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Untitled Prezi

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Tricia Dan

on 21 April 2013

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ASC 855-10-25-3:
An entity shall not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date and before the financial statements are issued or are available to be issued. There two types of subsequent events:

The first type consists of events or transactions that provide additional evidence about conditions that exited at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events).

The second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose subsequent to that date (that is, nonrecognized subsequent events. Should This be Recognized
or Disclosed? Shakespeare’s management uses $10 million from the modified line of credit to acquire Hamlet, a competitor publishing company.

Management ‘s estimate on how to allocate the $10 million is as follows:
$2 million from current assets
$8 million from non-current assets (comprising of $5 million of identifiable noncurrent assets, $2 million of intangible assets, and $1 million of goodwill).
Hamlet’s prior-year financial statements show that it had revenue of $3.2 million and EBITDA of $1.1 million. The Facts: The Acquisition of Hamlet Since the change in estimation takes place after December 31, the change should not be recognized but instead disclosed in the financial statement.
From the auditing point of view, the estimated number is validated because Management has a history of accurately estimating the IBNR liability using these techniques as validated by the actual claims received. AICPA AU-C 500, AU-C 501 The Solution Medical Benefits Payable Is issue recognized or disclosed?
ASC 855-10-25-3:
“An entity shall not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date but before financial statements are issued or are available to be issued.” Line of Credit Modification
$20 million maximum.
Due in approximately 6 years from the balance sheet → December 2016.
Interest accrues at LIBOR (subject to 3.5% floor) + 3% per year.
Required commitment fee of 0.5% per year on the portion of the LOC not drawn upon. Line of Credit Modification
$10 million maximum.
As of December 31, 2010 Shakespeare had taken out $8 million.
Due in approximately 3 years from the balance sheet → December 2013.
Interest accrues at LIBOR (subject to 3.5% floor) + 7.5% per year.
Required commitment fee of 2% per year on the portion of the LOC not drawn upon. Line of Credit Modification Line of Credit
Shakespeare Inc:
Book printing & publishing company.
Privately held.
December 31st year end The Facts: What should Shakespeare state in its disclosure about the date through which the financial statements were evaluated for subsequent events? Did Shakespeare acquire Hamlet for the amount stated?

AU-C Section 501 External Conformation: The auditor may need to obtain conformation from Shakespeare’s legal team to see if they actually acquired Hamlet and if it’s for the amount stated ($10 million).

Also the Auditor should request of management to provide written representations about whether it believes significant assumptions used by it in making accounting estimates are reasonable. In this case how did management estimate how the $10 million should be appropriated? AU-C Section 580 paragraph 16 Auditing Issues: Since the acquisition Hamlet happened on March 10, 2011, which is after the balance sheet date but during the subsequent period then it is a non-recognized subsequent event and it should should not be recognized, but disclosed in the notes. Should This be Recognized or Disclosed?
Cont'd Whether the acquisition of Hamlet should be disclosed or recognized, depends on whether the acquisition was made before or after the financial statements date. Accounting for the Acquisition of Hamlet: According FASB 805-10-20 - regarding transactions or other events in which an acquirer obtains control of one or more businesses: Transactions sometimes referred to as true mergers or mergers of equals also are business combinations. Therefore the acquisition of Hamlet should be classified as a business combination.
Also the acquisition was done after the balance sheet date but before the financial statements were issued making it a subsequent event. The Issue: This means that the company overestimated the medical benefit payable by 0.5 million.
Should the information pertaining to actual claims incurred as of the balance sheet date that became available after the balance sheet date be considered in determining management’s best estimate of the medical benefits payable? If so, how does this information impact the amount recognized or disclosed? The Issue The Facts The company has self-insured medical benefits for its employees.
The company estimates the cost of medical benefits payable, including the costs that have been incurred but not yet reported (IBNR). Management has a history of accurately estimating the IBNR.
As of December 31, 2010, the estimated IBNR liability is $1.25 million.
As of review on March 18, 2011, the actual claim cost is $0.75 million.
Unamortized deferred costs are now amortized over 6 years.
Fees and 3rd party costs incurred are amortized over 6 years. Line of Credit Modification Accounting depends on whether the new borrowing capacity is greater or lower than the original borrowing capacity.

“If the borrowing capacity of the new arrangement is greater than or equal to the borrowing capacity of the old arrangement, then any unamortized deferred costs, any fees paid to the creditor, and any third-party costs incurred shall be associated with the new arrangement (that is, deferred and amortized over the term of the new arrangement).“ ASC 470-50-40-21-b Line of Credit Modification
A line of credit is an agreement between a bank and a customer that establishes a maximum loan balance that the bank will allow the borrower to maintain.
So a modification to the line of credit refers to changing the borrowers' limit to borrow, formally known as “borrowing capacity”, or the terms of the loan. Line of Credit Modification When to recognize:
Line of Credit Modification
Medical Benefits Payable
Acquisition of New Company The Issues:
To Recognize or Not to Recognize, That is the Question Case 12-02 (L)

The auditor should perform audit procedures designed to obtain sufficient and appropriate audit evidence that all subsequent events that require adjustment of, or disclosure in, the financial statements have been identified. (AU-C Section 560).
In this case the auditor would gather audit evidence (AU-C Section 500) to see that the acquisition of Hamlet was really a subsequent event and if it was disclosed in the notes of the financial statements in accordance with applicable financial reporting framework. This audit evidence would consist of: a letter of engagement, financial statements and notes, and bank statements. Auditing Issues: The difference is not a misstatement of the financial statement but rather an Estimation uncertainty - The susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement. AU-C-540
The estimation method is reasonable because management got assistance of third-party experts using actuarial techniques, assumptions, and observations that are based on past experience of claims paid through the balance sheet date. AU-C-500 The Solution From the accounting standard point of view, the estimation of medical benefits payable should be recognized, according to FASB 720-20-25-14.
According to FASB 944-40-35-1, changes in estimates of claims costs resulting from the continuous review process and differences between estimates and payments for claims shall be recognized in income of the period in which the estimates are changed or payments are made. The Solution
When did Shakespeare submit a request for the LOC modification?
AU C Section 505: External Confirmation
Were there any fees or 3rd party costs incurred due to the modification?
How does the company amortizes deferred costs?
Was the modification to the LOC disclosed in the notes to the financial statements?
AU C Section 500: Audit Evidence Line of Credit Modification Modification Definition: Original LOC: New LOC: Accounting: Auditing Issue: When did Shakespeare really acquire Hamlet? Should the financial statements be adjusted for this acquisition? Shakespeare should state in its disclosure that the date which theses events occur was after the financial statement date but before the financial statements were issued making this period the subsequent period. Thank You You have been
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