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CPA Exam Changes

CPA Exam Changes

The time is now. Take the first step towards CPA Exam success!

The 2020 CPA Exam changes are around the corner, but there’s still plenty of time to pass a few sections in 2019. Our CPA experts recommend taking FAR NOW to avoid the upcoming changes.

Here’s why:

Starting January 1, 2020, there have been major changes to the FAR exam, specifically surrounding Financial Instruments - Credit Losses. These changes are quite pervasive and complicated, as they apply to most financial assets and require the use of more judgment and various factors in developing expectations of credit losses.

But not to worry, we’re here to help you get to the finish line in time.

Here’s how:

  • Our signature SmartPath Predictive Technology™ will be your guide to efficiently working through course materials. SmartPath provides recommended targets based on the performance of previous students that passed the CPA Exam, giving you a clear, data-driven path to success.
  • A student-favorite, the Roger CPA Review study planners, will provide you with the game plan you need to stay on track and pass FAR Exams in 2019.
  • The fully-featured mobile app gives you access to your entire course while on-the-go, helping you squeeze in extra study time.
     

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FAR CHANGES ON THE 2020 CPA EXAM

Financial Instruments – Credit Losses (ASUs 2016-13, 2018-19, 2019-05) — The credit loss (ie, bad debt) changes are pervasive and complicated.  These changes remove more bright-line rules that accountants are used to and require more judgment, and in some cases data analytics, to develop expectations for credit losses.  Here’s some of the basics:

  • This represents a switch from an incurred credit loss model to a current expected credit loss (CECL) model to reflect economic downturns in the financial statements faster (ie, earlier recognition).
  • The new model estimates expected credit losses over the lifetime of the asset for more credit risk transparency.
  • Estimates can be based on historical information, current conditions or reasonable and supportable forecasts (eg, predictive data analytics).
  • The new guidance applies to assets measured at amortized cost (eg, receivables and held-to-maturity debt securities) and available-for-sale (AFS) debt securities, as well as finance leases and off-balance-sheet credit exposures (eg, financial guarantees).
  • When expected credit losses increase, an allowance for credit losses (ie, a contra-account) is booked at the reporting date to adjust the value of the asset, and credit loss expense is recognized on the income statement.

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  • When expected credit losses decrease, the allowance for credit losses is decreased, and a credit loss expense is reversed on the income statement.
  • Such assets are written off when they are entirely uncollectible.
     
  • Goodwill (ASU 2017-04)
    • The second step in the goodwill impairment test (ie, calculating the implied fair value of goodwill) has been eliminated for simplification purposes.Now you basically just compare the fair value of the reporting unit with its carrying value. If fair value is less than carrying value, then goodwill is impaired and a loss should be recognized.
    • Aligns the accounting treatment of implementation costs incurred in a cloud computing arrangement that is treated as a service contract with the requirements to capitalize implementation costs incurred with respect to internal-use software.
    • Expands the private company accounting alternative for variable interest entities (VIEs) to provide an election not to apply the regular VIE GAAP guidance when certain criteria are met.
    • Statement No. 87 provides a single model for lease accounting (ie, all leases are essentially finance leases, with limited exceptions).
    • Statement No. 89 provides clarification on accounting for interest cost incurred before the end of a construction period.
    • Intangibles (ASU 2018-15)
    • Variable interest entities (ASU 2018-17)
    • GASB Updates

Further Breakdown of FAR 2020 CPA Exam Changes

Expected Credit Loss Model (ASC 326-20)

What assets will be affected by this change?

  • Accounts receivable (A/R), financing receivables, finance leases, held-to-maturity (HTM) debt securities, available-for-sale (AFS) debt securities, and other off-balance sheet credit exposures (eg, financial guarantees).

How is each type of asset affected by the change?

  • A/R, HTM debt securities, & finance leases:
    • Estimate losses over life of asset with pools of assets that have similar risk profile assumptions to capture risk, even if the risk is remote.
    • Management should have a reasonable forecast of economic conditions and documentation to support this.
    • For assets that are purchased having a significant credit deterioration since issuance, an allowance needs to be recorded at acquisition.
    • Significant new disclosures will be required in statements.
  • AFS debt securities:
    • No longer consider the length of time an instrument has been impaired in model.
    • Record an allowance for credit losses instead of a reduction in amortized cost basis.
    • Limit credit losses to excess of amortized cost over fair value.
    • Reduce allowance for credit risk improvements and reverse credit loss expense in the income statement.

How will it affect the financial statements?

