Below, the AICPA will post recent questions and answers issued since July 2019. 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 committee of the AICPA. Consult AICPA Technical Questions and Answers for all technical staff questions and answers issued by the AICPA.
If you have specific questions about information contained here, contact the AICPA's Technical Hotline.
Accounting Questions and Answers
.41 Determination of the effective interest rate (Issue Date: June 2020)
Inquiry—If a creditor restructures a loan due to COVID-19 to include a period of reduced payments, and the restructuring is neither a troubled debt restructuring (TDR), nor required to be accounted for as a new loan, how should a creditor recognize interest income on the restructured loan1?
.42 Classification of Advances Under the Paycheck Protection Program (Issue Date: June 2020)
Inquiry—Should the lending institution account for an advance under this program as a loan or as a facilitation of a government grant?
.43 Consideration of the SBA Guarantee Under the Paycheck Protection Program (Issue Date: June 2020)
Inquiry—Is the guarantee from the SBA considered “embedded” as opposed to a “freestanding contract” and, thus, can it be considered in estimating credit losses on the loan?
.44 Accounting for the Loan Origination Fee Received From the SBA (Issue Date: June 2020)
Inquiry— What is the accounting for the fee received or receivable from the SBA for originating the loan and the potential clawback of the fee?
.18 Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program (Issue Date: June 2020)
Inquiry —How should a nongovernmental entity account for a forgivable loan received under the Small Business Administration Paycheck Protection Program (PPP)?
.53 Accounting for Costs Incurred in Connection With the Implementation of Electronic Health Record Systems (Issue Date: April 2020)
Inquiry—The widespread implementation and use of electronic health record (EHR) systems are primary agenda items for a number of health care entities. EHR technology has shown to be effective in transforming the quality, safety, and efficiency of care within health care entities that have implemented the technology successfully. However, successful implementation can be time-consuming and expensive as health care entities struggle to adopt these systems in a manner that meets regulatory mandates and clinicians’ expectations. Integration of EHR technology into clinical workflow, the adoption strategies used when implementing EHR technology, and technological upgrades and continuous quality improvement are all issues that health care entities confront when seeking to implement and use EHR systems to store and manage clinical information.
How should health care entities account for costs incurred in connection with the implementation of EHR systems for internal use?
.54 Financial Presentation Considerations Related to Transactions Involving Provider Taxation Programs and Similar Arrangements (Issue Date: April 2020)
Inquiry—The Medicaid program is set up on a state-by-state basis to provide medical assistance to the indigent. Although state-administered, the program is a joint federal and state program for which the federal government finances a portion of the cost. Under this arrangement, the federal government "matches" a percentage of the total amount paid by the state to health care providers. This matching is referred to as federal financial participation.
States have attempted to increase the amount of federal matching funds for which they are eligible by increasing the amount of medical assistance they provide. In order to pay for the increased medical assistance, some states have imposed provider taxes on health care entities and used those funds to make additional provider payments. As a result, these states have been able to generate additional federal matching funds without expending additional state funds. How should a health care entity present provider taxes paid within their financial statements?
Auditing Questions and Answers
.01 Background to Section 3100.02—Revised Section 163(j) Limitation (Issue Date: December 2019)
As part of the Tax Cuts and Jobs Act (TCJA), Section 163(j) of the Internal Revenue Code was amended to limit interest deductibility for a broader population of companies for tax years beginning after 2017. In general, the Section 163(j) rules limit deductions for net interest expense to 30% of adjusted taxable income, except for certain small businesses. For purposes of this limitation, adjusted taxable income is defined similar to the financial measure commonly referred to as earnings before interest, tax, depreciation, and amortization (EBITDA) for tax years beginning before December 31, 2021, and similar to the financial measure commonly referred to as earnings before interest and taxes (EBIT) for tax years beginning after December 31, 2021. The disallowed interest deduction has an unlimited carryforward period.
Since the enactment of the TCJA, the revised Section 163(j) limitation has led to more entities having a deferred tax asset (DTA) for this type of carryforward. More specifically, entities with significant debt and interest expense may have experienced (and expect to continue to experience) disallowed interest deductions every year.
.02 Evaluation of the Realizability of a Section 163(j) Carryforward
Inquiry—When an entity expects to generate future disallowed interest deductions, how should an entity assess realizability of its existing DTA related to disallowed interest deductions when there are (a) reversing deferred tax liabilities (DTLs) and (b) an expectation of future interest expense that also will be limited under Section 163(j)?
GASB Statement No. 84, Fiduciary Activities, became effective for reporting periods beginning after December 15, 2018. GASB Statement No. 84 changed the framework to evaluate whether activities are fiduciary in nature and clarified that the reporting of fiduciary activities applies also to special-purpose governments engaged in business-type activities (BTAs). One result of this standard is that some BTAs will be reporting fiduciary activities for the first time.
Because of the changes to the reporting entity that may result from implementation of GASB Statement No. 84, questions have arisen about the auditor’s consideration of materiality when a government omits reporting fiduciary activities. GASB Implementation Guide 2015-1, Q7.4.1, as amended, provides guidance that preparers use professional judgment for assessing materiality for this purpose, considering relevant qualitative factors and the relationship of the types of fiduciary funds to other appropriate information in the financial statements. The government’s quantitative materiality determination for each type of fiduciary fund could be made based on (a) the significance of those funds to all fiduciary funds of the reporting government or (b) the significance of those funds to all funds of the government.
