1. FASB Update Rahul Gupta Project Manager
Financial Accounting Standards Board
August 14, 2013
The views expressed in this presentation are those of the presenter.
Official positions of the FASB and IASB are reached only after extensive due process & deliberations.

2. Topics FASB projects EITF Issues Private Company Council
Recent Standards
Going Concern
Definition of a Public Business Entity
EITF Issues
Private Company Council

3. Topics Joint projects with the IASB Financial Instruments
Classification & Measurement
Impairment
Revenue Recognition
Leases
Insurance

4. Accounting Standards Update
Recent Standards
Accounting Standards Update
Effective Dates
Update No —Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force)
Fiscal years and interim periods within those years beginning after December 15, Nonpublic entities: after December 15, 2014.
Update No —Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (a consensus of the FASB Emerging Issues Task Force)
Qualifying new or redesignated
hedging relationships entered into on or after July 17, 2013
Update No —Fair Value Measurement (Topic 820): Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No
Effective July 2013
Update No —Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements
Interim and annual reporting periods in fiscal years beginning after December 15, 2013

5. Accounting Standards Update
Recent Standards
Accounting Standards Update
Effective Dates
Update No —Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting
Annual reporting periods beginning after December 15, 2013, and interim reporting periods therein
Update No —Not-for-Profit Entities (Topic 958): Services Received from Personnel of an Affiliate (a consensus of the FASB Emerging Issues Task Force)
Fiscal years beginning after June 15, 2014, and interim and annual periods thereafter
Update No —Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force)
Fiscal years (and interim reporting periods within those years) beginning after December 15, Nonpublic entities: annual period beginning after December 15, 2014, and interim and annual periods thereafter

6. Accounting Standards Update
Recent Standards
Accounting Standards Update
Effective Dates
Update No —Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (a consensus of the FASB Emerging Issues Task Force)
Fiscal years, and interim periods within those years, beginning after December 15, Nonpublic entities: fiscal years ending after December 15, 2014, and interim periods and annual periods thereafter.
Update No —Financial Instruments (Topic 825): Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities
February 2013
Update No —Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
Reporting periods beginning after December 15, 2012; Nonpublic entities: December 15, 2013
Update No —Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities
Fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods

7. Going Concern

8. Going Concern - Background
Going Concern (GC) presumption is critical to financial reporting
Today, auditors are responsible for assessing uncertainties about the GC presumption
U.S. GAAP has no guidance on management’s disclosures of GC uncertainties
Proposal intended to reduce diversity, standardize disclosure timing & content
ED issued in June 2013; comment period concludes September 24, 2013

9. Management’s Assessment of GC Uncertainties
Proposed model:
Management at each reporting period would assess an entity’s potential inability to meet its obligations
Start disclosures if it is more-likely-than-not that an entity will not meet obligations in 12 months, or known/probable that it will not meet obligations in 24 months
Do not consider mitigating impact of plans outside the normal course of business
If likelihood reaches probable (considering all plans), declare substantial doubt (SEC filers only)

10. Definition of a Public Business Entity

11. Definition of a Public Business Entity
Issue: Multiple definitions of Nonpublic Entity and Public Entity in U.S. GAAP
Objectives
Clarify organizations within the scope of private company decision making framework for potential modifications to U.S. GAAP
Simplify & increase comparability

12. Public Business Entity Definition
A business entity that meets any one of the following criteria:
It is required by the U.S. SEC to file/furnish financial statements, or does file or furnish financial statements, with the U.S. SEC (including entities whose financial statements or financial information are required to be or are included in a filing).
It is required by the Securities Exchange Act of 1934, as amended, or rules and regulations promulgated thereunder, to file/furnish financial statements with a regulatory agency.
It is required to file/furnish financial statements with a regulatory agency for purposes of issuing securities to be traded in a public market.

13. Public Business Entity Definition
A business entity that meets any one of the following criteria:
It has (or is a conduit bond obligor for) unrestricted securities that are traded or can be traded on an exchange or an over-the-counter market.
Its securities are unrestricted, and it is required to provide U.S. GAAP financial statements to be made publicly available on a periodic basis pursuant to a legal or regulatory requirement.
This excludes a not-for-profit entity or an employee benefit plan within the scope of Topics 960 through 965 on plan accounting.

