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ACCOUNTING & AUDITING UPDATE Jennifer Blake, Senior Manager.

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Presentation on theme: "ACCOUNTING & AUDITING UPDATE Jennifer Blake, Senior Manager."— Presentation transcript:

1 ACCOUNTING & AUDITING UPDATE Jennifer Blake, Senior Manager

2 The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought.

3 Agenda New Accounting Standards Proposed Standards Private Company Council 3

4 What’s new for 2013? Comprehensive Income Intangible Assets 4


6 Comprehensive Income What is other comprehensive income? – Gains and losses that are included in equity but that bypass the income statement Unrealized gains/losses on available for sale securities Changes in defined benefit pension plans Cash flow hedge gains and losses Foreign currency gains and losses What is accumulated comprehensive income? 6

7 Comprehensive Income Adds additional disclosures for items reclassified out of accumulated other comprehensive income Does not change the current requirements for reporting net income or other comprehensive income 7

8 Comprehensive Income Additional disclosure requirements: – Changes in the balances of each component of accumulated other comprehensive income (AOCI) – The effect of significant reclassifications out of each component of AOCI on the line items in the statement of income 8

9 Changes in AOCI Balances by Component Disaggregate the total change of each component of other comprehensive income and separately present: 1.Reclassification adjustments 2.Current-period other comprehensive income Both before-tax and net-of-tax presentations are acceptable Presented on the face of financial statements or as a separate disclosure in the notes 9

10 10 Entity ABC Notes to Financial Statements Changes in Accumulated Other Comprehensive Income by Component {a} Fore the Period Ended December 31, 2013 Gains and Losses on Cash Flow Hedges Unrealized Gains and Losses on Available for Sale Securities Total Beginning Balance $ (5,000) $ 8,000 $ 3,000 Other Comprehensive Income Before Reclassifications 7,000 8,000 15,000 Amounts Reclassified from Accumulated Other Comprehensive Income (2,250) (3,000) (5,250) Net Current Period Other Comprehensive Income 4,750 5,000 9,750 Ending Balance $ (250) $ 13,000 $ 12,750 {a} All amounts are net of tax. Amounts in debit indicate debits.

11 Significant Items Reclassified Out of AOCI Required to present information about significant items reclassified out of AOCI by component either: 1.On the face of the statement where net income is presented or 2.As a separate disclosure in the notes to the financial statements. 11

12 12 Entity ABC Notes to the Financial Statements Reclassifications out of Accumulated Comprehensive Income {a} For the Period Ended December 31, 2013 Details about Accumulated Other Comprehensive Income Components Amount Reclassified from Accumulated Other Comprehensive Income Affected Line Item in the Statement Where Net Income is Presented Unrealized Gains and Losses on Available for Sale Securities: $ 2,300Realized gain/(loss) on Sale of Securities (285)Impairment expense Insignificant Items (15) $ 2,000Total before tax (500)Tax (expense) or benefit $ 1,500Net of tax Amortization of defined benefit pension items: Prior Service Costs $ (2,000){b} Transition Obligation (2,500){b} Actuarial gains/(losses) (1,500){b} $ (6,000)Total Before Tax 1,500Tax (expense) or benefit $ (4,500)Net of tax Total Reclassifications for the Period $ (3,000)Net of tax {a} Amounts in parentheses indicate debits to profit/loss {b} These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see pension footnote for additional details).

13 13 Entity ABC Statement of Income For the Period Ended December 31, 2013 Interest Income (includes $1,000 accumulated other comprehensive income reclassifications for net gains on cash flow hedges) $ 122,500 Interest Expense (32,000) Net Interest Income Before Provision Expense 90,500 Provision Expense (5,000) Net Interest Income After Provision Expense 85,500 Other Income Fee Income 10,000 Gain on Sale of Securities (includes $4,000 accumulated other comprehensive income reclassifications for unrealized net gains on available for sale securities) 7,300 Other income 2,000 19,300 Other Expense (54,000) Net Income Before Provision for Income Taxes 50,800 Income Tax Expense (includes ($1,750) income tax expense from reclassification items) (15,240) Net Income $ 35,560