Chapters 4 and 16 of the AICPA Audit and Accounting Guide State and Local Governments describe in detail the auditor’s materiality considerations when planning, performing, evaluating the results of, and reporting on an audit. As noted in that guidance, auditors consider materiality for governmental financial statement audits at the opinion-unit level. The opinion units affected by the omission of fiduciary activities are either the aggregate remaining fund information opinion unit or the aggregate discretely presented component unit and remaining fund information opinion unit.
.24 Auditor Assessment of a Special-Purpose Government's Only Immaterial Fiduciary Fund
Inquiry—A BTA has not previously reported any fiduciary activities and has, therefore, used a single column for financial statement presentation. In accordance with guidance in the AICPA Audit and Accounting Guide State and Local Governments, the auditor has considered only one opinion unit for the BTA in previous audits. In implementing GASB Statement No. 84, the BTA determines that it has an activity that meets the criteria to be reported as a fiduciary fund in its financial statements. However, the BTA elects not to present the only identified fiduciary fund in the financial statements because it considers it to be immaterial based on the guidance in GASB Implementation Guide 2015-1, Q7.4.1, as amended.
How should the auditor assess the appropriateness of the government’s omission of the fiduciary fund?
.24 Background to Sections 9110.25–.27—OMB 2019 Compliance Supplement (Issue Date: September 2019)
For compliance audits performed under Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, also referred to as single audits, the Office of Management and Budget (OMB) Compliance Supplement (supplement), issued annually, serves to identify existing important compliance requirements that the federal government expects to be considered as part of a single audit.
The 2019 supplement revised the approach used by the federal government to identify the compliance requirements subject to the compliance audit. In previous annual editions of the supplement, federal agencies identified all applicable compliance requirements for programs included in the supplement from 12 potential types of compliance requirements. Auditors would then determine which of the applicable requirements to test based on an evaluation of whether noncompliance could have a direct and material effect on a major federal program. For programs included in the 2019 supplement, OMB has limited the number of compliance requirements federal agencies can select as subject to the compliance audit to 6 of the 12 potential types of compliance requirements (except for the research and development cluster, which was permitted to identify 7 requirements). Auditors are still expected to determine which of the requirements identified by the federal agency as subject to the compliance audit to test based on an evaluation of whether noncompliance could have a direct and material effect on a major federal program.
AU-C section 935, Compliance Audits,* provides the requirements and guidance for the performance of single audits performed under generally accepted auditing standards (GAAS).
Section 9110.25, Opining on Compliance When the OMB Compliance Supplement Excludes Direct and Material Compliance Requirements From the Scope of a Single Audit (Issue Date: September 2019)
Inquiry—For a single audit performed using a supplement, such as the 2019 supplement, that limits the number of compliance requirements federal agencies can select as subject to the compliance audit, can an auditor provide an opinion on compliance if the supplement excludes certain types of compliance requirements from the scope of the audit and the auditor is aware that one or more of those excluded requirements could have a direct and material effect on a major federal program? For example, if the supplement does not identify eligibility (one of the 12 potential types of compliance requirements identified in the supplement) as one of the types of compliance requirements subject to the compliance audit for a major federal program, can the auditor provide an opinion on compliance if the auditor is aware that a key part of the program is based on providing benefits to individuals that meet certain income eligibility criteria?
Section 9110.26, Effect on Auditor Reporting Due to the OMB Compliance Supplement Change in Approach for Identifying the Requirements Subject to the Single Audit (Issue Date: September 2019)
Inquiry—Does the change of approach in the supplement for identifying the types of compliance requirements subject to the compliance audit require the auditor to revise the report wording for the report on compliance for each major federal program illustrated in AICPA Audit Guide Government Auditing Standards and Single Audits?
Section 9110.27, Including an Other-Matter Paragraph to Describe the OMB Compliance Supplement Change in Approach for Identifying the Requirements Subject to the Single Audit (Issue Date: September 2019)
Inquiry—May an auditor include an other-matter paragraph in the report on compliance for each major federal program describing the change to the supplement for identifying the types of compliance requirements subject to the compliance audit?
Section 8100.04, Reporting Guidance Upon Initial Implementation of Statement on Auditing Standards No. 134, as Amended (Issue Date: October 2019)
Inquiry—Statement on Auditing Standards (SAS) No. 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements, as amended (hereinafter referred to as SAS No. 134 in this question and answer), addresses, among other things, the auditor’s responsibility to form an opinion on the financial statements and the form and content of the auditor’s report issued as a result of an audit of financial statements. The following AU-C sections1 from SAS No. 134 become effective for audits of financial statements for periods ending on or after December 15, 2020:
- 700, Forming an Opinion and Reporting on Financial Statements
- 701, Communicating Key Audit Matters in the Independent Auditor’s Report
- 705, Modifications to the Opinion in the Independent Auditor’s Report
- 706, Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor’s Report
Upon the effective date, the required form and content of the auditor’s report will supersede the required form and content of the auditor’s report that has been in effect in extant AU-C section 700A, AU-C section 705A, and AU-C section 706A of the same titles. Early implementation is not permitted.
If a continuing auditor is engaged to perform an audit of comparative financial statements in the first year of implementation of SAS No. 134, is the auditor permitted to express an opinion on all periods presented in one report in accordance with SAS No. 134?
1 The guidance in this technical question and answer (TQA) is not applicable to the accounting by borrowers and should not be applied by borrowers by analogy.
* All AU-C sections can be found in AICPA Professional Standards.