14. Definition of a Private Company
Next steps
Issuance of an Accounting Standards Update  in August
Would not affect existing requirements.
Comment period ending September 2013

15. EITF

16. EITF Consensuses Out for Comment
Comment Deadline
Proposed Accounting Standards Update—Receivables—Troubled Debt Restructurings by Creditors (Subtopic ): Reclassification of Collateralized Mortgage Loans upon a Troubled Debt Restructuring
September 17, 2013
Proposed Accounting Standards Update—Service Concession Arrangements (Topic 853)
Proposed Accounting Standards Update—Consolidation (Topic 810): Measuring the Financial Liabilities of a Consolidated Collateralized Financing Entity

17. EITF―Open Issues
12-F: Recognition of New Accounting Basis (Pushdown) in Certain Circumstances
13-B: Accounting for Investments in Tax Credits
13-D: Determining Whether a Performance Target That Is Allowed to Be Met after the Requisite Service Period Is a Performance Condition or a Condition That Affects the Grant-Date Fair Value of the Awards
13-F: Accounting for the Effect of a Federal Housing Administration Guarantee

18. Private Company Council

19. Private Company Council: Projects
Accounting for identifiable intangible assets in a business combination (Issue 13-01A)
Accounting for goodwill subsequent to a business combination (Issue 13-01B)
Applying variable interest entity guidance to common control leasing arrangements (Issue 13-02)
Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps (Issue 13-03)
Next Meeting: September 2013

20. PCC Issue 13-01A Proposed Changes
Accounting for Identifiable Intangible Assets in a Business Combination
Modifies requirement for private companies to separately recognize fewer intangible assets acquired in a business combination
Enables private companies to recognize only those intangible assets arising from noncancelable contractual terms or assets from other legal rights
Other intangible assets would not be recognized separately from goodwill even if separable

21. PCC Issue 13-01B Proposed Changes
Accounting for Goodwill Subsequent to a Business Combination
Goodwill amortized for a period not to exceed 10 years, and tested for impairment only when a triggering event occurs
Goodwill tested for impairment at the company- wide level as compared to the current requirement to test at the reporting unit level
Impairment testing would also involve a one step approach as opposed to two-step approach

22. PCC Issue 13-01B Proposed Changes
Accounting for Goodwill Subsequent to a Business Combination
Step two of the current impairment test, which requires the application of a hypothetical purchase price allocation to calculate the goodwill impairment amount, would be eliminated
Instead, the goodwill impairment amount would represent the excess of the company’s carrying amount over its fair value

23. PCC Issue 13-02 Proposed Changes
Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements (FIN 46(R)/FAS 167)
Exempts private companies from applying the consolidation guidance for variable interest entities under common control leasing arrangements
If substantially all activities between private company and lessor are involved with leasing activities of the lessor
When the arrangement between a private company lessee and a lessor entity meets certain conditions, the private company lessee can elect the alternative

24. PCC Issue 13-02 Proposed Changes
Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements (FIN 46(R)/FAS 167)
Conditions to qualify for alternative
Lessor entity and the private company lessee are under common control
Company lessee has a leasing arrangement with the lessor entity
Substantially all of the activity between the two entities is related to the leasing activity of the lessor entity
Ex: guarantee on the lessor entity’s mortgage on a leased asset

25. PCC Issue 13-03 Proposed Changes
Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps
Gives private companies the option to use two simpler approaches to accounting for certain types of interest rate swaps that are entered into the purposes of economically converting its variable- rate borrowing to a fixed-rate borrowing
Combined instruments approach
Simplified hedge accounting approach

26. PCC Issue 13-03 Combined Instruments
Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps
An accounting alternative to account for a swap and a variable-rate borrowing as one combined financial instrument. I
Swap would not be recorded in the company’s financial statements (except for the period-end accrual relating to the next swap settlement)

27. PCC Issue 13-03 Combined Instruments
Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps
Applied provided certain criteria are met:
Swap term approximates the term of the borrowing and the swap becomes effective at the same time as the borrowing.
Approach would be applicable to all of its swaps, whether entered into on or after the date of adoption or existing at that date, provided that the requirements of applying this approach otherwise are met.
Under this approach the settlement value of the swap would be disclosed in the notes to the financial statements.

