Recently Issued Technical Questions and Answers 

The following are recent technical staff questions and answers issued since July 2012 and may have been revised since original issuance. The questions and answers in this section are not sources of established authoritative principles. This material is based on selected practice matters identified by the staff of the AICPA's Technical Hotline and various other bodies within the AICPA and has not been approved, disapproved, or otherwise acted upon by any senior technical committee of the AICPA. Consult Technical Practice Aids for all technical staff questions and answers issued by the AICPA. The subscription of Technical Practice Aids available through the AICPA's Online Professional Library is updated to reflect conforming changes due to the issuance of the SAS Nos. 122–126. If you have specific questions about information contained in a TIS section, contact the AICPA's Technical Hotline. Already know which recently issued question and answer you're looking for? Use the following list to jump directly to its text: TIS Section Title Issue Date 8800.01–.41 Audits of Group Financial Statements and Work of Others March 2013; February 2013; November 2012 9110.21 Reporting on Current-Value Financial Statements That Supplement Historical-Cost Financial Statements in Presentations of Real Estate Entities March 2013 9110.22 Use of Restricted Alert Language When Financial Statements Are Audited in Accordance With GAAS and Government Auditing Standards March 2013 9110.23 Modification of Compliance Report When Financial Statements Are Audited in Accordance With GAAS March 2013 6910.34 Application of the Notion of Value Maximization for Measuring Fair Value of Debt and Controlling Equity Positions February 2013 6910.35 Assessing Control When Measuring Fair Value February 2013 9100.07 Naming the City and State Where the Auditor Practices February 2013 9110.20 Effective Date of AU-C Section 905 in a Compliance Audit December 2012 6300.39 Cumulative Effect of Change in Accounting Principle — ASU No. 2010-26 October 2012 6300.40 Deferrable Commissions and Bonuses Under ASU No. 2010-26 October 2012 6400.49 Presentation of Claims Liability and Insurance Recoveries—Contingencies Similar to Malpractice October 2012 6400.50 Accrual of Legal Costs Associated With Contingencies Other Than Malpractice October 2012 6400.51 Presentation of Insurance Recoveries When Insurer Pays Claims Directly October 2012 6400.52 Insurance Recoveries From Certain Retrospectively Rated Insurance Policies October 2012 9170.02 Supplementary Information That Accompanies Interim Financial Information (revised December 2012) October 2012 6400.48 Accounting for Costs Incurred During Implementation of ICD-10 July 2012 9110.19 Lender Comfort Letters July 2012

Inquiry — If an entity is retrospectively applying the guidance in ASU No. 2010-26, what effects of a change in accounting principle should be included in the cumulative effect?

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Inquiry — Under the guidance of ASU No. 2010-26, are all commissions and bonuses deferrable?

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Inquiry — The U.S. health care system is scheduled to transition from the International Classification of Diseases, 9th Edition (ICD-9) code sets used to report medical diagnoses and inpatient procedures to the International Classification of Diseases, 10th Edition (ICD-10). ICD-10 expands the number of available codes from 24,000 to greater than 155,000. With its expanded capacity and complexity, ICD-10 enables the documentation of many different types of diseases and conditions and the capture of diagnostic information with a higher level of specificity. The transition from ICD-9 to ICD-10 is expected to produce several distinct benefits for health care entities, including the following:

• Improved precision in documentation of clinical care, which is expected to result in greater accuracy in the processing of claims and reimbursements
• Higher quality and more specific data that can be tracked and used to improve disease management programs and clinical outcomes

Implementing ICD-10 by October 1, 2013, is mandatory. Health care entities that do not comply are expected to be unable to submit claims to third-party payors for payment. Costs expected to be incurred in connection with the conversion include those to (a) modify existing computer systems to accept the ICD-10 fields or to replace systems that cannot be made ICD-10 compliant, (b) enhance electronic medical records, (c) train clinical coders to use ICD-10, and (d) train clinicians to improve their documentation practices so that medical documentation contains the details necessary to support the higher level of specificity that ICD-10 enables.

