1 FASB Update Rahul Gupta Project Manager Financial Accounting Standards BoardAugust 13, 2014The views expressed in this presentation are those of the presenter.Official positions of the FASB are reached only after extensive due process & deliberations.
4 Recent Accounting Standards Updates No.TitleDefinition of a Public Business EntityAccounting for Investments in Qualified Affordable Housing Projects (a consensus of the EITF)Accounting for Goodwill (a consensus of the PCC)Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach (a consensus of the PCC)Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the EITF)Service Concession Arrangements (Topic 853) (a consensus of the EITF)Technical Corrections and Improvements Related to Glossary TermsApplying Variable Interest Entities Guidance to Common Control Leasing Arrangements (a consensus of the PCC)
5 Recent Accounting Standards Updates No.TitleReporting Discontinued Operations and Disclosures of Disposals of Components of an EntityRevenue from Contracts with Customers (Topic 606)Development Stage Entities (Topic 915)Repurchase-to-Maturity Transactions, Repurchase Financings, and DisclosuresAccounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the EITF)
6 ASU 2014-02, Accounting for Goodwill (a consensus of the PCC)
7 ASU 2014-02: Goodwill Final Alternative Do not amortize goodwill Current U.S. GAAPDo not amortize goodwillTest for impairment at least annually or more frequentlyReporting unit levelTwo-step testOptional qualitative assessmentFinal AlternativeAmortize over 10 years or lessTest for impairment upon occurrence of triggering eventEntity level or reporting unit levelOne-step testOptional qualitative assessment
8 & interim periods thereafter ASU : GoodwillTransition: Amortize existing goodwill prospectively over 10 years or less if the private company can demonstrate that another useful life is more appropriate.Effective Date: Applied prospectively for existing goodwill and new goodwill recognized in the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. Early adoption is permitted.1st annual periodPrivate Companies& interim periods thereafterQ1Q2Q3YEQ1Q2Q3Dec. 15, 20142015
9 ASU , Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach (a consensus of the PCC)
10 ASU 2014-03: Interest Rate Swaps Impact of interest rate swapCurrent GAAPPCC AlternativeNo hedge accountingHedge accountingCombined instruments (Not pursued)Simplified hedge accounting (Final)Income statementVolatility in interest expense as result of changes in FVInterest expense approximates fixed rate debtBalance sheetAsset or liability at fair valueOnly disclosure of settlement valueAsset or liability at settlement value (or FV)Other comprehensive incomeNo impactIncludes changes in fair value of effective portion of hedgeIncludes changes in settlement value (or FV) of the swap
11 ASU 2014-03: Interest Rate Swaps Transition: Private companies may apply either the modified retrospective approach or the full retrospective approach upon adoption. Existing swaps as of the date of adoption may qualify for the simplified hedge accounting approach.Effective Date: Effective for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. Early adoption is permitted.1st annual periodPrivate Companies& interim periods thereafterQ1Q2Q3YEQ1Q2Q3Dec. 15, 20142015
12 ASU , Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (a consensus of the PCC)
13 ASU 2014-07: Common Control Leasing & VIE Typical private company common control leasing arrangementOwnerManufacturing CompanyLeasing Company100% InterestPays RentLeases Land & BuildingBankMortgageDebt
14 ASU 2014-07: Criteria to qualify for scope exception 1) Lessor entity & private company lessee (reporting entity) are under common control2) Private company lessee has leasing arrangement with lessor entity3) Substantially all activity between two entities is related to leasing activity between lessor entity to the private company lessee4) If the private company lessee explicitly guarantees or provides collateral for any obligation of the lessor related to the asset leased by the private company, then the principal amount of the obligation at inception does not exceed the value of the asset leased by the private company from the lessor.
