Stay tuned:  Tomorrow we will send out a newsletter with details on Rural Development's Newly Released Chapter 4 of Handbook 2-3560, and the long-awaited 2019 Rural Development Audit Guide

After consultation with multiple CPA firms as to how ASU 2016-18 affects HUD project audits, REAC will not adopt these changes in the HUD chart of accounts. Therefore, for purposes of the REAC Financial Data Template, cash flow data will continue to present changes in escrows and reserve for replacements in the investment section of the cash flow statement. 

The decision, based on lengthy discussions with many firms regarding the ASU requirements and their opinions on implementation, is the simplest approach REAC can take. Conversations indicate a wide variety of interpretations on the nature of restricted cash. Some believe all HUD accounts representing tenant security deposits, restricted deposits, and funded reserves should be included on the statement of cash flows as cash. Others believe only tenant security deposits and self-restricted reserves, such as operating reserves, should be included in cash, cash equivalents and restricted cash. Still others believe that mortgage escrows are the only accounts that should be excluded from the aforementioned cash accounts.

The lack of consensus presents a barrier to implementation since there is only one template for supplemental cash flow data. Such numbers of firms unwilling to make the change in the basic financial statements prevents the implementation of the supplemental cash flow data as envisioned by the ASU.  More importantly, HUD has no particular need for the information as proposed in the ASU. In fact, inclusion of the ASU in the template would require manual review procedures that are currently being performed automatically. REAC believes making the change inhibits its mission of evaluating multifamily submissions.  By leaving the HUD chart of accounts as is, individual CPA firms can make decisions with respect to the presentation of restricted cash in their basic statements of cash flows and maintain the data currently used by REAC in their reviews.

Background

In November 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2016-18 on Restricted Cash. The ASU is effective for audits ending on December 31, 2019.  The update requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period totals on the cash flow statement. The amendments are designed to reduce the diversity in practice that exists when these amounts are presented in the statement of cash flows. Unfortunately, the update does not provide any additional clarification of the term “restrictions.”

In concept, the ASU has an impact on multifamily engagement as the statements of financial position contain numerous accounts that could be classified as restricted.  As a result, changes in these accounts would now be presented in cash flows statement as “Cash from Operations” as opposed to “Cash provided by Investing Activities.”

Our Position

Although AHACPA supports REAC’s decision to not change the template, we do so for very specific reasons.  First, the diversity of opinion regarding implementation in the basic financial statements made it impossible to get consensus on the supplemental data template. Additionally, our general position is to limit the amount of changes to the template unless required. AHACPA believes that differences between the basic financial statements and the supplemental data are in the best interests of the CPAs who audit these entities. The differences between the requirements of GAAP financial statements and supplemental data derived from GAAP-based financial statements is an important distinction to maintain.

There are several dilemmas surrounding this decision. 

1. The cash flow statements will be different. This is a primary concern among firms as they develop templates for FY 2019 audits.  One cash flow is simpler.

2. The auditor could be confused about their ability to give an AU-C 725 opinion on the supplemental data.  We have been asked this multiple times. 

There is not much that can be done to remedy the differences in the two statements.  In our opinion, this difference should have existed from the beginning.  The current cash flow presented in the basic statements is not GAAP because escrows and reserve for replacements were presented “net.” They should have been presented with specific increases and decreases separately.  Further, we are quite certain that neither mortgage escrows or reserve for replacements are not really investments.  Finally, the actual investment accounts contained in the REAC chart of accounts are not included as investments but are included in cash in the cash flow. The pending change is allowing each client to revise their financial statements to be more in-line with their own interpretations of GAAP.  Nevertheless, in the last twenty years, no one has ever reported a specific problem with this presentation or required any report modification due to following HUD’s requirements.

Implementation Options

Everyone should now understand that the adoption of the ASU will now result in a difference in the total amount of cash, cash equivalents and restricted cash in the basic statement of cash flows and the HUD supplementary data schedule. Since there are multiple interpretations of the requirements for implementation, this difference would exist under any scenario. As mentioned above, there may still be instances where the basic statements of cash flows do not match the HUD version. 
 
Here is what we believe to be the implementation options. Each option recognizes that there will be no change for the HUD financial data template.
 
Option 1 – Adopt the ASU for the basic financial statements and maintain the difference between the two statements.  This option gives credence to the new ASU and attempts to establish a more correct GAAP presentation.  Remember that the HUD Financial Data Templates (FDT) are GAAP-based but are not required to be completely aligned with GAAP.  The templates are not required to match the basic financial statements themselves.  Remember, the opinion given on supplemental data is not based on the basic financial statements themselves.  Such data is derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. the GAAP-related financial data used to prepare the basic financial statements.  Accordingly, differences have existed and will continue to exist between a pure GAAP presentation and the supplementary data. In this case, we do not believe the difference between the basic financial statements and the supplemental data is material enough to warrant any modification to the AU-C 725 opinion referred to in the auditor’s report.

