Auditing Sprecial Purpose Frameworks--Pension Accounting, Revenue Recognition

The foundation for a cost-beneficial audit strategy is an auditor’s knowledge of the principles in a reporting entity’s applicable financial reporting framework, the framework selected and used in its financial reporting system. Clarified Audit Standards, first of all, require the auditor to evaluate the applicable framework to determine if it results in financial statement and footnote presentations of financial position, results of operations and cash flows that are appropriate and reasonable.

This article continues to lay such a framework by comparing significant principles in U.S. GAAP with the AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs).  These topics are discussed below:

·      Retirement and Postemployment Benefits

·      Comprehensive Income

·      Revenue Recognition

Retirement and Postemployment Benefits

U.S. GAAP:

Accounting standards use a projected benefit obligation model that requires accounting for the aggregate of periodic pension costs and the overfunded and underfunded status of defined benefit and post-retirement benefits plans.  Defined contribution plans’ costs are accounted for as period expenses.

FRF for SMEs:

Management may elect to account for plans using a current contribution payable method or one of the accrued benefit obligation methods similar to U.S. GAAP.  General disclosures include:

·        Description of the plan and the period cost recognized.

·        Multi-employer plans description, period cost and any liability that would result from a probable withdrawal.

·        Description of deferred compensation plans, their participants and how payments are determined.

·        For defined benefit plans:

o       Description, plan participants and how benefits are determined.

o       Funded status information including benefit obligation, market value of plan assets and the under-funded or over-funded status at the reporting date.

o       Under the current contribution method, the current and following years contributions.

o       Expected rate of return on assets and the discount rate used to determine the benefit obligation.

o       Any current period termination benefits.

Comprehensive Income

U.S. GAAP:

Items of comprehensive income, such as the unrealized appreciation on available for sale securities and prior service costs for defined benefit pension plans, are reported in a separate statement of comprehensive income or a single statement combined with operating income.

FRF for SMEs:

This framework does not recognize items of comprehensive income.

Revenue Recognition

U.S. GAAP:

Revenue is recognized when it is earned or realized based on evidence of the arrangement, the occurrence of a point of sale or delivery, a fixed sales price and reasonable assurance of collectability.  Contracts for production or construction are accounted for currently under the percentage of completion or completed contract methods.  Future standards for recognizing revenue under the contract method will likely require revenue recognition as performance obligations are completed.

FRF for SMEs:

Revenue recognition is more principles-based and revenues will be recorded based on performance and reasonable assurance of collectability.  When the risks and rewards of ownership of goods are transferred to a customer, performance of a transaction is accomplished.  For services in long-term contracts, such as construction or production contracts, the percentage of completion or completed contract methods may be used.  The consideration received for the service will indicate accomplishment of stages of performance of a service.  General disclosures include:

·        Revenue recognition policy for all types of transactions in Note A.

·        Accounting policies for multi-deliverables.

·        Explanation of why the completed contract method is used instead of the percentage-of-completion method, if applicable.

·        Revenue and contingent assets from any contract-related claim.

·        Major categories of revenue disclosed on the statement of operations.

·        Any unrecorded claims if claims are not recorded until received or awarded.

My series of four live two-hour webcasts with CPE credit covering the AICPA’s FRF for SMEs can be accessed by clicking the applicable link on the left side of my home page, www.cpafirmsupport.com.