Page 2 1210-1396206 Accounting update – HFMA CCRC accounting standard update ► ASU 2012-01 was issued to clarify that a continuing care retirement community should classify advance fees as deferred revenue only when its resident contract provides for repayment of the refundable advance fee upon reoccupancy and the repayment is limited to the proceeds received from the new occupant. ► The guidance is effective for fiscal periods beginning after December 15, 2012 for public entities (including conduit bond obligors) and a year later for nonpublic entities. Early adoption is permitted. ► The guidance should be applied retrospectively by recording a cumulative-effect adjustment to opening retained earnings (or unrestricted net assets) as of the beginning of the earliest period presented.
Page 3 1210-1396206 Accounting update – HFMA CCRC accounting standard update ► When adopted entities will likely have to ► (1) reclassify the remaining unamortized deferred revenue to a refund liability and ► (2) increase the refund liability and reduce opening retained earnings (or unrestricted net assets) for the previously amortized deferred revenue ► Applying the ASU may also trigger recognition of a liability associated with the obligation to provide future services (as the unamortized deferred revenue balance is a component of that calculation).
Page 4 1210-1396206 Accounting update – HFMA Fair value ► IFRS 13 and ASU 2011-04 were issued in May 2011 ► Largely converge the requirements for fair value measurements and disclosures ► Key changes/clarifications to U.S. GAAP related to measuring fair value ► Concepts of “highest and best use” and “valuation premise” only apply to nonfinancial assets, however financial assets and liabilities with offsetting risks may be measured on the basis of their net exposure if certain criteria are met ► Use of “blockage factor” prohibited in all fair value measurements (regardless of fair value hierarchy level) ► Other premiums/discounts may be applied if market participants would consider them and their inclusion is not inconsistent with the unit of account ► Additional guidance provided on (1) estimating the fair value of own equity instruments and liabilities and (2) determining the principal market of item being measured ► Effective for public companies for periods beginning after December 15, 2011 ► Nonpublic – effective annual periods beginning after December 15, 2011
Page 5 1210-1396206 Accounting update – HFMA Fair value New disclosure requirements ► Additional information about Level 3 measurements ► Quantitative information about the significant unobservable inputs used in determining fair value for Level 3 measurements ► Narrative description of the sensitivity of recurring Level 3 measurements to changes in the unobservable inputs disclosed, including the interrelationship between these inputs ► Description of valuation processes surrounding Level 3 measurements ► Fair value hierarchy classification for assets and liabilities whose fair value is only disclosed ► Any (not just significant) transfers between Level 1 and 2 of the fair value hierarchy ► Reasons why the current use of a nonfinancial asset measured at fair value differs from its highest and best use (if applicable) ► Nonpublic entities are exempt from certain disclosures
Page 6 1210-1396206 Accounting update – HFMA Joint projects overview ► FASB and IASB goal – improved, high-quality, converged accounting standards ► Boards are focusing on financial instruments, revenue recognition, leases and insurance contracts ► Timelines were extended ► Decisions to re-expose revenue and leases proposals will cause additional delays ► Certain lower priority projects set aside for near term ► Boards are redeliberating many projects, making tentative decisions ► These decisions are subject to change ► Boards have not finalized effective dates and transition methods for several joint projects
Page 8 1210-1396206 Accounting update – HFMA Financial instruments Overview ► FASB issued financial instruments ED in May 2010 ► Covers classification and measurement, impairment and hedging ► Major changes proposed to the current accounting requirements ► Comments on the ED indicated a large majority oppose many key aspects of the proposal ► Many expressed concerns about the lack of convergence ► Redeliberations ► Classification and measurement – FASB has significantly changed the model in the ED in its redeliberations ► The Boards are jointly redeliberating certain aspects of their respective models to reduce key differences ► Impairment – Boards are jointly developing a new approach ► FASB expects to finalize redeliberations on both classification and measurement and impairment and issue EDs in the second half of 2012 ► Hedging – FASB expects to begin redeliberations in late 2012 ► FASB issued a separate ED on liquidity and interest rate risk disclosures in Q2 2012
Page 9 1210-1396206 Accounting update – HFMA Leases Overview ► Boards issued joint ED in August 2010 ► Objective is to record lease contracts on the balance sheet ► Project responds to some of the criticisms of the current model ► Addresses accounting for leases from the perspective of lessees and lessors ► Boards decided to re-expose due to significant changes to proposed model ► Prior to issuance, Boards will address how the decision to classify leases affects previous decisions (e.g., transition and disclosure) and other remaining issues ► Second ED expected in the fourth quarter of 2012 ► Full retrospective or modified retrospective adoption at the effective date would be required