28. PCC Issue 13-03 Simple Hedge Accounting
Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps
Practical expedient to qualify for hedge accounting
Criteria to qualify for simplified hedge accounting similar to combined instruments approach criteria
However, term of the swap could be shorter than the term of the borrowing and the swap does not have to become effective at the same time as the borrowing

29. PCC Issue 13-03 Simple Hedge Accounting
Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps
Under approach, swap and the related borrowing would continue to be accounted for as two separate financial instruments
However, no ineffectiveness would be assumed for qualifying swaps designated in a hedging relationship
Designated swap may be recorded at settlement value in the company’s financial statements instead of at fair value

30. Joint FASB/IASB Projects

31. Financial Instruments

32. Financial Instruments: Overview
Improve decision usefulness
Reduce complexity
Convergence
Three phases:
Classification & Measurement
Impairment
Hedge Accounting

33. Financial Instruments: Status
FASB
Exposure Draft on Classification and Measurement issued in February 2013
Exposure Draft on Impairment issued in December 2012
Hedging likely to begin in 2013
IASB
Amendments to IFRS 9 on Classification & Measurement exposed November 2012
Exposure Draft on Impairment issued March 2013
Review Draft on Hedging posted until December 2012

34. Financial Instruments: Classification & Measurement

35. Classification & Measurement: Timeline
May 2010
Exposure Draft
June – Sept 2010
Outreach
Fall 2010 – December 2012
Re-deliberations & Outreach
Feb 2013
1H 2013
June 2013
Begin
Re-deliberations

36. Classification & Measurement: Background
FASB Exposure Draft (May 2010)
Fair value model
Feedback:
Key aspects opposed
Lack of convergence
Joint Redeliberations (Jan 2012)
FASB’s tentative model
Guidance in IFRS 9
Converged in principle

37. Classification & Measurement: FASB Proposal

38. Classification & Measurement: Financial Assets
Classified in one of three categories:
Amortized cost—financial assets with solely payments of principal and interest that are held for the collection of contractual cash flows
Fair value through other comprehensive income (OCI)— financial assets with solely payments of principal and interest that are both held for the collection of contractual cash flows and for sale
Fair value through net income—financial assets that do not qualify for measurement at either amortized cost or fair value through other comprehensive income. (residual category)

39. Classification & Measurement: Financial Assets
Equity investments
Equity investments measured at fair value through net income
Practicability exception – No readily determinable fair value
Observable price changes in orderly transactions for the identical or similar assets of the same issuer
One-step impairment model
Hybrid Financial Assets
No bifurcation
Apply solely principal & interest test to entire instrument

40. Classification & Measurement: Financial Liabilities
Generally amortized cost, unless:
Business strategy is to transact at fair value
Short sale
Nonrecourse debt
Hybrid Financial Liabilities
Bifurcation and separate accounting of embedded derivatives based on existing U.S. GAAP

41. Classification & Measurement: Fair Value Disclosure
Public Companies
Financial assets & financial liabilities measured at amortized cost
Parenthetical presentation of fair value on the face of the balance sheet
Except for receivables/payables due in less than a year and demand deposit liabilities
Private Companies
NOT required to disclose fair value information either parenthetically or in the notes to the financial statements.

42. Financial Instruments: Impairment

43. Impairment: Timeline May 2010 Exposure Draft January 2011
Supplementary Document
Feb 2011 – October 2012
Re-deliberations & Outreach
December 2012
Exposure Document
1H 2013
Outreach
2H 2013
Re-deliberations

44. Impairment: Project Objectives
Timely Recognition of Credit Losses
Address concerns about delayed recognition of losses under incurred loss approach
Present value of cash flows an entity expects to collect consistent with classification & measurement objective for assets held for collection
Single model for loans and debt securities

45. Impairment: Project Objectives
Separate Presentation of Interest Income & Credit Losses
Rate of return includes lender compensation for credit risk inherent in debt instrument
Investors want separate presentation of credit losses from interest income (“decoupled” approach)
Effective rate as discount rate (in a DCF approach) isolates credit loss & does not introduce noise related to market changes

46. Impairment: Basics of FASB Model
Every reporting period, expected credit losses would be re-estimated
Favorable and unfavorable changes reported in earnings
Current estimate of expected credit losses based on:
current risk ratings of the assets
historical loss experience for assets with similar risk ratings and remaining lives adjusted for changes in current circumstances
reasonable & supportable expectations about the future

