Page 2 EY Q1 2014 financial reporting update Today’s agenda ► Final standards ► Q1 matters to consider ► Other developments
Page 3 EY Q1 2014 financial reporting update Today’s agenda ► Final standards ► Q1 matters to consider ► Other developments
Page 4 EY Q1 2014 financial reporting update Definition of a public business entity (PBE) ► Currently, does not change whether an entity is considered public or nonpublic for previously existing US GAAP requirements ► Broader than other definitions of public entity and publicly traded company that exist in US GAAP ► Determines whether an entity can use: ► Private company council (PCC) accounting alternatives ► Other “private” company relief (e.g., disclosure, transition, effective date differences) in new standard-setting Private companies should consider whether they might become a PBE when deciding whether to elect the PCC alternatives because the FASB and the SEC have not provided transition guidance.
Page 5 EY Q1 2014 financial reporting update Definition of a public business entity (PBE) Entities that meet the definition CriterionEntities that meet the criterion a)Has financial statements or financial information furnished to or filed with the SEC, or included in an SEC filing ► Significant acquirees (Rule 3-05) ► Significant equity method investees (Rule 3-09, 4-08(g)) b)Required by the 1934 Act to file financial statements with a regulator other than the SEC ► Some financial institutions and insurance companies c)Required to file financial statements with a foreign or domestic regulator to issue securities ► Entities that file US GAAP financial statements with a foreign regulator d)Has securities on an exchange or an over-the-counter (OTC) market ► Depends on facts and circumstances e)Has securities not subject to contractual transfer restrictions and required to prepare US GAAP financial statements and make them publicly available ► Depends on facts and circumstances
Page 6 EY Q1 2014 financial reporting update Opinion check Do you expect your company to be affected by the new definition of a public business entity? A. Yes B. No C. Unsure D. Does not apply (EY, faculty, other)
Page 7 EY Q1 2014 financial reporting update Standards effective in 2014 Presentation of unrecognized tax benefits (ASU 2013-11) ► Disclosure of deferred tax assets likely changes as a result ► Not expected to change: ► Disclosure of uncertain tax positions ► Income tax provision Effective dates of ASU 2013-11 for calendar year-ends Transition methodPublicPrivateEarly adoption? ProspectiveQ1 20142015Yes ► Net settlement is required or expected ► Net settlement is not required or expected Gross presentationNet presentation ► Balance sheet presentation standard ► Liabilities for unrecognized tax benefits are offset against deferred tax assets (for net operating losses, similar tax losses or tax credit carryforwards)
Page 8 EY Q1 2014 financial reporting update Today’s agenda ► Final standards ► Q1 matters to consider ► Other developments
Page 9 EY Q1 2014 financial reporting update Proxy reminders SEC focus areas ► Compensation discussion and analysis ► Clear description of all factors in assessing performance and the weight attached to each ► Quantitative and qualitative discussion of targets ► Comparison of actual compensation to targets ► Explanation of how and why compensation committee used discretion Example SEC Staff comment letter Please tell us the specific performance targets for each named executive officer as well as the actual results achieved and how you evaluated the results to reach the actual payouts. Please provide more detail regarding the “discretion” the committee applied towards your performance metrics.
Page 10 EY Q1 2014 financial reporting update Proxy trends Say-on-pay (SOP) and audit committee disclosures ► SOP trends – high investor support ► Average support is > 90% for Russell 3000 companies ► Audit committee disclosures – increased voluntarily in response to shareholder requests Triennial companies will have second SOP votes in 2014 Audit committee (AC) disclosures % of Fortune 100 20122013 Auditor selection is in best interest of shareholders4%23% AC is involved in lead audit partner selection1%17% AC is responsible for fee negotiations1%9% AC is responsible for auditor appointment, oversight and compensation 37%50% AC considered impact of auditor rotation3%15%
Page 11 EY Q1 2014 financial reporting update Proxy trends Other shareholder proposals ► Top trends ► Lobbying activities ► Sustainability reports ► Greenhouse gas emissions ► Eliminate classified board ► Executive pay practices ► Emerging trends ► Cybersecurity ► Corporate tax strategies ► Limit interim vote access ► Director tenure and independence ► Human rights risk assessment Company-investor engagement has increased over the last year
Page 12 EY Q1 2014 financial reporting update Estimated annual effective tax rate (EAETR) ► Make best estimate of the annual effective tax rate for full fiscal year at end of each interim period ► Use EAETR to record tax on current year-to-date basis ► Project year-end temporary differences and valuation allowance ► Exclude benefits of expired provisions ► Package of business “tax extenders” expired again on 31 December 2013 ► Recognize the income tax effect of tax law change in the interim period of enactment ► Cumulative effect of change is recognized as a discrete item in continuing operations ► Spreading to earlier periods prohibited, even if retroactive
Page 13 EY Q1 2014 financial reporting update Estimated annual effective tax rate (EAETR) ► Changes to indefinite reinvestment assertion ► Record in the interim period the change in assertion occurs ► Record tax effects related to prior year undistributed earnings – discrete ► Record tax effects related to current year undistributed earnings – adjust EAETR ► Discontinued operations ► Revise EAETR applied to income from continuing operations in current and subsequent interim periods of current fiscal year ► Recast income taxes related to prior interim periods (as applicable) between continuing and discontinued operations
Page 14 EY Q1 2014 financial reporting update Adopting 2013 COSO framework ► Transition activities ► Map existing controls and related activities to 17 principles ► Evaluate whether 1) each of the 17 principles are present and functioning and 2) five components are integrated ► Other significant changes ► Financial reporting fraud ► Information quality (e.g., in management review controls) ► Outsourced service providers ► Deficiency evaluation Common questions ► How much effort will the transition take? ► What documentation will external auditors expect? ► Does the expansion of the framework to include nonfinancial reporting and internal reporting affect management’s assessment or integrated audit?