Page 10 1210-1396206 Accounting update – HFMA Key changes since the original ED Residual value guarantees ASC 840Exposure draftTentative decisionEffect Residual value guarantees are included in minimum lease payments Amounts expected to be paid under residual value guarantees are included in lease payments Lessees – no change Lessors – amounts expected to be received under residual value guarantees are excluded from lease payments and recognized at the end of the lease For lessors, this will result in a lease receivable that is less than the lease liability recognized by the lessee
Page 11 1210-1396206 Accounting update – HFMA Key changes since the original ED Discount rate and initial measurement date ASC 840Exposure draftTentative decisionEffect Lower of the lessee’s incremental borrowing rate or the implicit rate in the lease Rate can be determined using multiple alternatives Lessors and lessees should use the rate charged by the lessor. If this is not known by the lessee, the lessee may use its incremental borrowing rate. Removed some subjectivity for lessor’s rate; lessee frequently will not know the rate the lessor charges the lessee Date of commencement of the lease Date of inception of the lease Date of commencement of the lease Eliminates the ambiguity on how to account for changes that could occur between the inception and commencement of a lease
Page 12 1210-1396206 Accounting update – HFMA Key changes since the original ED Reassessment ASC 840Exposure draftTentative decisionEffect Not required to reassess unless the lease is modified Reassess the judgments and estimates used to determine the lease term and the present value of lease payments when facts or circumstances indicate that there could be a significant change in the right to receive lease payments since the previous reporting period Reassess only when there is a significant change in factors relevant to determining if a significant economic incentive exists or significant change in amounts expected to be paid. However, lease payments that depend on an index or a rate should be reassessed using the index or rate that exists at the end of each reporting period. Tentative decisions may help to reduce the burden of reassessment
Page 13 1210-1396206 Accounting update – HFMA Key changes since the original ED Sale-leaseback ASC 840Exposure draftTentative decisionEffect The accounting treatment of a sale and leaseback transaction depends upon the type of lease involved (i.e., operating or finance lease). Restrictive criteria for real estate transactions. Sale-leaseback transactions must meet specific criteria to be accounted as a sale and a lease. Transactions that do not meet the criteria would be accounted for as financing transactions. Restrictive criteria for sale-leaseback treatment eliminated. Determine whether a transaction is a sale based on control criteria in revenue recognition Exposure Draft. Sale treatment achieved more frequently
Page 14 1210-1396206 Accounting update – HFMA Key changes since the original ED Lessee accounting model ASC 840Exposure draftTentative decisionEffect Leases are classified as either capital leases or operating leases based on whether the lessor retains the risks or benefits associated with the leased asset. This classification determined whether a lease would be on or off balance sheet and the expense recognition pattern for the lease. Rent expense is recognized straight-line. All lessees would use a single method of accounting for all leases. Balance sheets of lessees would include both assets representing the right to use the leased asset and liabilities arising from lease contracts at the present value of the expected lease payments. Subsequently, lessee would recognize interest expense using the interest method and separately amortize the ROU asset. The expense recognition would accelerate lease expense. The FASB and IASB have decided to classify leases primarily based on the nature of the underlying asset being leased. For lessees, some leases would have a straight-line lease expense recognition pattern and others would have an accelerated lease expense recognition pattern. All leases (other than short- term leases) would be recognized on the balance sheet. The lease expense profile would vary depending on many factors.
Page 15 1210-1396206 Accounting update – HFMA Key changes since the original ED Lessor accounting model ASC 840Exposure draftTentative decisionEffect Leases are classified as either capital leases or operating leases based on whether the lessor retains the risks or benefits associated with the leased asset. This classification determined whether a lease would be on or off balance sheet and the income recognition pattern for the lease. Two approaches for lessors accounting (performance obligation approach or derecognition approach) each to be used in different circumstances depending on whether the lessor retains exposure to significant risks or benefits associated with the leased asset. Lessors would apply operating lease accounting to straight-line leases and the receivable and residual approach to accelerated leases. Lessors following operating lease accounting would neither recognize a lease receivable nor derecognize a portion of the underlying asset even though the lessee would recognize a liability to make lease payments and a corresponding right-of-use asset. No special provisions would be included for lessors of investment property. ► Eliminates arbitrary distinction between capital and operating leases and special accounting for leveraged leases. ► Significant change in accounting for non- investment property leases that were previously classified as operating leases.
