Private Company Accounting THE PCC AND OTHER ACTIVITIES JANUARY 21, 2016

Speaker 2 Located in our Kansas City office, Mark is a member of our Professional Standards Group (PSG). Mark's role includes instructing in our national training program, presenting as a subject matter expert at webinars and conferences, and preparing MHM publications on accounting and auditing issues. As a PSG member, Mark consults with clients and engagement teams across the country in many areas of accounting and auditing. Mark has served clients as an auditor, consultant and advisor in numerous industries including manufacturing, distribution, mining, retail sales, services and software. Mark Winiarski, CPA Shareholder, MHM MHM

Learning Objectives and Agenda 3MHM Understand the four PCC accounting alternatives Learn what is new at the PCC Understand reporting alternatives for private companies The purpose and applicability of the private company council (PCC)

Private Company Council

 The PCC has two principal responsibilities:  The PCC will determine whether exceptions or modifications to existing non-governmental U.S. Generally Accepted Accounting Principles (U.S. GAAP) are required to address the needs of users of private company financial statements.  The PCC will serve as the primary advisory body to the Financial Accounting Standards Board (FASB) on the appropriate treatment for private companies for items under active consideration on the FASB’s technical agenda. 5

 Private companies are those that are not:  Public business entities  Not-for-profit entities under ASC Topic 958  Employee benefit plans under ASC Topic 960 through 965  Public business entities are those that meet any of five criteria  Those required by the SEC to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC.  Including entities whose financial statements or financial information are required to be included in a filing. Identifying a Private Company

 Five criteria continued:  Those required by the Securities Exchange Act of 1934, as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency, other than the SEC.  Those required to file or furnish financial statements with a regulatory agency (foreign or domestic) in preparation for the sale of securities or for purposes of issuing securities.  Those that have (or is a conduit bond obligor for) securities that are traded, quoted, or listed on an exchange or an over-the-counter market.  Those with securities not subject to contractual restrictions on transfer, and it is required to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods) pursuant to a legal, contractual, or regulatory requirement. Definition of a Public Business Entity

Private Company Accounting Alternatives

Without the Alternative Goodwill is indefinitely lived Three-step impairment test performed annually at the reporting unit level: 1.Optional qualitative assessment 2.Fair value test of the reporting unit 3.Measurement of impairment loss Without the Alternative Goodwill is indefinitely lived Three-step impairment test performed annually at the reporting unit level: 1.Optional qualitative assessment 2.Fair value test of the reporting unit 3.Measurement of impairment loss With the Alternative Elect to amortize goodwill 10 year period (or shorter) Amortize all goodwill Simplified impairment test only if a triggering event occurs Elect perform the impairment test at the entity or reporting unit level With the Alternative Elect to amortize goodwill 10 year period (or shorter) Amortize all goodwill Simplified impairment test only if a triggering event occurs Elect perform the impairment test at the entity or reporting unit level Accounting for Goodwill 9

 Must amortize all goodwill, including goodwill arising from an equity method investment  Must elect whether to perform an impairment test at the entity or reporting unit level.  Must determine the amortization period  Evaluate whether an impairment test is required for the year of adoption  Impairment testing is required when an event or circumstances occur that indicate that it is more likely than not the fair value of the entity is below its carrying value.  Upon adoption goodwill is amortized prospectively from the beginning of the year of the adoption Goodwill - Requirements and Elections 10

Goodwill - Presentation and Disclosure Presentation and disclosure is mostly consistent with existing requirements. Additional disclosures include:  Amortization expense  Accumulated amortization and impairment losses  Information about the amortization period when goodwill is acquired  How impairment loss was allocated to amortizable units of goodwill 11

Without the Alternative Under the acquisition method all intangible assets that are identifiable are measured at fair value and capitalized. Identifiable intangibles: Arise from contractual or legal rights, or May be sold, licensed, etc. separately from the entity Without the Alternative Under the acquisition method all intangible assets that are identifiable are measured at fair value and capitalized. Identifiable intangibles: Arise from contractual or legal rights, or May be sold, licensed, etc. separately from the entity With the Alternative Under the acquisition method all intangible assets that are identifiable are measured at fair value and capitalized except: Certain customer related intangibles Noncompetition agreements With the Alternative Under the acquisition method all intangible assets that are identifiable are measured at fair value and capitalized except: Certain customer related intangibles Noncompetition agreements Accounting for Intangible Assets (ASU ) 12

Accounting for Intangible Assets  Accounting alternative permits an entity to not recognize, for certain transactions:  Customer-related intangible assets unless they are capable of being sold or licensed independently from other assets of a business, and  Noncompetition agreements. The impact is such that customer related intangible assets and non-complete agreements are subsumed into the goodwill balance recognized in connection with the transaction. Therefore, goodwill must also be amortized.

Customer-Related Intangible Assets Commonly Qualify Commonly Do not QualifyNever Qualify Customer Relationships Customer ListLeases BacklogContract Assets Favorable Contracts with Customers Unfavorable Contracts with Customers Mortgage Servicing Rights

Accounting for Intangible Assets  Applicable to these types of transactions:  Business combinations  Investments accounting for under the equity method  Reorganizations applying fresh-start accounting Once elected, the accounting alternative must be applied to all qualifying transactions.