15 ASU 2014-07: Common Control Leasing & VIE Transition: Full retrospective approachEffective Date: Effective for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. Early adoption is permitted.1st annual periodPrivate Companies& interim periods thereafterQ1Q2Q3YEQ1Q2Q3Dec. 15, 20142015
16 ASU 2014-09, Revenue from contracts with customers (Topic 606)
17 Revenue RecognitionObjective: single, principle-based revenue standardImprove accounting for contracts with customersMore robust framework for recognizing revenueIncreased comparability across industries & capital marketsBetter disclosuresExcludes contributions and collaborative arrangementsSubstantially converged on major decisionsFinal standard issued on May 28, 2014
18 Core Principle and Application Core principle: Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services1Identify contract(s) with the customer2Identify performance obligations3Determine the transaction price4Allocate the transaction price to the identified performance obligations5Recognize revenue when performance obligation is satisfied
19 Disclosure requirements* 19Disaggregate revenue into categories that depict how revenue and cash flows are affected by economic factorsExplain the relationship with segment disclosuresDisaggregation of revenueOpening & closing balancesAmount of revenue recognized from contract liabilitiesExplanation of significant changes in contract balancesInformation about contract balancesTransaction price allocated to remaining performance obligationsQuantitative or qualitative explanation of when amounts will be recognized as revenueRemaining performance obligationsInterim requirementsAll quantitative disclosures in annual and interim(Public companies only)* Most quantitative disclosures are optional for nonpublic entities
20 Rev Rec—Issuance & Effective Dates: Timeline Issue final standardMay 2014Establish Transition Resource GroupJune 2014Effective Date – Public EntityJan. 2017Effective Date – Nonpublic Entity Jan. 2018A nonpublic company/not-for-profit has the option to early adopt (no earlier than a public company)Transition alternatives:Retrospective for all periods presentedApply when effectiveFor year of adoption, disclose amounts of financial statement line items under old method accounting (to allow trend analysis)
21 Transition Resource Group (TRG) – Overview To solicit, analyze, and discuss stakeholder issues arising from implementation of the new guidanceTo inform the FASB and the IASB about those implementation issues, which will help the Boards determine what, if any, action will be needed to address those issuesTo provide a forum for stakeholders to learn about the new guidance from others involved with implementationTRG will not issue guidance
22 How to Submit an IssueAny stakeholder can submit a potential implementation issueWe encourage submissions as soon as possibleIssue submitted about new revenue guidance shouldInvolve guidance that can be applied in different ways resulting in diversity in practiceBe pervasive (relevant to wide group of stakeholders)Submission forms will not be publicIssues may be discussed in publicFASB and IASB staff will read all submissions and decide priority of discussing issues
23 Additional Information Additional information on TRG websiteSubmission form and instructionsMeeting dates and materialsReplay of meetingsStaff contact informationTRG members
28 Current FASB Agenda Recognition and Measurement Projects Stage Accounting for Financial Instruments: Classification and Measurement2nd Exposure Draft RedeliberationsAccounting for Financial Instruments: ImpairmentInsurance: Improvements to accounting for long-duration contractsExposure Draft RedeliberationsLeasesAccounting for Goodwill for Public Business Entities and Not-for-ProfitsInitial DeliberationsClarifying the definition of businessConsolidations: Principal Versus Agent AnalysisCustomer’s Accounting for Fees in a Cloud Computing ArrangementSimplifying the Subsequent Measurement of InventoryExposure Draft OutstandingTechnical Corrections
29 Current FASB Agenda Presentation and Disclosure Projects Stage Clarifying Certain Existing Principles on Statement of Cash FlowsInitial DeliberationsDisclosure Framework—Entity’s Decision ProcessDiscussion Document RedeliberationsDisclosure Framework—Disclosure Reviews- Defined Benefits Plans- Fair Value- Income Taxes- Inventory- Interim ReportingFinancial Statements of Not-for-Profit EntitiesGoing ConcernFinal Standard Drafting
30 Current FASB Agenda Presentation and Disclosure Projects Stage Government Assistance DisclosuresInitial DeliberationsInsurance: Disclosures about Short-duration ContractsInvestment Companies: Disclosures about Investments in Another Investment CompanySimplifying Income Statement Presentation by Eliminating the Concept of Extraordinary ItemsExposure Draft Outstanding
31 Current FASB Agenda Research Projects Accounting Issues in Employee Benefit Plan Financial StatementsAccounting for Financial Instruments: HedgingAccounting for Financial Instruments: Interest Rate Risk DisclosuresFinancial Performance ReportingLiabilities & Equity—Short-term ImprovementsPensions—Cash Balance Plans
32 Reducing Complexity - Two Issues Complicated, unclear standard obscures its meaningAccounting treatment is clear, but applying it is lengthy, difficult & expensive
33 How FASB is Addressing the Problem Progress made and in processDeveloping internal Board policy on complexityBroaden thinking on complexity through outreachResearch project on Simplification Initiative
34 Simplification Initiative Objective Objective is to reduce cost and complexity while maintaining or improving the usefulness of the informationProjects would include narrow- scope items that the Board can complete in the short termWelcome input on ideas
35 Simplification Initiative: Tentative Decisions Measurement of inventoryInventory would be measured at the lower of cost and net realizable value. A reporting entity would no longer consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory.Prospective applicationEliminating extraordinary itemsRemoved the concept of extraordinary items from U.S. GAAPUnusual or infrequent items would be retained
36 FI: Classification & Measurement—Model TopicRedeliberated Model (decisions since ED)Cash flow TestCurrent GAAP - No cash flow test. Revert to the current embedded derivative guidance in Topic 815. Keep existing bifurcation requirements that apply to hybrid financial assets and liabilitiesBusiness modelCurrent GAAP - Retain existing separate accounting models to determine the classification and measurement of loans and securities (based on management’s intent)Equity SecuritiesFrom ED - All equity securities measured at fair value through net income (except equity method and nonmarketable securities)FVOCurrent GAAP - Unrestricted for financial assets and liabilities subject to Topic 825Practicability ExceptionEquity securities with no readily determinable fair value are measured at cost, adjusted for impairment and any observable price changes.