How should a health care entity account for costs incurred in connection with the implementation of ICD-10?

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Inquiry — ASU No. 2010-24, Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries (a consensus of the FASB Emerging Issues Task Force), addressed the presentation of a health care entity’s insurance claims and related insurance recoveries. The ASU specifically addressed malpractice claims but also referenced similar contingent liabilities. What is meant by similar contingent liabilities?

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Inquiry — FASB ASC 954-450 requires health care entities to estimate and accrue the legal costs that are expected to be incurred in connection with litigating a malpractice claim in the period the malpractice incident arises. In accounting for legal costs associated with contingency claims other than malpractice, some health care entities have followed guidance in FASB ASC 450-20-S99-2 that permits making a policy election to either expense claims-related legal fees in the period(s) in which the costs are actually incurred or to estimate and accrue them in the period in which the associated claim arises. Although that guidance specifically applies to entities required to apply the SEC’s rules and regulations, other entities have also looked to that guidance as a basis for establishing an accounting policy election.

Health System GHI has contingent liabilities associated with workers compensation claims. Based on the guidance in FASB ASC 450-20-S99-2, Health System GHI established an accounting policy of expensing legal costs incurred in connection with its workers compensation claims in the periods in which the legal costs are actually incurred. Does the adoption of ASU No. 2010-24 require Health System GHI to change its method of accounting for legal costs incurred in connection with its workers compensation claims to be consistent with the method used for legal costs associated with its malpractice claims?

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Inquiry — Prior to the issuance of ASU No. 2010-24, most health care entities that carried professional liability insurance only reported liabilities related to malpractice claims that were not covered by insurance (in effect, netting anticipated insurance recoveries against the related liability). ASU No. 2010-24 amended FASB ASC 954-450-25-2 to provide that a health care entity should not net insurance recoveries against related insurance claim liabilities and that the claim liability should be determined without consideration of insurance recoveries. The amendments are consistent with the guidance on netting receivables and payables in FASB ASC 210-20 that are more broadly applicable for other industries.

ABC Hospital’s medical malpractice insurance policy provides that the insurer will handle all aspects of claims handling and settlement for ABC Hospital’s covered malpractice claims, including making payments to plaintiffs directly on behalf of ABC Hospital. Thus, ABC Hospital neither pays its own malpractice claims nor receives insurance recoveries. How do the amendments to FASB ASC 954-450-25-2 made by ASU No. 2010-24 apply to ABC Hospital’s malpractice liabilities?

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Inquiry — GHI Health System’s (GHI’s) program of medical malpractice risk management includes a retrospectively rated insurance policy (that is, a policy with a premium that is adjustable based on actual claims experience during the policy term). The total annual premium consists of a minimum premium (representing the insurance company’s expenses and profits) and an additional amount for estimated claims that is adjusted based on GHI’s actual malpractice loss experience. The policy is also subject to a maximum premium amount. How would GHI apply the guidance in ASU No. 2010-24 to claims that are covered by an insurance policy with a retrospectively related premium that reflects GHI’s own experience?

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Inquiry — If an entity is retrospectively applying the guidance in ASU No. 2010-26, what effects of a change in accounting principle should be included in the cumulative effect?

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Inquiry — Under the guidance of ASU No. 2010-26, are all commissions and bonuses deferrable?

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Inquiry — Private equity funds or business development companies (collectively, a fund) may hold a controlling interest in an investee company and hold both equity and debt instruments issued by the investee. From a business strategy perspective, in this circumstance, the fund’s management generally views their investment in the debt and equity instruments as an aggregate position rather than as separate financial instruments. The fund’s management rarely, if ever, exits an investment by selling an individual financial instrument (that is, debt separate from equity or vice versa); rather, the instruments are generally exited in their entirety as a group (and the debt is typically redeemed at the amount owed, which we will assume to be par). When a fund has a controlling interest in an investee and holds both debt and equity positions in that investee for which there are not observed trades, is it appropriate to apply the notion of value maximization discussed in paragraph BC49 of Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, and, as a result, value the debt and equity positions together using an enterprise value approach?