Option 2 – Do not adopt the ASU for the basic financial statements.  This approach may appear more radical as it clearly deviates from the stated goals of the ASU.  However, this position is backed up by more than 20 years of non-GAAP cash flows which were presented in accordance with HUD rules.  The support for this position is as follows:

1. To begin with there is no consensus on the nature of the restrictions.  The ASU did not make any changes to the definition of “restricted” cash. 

2. There may be questions regarding mortgage escrows, security deposits and reserve for replacements (R4R) and whether they are truly restricted cash.  Of those, only one account (R4R) seems to meet that definition and that is only restriction related to approval.

3. Confusion could also arise from staying consistent with the HUD data schedule and if it is any more of a GAAP departure than netting the same accounts.

4. The main users of the financial statements have indicated that they do not need or want the change.

I confess--the more I think about this, the more I find myself drawn to the second option.   It stays consistent with the past approach, users do not need or want the change, and it removes any differences between the two statements.  Given the circumstances, each firm will have to decide for themselves how this standard is to be implemented.

Get the latest HUD Information!
Attend one of these upcoming courses in Las Vegas

AHACPA's 21st Annual Multifamily Conference
December 10th & 11th, 2019

Nationally Recognized Speakers:

• Peter B Bell, CPA, Peter B. Bell, CPA, LLC
• Sara Farina, CPA, MSA, Senior Associate – Plante Moran
• Marlow Hunter, CPA, Marlow C. Hunter, P.C.
• Kelly Perlman, CPA,  Audit Manager, Plante Moran
• Les Sparks, President, AHACPA

December 10th & 11th, 2019
Dec. 10th: 8:00 am - 5:00 pm
Dec. 11th: 8:00 am - 3:10 pm
16 hours of governmental CPE

The Cosmopolitan of Las Vegas
3708 Las Vegas Blvd South Las Vegas, NV 89109

Course Fee: $650 ($600 for AHACPA Members)
Register before Nov. 22 for a $50 early-registration discount

Topic Highlights:

• FASB Audit Issues including:
  • Refi vs Modification
  • Accounting for insurance events (involuntary conversion)
  • Upcoming accounting pronouncements that effect non-profit sponsor
  • New profit format (quick review)
  • Reserves/escrows reporting changes
• Yellowbook Update
• New RD Audit and Reporting Requirements
• Responding to Risk Assessment Risk
• HUD Audit Guide Update
• Discussion of REAC Position on Restricted Cash & ASU 2016-18
• RAD 202 Conversions Discussion of changes to reports, representation letters, engagement letters, etc

FHA-Lender Update
December 9th, 2019

Nationally Recognized Speakers:

• Marlow Hunter, CPA, Marlow C. Hunter, P.C.
• Dr. Andrew Schell, CPA, CMB, Managing Partner – MBS
• Les Sparks, President, AHACPA
• Monique White-Chiselom, Supervisory Auditor, HUD-FHA

December 9th, 2019
8:30 am - 4:30 pm
8 hours of governmental CPE

The Cosmopolitan of Las Vegas
3708 Las Vegas Blvd South Las Vegas, NV 89109

Course Fee: $395 ($345 for AHACPA Members)

Topic Highlights:

• Update from HUD-FHA, Financial Audit Requirements for FHA Lenders
• HUD Audit Guide & Compliance
• Yellowbook Update
• Mortgage Accounting and Mortgage Financing, including IRLC, ASC Levels, and Fair Value Measurements
• Risk Assessment Overview

Objective: To learn HUD accounting, auditing, and electronic submission requirements and how to efficiently implement those requirements.
Prerequisites / Advanced Preparation: General HUD accounting or audit experience. You do not need to print any course materials prior to your arrival. All materials will be provided for you.
Instructional Method: Group-Live with interactive discussion and Group Internet Based
Length / CPE Credits: One-day Update Courses provide up to 8 hours CPE credit (4 hours governmental accounting and 4 hours governmental auditing). Two-day Conferences provide up to 16 hours CPE credit (8 hours governmental accounting and 8 hours governmental auditing).
Cancellation Policy: All cancellation requests must be received in writing (email or fax is fine). Registration fees are fully refundable provided the request is received at least three weeks prior to the course. Requests received after this date, but one week before the course will receive a refund less an administration fee of $25 for Webinars, $50 for Update Courses, and $75 for Conferences. Due to financial obligations incurred by AHACPA, no refunds will be issued for cancellation requests received less than a week before the course.
Substitutions: If you are unable to attend a course you may substitute another individual or change locations without penalty. The location change must be within the same calendar year. For proper CPE credit and record keeping, you must notify us in advance of any substitution or change in location.
Contact Information: For more information regarding refund, complaint, and/or program cancellation policies, please contact our office at 801-547-0809.