AICPA Technical Practice Aids

This two-volume set contains all outstanding AICPA Statements of Position, Practice Bulletins and Practice Alerts issued through June 1, 2007, including:

• PCAOB Release 2007-001, Observations on Auditors' Implementation of PCAOB Standards Relating to Auditors' Responsibilities With Respect to Fraud
  
• PCAOB Staff Audit Practice Alert No. 1, Matters Related to Timing and Accounting for Option Grants.
  
• SOP 07-1, Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies
  
• Practice Alert 07-1, Dating of the Auditor’s Report and Related Practical Guidance
  
• Revised Practice Alert 03-1, Audit Confirmations
  
• Plus Q & A on industry-specific topics

This Edition includes, in a separate section, the Public Company Accounting Oversight Board (PCAOB) Staff Questions and Answers and Other Implementation Guidance designed to help auditors implement, and the Board's staff administer, the Board's standards.

In addition, this useful reference presents Technical Questions and Answers, and updated nonauthoritative section that offers carefully thought-out responses to selected inquiries received by the AICPA Technical Hotline and AICPA Technical and Industry Committees. Technical Practice Aids also includes Suitable Trust Services Criteria and Illustrations as a separate, easily accessed section.

Section 1200

Income Statement

.01      Disclosure of Revenues of an Agent

Inquiry - Company A is in the business of arranging sales of used cars for which service it receives a commission based on an established fee schedule.  Company A receives title to the cars sold but simultaneously transfers title to the car buyer. Company A warrants main engine components for thirty days after date of sale.

The following presentations of revenue in the income statement are being considered:

Commissions Earned                                                  $20,000
or
Sales                                                                                 $300,000
Cost of Sales                                                                     (280,000)
Gross Profit (or Net Commissions)                                     $ 20,000

What is the proper presentation of revenue?

Reply - since Company A is operational a broker, Company A should report Commissions Earned rather than Sales. However, Company A could disclose above the Commissions Earned figure, without showing a deduction, the amount of sales, as follows:

Sales Arranged                                                                   $300,000
Commissions Earned                                                            $ 20,000
Expenses, etc.                                                                            XXX

Company A should also make proper provision for the cost of warranties.

.04      Statement Title When There is a Net Loss

Inquiry - What title is suggested for the ''Statement of Income'' when a "net loss" exists in one or more years?

Reply - Companies included in the annual survey entitled Accounting Trends & Techniques ("Trends") file with the Securities and Exchange Commission. Accordingly, their annual reports include a three year statement of income. If a current year net loss is shown in the income statement, the "Trends'' companies usually describe the statement of income as the "State- ment of Operations.'' They occasionally use the title "Statement of Income (Loss)'' and very rarely use the title "Statement of Loss."

Some companies always use "Statement of Operations" since the heading will be the same whether there is a "net loss" or "net  income."

.05      Presentation of Reimbursed Payroll Expense

Inquiry - One company of a controlled group, in addition to its own operations, arts as a "paymaster" for the entire group. This company records the entire payroll of all members in the group on its general ledger to facilitate reconciliation with state and federal payroll tax returns. Each member of the group reimburses the "paymaster" for its share of payroll and payroll taxes and records management fee expense while the paymaster records it as management fee income.

Should the reimbursement be classified as other income in the separate income statement of the "paymasters" company?

Reply - No. The reimbursement should be allocated as a reduction of payroll and payroll tax expense because this approach would more accurately present the "paymaster'' company's expenses for its own operations.

.06      Note to TIS Section 1200.07 to 1200.16 - Accounting by Noninsurance
Enterprises for Property and Casualty Insurance Arrangements That
Limit Insurance Risk

Insurance enables a company (the insured) to transfer insurance risk to an insurer for a specified premium. Insurance may be purchased for a number of economic reasons generally with the underlying goal of transferring insurance risk, including property damage, injury to others, and business interruption.

The following series of questions and answers (Sections 1200.07 through 1200.16) focus on certain aspects of finite insurance products that are utilized by noninsurance enterprises. Due to the diverse nature of contracts in the marketplace, the guidance in these questions and answers is designed to assist practitioners in identifying the relevant literature to consider in addressing their specific facts and circumstances. The TPAs contain many excerpts of applicable guidance, but readers should be familiar with all the guidance contained in that literature not only the specific paragraphs listed.

GAAP guidance for an insurance enterprise's purchase of reassurance is more extensive than guidance on accounting by noninsurance enterprises for insurance contracts. The accounting guidance for reassurance addresses transactions between an insurer (the contract holder) and a reinsurer (the issuer of the contract). TIS section 1200.07 through .16 address property and casualty insurance contracts between a policyholder and an insurance enterprise, which is similar to the relationship between an insurer and a reinsurer.

.07      Finite Insurance

Inquiry - What are "finite" insurance transactions?

Reply - Finite insurance contends are centrals that transfer a clearly defined and restricted amount of insurance risk from the policyholder to the insurance company, and the policyholder retains a substantial portion of the related risks under most scenarios. Nevertheless, under certain finite contracts there may be a reasonable possibility that the insurance Company will incur a loss on the contract.