  • Credit losses are recognized earlier than they would have been under current GAAP.
  • Income becomes more volatile as credit loss expense is recognized.
  • More processes and controls need to be implemented by management to consistently pool assets and determine conditions that affect their model.  Even if management doesn’t expect the allowance to change significantly, they need to have a repeatable and understandable process to how they came to that conclusion. Documentation in the notes to financials will be required.
  • More data will need to be collected and included in the model to help management decide how to identify information that can be used in developing the reasonable and supportable forecast, whether internal or external, to estimate the expected credit losses.

What are the key differences between the old incurred loss model and the new expected credit loss model?

  • Instead of reporting losses that have been incurred as of the balance sheet date, credit loss expense is now recognized for credit losses that are expected over the life of the asset.  Since this recognition of losses will now flow through the income statement, earnings will likely become more volatile.
  • Pooling of assets that share a common risk profile is required with the new model, whereas current GAAP permits but doesn’t require this.  Management discretion on what assets to pool together comes into play.  This also means that where a single asset may not have had any expected credit losses, the pool of similar assets could. 
  • Economic conditions are considered in both current GAAP and the new model.  The new model also includes management’s expectations of future economic conditions.  This is another area where more judgment is required. 
  • The result of the new model should show up on the balance sheet as what management thinks is the net amount that will be collected on the asset.

Implementation considerations for the expected credit loss model:

  • Components of amortized cost include unpaid principal balance, accrued interest, unamortized discounts / premiums, foreign exchange adjustments, and fair value hedge accounting adjustments.
  • Limited historical loss information may be available for amortized cost other than unpaid principal balance.
  • Processes and controls will need to be developed for gathering data for the components of amortized cost that haven’t been historically captured.
  • Pools of similar assets based on risk profile will need to be reviewed at each measurement date to confirm they still share risk attributes and belong to the same pool.  This review and any changes will need to be documented.
  • Losses need to be reflected over the asset’s contractual life. 
    • Included: expected prepayments and contractual extensions. 
    • Excluded: expected extensions, renewals and modifications.
  • It may be hard to determine contractual life on assets that have no stated maturity like A/R and credit card receivables.  Management will also need to determine if a loan refinance with the same lender would be considered a prepayment.
  • Management judgment will be required to determine:
    • The method that is most appropriate for determining credit losses. A variety of methods may be used, including the discounted cash flow method, loss-rate methods, roll-rate methods, probability-of-default method, and aging schedules.
    • Designation of pools of assets with similar risk profiles.  Risk of default is understandable but may also include specific asset risks for the company or the company’s appetite for more or less risk based on its individual tolerance.
    • Key economic variables used in model.
    • Selection of reasonable and supportable forecast period.
    • Determination of how to select the estimate used—is it a single most likely outcome or a weighted average outcome based on probability?
    • Support adjustments to historical loss information and reversion methodology to the historical loss model past the reasonable and supportable forecast period of the expected loss model.
    • Is it worth managing all this data or can an external source of data be used?

Reference article: https://www.ey.com/publication/vwluassetsdld/technicalline_04486-181us_creditlosses_4october2018/$file/technicalline_04486-181us_creditlosses_4october2018.pdf?OpenElement

Goodwill (ASU 2017-04)

  • The only step in determining goodwill impairment will be the current 1st step of the impairment determination: comparing the fair value of a reporting unit with the carrying amount.  If the cost is greater than fair value, the goodwill impairment charge equals the difference up to the amount of goodwill allocated.
  • The primary goal of the standard is simplification and providing cost savings to all entities.
  • Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
  • Impairment losses on goodwill can’t be reversed once recognized.

Reference article: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-february-2017-(1)

Intangibles (ASU 2018-15)

The point of this guidance is to reduce diversity in practice for the costs of implementing cloud computing arrangements or hosting arrangements that are service contracts.  Entities that historically capitalized implementation costs for internal use software projects should apply their existing policies and procedures to implementation costs incurred in hosting arrangements that are service contracts.

Customers should apply ASC 350-40 to determine whether to capitalize implementation costs of the cloud computing arrangement or expense them as incurred.

  • Only qualifying costs incurred during application development stage can be capitalized.  Examples: costs of integrating the hosting arrangement with software on site, coding, configuring, customization, compensation and benefits for employees for time spent on application development activities, and interest costs incurred while implementing the hosting arrangement.
  • Other costs are required to be expensed like costs of project planning, training, maintenance after implementation, and data conversion.  Overhead costs (general and administrative) and training costs not related to software development or implementing the hosting arrangement can’t be capitalized.
  • For multiple element arrangements like training, hosting, maintenance, data conversion, etc. bundled together, companies need to allocate the costs to each element on the relative standalone price for each part of the contract.
  • Companies implementing hosting arrangements with multiple modules should accumulate costs and amortization records at the module level so that they can begin amortization at the appropriate time for that module.  Documentation of modules, costs, obsolesce, and impairment or abandonment are required.