Accounting for Intangible Assets Disclosures and Other Requirements  Existing required disclosures remain unchanged:  Business combinations qualitatively disclose the components of goodwill.  Equity method investments have no additional disclosures.  An entity electing this alternative must also apply the alternative on amortizing goodwill under ASU  The alternative is adopted prospectively

Without the Alternative Contemporaneous documentation of the hedge Required effectiveness testing Fair value Without the Alternative Contemporaneous documentation of the hedge Required effectiveness testing Fair value With the Alternative Documentation of six criteria before the end of the reporting period No effectiveness testing Elect to record and disclose the swap at settlement value instead of fair value With the Alternative Documentation of six criteria before the end of the reporting period No effectiveness testing Elect to record and disclose the swap at settlement value instead of fair value Simplified Hedge Accounting (ASU ) Receive-Variable, Pay-Fixed Interest Rate Swaps

18MHM Private Company Swap Counterparty Paying variable rate on debt (LIBOR) Receive variable payments (LIBOR) Pay fixed amounts

The standard may be adopted for interest rate swaps that meet the following criteria: 1.Debt (hedged cash flows) and swap use the same index and reset period 2.“Plain-vanilla” swap, any floor or cap on the variable interest rate of the swap must be comparable to the same term in the debt 3.Re-pricing and settlement match or differ by no more then a few days Simplified Hedge Accounting - Requirements 19

Criteria continued: 4.Fair value of the swap at inception is at or near zero 5.Swap notional value is equal to or less then the principal of the related debt 6.All interest payments occurring on the borrowing during the term of the swap are designated as hedged whether in total or in proportion to the amount being hedged Simplified Hedge Accounting - Requirements 20

 Document the election on a swap by swap basis the election to apply the simplified-hedge accounting approach  Documentation should address each of the qualifying criteria  Document the election to record and disclose the swap at settlement value or fair value  Elect to adopt using the retrospective approach or a modified retrospective approach Documentation and Elections 21

Without the Alternative Relationships with entities are evaluated under the VIE consolidation model if no scope exceptions are met A private company that is the primary beneficiary of a VIE consolidates the VIE A private company that has a variable interest in a VIE discloses the relationship Without the Alternative Relationships with entities are evaluated under the VIE consolidation model if no scope exceptions are met A private company that is the primary beneficiary of a VIE consolidates the VIE A private company that has a variable interest in a VIE discloses the relationship With the Alternative Relationships with leasing entities meeting four conditions are scoped out of the VIE guidance The scope exception applies to all relationships meeting the four criteria Additional disclosure requirements apply With the Alternative Relationships with leasing entities meeting four conditions are scoped out of the VIE guidance The scope exception applies to all relationships meeting the four criteria Additional disclosure requirements apply Variable Interest Entities (ASU ) 22

Requirements: 1)The lessor entity and the private company are under common control, 2)The private company has a lease arrangement with the lessor entity, 3)Substantially all the activity between the two entities is related to the leasing activities between the two entities, and 4)If the private company explicitly guarantees or provides collateral for obligations of the lessor entity, then the principal amount of the obligation must be less then the value of the asset at inception of the guarantee. VIE Common Control Leasing Arrangements 23

What is Common Control? The SEC staff concluded common control exists when:  An individual or enterprise holds more than 50 percent of the voting ownership of each entity  A group of shareholders holds more than 50 percent of the voting ownership of each entity and have contemporaneous written evidence of an agreement to vote a majority of the entities’ shares in concert exists  Immediate family members (i.e. married couples and their children, but not their grandchildren) hold more than 50 percent of the voting ownership interest of each entity…and there is no evidence those family members will not vote their shares in concert. 24 The FASB and PCC have said that the definition of common control is broader then the SEC interpretation

VIE Common Control Leasing Arrangements An adopting company must apply other US GAAP to a qualifying lessor entity.  Other consolidation guidance  Lease accounting  Accounting for guarantees  Accounting for joint and several obligations  Accounting for investments  Related party disclosures 25

VIE Common Control Leasing Arrangements  Must apply the retrospective approach  Deconsolidation, if required, for all periods presented  Apply the impact of deconsolidation and other applicable GAAP to beginning equity  Disclosure  Explicit (contractual) and implicit exposure to support the lessor  Qualitative description of events that may cause the private company to support the lessor 26

Before Adopting a PCC Accounting Alternative 27  Evaluate the impact of the adoption on financial covenants, employment arrangements, other contracts, and expectations of users of the financial statements.  Costs that may be incurred if a private company becomes a public business entity.  Reversal of prior accounting if register with the SEC  Potential decrease in usefulness of financial statements  Subsuming intangibles in a business combination  Settlement value instead of fair value for swaps MHM

Current Activities of the PCC

PCC Accounting Alternatives Effective Date 29  Three of the standards are effective for calendar year ended December 31,  Intangible assets alternative effective for calendar year ended December 31,  Proposal to eliminate the effective date guidance  Solves the “preferability” issue for first time adoption  Approved by the FASB  Retains the existing transition guidance  Prospective treatment for amortizing goodwill  One time chance to retrospectively apply the simplified swap guidance MHM

Three Year Review of the PCC 30  The Financial Accounting Foundation (FAF) decided to improve effectiveness of the PCC by:  Focusing efforts on active agenda projects  Formation of a technical agenda consultation group  Improve communication and transparency  Retained the existing size of the PCC (9-12 members)  Continued the planned transition of oversight from a special committee to the Standard-Setting Process Oversight Committee  As scheduled, three new members appointed and a new chair Candace E. Wright from Postlethwaites & Neterville were appointed for 2016 MHM

Current PCC Projects 31  Applying VIE guidance to entities under common control  Objective is to consider whether changes are necessary to the VIE guidance for common control entities  The staff are researching providing additional guidance and examples on how to apply the VIE guidance to common control arrangements MHM

Other Activities 32  Input into FASB projects  Income tax rate reconciliation  Voiced objections to making it a requirement  Balance sheet classification of debt  Recommended subjective acceleration clauses should not be classified as unless the clause is triggered  Recommended debt covenant violations waived subsequent to period end should not be classified as current MHM

Reporting Alternatives for Private Companies

Non-GAAP Frameworks 34

? QUESTIONS ? ?? 35MHM

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