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Inquiry — Is it appropriate to aggregate positions across multiple reporting entities (multiple funds) to assess control for purposes of whether a control premium might be appropriate in a fair value measurement, or does control have to reside in a single fund for the enterprise value approach to be acceptable? Also, is it appropriate to consider “club deals” in which a group of unrelated investors jointly make an investment when assessing control?

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.01 "Applicability of AU-C Section 600"
Inquiry — Do the requirements of AU-C section 600, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors) (AICPA, Professional Standards), apply only when the auditor makes reference to the audit of another auditor in his or her report on the group financial statements?

.02 "Making Reference to Any or All Component Auditors"
Inquiry — If the group engagement partner decides to make reference to one component auditor in the audit report on the group financial statements, is he or she required to make reference to all component auditors in that report?

.03 "Deciding to Act as Auditor of Group Financial Statements"
Inquiry — What factors determine whether an auditor decides to act as the auditor of a group’s financial statements?

.04 "Factors to Consider Regarding Component Auditors"
Inquiry — What factors might the group engagement partner consider when deciding to use the work of a component auditor and whether to make reference to the component auditor in the auditor’s report on the group financial statements?

[.05] Deleted
[Deleted, March 2013, due to the issuance of SAS No. 127, Omnibus Statement on Auditing Standards—2013. See section 8800.27, “Circumstances in Which Making Reference Is Inappropriate.”]

.06 "Governmental Financial Statements That Include a GAAP-Basis Component"
Inquiry — When a governmental university includes a nongovernmental foundation as a component unit in its financial statements, as required by the Governmental Accounting Standards Board (GASB) financial reporting framework (that is, a not-for-profit foundation that appropriately uses accounting principles generally accepted in the United States of America [GAAP] as promulgated by the Financial Accounting Standards Board [FASB]), may the auditor’s report on the university’s group financial statements make reference to the auditor of the foundation’s financial statements when the group engagement team identifies the foundation as a component?

[.07] Deleted
[Deleted, March 2013, due to the issuance of SAS No. 127, Omnibus Statement on Auditing Standards—2013. See section 8800.27, “Circumstances in Which Making Reference Is Inappropriate.”]

.08 "Component Audit Performed in Accordance With Government Auditing Standards"
Inquiry — When a component auditor conducts an audit of a component’s financial statements using Government Auditing Standards (GAS), and the group engagement team conducts the audit of the group financial statements using GAAS, may the auditor’s report on the group financial statements make reference to the component auditor?

.09 "Component Audit Performed by Other Engagement Teams of the Same Firm"
Inquiry — Do the requirements of AU-C section 600 apply when a CPA firm uses auditors in different offices of the firm to perform various audit procedures related to the audit of a single entity’s financial statements?

.10 "Terms of the Group Audit Engagement"
Inquiry — What matters are required to be included in the terms of the group audit engagement?

.11 "Equity Method Investment Component"
Inquiry — If a company has an investment accounted for using the equity method, is the equity method investment considered a component for applying AU-C section 600?

.12 "Criteria for Identifying Components"
Inquiry — What criteria might the group engagement team use to identify components?

.13 "Criteria for Identifying Significant Components"
Inquiry — What criteria might the group engagement team use to identify significant components?

.14 "No Significant Components Are Identified"
Inquiry — Do the requirements of AU-C section 600 apply when the group engagement team does not identify any significant components?

.15 "Restricted Access to Component Auditor Documentation"
Inquiry — When a component auditor restricts the group engagement team’s access to relevant documentation, will the auditor of the group financial statements be able to report on the group financial statements?

.16 "Responsibilities With Respect to Fraud in a Group Audit"
Inquiry — Does AU-C section 600 change the auditor’s responsibilities with respect to fraud in the audit of a group’s financial statements?