Reference article: https://www.ey.com/publication/vwluassetsdld/technicalline_04271-181us_cloudcomputing_6september2018/$file/technicalline_04271-181us_cloudcomputing_6september2018.pdf?OpenElement

Variable interest entities (ASU 2018-17)

This standard applies to all entities except for public entities, non-for-profit entities, and employee benefit plans qualifying common control arrangements.  It creates an alternative accounting policy election to not apply VIE guidance to legal entities under common control.  All the following criteria must be met for this election:

  • Reporting entity and legal entity are under common control.
  • Reporting entity and legal entity are not under common control of a public entity.
  • Legal entity under common control is not a public entity.
  • Reporting entity doesn’t have a direct or indirect controlling financial interest in the legal entity.

Additional disclosures are required related to the reporting entity’s involvement and exposure to entities with this election.  While it doesn’t require consolidation, a combined financial statement presentation is still an option to show combined results for entities under common control.  Early adoption is allowed, and entities are required to apply the amendments retrospectively.

Reference article: https://www.cohencpa.com/insights/articles/asu-2018-17-a-private-company-accounting

GASB Statement No. 87

The rule change will make GASB lease accounting similar to FASB lease accounting where substantially all leases will be required to be reported on the balance sheet.  Distinctions between operating and finance leases, however, are eliminated. 

For Lessees:

  • Lease liabilities will be considered long-term debt.
  • Lease payments will be financing outflows on the cash flow statement.
  • For operating-type leases, rent expense will no longer be reported in the activity statement.  Instead, interest expense on the liability and amortization expense related to the asset will be reported.

For Lessors:

  • Lessor accounting will mirror lessee accounting—this is different from FASB and IASB.
  • Lessor will recognize a lease receivable and a corresponding deferred inflow while still reporting the asset underlying the lease.
  • Interest income from the receivable will be recognized using the effective interest method.
  • Lease revenue will be recognized through amortizing the deferred inflow over the lease term.
  • New rules exclude leases associated with investment assets carried at fair value like investment rental property.  This accounting doesn’t change from current treatment.

GASB vs. FASB Differences

  • Right-of-use assets may amortize more quickly than liabilities in GASB, which will negatively impact net position.  FASB’s treatment has the asset and liability at roughly the same amount.
  • FASB reports lease liabilities as long-term operating payables.  GASB has them as long-term debt.  This could impact compliance with debt covenants.
  • FASB reports straight-line rent expense, and GASB reports interest expense on the liability and amortization expense on the asset.  This speeds up expense recognition.
  • Statement of cash flows: GASB – capital financing outflows / FASB – operating outflows.

Reference article: https://www.pwc.com/us/en/cfodirect/publications/in-brief/gasb-lease-accounting-rules.html

GASB Statement No. 89

This statement requires state and local government agencies, including public housing authorities, to expense interest during the construction period instead of capitalizing the interest and including it in the asset’s value.  The change was made to simplify reporting and show the true cost of borrowing.  The benefit of expensing interest has an immediate impact on the income statement instead of amortizing over several years.

Reference article: https://www.bdo.com/insights/business-financial-advisory/pha-finance/%E2%80%8Bgasb-statement-89-accounting-for-interest-costs

Top 2 Changes to the 2019 CPA Exam

Hello and welcome. My name is Roger Philipp of Roger CPA Review. Today I wanna talk about the top two changes to the CPA Exam in 2019.

We've been working hard to ensure that our 2019 course materials reflect the updates to the CPA Exam provided to us by the AICPA. While there are not structural changes on the exam, there are major content changes happening on the FAR and REG exams that are going into effect January 1st, 2019.