Page 16 1210-1396206 Accounting update – HFMA Key changes since the original ED Transition Exposure draftTentative decision ► Simplified retrospective approach – lease related assets and liabilities would be measured based on the present value of remaining lease payments. ► Only simple capital leases may be grandfathered. ► May choose full retrospective approach or modified retrospective approach ► Modified retrospective approach is similar to the simplified retrospective approach except for certain reliefs provided to lessees: ► Right of use asset equal to the proportion of the liability to make lease payments at commencement calculated on the basis of the remaining lease payments ► Discount rate may be determined at a group level for leases with similar characteristics ► Difference between assets and liabilities recorded would be an adjustment to opening retained earnings ► May choose to grandfather existing capital leases (with the exception of leveraged leases for lessors) and short-term leases ► May elect to use hindsight when preparing comparative information and not evaluate initial direct costs for leases that began before the effective date
Page 17 1210-1396206 Accounting update – HFMA Summary of proposals for lessees Initial measurement ► Record a right-of-use asset and a liability to make lease payments at the present value of the lease payments over the lease term ► Initial direct cost incurred by lessee are included in right-of-use asset and lease incentives are deducted from right-of-use asset Subsequent measurement ► Right-of-use asset amortized over the shorter of the lease term or economic life of the leased asset and recognized as amortization expense ► Lease payments paid by lessee allocated as a reduction of the liability to make lease payments and interest expense using the interest method – next page for the most up-to-date discussion on subsequent measurement No more rent expense ► Right-of-use asset would be considered for impairment by referring to existing applicable standards for intangible assets (ASC 350)
Page 18 1210-1396206 Accounting update – HFMA Subsequent measurement ► The Boards decided to distinguish between two types of leases, which we refer to as straight- line leases and accelerated leases. Both lessees and lessors would use the same criteria to classify leases. The two types of leases would have different lease income and expense recognition patterns. ► Principle for classification ► Based on whether the lessee acquires and consumes more than an insignificant portion of the underlying asset over the lease term. ► Leases of property (i.e., land, building or part of a building) would be classified as straight- line leases unless either of the following conditions is met: ► The lease term is for the major part of the economic life of the underlying asset. ► The present value of fixed lease payments accounts for substantially all of the fair value of the underlying asset. ► Leases of assets other than property (e.g., equipment) would be classified as accelerated leases unless either of the following conditions is met: ► The lease term is an insignificant portion of the economic life of the underlying asset. ► The present value of the fixed lease payments is insignificant to the fair value of the underlying asset. Summary of proposals for lessors
Page 19 1210-1396206 Accounting update – HFMA Summary of proposals for lessors (continued) Lease classification ► Lessors would apply operating lease accounting to straight-line leases and the receivable and residual approach to accelerated leases ► Same classification principle as lessees Initial measurement (receivable and residual approach) ► Record a lease receivable representing the lessor’s right to receive lease payments measured as the present value of the lease payments over the lease term ► Derecognize the underlying asset and allocate a portion of the carrying value to the leased asset “sold” based on a ratio of the lease receivable over the estimated the fair value of the lease asset at lease commencement ► Recognize profit (or loss) for the difference between the lease receivable and the carrying value allocated to the lease asset “sold” ► This represents profit or loss only for the portion of the asset that is “sold” rather than profit on the entire asset as in today’s accounting ► Profit associated with the residual asset would be deferred until the asset is subsequently sold or re-leased ► Record a residual asset for the carrying value allocated to the leased asset not “sold”
Page 20 1210-1396206 Accounting update – HFMA Summary of proposals for lessors (continued) Subsequent measurement (receivable and residual) ► Lease payments received by lessor allocated as a reduction of the lease receivable and interest income using the interest method ► Recognize interest income to bring the residual asset to its estimated fair value at the end of the lease Initial and subsequent measurement (operating lease) ► Current operating lease accounting – rent income
Page 21 1210-1396206 Accounting update – HFMA Leases Tentative decisions ► Lessees and lessors would distinguish between two types of leases based primarily on the nature of the underlying asset being leased ► Certain conditions could overcome presumptive classification ► Lessees would recognize a right-of-use asset and a lease liability for both types of leases ► Leases of property (i.e., land, building or part of a building) – generally recognize straight-line lease expense similar to operating leases under current accounting ► Leases of equipment – generally recognize amortization expense and interest expense separately in a pattern usually resulting in accelerated expense recognition ► Lessors ► Leases of property – generally apply operating lease accounting ► Leases of equipment – generally recognize a lease receivable, a residual asset and day-one profit (if any) ► Income related to interest on the receivable and accretion of residual asset would be recognized over lease term ► Lessees and lessors could apply operating lease accounting for short-term leases
