contracts; and IFRS 16, Leases.

These amendments relate to:

• Changes in contractual cash flows: a company will not be required to derecognize or adjust the carrying amount of financial instruments for changes required by the reform, but will instead update the effective interest rate to reflect the change to the alternative benchmark rate;
• Hedge accounting: a company will not have to discontinue hedge accounting solely because it makes changes required by the reform, if the hedge meets other hedge accounting criteria; and
• Disclosures: a company will be required to disclose information about new risks arising from the reform and how it manages the transition to alternative benchmark rates.

These amendments are effective for annual reporting periods beginning on or after January 1, 2021, with early adoption permitted.

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AUDITING AND INTERNAL CONTROLS HEADLINES:
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Material Misstatements – AICPA Proposes Standard on Assessing Risks of Material Misstatement

The Auditing Standards Board (ASB) of the AICPA has issued the exposure draft, Proposed Statement on Auditing Standards (SAS), Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement. The proposed SAS is designed to superseded SAS No. 122, Statements on Auditing Standards: Clarification and Recodification, as amended, Section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement. The comment deadline is November 25, 2020.

“The way business is conducted and the manner in which entities record, process and summarize financial information has evolved rapidly,” said Bob Dohrer, AICPA Chief Auditor. “This evolution affects the auditor’s assessment of the risks of material misstatement. This proposed SAS, which reflects this ongoing transformation, improves audit quality by enhancing the auditor’s process for identifying and responding to the risks of material misstatement in an entity’s financial statements.”

The ASB based the proposal on the International Standard on Auditing (ISA) 315, Identifying and Assessing the Risks of Material Misstatement. The overall objectives of this proposed SAS are to:

• Enhance the requirements and guidance on identifying and assessing the risks of material misstatement, particularly the guidance that addresses the entity’s system of internal control and information technology; and
• Revise the definition of significant risks. The current definition focuses on risks that require special audit considerations, whereas the proposed revision focuses on where those risks lie on the spectrum of inherent risk and includes new guidance intended to enhance an auditor’s professional skepticism.

Health Care Entities – AICPA Issues Additional CARES ACT TQAs for Health Care Entities

The AICPA has issued new Technical Questions and Answers (TQAs) under Section 6400, Health Care Entities.

TQA Section 6400, Health Care Entities, includes guidance in the form of questions and answers for practitioners in application of FASB standards by hospitals, physician’s offices, and other health care providers and entities.

This set of TQAs provides guidance for the lease components in Type A life care contracts by continuing care retirement communities. These are communities that provide residents with different residential, social, and health care services depending upon the residential agreements and the needs and health of the residents. With the Type A life care contracts, a resident may enter an independent living unit and be transferred to assisted living or nursing facilities as his or her health declines.

The update adds the following new questions and answers related to accounting for the components of Type A life care contracts:

• TQA section 6400.55, “Background to Sections 6400.56–.62 — Accounting for Lease Components in Type A Life Care Contracts by Continuing Care Retirement Communities;”
• TQA section 6400.56, “Embedded Lease Component Within Type A Life Care Contracts;”
• TQA section 6400.57, “Determination of the Lease Term When an Embedded Lease Component for an Independent Living Unit Is Present Within Type A Life Care Contracts;”
• TQA section 6400.58, “Classification of an Embedded Lease Component Within Type A Life Care Contracts;”
• TQA section 6400.59, “Non-Lease Components Within the Resident Agreement of Type A Life Care Contracts;”
• TQA section 6400.60, “Measurement of Lease Payments if a Lease for an Independent Living Unit Exists in a Type A Life Care Contract;”
• TQA section 6400.61, “Reassessment of Lease Term Within the Resident Agreement of Type A Life Care Contracts;” and
• TQA section 6400.62, “Impact on a Lease Component Within the Resident Agreement of Type A Life Care Contracts When a Resident Transitions to Assisted Living or Skilled Nursing.”

Health Care Entities – AICPA Issues Additional CARES ACT TQAs for Health Care Entities

The AICPA has issued new Technical Questions and Answers (TQAs) under Section 6400, Health Care Entities. This set of TQAs provides guidance on CARES Act provisions specific to health care entities.