In Financial, Accounting, and Reporting, or in FAR, the big area that changed is leases. In 2016, the FASB issued ASC 842, which updated the accounting treatment of the leases. The goal was to provide more transparency and comparability among companies regarding lease assets and liabilities. To help ensure the transition, the Board allowed entities to adopt both the new lease standard and it wasn't gonna hit the exam or isn't until January 2019, which is now quickly approaching. Some of the changes include balance sheet recognition. Operating leases lasting over 12 months now must be reported on the balance sheet. So before we had what we called an off-balance sheet risk, now they have to be listed in the balance sheet. The new standard creates transparency for investors regarding a company's financial leverage and earnings. With financial statement disclosures, ASC 842 has much more stringent disclosure requirements for both quantitative and qualitative financial statement disclosures. The increased requirements may require companies to improve or implement new systems, procedures, and controls to provide the required disclosure. Lease qualification, long-term leases are now reported on the balance sheet. Short-term leases of 12 months or less are still allowed to be excluded from the balance sheet, but you could include them if you so desire. The new standard dictates that if the lessee does not have the right to control the use of the asset, then the transaction may not qualify as a lease. So that deals with control, so you've got to have the control. With lease payments there is a new revised definition of indirect costs resulting in fewer allowed capitalized costs. Executory costs, like property taxes, insurance, will now be included in lease payments. Regarding a sale leaseback transaction, so you sell it and then you immediately lease it back, to qualify as a sale, the transfer of the asset must adhere to the revenue recognition requirements in ASC 606, which deals with revenue from customers with contracts. When the transaction does not qualify as a sale, it is classified as a financing transaction, so kinda like you borrow the money in more of what we call a note payable.

So what does all of this mean for you? Well, since several bright-line tests have been removed, the update also requires that more judgment be applied. Because we used to have these four criteria for a capital lease, now we call it a finance lease. Now there's five criteria. Things like specialized nature, a purchase option, title transfer, but here is an area where it kinda got a little gray. The term, it says it has to be a major part of the lease, used to say 75%. Payment, substantially all, which used to be 90% of the fair market value. So that's where the bright-line tests kinda come in. So what you're gonna see is you're gonna need more of what we call brain power when addressing these questions on the CPA Exam once these changes go into effect on January 1st, 2019.

Now let's talk a little bit about regulation changes, especially in the area of taxation. This is probably the biggest change that everyone is talking about to the CPA Exam, especially in Regulation. And this is due to what we call the TCJA, which is the Tax Cut Job Acts of 2017. This significantly changed and updated the tax code, which impacts all the sections of tax, which accounts for most as up to 85% of the Regulation exam. This is the section we highly recommend that you take this year in 2018, as it will require you to relearn all that great stuff that you studied in school about taxes, whether it was in university or whether you've been working in the real world, it'll all change.

Here are some, just a few of the examples of the changes.

  • There's an increase in the Section 179 deduction. So we talk about deductions for depreciation and bonus depreciation. Used to be about half a million, now it went up to a million, starts to phase out at $2.5 million.
  • Increased standard deduction, but the elimination of the personal exemption. So no more personal exemption, dependency exemptions, but your standard deduction is $12,000. Married, filing joint, double or $24,000. Might be a good reason to get married.
  • New limitations on property and state taxes, as well as local taxes and also mortgage interest. So your property and state tax and all those are limited to $10,000 max. Your mortgage interest used to be a million one. They dropped it down to $750,000.
  • There's also a new deduction of up to 20% for owners of certain pass-through entities, like S-corps, partnerships, and so on. It's called a QBI deduction, or a Qualified Business Income Deduction, which is really nice.
  • If we increase the charitable contribution, so if you donate cash, you could instead of 50% of AGI, they increased it to 60% of AGI.
  • Entertainment expenses are now disallowed. So we used to do meals and entertainment. Now it's just meals, no more entertainment.
  • The new corporate tax rate, a flat tax rate, it went from 35% down to 21%, which is helpful. And that whole purpose was to bring corporations back in the United States. Increased gross receipts test, which allows more entities now to use the cash basis or cash method of accounting. Used to be at $10 million, they increased to $25 million.

So in conclusion, you can see that the CPA Exam content updates to these two areas will be significant. If you need help working these exams into your busy schedule, our new SmartPath Predictive Technology is the most effective way to maximize your study time. Well, it's a data-driven platform that tells you exactly where and how to focus your efforts. It takes the guesswork out of CPA Exam preparation. It's helping candidates pass the exam faster than ever before. They're more effective, they're more efficient. No matter when you decide to take the exam, we have your back and we'll guide you on the SmartPath to CPA Exam success.

Thank you and good luck in your studies.

Learn about the top 2 changes to the 2019 CPA Exam and how our patent pending SmartPath Predictive Technology will help you pass faster than ever before.

We understand the importance of providing students with everything they need to successfully prepare for and take the CPA Exam. Our expert team of CPAs worked hard to ensure our 2019 course materials addressed the July 2019 CPA Exam changes that were eligible for testing on July 1, 2019. Our course was updated by June 11, 2019 to accommodate the July 1st revisions.

The updates in our course software not only prepared students for the changes, but also gave them the confidence and resources they needed on Exam day. See revisions below for each 2019 CPA Exam section.

Auditing and Attestation (AUD)

Blueprints: The 2019 AUD Blueprints do not include any additional or eliminated content areas. However, there have been revisions to add more detail on professional skepticism and Audit Data Analytics (ADAs). Note that these updates do not change the nature or scope of content eligible for testing.