Page 15 EY Q1 2014 financial reporting update Fact check Has your company started the transition to the 2013 COSO framework? A. Yes B. No C. Does not apply (EY, faculty, other)
Page 16 EY Q1 2014 financial reporting update Other SEC reminders Conflict minerals ► Rule upheld by a US district court in July 2013 ► Currently under appeal ► Companies may need to file Form SD, conflict minerals report and obtain independent private sector audit (IPSA) ► For the first two years the conflict minerals report may be unaudited if products are “conflict undeterminable” ► An IPSA provides assurance on whether the: ► Design of the due diligence framework used conforms with a recognized framework ► Company performed due diligence described in its conflict minerals report Initial disclosures on Form SD are due 2 June 2014
Page 17 EY Q1 2014 financial reporting update Other SEC reminders Cybersecurity and data protection ► Increased attention from regulators, lawmakers and shareholders ► SEC recently hosted a cybersecurity roundtable ► Disclose significant specific risks associated with cyberattacks ► Refer to Corporation Finance Disclosure Guidance: Topic No. 2, Cybersecurity ► Do not refer to cybersecurity risk factors in hypothetical terms if a cyberattack has occurred ► State known and potential costs and other financial and nonfinancial consequences of cyberattacks
Page 18 EY Q1 2014 financial reporting update Mandatory firm rotation ► EU provisional agreement for Public Interest Entities (PIEs) ► PIEs generally include companies listed in the EU, banks and other financial institutions (e.g., investment firms) ► Mandatory firm rotation: maximum of 10 years (certain exceptions for joint audits and retenders) ► Restrictions on non-audit services ► India ► Similar to EU provisions but applies to most companies incorporated in India (including subsidiaries and private companies), pending final rule-making and interpretation ► United States ► Not being considered; focus on changes to auditor’s report Multinationals should consider the effects
Page 19 EY Q1 2014 financial reporting update Today’s agenda ► Final standards ► Q1 matters to consider ► Other developments
Page 20 EY Q1 2014 financial reporting update Status of selected FASB projects First half 2014Second half 2014 Revenue recognitionFinal standard LeasesRedeliberations Insurance contractsRedeliberations Financial instruments Classification and measurementRedeliberationsFinal standard ImpairmentRedeliberationsFinal standard HedgingFASB staff research Goodwill for public business entitiesDeliberationsTo be determined Consolidation (principal – agency)Redeliberations Going concernRedeliberations Disclosure framework (board process)Exposure draftComment period Disclosure framework (entity process)Summarizing results from field testing Discontinued operationsFinal standard
Page 21 EY Q1 2014 financial reporting update Reporting discontinued operations Summary of significant changes in criteria CurrentProposed standard Threshold for item held for sale or disposed of Component Component AND major strategic shift having a major effect on financial results Held for sale on acquisition Asset group AND certain held for sale criteria met Business AND all held for sale criteria met Significant ongoing involvement ProhibitedAllowed Scope exceptions (e.g., equity method investments) Yes, various Limited to oil and gas properties using the full cost method
Page 22 EY Q1 2014 financial reporting update Reporting discontinued operations Summary of changes in presentation and disclosure ► Assets/liabilities must be classified as held for sale in the period the criteria are met and all prior periods presented ► New disclosures for discontinued operations: ► Major components of pretax income or loss ► Details of the major assets and liabilities ► Operating and investing cash flows OR depreciation, amortization, capital expenditures and significant noncash items ► Quantitative information about continuing involvement ► Disclose pretax profit or loss for individually material disposals not meeting discontinued operations criteria Final standard expected in second quarter
Page 23 EY Q1 2014 financial reporting update Financial instruments Classification and measurement ► FASB decided not to pursue the proposed cash flow characteristics test and business model assessment ► FASB plans to evaluate definition of “security” to address practice issues Final standard expected in second half of 2014 ► Bifurcation of embedded derivative features ► Classification and measurement models for loans and debt securities Same (as current US GAAP) ► Equity instruments measured at fair value through net income (no remeasurement through other comprehensive income) Changing (from current US GAAP)
Page 24 EY Q1 2014 financial reporting update Financial instruments Impairment for debt instruments Yes Measured at amortized cost Measured at fair value (FV) through other comprehensive income (OCI) Apply proposed “current expected credit loss” model to measure credit losses Is fair value less than amortized cost? No allowance Yes* No * Allowance for credit losses on debt instruments measured at FV-OCI would be limited to the difference between FV and amortized cost Debt instruments