.17 "Inclusion of Component Auditor in Engagement Team Discussions"
Inquiry — Is the engagement team required to include the component auditor in its discussions of the entity’s susceptibility to material misstatements of the financial statements due to error or fraud?

.18 "Determining Component Materiality"
Inquiry — If the group engagement partner decides to make reference to a component auditor in the auditor’s report on the group financial statements, does the group engagement team establish materiality for the component auditor to use in the separate audit of the component’s financial statements?

.19 "Understanding of Component Auditor Whose Work Will Not Be Used"
Inquiry — Is the group engagement team required to obtain an understanding of a component auditor for a component that is not a significant component if the group engagement team does not plan to use the work of the component auditor and plans only to perform analytical procedures at a group level?

.20 "Involvement in the Work of a Component Auditor"
Inquiry — When the group engagement partner decides to assume responsibility for the work of a component auditor, is the group engagement team required to be involved in the work of the component auditor?

.21 "Factors Affecting Involvement in the Work of a Component Auditor"
Inquiry — What factors might affect the group engagement team’s involvement in the work of a component auditor?

.22 "Form of Communications With Component Auditors"
Inquiry — When the group engagement partner decides to assume responsibility for the work of a component auditor, are all communications between the group engagement team and component auditor required to be in writing?

.23 "Use of Component Materiality When the Component Is Not Reported On Separately"
Inquiry — Is it necessary to use a component materiality lower than group materiality when the component will not be reported on separately, and the audit of the entire group is being performed by the group engagement team as one audit?

.24 "Applicability of AU-C Section 600 When Only One Engagement Team Is Involved"
Inquiry — Company X consolidates the operations of Entity A. The same group engagement team that audits Company X also audits Entity A. Because only one engagement team is involved, does AU-C section 600 apply? If so, what does AU-C section 600 require that is not already covered by other auditing standards?

.25 "Applicability of AU-C Section 600 When Making Reference to the Audit of an Equity Method Investee"
Inquiry — When the group engagement partner decides to make reference to the audit of the component auditor of an equity investee in the auditor’s report on the group financial statements, is the group auditor still required to determine component materiality for those components for which reference to component auditors will be made?

.26 "Procedures Required When Making Reference to the Audit of an Equity Method Investee"
Inquiry — The auditor of Company A has decided to make reference to the audit of the component auditor of an equity investee in the report on Company A’s financial statements. In addition to obtaining and reading the equity investee’s financial statements and component auditor’s report thereon, what additional procedures may be necessary in order to determine that the equity investment has been properly recorded?

.27 "Circumstances in Which Making Reference Is Inappropriate"
Inquiry — Are there any circumstances in which it would be inappropriate to make reference to the audit of a component auditor of an equity investee in the auditor’s report on the group financial statements?

.28 "Lack of Response From a Component Auditor"
Inquiry — Paragraph .40 of AU-C section 600 requires the group engagement team to communicate to the component auditor and ask for his or her cooperation. Paragraph .41 of AU-C section 600 requires the group engagement team to ask the component auditor for certain information. If the component auditor does not respond to the group engagement team, is the auditor of the group financial statements precluded from making reference to the audit of a component auditor?

.29 "Equity Investee’s Financial Statements Reviewed, and Investment Is a Significant Component"
Inquiry — Company X has an equity investment in Entity A that the group engagement team has identified as a significant component. If the management of Entity A has their financial statements reviewed but refuses to allow an audit or any other work to be performed on Entity A’s financial statements, does a scope limitation exist?

.30 "Making Reference to Review Report"
Inquiry — Is it ever appropriate to make reference to another CPA’s review report in an auditor’s report on group financial statements?

.31 "Review of Component That Is Not Significant Performed by Another Practitioner"
Inquiry — Company X has an equity investment in Entity A that is not considered a significant component. A review of the financial statements of Entity A has been performed by another practitioner. Can the group engagement team use the work of the practitioner as part of the audit evidence for the audit of the group financial statements?