14 Comprehensive Income Effective Date – Public Companies Fiscal years, and interim periods within those years, beginning after December 15, 2012 (December 31, 2013 financial statements). – Nonpublic Companies Fiscal years beginning after December 15, 2013 (December 31, 2014 financial statements). – Disclosures applied prospectively 14


16 Indefinite-Lived Intangible Assets Amends the current guidance on testing indefinite-lived intangible assets, other than goodwill, for impairment. Under the current guidance an entity must: – Atleast annually – Calculate and compare the asset’s fair value with its carrying value – Record impairment loss if asset’s carrying value exceeds its fair value 16

17 Indefinite-Lived Intangible Assets 17 Under new guidance an entity has the option of first performing a qualitative assessment – Determine whether it is more likely than not that the asset is impaired – Evaluate events and circumstances that may affect the significant inputs used to determine the fair value of the asset If based on qualitative assessment it is determined that it is more likely than not the asset is impaired, then the entity could proceed to the quantitative impairment test

18 Qualitative Assessment 18 Cost factors Financial performance Legal, regulatory, contractual, political, business, or other factors Other relevant entity-specific events Industry and market considerations Macroeconomic conditions

19 Considerations 19 Do internal personnel have skills and knowledge to perform assessment? What supporting documentation do we need to substantiate conclusions about each event and circumstance considered in the qualitative assessment? Is the most recent determination of fair value a good proxy for the current-period fair value?

20 Indefinite-Lived Intangible Assets Effective Date – Annual and interim impairment tests performed in fiscal years beginning after September 15, 2012 – Early adoption is permitted 20

21 Significant Proposed Guidance Credit Impairment Leases Financial Instruments 21


23 Proposed Credit Impairment Model Changes the requirement for accounting for the estimate of credit losses from an “incurred” to an “expected” loss model Provides a single impairment approach for all financial assets measured at amortized cost or fair value through OCI Certain limited circumstances would allow a practical expedient 23

24 Expected vs. Incurred Loss Model SubjectExpected LossIncurred Loss Recognition thresholdNo recognition threshold. At the end of every reporting period, impairment allowance recognized on the basis of expected credit losses Impairment recognized only after a loss event has occurred or its occurrence is probable Measurement approachNo prescribed methodology, however is based upon lifetime of expected losses by incorporating forecasted loss factors Generally relies on historical loss rates adjusted for various qualitative factors 24

25 Measurement of Expected Credit Losses No prescribed methodology however the proposal requires the estimate of current expected credit losses to: – Incorporate the time value of money – Reflect all internally and externally available information considered relevant in making the estimate – Reflect at least two possibilities 1.That a credit loss exists, and 2.That no credit loss exists – Reflect how credit enhancements mitigate expected credit losses Does not require a discounted cashflow analysis 25

26 Examples of Estimating Credit Losses Loss rate approach Base component and a credit risk adjustment By-vintage basis Collective estimation method and an individual asset estimation method 26

27 Other Key Aspects Interest Income – Based on contractual cash flows – Should remain separate from the credit losses Accounting for Nonaccrual – Not probable that an entity will receive payment of substantially all of the principal Cost recovery method – Probable entity will receive substantially all principal but not probable the entity will receive all of the interest Cash basis method 27

28 Other Key Aspects Troubled debt restructurings – Definition and determination of TDRs remain the same – Cost basis adjusted Post modification effective interest rate equals the pre- modification effective interest rate – Impairment from restructuring recorded as direct write-off 28

29 Effective Date and Transition Cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective No effective date has been proposed for the final guidance 29


31 Leases – Lessee Accounting Right of Use (ROU) approach Recognize and record all leases 1.Asset = right to use the underlying asset 2.Liability = future lease payment obligations Both asset and liability initially measured at the present value of the future lease payments Leases with maximum lease term of 12 months or less may be excluded 31

32 Initial Measurement SubjectDescription Lease termNoncancellable period of the lease, together with both of the following 1) renewal options, and 2) termination options if there is significant economic incentive for an entity to exercise or not exercise the option Lease paymentsInclude fixed payments and only variable payments that are: 1) based on an index or rate, and 2) in-substance fixed lease payments Discount rateRate the lessor charges the lessee, if available. If that rate is not available then the lessee’s incremental borrowing rate as of the date of lease commencement would be used. 32