  • Added references to professional skepticism in the section introduction:
    • Professional skepticism reflects an iterative process that includes a questioning mind and a critical assessment of audit evidence. It is essential to the practice of public accounting and the work of newly licensed CPAs.
  • Added a Topic in Area I, Group B titled “Professional skepticism and professional judgment” with the following remembering and understanding task statements:
    • Understand the concepts of professional skepticism and professional judgment.
    • Understand personal bias and other impediments to acting with professional skepticism, such as threats, incentives and judgment-making shortcuts.
  • Added an analysis representative task statement in Area III, Group A – Performing Further Procedures and Obtaining Evidence - Understanding sufficient appropriate evidence, as follows:
    • Investigate evidence that either contradicts or corroborates management explanations, expectations and other hypotheses throughout an audit or non-audit engagement.
  • Revised the analysis representative task statement in Area III, Group C, Topic 3 – Performing Further Procedures and Obtaining Evidence – Performing specific procedures to obtain evidence - Inquiry of management and others, as follows:
    • Analyze responses obtained during structured or informal interviews with management and others, including those in non-financial roles, and ask relevant and effective follow-up questions to understand their perspectives and motivations in an audit or non-audit engagement.
  • Added an analysis representative task statement in Area III, Group C, Topic 6 – Performing Further Procedures and Obtaining Evidence – Performing specific procedures to obtain evidence - All other procedures, as follows:
    • Modify planned procedures based upon new information, such as inconsistent explanations, new evidence and environmental cues, to achieve audit objectives in an audit of an issuer or a nonissuer.
  • Revised the 3rd bullet under the Area II description:
    • Assessing Risks and Planning Further Procedures — Identifying and assessing risks of misstatement due to error or fraud and developing appropriate engagement procedures, including understanding and calculating materiality and considering specific engagement risks, as well as incorporating concepts such as audit data analytics, group audits, using the work of the internal audit function and the work of specialists.
  • Revised the 1st sentence in the description of Area III:
    • Area III of the AUD section blueprint covers performing engagement procedures and concluding on the sufficiency and appropriateness of evidence obtained, including performing specific types of procedures (e.g., analytical procedures, analytical procedures using audit data analytics, observation and inspection, recalculation and reperformance); testing the operating effectiveness of internal controls; performing tests of compliance and agreed-upon procedures; understanding and responding to specific matters that require special consideration (e.g., accounting estimates, including fair value estimates); evaluating and responding to misstatements due to error or fraud and to internal control deficiencies; obtaining management representations; and performing procedures to identify and respond to subsequent events and subsequently discovered facts.
  • Revised the application representative task statements in Area II, C, 4:
    • Identify and document an entity’s key IT general and application controls, their impact on the audit of an entity’s financial statements, including an audit of an entity’s internal controls, and consider the effect of these controls and manual controls on the completeness and reliability of an entity’s data.
    • Perform and document tests of an entity’s key IT general and application controls, their impact on the audit of an entity’s financial statements, including an audit of an entity’s internal controls, and consider the effect of these controls and manual controls on the completeness and reliability of an entity’s data.
  • Added an analysis representative task statement in Area II, E, 3:
    • Assess risks of material misstatement using audit data analytic outputs (e.g., reports and visualizations) to determine relationships among variables and interpret results to provide a basis for developing planned audit procedures.
  • Added an analysis representative task statement in Area III, C, 1:
    • Perform analytical procedures using outputs from audit data analytic techniques to determine relationships among variables and interpret results in an audit or non-audit engagement.
  • Added two analysis representative task statements in Area III, C, 6:
    • Determine the attributes, structure and sources of data needed to complete audit data analytic procedures.
    • Use audit data analytic outputs to determine relationships among variables and interpret results to meet objectives of planned procedures in an audit or non-audit engagement.

Content: The AUD section of the Exam will see some slight adjustments in content for 2019, including:

  • PCAOB release 2017-001, The Auditor’s Report on an Audit of Financial Statements when the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB Standards—Eligible for testing Q3 2018 (except for critical audit matters, which is eligible for testing in Q3 of 2019).
  • SSARS No. 24, Omnibus Statement on Standards for Accounting and Review Services —2018—Eligible for testing in Q3 2019.
  • Government Auditing Standards—2018 Revision (Yellow Book)—Updates related to performance audits are eligible for testing in Q3 of 2019 (Updates related to financial audits, attestation engagements, and reviews of financial statements are eligible for testing in Q3 of 2020).