.32 "Issuance of Component Auditor’s Report"
Inquiry — Company X has an investment in Entity A accounted for under the equity method of accounting. Company X is audited by one firm, and a CPA from a different firm performs audit procedures at Entity A sufficient to provide the auditor of Company X with appropriate audit evidence relative to the equity investee’s financial information. Is it necessary for the auditor of Company X to obtain an auditor’s report on Entity A’s financial statements from the component auditor?

.33 "Structure of Component Auditor Engagement"
Inquiry — Company X has an investment in Entity A accounted for under the equity method of accounting. Entity A is not willing to pay for an audit of its financial statements. Would an agreed-upon procedures engagement performed by an independent CPA for Entity A be sufficient to provide the auditor of Company X with appropriate audit evidence relative to the investment in the equity investee?

.34 "Subsequent Events Procedures Relating to a Component"
Inquiry — Company X has an investment in Entity A that is accounted for by the equity method of accounting. Company X and Entity A are audited by different auditors. The audit of Entity A was completed before the audit of Company X began, and the auditor of Company X’s financial statements has decided to make reference to the report of the auditor of Entity A. In such circumstances, who is responsible for performing auditing procedures relating to subsequent events at Entity A that may require adjustment to, or disclosure in, the group financial statements?

.35 "Component and Group Have Different Year-Ends"
Inquiry — Company X has a component comprising an investment in Entity A accounted for by the equity method of accounting. Entity A is audited by a component auditor. Entity A has a different year-end than Company X. The auditor of the group financial statements has decided to make reference to the audit of the component auditor. What procedures, if any, would be appropriate for the group engagement team perform as a result of the difference in year-ends?

.36 "Investments Held in a Financial Institution Presented at Cost or Fair Value"
Inquiry — Paragraph .11 of AU-C section 600 defines a component as “[a]n entity or business activity for which group or component management prepares financial information that is required by the applicable financial reporting framework to be included in the group financial statements.” Is an investment in a certificate of deposit or other types of cash investments held by a financial institution (for example, an overnight repurchase agreement) deemed a component for purposes of AU-C section 600?

.37 "Employee Benefit Plan Using Investee Results to Calculate Fair Value"
Inquiry — Do the investments in an employee benefit plan that rely on the investee results to calculate fair value constitute components under AU-C section 600?

.38 "Using Net Asset Value to Calculate Fair Value"
Inquiry — Paragraphs 59–62 of FASB ASC 820-10-35 permit a reporting entity to estimate the fair value of an investment using net asset value (NAV) per share of the investment (or its equivalent) if NAV is calculated in a manner consistent with the measurement principles of FASB ASC 946, Financial Services—Investment Companies, as of the reporting entity’s measurement date. If an entity uses the NAV of an investment as a practical expedient to estimate the fair value of that investment, is that investment considered a component under AU-C section 600?

.39 "Disaggregation of Account Balances or Classes of Transactions"
Inquiry — Company X consolidates the operations of Entity A. The same group engagement team audits Company X and the operations of Entity A; no other auditors or engagement teams are involved. Are there any requirements in AU-C section 600 to disaggregate account balances or classes of transactions for purposes of auditing the consolidated financial statements of Company X? For example, is the auditor required to disaggregate accounts receivable for purposes of confirmation procedures, or can the consolidated group of accounts be treated as one population?

.40 "Variable Interest Entities (VIEs) as a Component"
Inquiry — Company X consolidates the financial information of Entity A, a variable interest entity of which Company X is the primary beneficiary. Is Entity A considered a component for purposes of AU-C section 600?

.41 "Component Using a Different Basis of Accounting Than the Group"
Inquiry — A component whose financial information is required to be consolidated into group financial statements maintains its financial information on the tax basis of accounting. The group financial statements are prepared using GAAP. What is the group auditor’s responsibility regarding the consolidation of the component’s financial information into the group financial statements?