47. Impairment: Basics of FASB Model
Expected losses are inherent in groups of similar assets; inability to identify which asset will deteriorate should not interfere with timely recognition of losses that are expected in the individual assets held

48. Impairment: Basics of FASB Model
FASB used term “full” rather than “lifetime” to avoid suggesting that projections through the remaining life are necessary.
Rather, we expect estimates will start with historical information, and be adjusted using available information that indicates that current expectations differ from past experience

49. Impairment: Debt Securities and FV-OCI Assets
Same approach as loans
As a practical expedient, entity may elect not to recognize expected credit losses for financial assets classified at FV-OCI when both of the following conditions are met:
FV of financial asset is greater than amortized cost basis
Expected credit losses on financial asset are insignificant
For high-quality assets; cost-benefit consideration

50. Impairment: Purchased Credit Impaired (PCI) Assets
Common issue for business combinations & portfolio transfers; current U.S. GAAP is complex & confusing
Same approach to estimating expected credit losses as originated and non-PCI assets
Initial estimate of expected credit losses is recognized as an adjustment to the cost basis of the asset (an allowance) and would not be recognized as interest income

51. Impairment: Summary
A model that leverages existing internal credit risk management tools and systems (inputs will change)
A consistent measurement approach throughout the portfolio with no barriers or thresholds for recognition
An approach for PCI assets that is
less complex and costly to implement
easier to explain to investors

52. Revenue Recognition

53. Revenue Recognition: Project status
2010
2011
2011
2013
June 2010
Exposure draft
Revenue from Contracts with Customers
974 comment letters
March 2012
Comment letter deadline
April 2012
Roundtables
May 2012 onwards
Redeliberations and drafting
November 2011
Revised exposure draft
Re-exposure of Revenue from Contracts with Customers
358 comment letters
Q2 2013
Final ASU for US GAAP and final standard for IFRS 53

54. Revenue Recognition: Background
Current U.S. GAAP
200+ pieces of literature
Broad concepts
Many industry-specific requirements
Inconsistency
Objective
Create single, joint standard
Consistent across industries/markets
More robust framework

55. Revenue Recognition: Scope
Excluded
Included
CONTRACTS WITH CUSTOMERS
Lease contracts
All other contracts with customers
including unbundled services from lease & insurance contracts
Insurance contracts
Financial instruments
including financial services fees that are integral part of effective interest rate

56. Revenue Recognition: 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 services 56

57. Revenue Recognition: Steps to Apply the Core Principle
Identify contract(s) with the customer
Identify separate performance obligations
Determine transaction price
Allocate transaction price
Recognize revenue when performance obligation is satisfied

58. Revenue Recognition: Onerous performance obligations
The revenue standard will not include an onerous test
Instead, an entity will apply the onerous tests in existing IFRS or US GAAP
IFRS
Requirements in IAS 37 for onerous contracts would apply to all contracts with customers
US GAAP
Existing guidance for recognition of losses will be retained, including guidance in Subtopic for losses on construction and production contracts

59. Revenue Recognition: Implementation Guidance
Warranties
Licenses
Right of return
Customer options for additional goods or services
Breakage (customers’ unexercised rights)
Principal versus agent
Bill and hold arrangements
Repurchase agreements
Nonrefundable upfront fees
Customer acceptance

60. Leases

61. Leases: Where We Are Now
2010
2013
2013
TBD
August 2010
Exposure Draft
Leases
1H 2013
Second Exposure Draft
Leases
Consultation
TBD
Final Standard
Leases
Comment period: 4 months
786 comment letters received
Contained proposals for both lessees and lessors
Re-expose proposals
Comment period 120 days
Focus on revisions to 2010 proposals
Will contain proposals for both lessees & lessors
Outreach
Working group meetings
Redeliberations
Effective date: TBD
Will contain guidance for both lessees & lessors

62. Insurance Contracts

63. Insurance: Timeline Sept 2010 FASB issues Discussion Paper Dec 2010 –
Mar 2013
Outreach and Joint Redeliberations
June 2013
Exposure Draft
2H 2013
Outreach

64. Questions & Answers