Business Environment and Concepts (BEC)

Blueprints: There have been revisions to the July 2019 BEC Blueprints to add clarification and reorganize the material. However, the revisions do not significantly change the content eligible for testing. More specifically, these changes:

  • Clarify the Section introduction by:
    • Replacing the description of Area I with the following:
      • Area I of the BEC section blueprint covers several topics related to Corporate Governance, including the following:
        • Knowledge and use of internal control frameworks
        • Knowledge and use of enterprise risk management frameworks
        • Identifying key corporate governance provisions of regulatory frameworks and laws such as the Sarbanes-Oxley Act of 2002
    • Replacing the description of Area IV with the following:
      • Area IV of the BEC section blueprint covers several topics related to Information Technology (IT), including the following:
        • Understanding the role of IT and systems, including the use of data in supporting business decisions.
        • Identifying IT-related risks associated with an entity’s information systems and processes, such as processing integrity, protection of information and system availability, including those risks introduced by the relationships with third-parties.
        • Identifying application and IT general control activities, whether manual, IT dependent or automated, that are responsive to IT-related risks, such as access and authorization controls, system implementation testing and incident response plans.
      • Adding a reference:
        • COSO-issued application material, thought papers and guides related to the above frameworks
  • Reorganize Area IV, Information Technology, to clarify the nature and scope of content. The following representative tasks have been revised as follows:
    • Area IV, A, 1 – Understanding of information technology (IT) – Organization and governance: Identify the role of information systems (e.g., enterprise and application systems) in key business processes (e.g., sales, cash collections, purchasing, disbursements, human resources, payroll, production, treasury, fixed assets, general ledger and reporting).
    • Area IV, A, 3 – Understanding of information technology (IT) – Data:
      • Understand key characteristics of a relational database (e.g., data dictionary, data types, tables, records, fields, relationships, keys, views, queries and reports).
      • Recognize the role of big data in supporting business decisions.
    • Area IV, A, 3 – Understanding of information technology (IT) – Data: Use business intelligence (including data analytics and statistics) to support business decisions.
    • Area IV, B, 1 – Risks associated with IT - Risk assessment: Identify IT-related risks and describe mitigation strategies given risk severity, probability and costs.
    • Area IV, B, 2 – Risks associated with IT - System development and maintenance: Determine the fundamental issues and risks associated with selecting, developing and implementing new information systems or maintaining existing information systems.
    • Area IV, Group B, Topic 3 – Risks associated with IT - Processing integrity: Determine the risks associated with ensuring the completeness, accuracy and continued processing integrity in input, storage, processing and output processes.
    • Area IV, Group B, Topic 3 – Risks associated with IT - Processing integrity: Determine the risks associated with ensuring the completeness, accuracy and continued processing integrity in input, storage, processing and output processes.
    • Area IV, B, 4 – Risks associated with IT - Security, availability, confidentiality and privacy:
      • Identify the risks (e.g., cybersecurity and internal) associated with protecting sensitive and critical information (e.g., proprietary and personal information) within information systems (including processing, storing and transmitting information internally and with external parties).
      • Perform threat identification to identify risks related to information confidentiality.
    • Area IV, B, 4 – Risks associated with IT - Security, availability, confidentiality and privacy: Perform threat identification to identify risks related to system availability.
    • Area IV, C, 1 – Controls that respond to risks associated with IT – Application controls: Determine the role and appropriateness of input, storage, processing, and output application controls (e.g., authorizations, approvals, tolerance levels, input edits and configurations) to support completeness, accuracy and continued processing integrity.
    • Area IV, C, 2 – Controls that respond to risks associated with IT - General IT controls:
      • Understand the controls and testing strategies used in selecting, developing and implementing new information systems.
      • Identify effective IT control activities, including manual, IT dependent and automated controls, as well as preventive, detective and corrective controls.
    • Area IV, C, 3 – Controls that respond to risks associated with IT - Logical and physical controls: Identify logical and physical access controls (e.g., roles and rights and segregation of duties).
    • Area IV, C, 3 – Controls that respond to risks associated with IT - Logical and physical controls:
      • Identify the controls associated with protecting sensitive and critical information (e.g., proprietary and personal) within information systems.
      • Determine responses to information system confidentiality risks (e.g., incident response plan).
    • Area IV, C, 4 – Controls that respond to risks associated with IT - Continuity and recovery plans: Determine responses to system availability risks (e.g., data backup and recovery procedures and alternate processing facilities).

Content: There are no new content updates to BEC for 2019.

Financial Accounting and Reporting (FAR)

Blueprints: The FAR Blueprints have one change in response to ASU 2016-14: Presentation of Financial Statements of Not-for-Profit Entities (eligible for testing on January 1, 2019).