Page 25 EY Q1 2014 financial reporting update Leases ► Lessee accounting – most leases on balance sheet ► IASB – all leases would be classified as Type A ► FASB – dual lease classification (Type A and Type B) based on current IFRS principles (like US GAAP but no bright-lines) ► Lessor accounting – Both Boards support using existing IFRS classification principles (similar to current US GAAP) ► Differ on recognition of initial selling profit, if any, for certain Type A leases (i.e., sales-type leases) ► Other tentative decisions reached ► Lease term, short-term lease exception, other simplifications ??? Final standard Q1 2014 Begin redeliberation s 2011 - 2013 Redeliberations and 2 nd ED Q3 2010 Exposure draft (ED)
Page 26 EY Q1 2014 financial reporting update Accounting for goodwill Public business entities (PBEs) and not-for-profits ► PBEs expressed concerns about the cost and complexity of the annual goodwill impairment test ► The FASB is evaluating three potential alternatives ► Direct write-off ► Simplified impairment ► Amortization ► Timing of a potential exposure draft is uncertain ► FASB to consider feedback on the IASB’s ongoing post- implementation review of IFRS 3(R), Business Combinations
Page 27 EY Q1 2014 financial reporting update Opinion check Which approach to accounting for goodwill would you prefer for public business entities? A. Direct write-off B. Simplified impairment C. Amortization D. Other
Page 28 EY Q1 2014 financial reporting update EITF update – selected projects No.Issue addressedStatus 12-FRecognition of new accounting basis (pushdown) in certain circumstances Consensus for exposure 12-GMeasuring the financial assets and financial liabilities of a consolidated collateralized financing entity Discussions 13-BAccounting for investments in qualified affordable housing projects Final ASU issued 13-DAccounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period Final consensus 13-FAccounting for the effect of a Federal Housing Administration guarantee Comment letter period 13-GDetermining whether the host contract in a hybrid financial instrument issued in the form of a share is more akin to debt or to equity Discussions
Page 29 EY Q1 2014 financial reporting update EITF update – Issue 12-F Recognition of new accounting basis (pushdown) ► Applies to SEC registrants ► Allowed when an entity becomes substantially wholly owned (> 80% acquired) ► Required when 95% or more of an entity is acquired ► Considers group of investors that effectively acts as one investor (collaborative group) ► Applies to all entities ► Allowed when an entity becomes controlled by a new party ► Optional ► Does not consider collaborative groups ► Requires new disclosures Current SEC requirementsConsensus-for-exposure Pushdown accounting: reflecting acquirer’s new basis at fair value in stand-alone financial statements of acquired entity SEC Staff has not stated if it will change its guidance
Page 30 EY Q1 2014 financial reporting update Disclosure reform ► FASB disclosure framework project ► Exposure draft proposes a new chapter to the conceptual framework to improve the FASB’s process for establishing disclosure requirements ► SEC Staff study of Regulation S-K ► Recommends a comprehensive review of SEC disclosures Comment period ends 14 July 2014 Principles-based Technology used to enhance readability Presentation, delivery and frequency of filings Considerations for review Scaled requirements
Page 31 EY Q1 2014 financial reporting update SEC proposals Crowdfunding and Regulation A+ ► Provide private companies access to capital by making certain public offerings exempt from registration ProvisionCrowdfunding Regulation A+ Tier 1Tier 2 Maximum in 12 months$1 million$5 million$50 million Individual investor limitations YesNoYes Subject to state securities laws and registration NoYesNo Audit of financial statements required Yes, offering > $500K NoYes Ongoing reporting and filing deadline Yes (120 days after year-end) No Yes (120 days after year-end; 90 days after half-year) Number of years of financial statements Two years
Page 32 EY Q1 2014 financial reporting update Private company council (PCC) update Project status No.Alternatives under US GAAPStatus 13-01AAccounting for identifiable intangible assets in a business combination Proposed ASU (research in progress) 13-01BAccounting for goodwill subsequent to a business combination ASU issued 13-02Applying variable interest entity guidance to common control leasing arrangements ASU issued 13-03AAccounting for certain receive-variable, pay-fixed interest rate swaps – simplified hedge accounting approach ASU issued 13-03BAccounting for certain receive-variable, pay-fixed interest rate swaps – combined instruments approach Removed from agenda
Register free at: www.ey.com/us/accountinglink AccountingLink What you need to know. When you need to know it. Because change is constant in the financial reporting world, you need the latest information, analysis and insight, first.
Page 34 EY Q1 2014 financial reporting update Thanks for participating.