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Inquiry — Paragraph .40 of AU-C section 700, Forming an Opinion and Reporting on Financial Statements (AICPA, Professional Standards), states that the auditor’s report should “name the city and state where the auditor practices.” May the auditor comply with this requirement by issuing his or her report on the firm’s letterhead that contains the city and state where the auditor practices?

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Inquiry — No-documentation or low-documentation loans remain popular options within the lending community, especially in lending to the self-employed. The information a prospective borrower is asked to furnish in connection with such loans is limited; however, lenders or brokers still attempt to assess a borrower’s creditworthiness and verify the accuracy of information provided to them by the borrower.

Examples of requested information include

• confirmation of a client’s self-employed status.
• verification of income from self-employment.
• profitability of a client’s business.
• the impact on a client’s business if money is withdrawn to fund the down payment on a real estate purchase.

How may an accountant respond to a request from a client, lender, or loan broker to confirm client information in connection with a pending loan application?

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Inquiry — AU-C section 905 is “effective for the auditor’s written communications related to audits of financial statements for periods ending on or after December 15, 2012. For all other engagements conducted in accordance with GAAS, this section is effective for the auditor’s written communications issued on or after December 15, 2012.”

Which effective date applies in a compliance audit performed pursuant to AU-C section 935, Compliance Audits (AICPA, Professional Standards), and Office of Management and Budget Circular A-133, Audits of States, Local Governments and Non-Profit Organizations (Circular A-133), in which the financial statements of an entity are for a period prior to December 15, 2012 (for example, as of and for the year ended September 30, 2012), but the opinion on compliance and reporting on internal control over compliance (the Circular A-133 report) relating to that same period is issued after December 15, 2012 (for example, the Circular A-133 report is issued on January 15, 2013)?

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Inquiry — A real estate entity presents current-value financial statements to supplement historical-cost financial statements. May an auditor accept an engagement to report on current-value financial statements that supplement historical-cost financial statements and, if so, how should the auditor report?

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Inquiry — Paragraph .11 of AU-C section 905, Alert That Restricts the Use of the Auditor’s Written Communication (AICPA, Professional Standards), states that the restricted alert language required by paragraph .07 of AU-C section 905 should not be used when

1. the engagement is performed in accordance with Government Auditing Standards, and
2. the auditor’s written communication (commonly referred to as a by-product report) pursuant to that engagement is issued in accordance with
   1. AU-C section 265, Communicating Internal Control Related Matters Identified in an Audit (AICPA, Professional Standards);
   2. AU-C section 806, Reporting on Compliance With Aspects of Contractual Agreements or Regulatory Requirements in Connection With Audited Financial Statements (AICPA, Professional Standards); or
   3. AU-C section 935, Compliance Audits (AICPA, Professional Standards).

Assume an entity’s financial statements are audited in accordance with both GAAS and Government Auditing Standards. If the auditor issues a compliance report in accordance with AU-C section 806 but that report is not required to be issued in accordance with Government Auditing Standards and the report does not refer to Government Auditing Standards, is the auditor prohibited from using the restricted alert language required by paragraph .07 of AU-C section 905?

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Inquiry — The exhibit, “Illustrations of Reports on Compliance With Aspects of Contractual Agreements or Regulatory Requirements in Connection With Audited Financial Statements,” in AU-C section 806 provides illustrative reports on compliance based on a financial statement audit conducted in accordance with auditing standards generally accepted in the United States of America. Based on the facts in TIS section 9110.22, “Use of Restricted Alert Language When Financial Statements Are Audited in Accordance With GAAS and Government Auditing Standards,” does the auditor need to modify this language to indicate that the financial statement audit was also conducted in accordance with Government Auditing Standards?

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Inquiry — When performing an interim review in accordance with AU section 722, Interim Financial Information (AICPA, Professional Standards), is the auditor required to report on supplementary information when a client presents supplementary information along with interim financial statements?

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Inquiry — When performing an interim review in accordance with AU-C section 930, Interim Financial Information (AICPA, Professional Standards), is the auditor required to report on supplementary information when a client presents supplementary information along with interim financial statements?

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