  • Added a Topic titled “Notes to the financial statements” to Area I, C – Conceptual Framework, Standard-Setting and Financial Reporting - General-purpose financial statements: nongovernmental, not-for-profit entities with the following application task statement:
    • Adjust the notes to the financial statements to correct identified errors and omissions.

Content: The most prominent change to the FAR Exam in 2019 is to the highly tested topic, Leases (ASU 2016-02, 2018-01, 2018-10, 2018-11, 2018-20 and IFRS 16). You’ve probably already heard about it since the standards have been out since 2016, but just in case you haven’t, you might like to know that “off-balance sheet financing” has been eliminated. Operating leases must now be recognized by the lessee on the balance sheet (except for short-term leases of 12 months or less). Previously, only capital leases (now called “finance leases”) were recognized on the balance sheet. It’s important to note that IFRS 16 is slightly different in that it essentially considers all leases to be finance leases unless they are worth $5,000 or less.

You might also note that several bright-line tests have been removed and more judgement is now required, making the standard slightly more difficult to apply. For example, there is no more “bargain purchase option” for purposes of determining whether a lease is a finance lease. A purchase option must now be “reasonably certain to be exercised”; i.e., it no longer really matters whether it is a bargain or not.

In addition to this major lease accounting makeover, there are a few other minor modifications that are testable in 2019:

  • ASU 2017-06: Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting
  • ASU 2017-08: Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities
  • ASU 2017-11: Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815): I–Accounting for Certain Financial Instruments with Down Round Features, II–Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception
  • ASU 2017-12: Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
  • ASU 2018-02: Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
  • ASU 2018-03: Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
  • ASU 2018-04: Investments—Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273
  • ASU 2018-05: Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118
  • ASU 2018-07: Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
  • ASU 2018-08: Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made
  • ASU 2018-09: Codification Improvements—Eligible for testing in Q2 of 2019

GASB Updates:

  • Statement No. 84 – Fiduciary Activities
  • Statement No. 88 – Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements

Regulation (REG)

Blueprints: The revisions made to the REG Blueprint in January of 2019 were to accommodate tax reform. The mid-year Blueprint changes merely provide clarification and do not change the nature and scope of content eligible for testing.

  • Revised existing analysis task statement in Area III, Group B - Federal Taxation of Property Transactions - Cost recovery (depreciation, depletion and amortization) to read as follows:
    • Compare the tax benefits of the different expensing options for tax depreciation for federal income tax purposes.
  • Added an application representative task statement in Area IV, Group C – Federal Taxation of Individuals (including tax preparation and planning strategies) - Adjustments and deductions to arrive at adjusted gross income and taxable income, as follows:
    • Calculate the qualifying business income (QBI) deduction for federal income tax purposes.
  • Removed reference to personal exemptions from Group F of Area IV, Federal Taxation of Individuals (including tax preparation and planning strategies) - Filing status and exemptions, deleted two task statements on personal exemptions, and added the following remembering and understanding task statement:
    • Recall relationships meeting the definition of dependent for purposes of determining taxpayer filing status.
  • Removed references to alternative minimum tax for C Corporations and removed task statements focused solely on testing alternative minimum tax for C Corporations in Area V, Group C, Topic 1 – Federal Taxation of Entities (including tax preparation and planning strategies) - C Corporations - Computations of taxable income, revising existing task statements as follows:
    • Calculate the credits allowable as a reduction of tax for a C corporation.
    • Analyze the impact of net operating and/or capital losses during tax planning for a C corporation.
  • Added remembering and understanding representative task statements in Area V, Group C, Topic 5 – Federal Taxation of Entities (including tax preparation and planning strategies) - C Corporations - Multijurisdictional tax issues (including consideration of local, state and international tax issues), as follows:
    • Identify situations where the base erosion and anti-abuse tax (BEAT) would apply.
    • Identify factors that would qualify income as Foreign Derived Intangible Income (FDII).
    • Define the components of Global Intangible Low-Taxed Income (GILTI).
  • Revised the 2nd application representative task statement in Area V, Group E, Topic 7 – Federal Taxation of Entities (including tax preparation and planning strategies) - Partnerships - Ownership changes, as follows:
    • Calculate the revised basis of partnership assets due to a transfer of a partnership interest for federal income tax purposes.
  • Added to the Section introduction – The REG section of the Exam includes multiple-choice questions, task-based simulations and research prompts. Candidates should assume that the information provided in each question is material and should apply all stated assumptions. To the extent a question addresses a topic that could have different tax treatments based on timing (e.g., alimony arrangements or net operating losses), it will include a clear indication of the timing (e.g., use of real dates) so that the candidates can determine the appropriate portions of the Internal Revenue Code or Treasury Regulations to apply to the question. Absent such an indication of timing or other stated assumptions, candidates should assume that transactions or events referenced in the question occurred in the current year and should apply the most recent provisions of the tax law in accordance with the timing specified in the CPA Exam Policy on New Pronouncements.
  • Area III, A, 4 – Federal Taxation of Property Transactions - Acquisition and disposition of assets - Related party transactions (included imputed interests):
    • Calculate the direct and indirect ownership percentages of corporation stock or partnership interests to determine whether there are related parties for federal income tax purposes.
  • Area III, C, 3 – Federal Taxation of Property Transactions - Estate and gift taxation - Determination of taxable estate:
    • Recall assets includible in a decedent’s gross estate for federal estate tax purposes.
    • Recall allowable estate tax deductions for federal estate tax purposes.