37 FI: Classification & Measurement “FAS 107” Disclosures:FV information for assets & liabilities carried at amortized costPublic Business Entities – required, either parenthetically on face of statements or in notesExcluded: receivables and payables due in less than one year, demand deposit liabilitiesOther Entities – no presentation or disclosure requirementRegardless of asset size or presence of derivatives
38 FI: Impairment (Credit Losses) Expected credit loss model reflecting more forward-looking informationImmediate recognition of lifetime expected credit losses on income statementMeasurement of expected credit losses (ECL)Reflects management’s expectation based on past events, current conditions, & reasonable and supportable forecastsReflect the risk of loss (i.e., the possibility that a loss will occur) as opposed to reflecting the most likely outcome (statistical mode)Provide enhanced disclosures compared to current GAAP (still to be redeliberated)
39 FI: Impairment (Credit Losses) The proposal applies to the following:Debt instruments (e.g., loans and securities) measured at:Loan commitmentsLease receivablesTrade receivablesPledge receivables (to be redeliberated)Amortized costFV - OCI
41 EITF―Open Issues Issue Status Issue 12-F: Pushdown Accounting Exposure Draft RedeliberationsIssue 12-G: Measuring the Financial Liabilities of a Consolidated Collateralized Financing EntityFinal Standard DraftingIssue 13-F: Accounting for the Effect of Federal Housing Administration GuaranteeIssue 13-G: Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity
42 Pushdown Accounting (EITF Issue 12-F) Exposure Draft Issued – Comment period ended July 31, 2014 BackgroundCurrent U.S. GAAP offers limited guidance about when and how pushdown accounting should be applied.Pushdown accounting governed by SEC staff guidance (for SEC registrants)Pushdown accounting required when 95% (or more) of reporting entity (SEC registrant) is acquired; optional between 80% to 95%; and prohibited below 80% ownership.Perceived as complex because of different thresholds, exceptions and other related rules.Pushdown accounting optional for entities other than SEC registrants.Exposure Draft Issued on April 28, 2014Provides option to apply pushdown accounting when acquirer (as defined in Topic 805) obtains control of reporting entity.Utilizes existing US GAAP concepts of “control” from Consolidations (Topic 810), and “acquisition method” from Business Combinations (Topic 805)Scope and TransitionAn acquired entity, both public and nonpublic, that is a business or nonprofit activity. Effective only for future acquisitions after effective date (yet TBD).
43 Pushdown Accounting (EITF Issue 12-F) Exposure Draft Main Provisions – Comments period ended July 31, 2014Reflect new basis of accounting established by acquirer for individual assets and liabilities of acquired entity by applying Topic 805 on business combinations (mostly fair value)Recognize goodwill that arises due to application of Topic 805Do not recognize bargain purchase gainsDisclose information that enables users to evaluate effect of pushdown accountingElects pushdown accountingDo not elect pushdown accountingDisclose that entity has:undergone a change-in-control event, andelected to continue to prepare its financial statements using its historical basisEntities will evaluate at each period whether they’ve gone through a change-in-control event
45 Private Company Council: Open Projects IssueStatus13-01A: Accounting for Identifiable Intangible Assets in a Business CombinationExposure Draft Redeliberations14-01: Definition of a Public Business Entity (phase 2)Initial Deliberations
46 Identifiable Intangible Assets (in a Business Combination): Stakeholder Feedback User RelevanceSome question that the requirement for separate recognition & measurement of certain identifiable intangible assets from goodwill does not provide users with decision-useful informationCost & ComplexityEstimating fair value of certain assets, including some identifiable intangible assets, e.g. customer relationships
47 Identifiable Intangible Assets: Proposal At April 29 meeting, PCC discussed various alternatives, including:Recognizing & measuring only intangible assets capable of being sold or licensed independentlyPrinciple-based vs rules-based approachNext steps: directed staff to perform more analysis and outreach
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