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Financial Reporting and Regulatory Update

Third Quarter 2019

From the AICPA

Practice aid for credit losses standard

On Sept. 9, 2019, the AICPA issued a practice aid, “Allowance for Credit Losses – Audit Considerations,” to help auditors as they communicate with management and audit committees on ASC 326, “Financial Instruments – Credit Losses.” The practice aid addresses considerations in auditing the allowance for credit losses related to loans under ASU No.2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Key areas within the auditing process include:

  • Gaining an understanding of the entity
  • Assessing risks
  • Identifying audit-relevant controls
  • Crafting an audit response
  • Performing audit procedures
  • Evaluating audit results and disclosure considerations

The publication is aimed primarily at auditors, but it also will help lenders preparing to implement ASU 2016-13. The practice aid, part of a broader AICPA initiative, will be included in the AICPA Credit Losses Auditing and Accounting Guide planned for release in 2020.

Working drafts on credit losses standard implementation issues

On Aug. 15, 2019, the AICPA’s Financial Reporting Executive Committee (FinREC) issued three new working drafts that provide guidance on implementation issues related to ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”

The drafts focus on depository and lending institutions and include:

The working drafts will be included in the AICPA Allowance for Credit Losses – Audit and Accounting Guide upon issuance.

Comments are due Oct. 15, 2019.

Proposed SAS on auditing accounting estimates

The AICPA’s Auditing Standards Board (ASB) issued, on Aug. 22, 2019, a proposed Statement on Auditing Standards (SAS), “Auditing Accounting Estimates and Related Disclosures.” The proposed SAS makes the AICPA’s standard conform with that of the International Auditing and Assurance Standards Board, with language changes to follow usage in the U.S. The proposed SAS, if adopted as proposed, would supersede SAS 122, “Statements on Auditing Standards: Clarification and Recodification,” as amended, Section 540, “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures” (AU-C Section 540). The ASB also incorporated elements of the PCAOB’s recently adopted Auditing Standard 2501.

Among other items, the proposed SAS:

  • Explains the nature of estimation uncertainty
  • Provides guidance on scalability of the requirements
  • Requires separate assessment of inherent risk and control risk
  • Provides enhanced risk assessment requirements tailored to estimates
  • Requires that further audit procedures must respond to the reasons for the assessed risks of material misstatement
  • Discusses the exercise of professional skepticism and how it is affected by the auditor’s evaluation of inherent risk factors

The effective date for audits of financial statements would be for periods ending on or after Dec. 15, 2022.

Comments are due Nov. 22, 2019.