33 Subsequent Measurement Liability – Effective interest method used to make lease payments Asset – Two different approaches dependent on underlying asset and terms of lease Financing Straight-line 33

34 Subsequent Measurement Type A – Financing Lease - Other than Property Lease Type B – Straight-line – Property Lease Lease term: Major part of the remaining economic life of the underlying asset, or Lease term: insignificant part of total economic life of the underlying asset, or Present value of lease payments accounts for substantially all of the fair value of the underlying assets, or Present value of lease payments is insignificant relative to the fair value of the underlying assets Lessee has a significant economic incentive to exercise an option to purchase the underlying asset 34

35 Example Assume lessee enters into a 3- year lease with the following annual payments Year 1 - $20,000 Year 2 - $24,000 Year 3 - $28,000 Initial Measurement of the ROU asset and liability to make lease payments is $64,012 based on a discount rate of 5%. 35

36 Example 36

37 Example 37

38 Transition - Lessee Capital Leases – Carry forward amounts recorded as of the date of initial application, or – Apply full retrospective approach Operating Leases – Full retrospective approach, or – Modified retrospective approach at the beginning of the earliest comparative period presented 38


40 Financial Instruments Applies to most financial instruments, except for the following: – Instruments classified in stockholders’ equity – Stock compensation arrangements – Pension plan assets and obligations – Lease receivables and payables – Financial guarantee contracts Derivative instruments under ASC 815 40

41 Classification of Financial Assets Classification dependent on: 1. their contractual cash flow characteristics 2.The business model in which they are managed Three classification and measurement categories 1.Fair Value – Net income (FV-NI) 2.Fair Value – OCI (FV-OCI) 3.Amortized Cost 41

42 Contractual Cash Flow Characteristics Assessment Do the contractual terms of the financial asset “give rise on specified dates to cashflows that are solely payments of principal and interest on the principal amount outstanding (SPPI)”? – No, then generally classified and measured FV-NI Examples: equity securities, debt instruments with commodity- indexed payments – Yes, then assess business model 42

43 Business Models Three distinct business models 1.Hold to collect Amortized Cost 2.Hold and sell FV-OCI or FV-NI (optional) 3.Other that is not consistent with (1) and (2) above FV-NI 43

44 Classification of Financial Liabilities Measured at amortized cost, with the following exceptions: 1. Short sale obligations – FV-NI 2.Financial liabilities for which entities business strategy is to subsequently transact at fair value – FV-NI 3.Nonrecourse financial liabilities that are contractually required to be settled with only the cash flows from related financial assets – accounted for on same basis as related financial asset 44

45 Presentation The following is required to be presented on the face of the entity’s balance sheet – Financial assets and liabilities, by measurement category – Separate line item for hold-to-collect financial assets that have been identified for sale – Parenthetical fair value information for all financial assets and liabilities accounted for at amortized cost (exception: demand deposits and receivables/payables due in less than one year) – Parenthetical amortized cost information for its own outstanding debt instruments accounted for at FV-NI 45

46 Effective Date and Transition Cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective No effective date has been proposed for the final guidance 46


48 Private Company Council (PCC) Created in 2012 to identify and vote on differences in U.S. GAAP for private companies Will decide on exceptions and modifications to U.S. GAAP for private companies FASB will be responsible for “endorsement” rather than ratification of the PCC’s decisions – 60 days to act of PCC decisions – Must provide public, written notice if FASB fails to endorse 48

49 Differentiating Factors for Public and Private Companies Types and number of financial statement users Financial statement user access to management Investment strategies of equity investors Ownership and capital structures Accounting resources Learning about new financial reporting guidance 49

50 Proposed Decision Making Framework Identifies five areas for possible alternative guidance for private company 1.Recognition and measurement 2.Disclosures 3.Presentation 4.Effective date 5.Transition 50

51 Questions Jennifer Blake Moss Adams LLP 509-777-0173

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