Content: Most of the 2019 REG Exam changes are due to tax reform. The Tax Cuts and Jobs Act of 2017 (TCJA) has impacted all tax sections, which can account for as much as 80% of the REG Exam. To get an idea of how extensive the changes are, we have provided a PARTIAL list of some of the most important changes:

  • P.L. 115-97: An Act to provide for reconciliation to titles II and V of the concurrent resolution on the budget for fiscal year 2018
    • Commonly referred to as the “Tax Cuts and Jobs Act”
    • Most significant overhaul of the U.S. tax code since the Tax Reform Act of 1986.
    • Impacts individual taxation, entity taxation (C corporations, S corporations, partnerships, limited liability companies, tax-exempt entities), and international taxation.
  • Taxation of Property Transactions (Area III of Blueprint—12-22%)
    • Section 179 deduction increased.
    • Definition of qualified real property eligible for Sec. 179 expensing is expanded.
    • Bonus depreciation is increased and expanded until being phased out again starting in 2023.
    • Required use of 150% declining balance depreciation method is repealed.
    • Straight-line recovery periods for qualified improvement property and residential rental property changed.
    • Gross-receipts test increased for purposes of UNICAP.
    • New Section 1031 like-kind exchange limitations.
  • Individual Taxation (Area IV of Blueprint— 15-25%)
    • Increased standard deductions.
    • No personal exemptions.
    • Increased child tax credit and new “family tax credit” provision for other dependents.
    • AMT exemptions increased.
    • New limitation on state and local taxes.
    • New mortgage interest limit.
    • Home equity deduction disallowed, unless certain requirements are met.
    • Pease limitation on overall itemized deductions suspended.
    • New 20% deduction for owners of certain pass-through entities.
    • Kiddie tax rates changed.
    • Alimony deduction/inclusion repealed, with exceptions.
    • Moving expenses deduction/exclusion suspended for most.
    • No casualty losses deductions, with exceptions.
    • 2% Misc. itemized deductions suspended.
    • Taxation of qualified gains/dividends changed.
    • New rules allowing limited distributions from 529 plans for elementary/secondary school expenses.
    • New exclusion for death/disability for student loan discharges.
    • Expanded deductions allowed for wagering losses.
    • Cash charitable contribution limitation increased.
    • Most entertainment expenses are disallowed.
    • NOL carryback provisions were repealed; may carry NOLs forward indefinitely.
  • Entity Taxation (Area V of Blueprint—28-38%)
    • Gross receipts test increased to allow more taxpayers to use cash method of accounting.
    • Inventories need not be accounted for under Section 471 if increased gross receipts test is met.
    • Corporate graduated tax rates reduced to flat 21% rate.
    • Corporate AMT is repealed.
    • New business interest deduction limitation.
    • Deduction for qualified transportation fringe benefits generally no longer allowed.
    • Revised “covered employees” definition for purposes of limitation on compensation paid to such employees of public corporations.
    • New limitation on accumulated earnings credit for certain controlled corporations.
    • Dividends received deduction percentages reduced to reflect lower corporate income tax rates.
    • Domestic production activities deduction is repealed.
    • New international tax rules.


CPA Exam Changes Q & A

If you purchase a Roger CPA Exam review course now, you will have access to a fully upgraded course platform once the 2019 CPA Exam changes go into effect in January 2019. All Roger CPA Review students will receive automatic updates to their online course materials for the duration of their course.

Exam content tests the skills that newly licensed CPAs must know to continue to protect the public interest, including:

  • Critical thinking, problem solving, analytical ability, and professional skepticism
  • Effective communication skills
  • Well-developed research skills
  • A strong understanding of the business environment and processes
  • Ethics and professional responsibilities