TQA Section 6400, Health Care Entities, includes guidance in the form of questions and answers for practitioners in application of FASB standards by hospitals, physician’s offices, and other health care providers and entities. Because the pandemic continues to create a financial strain on hospitals, physicians, and other health care entities, the AICPA issued this new set of TQAs to help nongovernmental health care entities account for payments received from the CARES Act, the Provider Relief Fund, and boosted Medicare and Medicaid payments.

These TQAs comprise ten pages of nonauthoritative accounting guidance developed by the AICPA Health Care Expert Panel. They address questions regarding CARES Act provisions and COVID-related FEMA funding specific to nongovernmental health care entities, which include business entities and not-for-profit entities.

“There is currently no explicit guidance within U.S. Generally Accepted Accounting Principles (GAAP) on the accounting for government grants to health care business entities,” said Andy Mrakovcic, CPA, AICPA Manager – Public Accounting and Staff Liaison to the AICPA Health Care Expert Panel. “We hope these TQAs will help health care business entities select an appropriate accounting model when applying for a government grant.”

The TQAs provide background information in the first TQA and address seven inquiries, including:

• TQA section 6400.63, “Background to Sections 6400.64–.70 — CARES Act Provisions Specific to Health Care Entities;”
• TQA section 6400.64, “Accounting for Provider Relief Fund Phase 1 General Distribution Payments;”
• TQA section 6400.65, “Recognition Uncertainties Associated With Provider Relief Fund General Distribution Payments;”
• TQA section 6400.66, “Period of Accounting for Provider Relief Fund General Distribution Payments;”
• TQA section 6400.67, “Accounting for Uninsured Pool Portion of Provider Relief Funds;”
• TQA section 6400.68, “Accounting for Payments Received Under the Medicare Accelerated and Advance Payment Program;”
• TQA section 6400.69, “Accounting for Temporary Increases in Medicare and Medicaid Payments;” and
• TQA section 6400.70, “FEMA Public Assistance Payments to NFP Health Care Entities for Emergency Protective Measures During the COVID-19 Pandemic.”

The AICPA also advises that when selecting an appropriate accounting model to apply to a government grant, a health care business entity should consider:

• U.S. GAAP guidance on selecting accounting principles for transactions or events for which no guidance exists (FASB ASC 105, Generally Accepted Accounting Principles);
• The specific characteristics and facts and circumstances associated with the grant; and
• Any preexisting accounting policies the entity may have established for government grants.

PPP Lenders – AICPA Issues Additional TQA Guidance for PPP Lenders

The AICPA and its Depository Institutions Expert Panel (DIEP) have released an additional Technical Questions and Answer (TQA) to help depository institutions, credit unions, credit card companies, broker-dealers, insurance companies and other lenders appropriately account for the loans they distribute under the Paycheck Protection Program (PPP).

The new TQA provides guidance for accounting for the loan when the borrower is not eligible for loan forgiveness, or failed to timely complete a loan forgiveness application and submit the required documentation to its lender, and when the Small Business Administration (SBA) determines in the course of its review that the borrower was ineligible for the PPP loan. In these situations, the loan will not be eligible for forgiveness, and immediate payment will be required.

The TQA answers the question, how should a lender account for the forgivable portion of the loan that is eligible for forgiveness during the settlement process, including the time period subsequent to the lender’s determination that the borrower is eligible for forgiveness and through the receipt of payment from the SBA?

The answer provides that the lender should continue to account for the forgivable portion of the loan as an interest-bearing loan (including amortization of loan origination fees, as noted in TQA Section 2130.44) through receipt of payment from the borrower or the SBA. Payments received from either the borrower or the SBA prior to maturity of the loan (other than required payments of principal and interest) are considered prepayments of the loan. Further, when payment is received from the borrower or the SBA (either in full or in part) prior to the loan’s maturity, amounts received should be accounted for as a prepayment, and unamortized loan origination fees should be accounted for in accordance with FASB ASC 310- 20, Receivables—Nonrefundable Fees and Other Costs.

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