Page 22 1210-1396206 Accounting update – HFMA Leases Tentative decisions (continued) ► Initially measure lessee’s liability and lessor’s receivable at the present value of the lease payments to be made over the lease term ► Lease term: noncancelable period plus any options for which there is significant economic incentive to extend (or not terminate) lease ► Examples – renewal rates priced at a bargain or penalty payments ► For a purchase option with significant economic incentive to exercise, include exercise price in lease payments ► Lessees would amortize right-of-use asset over economic life of underlying asset ► Variable lease payments based on: ► An index or rate would be included in amounts recognized on balance sheet ► Performance or usage would not be included in amounts recognized on balance sheet – instead, recognized when incurred ► Residual value guarantees: ► Lessees would recognize amounts expected to be payable as lease payments ► Lessors would not recognize amounts expected to be received until the end of the lease
Page 23 1210-1396206 Accounting update – HFMA Leases Tentative decisions (continued) ► Non-lease components would be accounted for separately except in limited circumstances ► Reassessment required for: ► Lease term and purchase option when there is a significant change in factors relevant to determining whether a significant economic incentive exists ► Changes in market rates after lease begins would not be included in assessment ► Discount rate when there is a change in the assessment of the lease term ► Residual value guarantees when events or circumstances indicate a significant change in the amount expected to be payable (lessees only) ► Variable lease payments based on an index or rate reassessed each reporting period using index or rate that exists at each measurement date ► Assess for impairment of the lessee’s right-of-use asset and lessor’s receivable and residual asset ► Sale-leaseback transactions would not be required to meet additional criteria beyond requirements of new revenue recognition guidance to recognize a sale and a lease (rather than a financing) ► Recognize gain or loss on sale
Page 24 1210-1396206 Accounting update – HFMA Consolidation Overview ► The FASB issued an ED in November 2011 that would: ► Rescind the FAS 167 deferral for certain investment funds ► More closely align U.S. GAAP with IFRS ► More closely align the consolidation models within U.S. GAAP ► The proposed changes would affect all reporting entities, especially those in the asset management industry ► Redeliberations by the FASB will consider: ► A consolidation principle and objective ► Kick-out and participating rights as well as related parties ► Consolidation conclusions for certain entities (e.g., money market funds) ► Potential alignment of the variable and voting interest models ► IASB issued IFRS 10 in May 2011 ► Single consolidation model ► Considers existence of potential voting rights and de facto control
Page 25 1210-1396206 Accounting update – HFMA Consolidation Highlights of the FASB proposal ► Adds principal-agent guidance to both the variable and voting models (for partnerships and similar entities) ► Principals consolidate ► Decision makers consider three factors: ► Compensation ► Other interests held ► Rights held by others ► Could affect whether: ► An entity is a variable interest entity (VIE) ► A reporting entity is the primary beneficiary of a VIE ► A general partner controls a voting interest partnership (or similar entity) ► Amends the evaluation of participating rights including: ► Which activities to consider (for voting interest entities) ► When such rights are substantive (for all entities)
Page 26 1210-1396206 Accounting update – HFMA Financial statement presentation ► New model would fundamentally redefine the way that financial statements are presented ► More cohesiveness across financial statements ► Additional detail through disaggregation ► Consider function, nature and measurement basis ► Additional disclosure of remeasurement information and changes in balances of select asset and liability items could be required ► Potential changes to certain aspects of the staff draft, including proposed requirement to present cash flows using the direct method ► Project assessed as lower priority and further action is not expected in the near term
Page 27 1210-1396206 Accounting update – HFMA Proposed guidance – liquidity disclosures ► On June 27, 2012, the FASB issued an exposure draft on liquidity risk and interest rate risk disclosures ► Ernst & Young released a related Technical Line, Liquidity and interest rate risk – new disclosures proposed for all entities, on June 29, 2012 ► The proposal requires significantly expanded qualitative and quantitative disclosures for all reporting entities – public, private and not-for-profit, including: ► A table of expected cash flow obligations ► A table of available liquid funds ► Any additional quantitative or narrative disclosure necessary for financial statement users to understand the entity’s exposure to the particular risk depicted in the tables, including: ► Discussing the significant changes in timing and amounts reflected in the tabular disclosures since the last reporting period ► Discussing the reasons for any changes and actions taken during the current period to manage the exposure
Page 28 1210-1396206 Accounting update – HFMA Proposed guidance – liquidity disclosures (continued) ► Public entities, including conduit bond obligors would be required to make these disclosures for both interim and annual periods ► Comment period ended on September 25, 2012